-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QM5oyH/uU2IXw2GxKnj7H2Y6+JOiWvOI7mr0Q2ZsVFWia4Xz4OR0boXYj7Z4zm6t uL7027Bxkr0S33qN/514Cw== 0000729661-97-000002.txt : 19970328 0000729661-97-000002.hdr.sgml : 19970328 ACCESSION NUMBER: 0000729661-97-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANS PACIFIC BANCORP CENTRAL INDEX KEY: 0000729661 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 942917713 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 002-86902 FILM NUMBER: 97564190 BUSINESS ADDRESS: STREET 1: 46 SECOND ST CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 4155433377 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 commission file number: 2-86902 TRANS PACIFIC BANCORP (Exact name of registrant as specified in its charter) California 94-2917713 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 46 Second Street, San Francisco, California 94105 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 543-3377 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of the voting stock held by non-affiliates of the registrant at February 28, 1997: Common Stock, no par value, $6,714,000 Number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Class Outstanding at February 28, 1997 Common Stock, no par value 1,120,195 Documents Incorporated by Reference: PARTS I, II, & IV - Annual Report to Shareholders for the year ended December 31, 1996("1996 Annual Report"). PART I Item 1. Business General Trans Pacific Bancorp, a California Corporation ("Bancorp") is the Bank holding company of Trans Pacific National Bank (the "Bank"), its wholly owned subsidiary, a national bank conducting a commercial banking business which opened for business on August 21, 1984. Other than acting as the holding company for the Bank and as the lessee of the Bank's premises, Bancorp does not currently conduct any other substantial activities. Accordingly, the reported consolidated net income for 1996 resulted primarily from the Bank's operations. The Bank is headquartered in the "South of Market" area of the City of San Francisco and is engaged in a wide variety of business operations customarily conducted by independent commercial banks in California, including the acceptance of checking and savings deposits, the issuance of certificates of deposit, and the making of loans. The Bank's primary lending activities are commercial loans, commercial lines of credit and short-term real estate- related loans. Additionally, the Bank continues to provide credit to the communities from which it draws deposits, with added emphasis on small business loans in low and moderate income areas. To a lesser extent, the Bank has engaged in consumer lending in the form of loans to individuals for household, family and other personal expenditures. As of December 31, 1996, the Bank had net loans totaling $47 million. Commercial loans and lines of credit represent 39 percent of the Bank's total loan portfolio and real estate loans represent 56 percent, and consumer and other loans 5 percent. The Bank also offers safe deposit boxes, ATM cards, traveler's checks, collection accounts and other customary bank services to its customers. The Bank's customers are generally individuals who live or work in the vicinity of the Bank's offices, small to medium size businesses and professional firms. As of December 31, 1996, most of the Bank's deposits had been obtained from local individuals, small businesses, professional firms, and state and local governments. The Bank had approximately 2,000 accounts totaling over $68 million in deposits as of December 31, 1996. Demand deposits, both interest- bearing and non-interest bearing represent 67 percent of the Bank's total deposits portfolio, time deposits represent 31 percent, and savings deposits 2 percent. In 1988, the Bank opened its International Department to provide banking products for customers dealing in international trade. The International Department provides a broad range of trade finance products, such as foreign exchange and foreign drafts, import and export letters of credit, documentary collections, standby letters of credit, and bankers acceptances. The International Department provides the Bank with an opportunity to offer trade finance services to U.S.-based small business and middle-market customers, a service which is generally not offered by community banks. Bancorp's headquarters location in San Francisco, a major international port city, is ideally located for trade activity with Pacific Rim countries. Also, in 1988, the Bank opened its second branch office, in downtown Alameda, in order to expand into the East Bay market of Northern California. To supplement the Alameda branch's deposit base, the Bank in 1990 acquired the deposits of the Webster Street branch of Southern California Savings and Loan in Alameda. This acquisition of a large base of retail time deposits and savings accounts enabled the Bank to increase its market share and customer base in Alameda and the surrounding areas. Acquisition On October 18, 1996, Bancorp entered into a definitive agreement pursuant to which TRP Acquisition Corp. ("TRP"), a Delaware corporation owned by a private investor group led by Chicago banker Denis Daly Sr. would merge with and into Bancorp, with Bancorp the surviving corporation wholly owned by the shareholders of TRP. On December 19, 1996, a special meeting of shareholders of Bancorp was held at which a majority of the outstanding shares of the corporation were represented, and the agreement was approved by the shareholders in accordance with the requirements of the California Corporations Code. Subject to certain terms and conditions, each outstanding share of Bancorp will be converted into the right to receive a cash payment of $8.19 per share at closing and possible additional payments from escrowed funds of up to $0.42 per share following the resolution of certain pending contingencies. The acquisition of Bancorp has been approved by both the shareholders of Bancorp and the Federal Reserve Bank of San Francisco, Bancorp's regulator. The transaction was completed on March 14, 1997. The change in ownership is not expected to have an adverse effect on the operations of Bancorp. The private investor group has indicated that it intends to retain the current management, branch locations, and product lines. Competition The banking business in the Bank's market area, the San Francisco Bay Area, is extremely competitive and has become increasingly so in recent years as major California banks have entered the small-business loan market. Additionally, the Bank competes with agencies of foreign banks, savings and loans, credit unions, finance companies and other non-banking institutions, such as brokerage firms, insurance companies and investment banking firms, all who offer similar services to customers. Among the competitive advantages that larger financial institutions have are the resources and ability to conduct large-scale marketing campaigns and to allocate investment assets, including loans, to regions of higher demand and yield. The larger institutions also have higher lending limits available to customers with large credit needs. The Bank's current maximum legal lending limits to a single borrower and related parties was $1.1 million on an unsecured basis and $1.9 million on a fully secured basis. For borrowers requiring loans in excess of the Bank's legal lending limits, the Bank has underwritten and will continue to underwrite such loans on a participating basis with its correspondent banks and with other independent banks, retaining that portion of such loans that is within its lending limits. The Bank believes it can continue to successfully compete by emphasizing personal customer contact and by providing a higher degree of personalized banking service to its customers. While Management believes that its service approach can help build customer loyalty and can offset competitive disadvantages resulting from legal and regulatory constraints due to its size, no assurances can be given that the Bank will succeed in this extremely competitive industry. Federal Reserve Monetary Policy The earnings of Bancorp are not only affected by general economic conditions, but also by the policies of various governmental regulatory authorities in the United States and abroad. In particular, the Federal Reserve System exerts a significant influence on interest rates and credit conditions, primarily through open market operations in US Government securities, varying the discount rate on member bank borrowings and setting reserve requirements against deposits. Federal Reserve monetary policies have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. Supervision and Regulation Under the Bank Holding Company Act (the Act), Bancorp is required to file reports of its operations with the Board of Governors of the Federal Reserve System (the Federal Reserve) and is subject to examination by regulators. Further, the Act restricts activities in which Bancorp may engage and the activities of any company in which the Bancorp owns more than 5 percent of the voting shares. Generally, permissible activities are limited to banking, the business of managing and controlling banks and activities closely related to banking as determined by the Federal Reserve. The Bank, as a national bank, is subject to regulation and examination by the Office of the Comptroller of the Currency (OCC), the Federal Reserve and the Federal Deposit Insurance Corporation. Additionally, there are numerous requirements and restrictions in the laws of the United States and the State of California affecting the Bank and its operations including: the requirement to maintain reserves against deposits; restrictions on the nature and amount of loans that it may make; requirements for community reinvestment; restrictions relating to its investments; restrictions relating to the places at which it may operate branches and its ability to acquire other banks and financial institutions. Throughout 1993 and for part of 1994, the Bank was operating under a Formal Agreement with the OCC, which required specific capital ratios and required management to implement certain steps to strengthen the Bank's operations. The Formal Agreement was terminated in September 1994, as the Bank had achieved full compliance with its terms. Additionally, for part of 1993 and throughout 1994, Trans Pacific Bancorp operated under a Memorandum of Understanding (MOU) with the Federal Reserve Bank, which required filing of progress reports and restricted certain operations, including the payment of cash dividends and issuance of additional debt. This MOU was terminated in February, 1995. Major regulatory changes affecting the Bank, and the financial services industry in general have occurred in the last several years and can be expected to occur increasingly in the future. The most significant recent change affecting banks was the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). In addition to providing for the recapitalization of the Bank Insurance Fund, this law makes a number of far- reaching changes in the legal environment for insured banks, including reductions in insurance coverage for certain kinds of deposits, increases in consumer-oriented requirements and disclosures, and major revisions to conform the process of supervision and examination of depository institutions, with an emphasis on risk-weighted capital levels. Quantitative measures established by the regulators require that Bancorp and the Bank maintain minimum ratios of capital to risk-weighted assets. Under the guidelines, capital is compared to the relative risk related to the balance sheet. The most recent notification from the OCC categorized the Bank as well capitalized, the highest capital tier, under the FDICIA regulatory framework for prompt corrective action. It is expected that this law and any other current proposals for regulatory change should not have a material effect on the operations, capital resources or liquidity of Bancorp or the Bank. Employees The Bank employed 34 full time equivalent persons at December 31, 1996. Management believes that its employee relations are excellent and that the compensation and benefits provided by the Bank to its employees are competitive. Benefits for Bank employees include stock options, an Employee Stock Ownership Plan and a 401(k) plan. Bancorp had no salaried employees at December 31, 1996. STATISTICAL DISCLOSURES I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential Information on the distribution of assets, liabilities, and stockholder equity and on interest rates and interest differential is incorporated by references from pages 5 and 6 of the 1996 Annual Report. II. Investment Portfolio Carrying Value of Investments, Maturity Ranges, Weighted Average Yield The following table list the carrying value, in thousands, and yield by expected remaining principal maturity date of the investment portfolio at December 31, 1996. The weighted average yield is calculated based on the amortized cost of securities. Weighted Average Available for sale securities Amortized Cost Fair Value Yield US Treasury securities and other government agency: Due within 1 year $ 2,004 $ 1,999 4.75% Due after 1 year through 5 years 9,072 9,053 6.46% Due after 5 years through 10 years 500 480 6.41% 11,576 11,532 6.16% Mortgage-backed securities 4,552 4,539 6.43% Other securities: Due within 1 year 972 961 4.82% Due after 1 year through 5 years - - -% Due after 10 years 376 376 6.26% 1,348 1,337 5.27% $ 17,476 $ 17,408 6.16% Other securities consist principally of corporate bonds. Expected remaining maturities may differ from remaining contractual maturities because borrowers have the right to prepay certain obligations with or without penalties. Information regarding the amortized cost, unrealized gains and losses, estimated fair value, and contractual maturity of investments at December 31, 1996 is incorporated by reference from pages 25 and 26 of the 1996 Annual Report III. Loan Portfolio Loans Outstanding by Type Information regarding types of domestic loans and loan concentrations at December 31, 1996 and 1995 is incorporated by reference from pages 16, 26 and 27 of the 1996 Annual Report. The Bank had no foreign loans at December 31, 1996. Maturities and Sensitivity to Changes in Interest Rates Final loan maturities, in thousands, and rate sensitivities of the loan portfolio at December 31, 1996 are as follows: Within One-Five After One Year Years Five Years Total Loans at fixed interest rates: Commercial $ 3,567 2,494 - 6,061 Real Estate 1,013 2,262 3,562 6,837 Installment 9 115 - 124 Other 11 - - 11 Total fixed interest-rate loans 4,600 4,871 3,562 13,033 Loans at variable interest rates: Commercial 12,360 - - 12,360 Real Estate 14,612 5,375 - 19,987 Installment 47 - - 47 Preference Line 2,102 - - 2,102 Total variable interest-rate loans 29,121 5,375 - 34,496 Total $ 33,721 10,246 3,562 47,529 Non Performing Assets Information on non-performing assets and risk elements is incorporated by reference from pages 8 and 9 of the 1996 Annual Report. IV. Summary of Loan Loss Experience Allocation of the Allowance for Loan Losses Information on the allocation of the allowance for loan losses by loan type is incorporated by reference from pages 10 and 11 of the 1996 Annual Report. Annual Credit Loss Experience Information on annual credit loss experience is incorporated by reference from page 11 of the 1996 Annual Report. V. Deposits Average Amount and Rates Paid Information on average deposits amounts and rates paid on domestic deposits is incorporated by reference from page 6 of the 1996 Annual Report. At December 31, 1996 and 1995, deposits of foreign depositors were not material. Time Certificates of Deposit Greater Than $100,000 Information on time certificates of deposits greater than $100,000 is incorporated by reference from page 29 of the 1996 Annual Report. VI. Return on Equity and Assets Years ended December 31, 1996 1995 1994 Return on average assets 0.89% 0.73% 0.30% Return on average equity 9.31% 7.14% 3.03% Dividend payout ratio 14.13% - - Equity to assets ratio 9.16% 10.08% 10.48% VII. Short-Term Borrowings Outstanding amounts, in thousands, of selected short-term borrowings were as follows: Years ended December 31, 1996 1995 1994 Federal funds purchased and repurchase agreements: Average amount outstanding $ 175 47 .3 Daily average rate 3.29% 6.43% 4.81% Highest month-end balance $ 1,210 900 - Year-end balance $ 204 - - Rate on outstandings at year end 2.55 - - Years ended December 31, 1996 1995 1994 Other borrowed funds: Average amount outstanding $ 383 212 885 Daily average rate 5.30% 6.10% 5.22% Highest month-end balance $ 527 454 1,329 Year-end balance $ 402 186 540 Rate on outstandings at year end 5.28% 5.24% 5.15% Federal funds borrowed are repaid the following business day. Repurchase agreements and other borrowed funds generally have original maturities not exceeding 180 days. Item 2. Properties Bancorp and the Bank's headquarters are located at 46 Second Street in San Francisco, California in the city's downtown Financial District. The building, with 8,500 square feet of usable space, is under lease, which expires in April, 2001, with a 3 year renewal option available under similar terms. The Bank maintains another branch at 1442 Webster Street in Alameda, California. The premises, purchased by Bancorp in 1988 and sold to the Bank in 1993, contains approximately 4,700 square feet. Bancorp believes that its facilities are well maintained and are generally adequate for its present and anticipated future needs. Item 3. Legal Proceedings The Company is involved in various claims and lawsuits incidental to its business. In the opinion of management, after review with independent legal counsel, the ultimate liability resulting from such claims and lawsuits will not have a material adverse effect on the financial position, results of operations, or liquidity of the Company. There were no material proceedings adverse to the Bank or Bancorp to which any director, officer, affiliate of the Bank or Bancorp, or 5 percent shareholder of the Bank or Bancorp, or any associate of any such director, officer, affiliate or 5 percent shareholder of the Bank or Bancorp, was a party adverse to the Bank or Bancorp. Additionally, none of the above persons had a material interest adverse to the Bank or Bancorp. Additionally, the Bank has been notified of a potential unasserted claim relating to a specific corporate deposit account. Independent legal counsel has requested additional information from the underlying corporate entity and the basis for any potential claim. Based on the information available at this time, management is unable to determine what liability, if any, will result from the resolution of this matter or whether any claim will be made. Bancorp has considered this matter in the pricing and escrow structure in the Agreement and Plan of Merger. Item 4. Submission of Matters to a Vote of Security Holders At the special meeting of shareholders held December 19, 1996, the acquisition of all issued and outstanding shares of Bancorp by a private investor group led by Chicago banker Denis Daly, Sr. was approved. Votes For Votes Withheld Votes Abstained Broker non-votes 822,435 none 3,450 none PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Market Information The common stock of Trans Pacific Bancorp (symbol: TPAE) is publicly traded in limited and infrequent transactions on the NASDAQ Bulletin Board. According to information made available to Bancorp, the range of high and low bids for such common stock for each calendar quarter since January 1995 is as follows: Calendar Year 1996 High Low First Quarter $ 5.25 4.50 Second Quarter 5.63 4.88 Third Quarter 6.50 5.25 Fourth Quarter 7.63 6.38 Calendar Year 1995 High Low First Quarter $ 2.50 2.25 Second Quarter 2.75 2.25 Third Quarter 4.50 2.50 Fourth Quarter 4.88 4.50 The last bid price known to Bancorp for its common stock was $7.75. There are no current plans to offer any common stock of Bancorp in a public offering. Holders As of December 31, 1996, there were 300 holders of the common stock of Bancorp. There are no other classes of common equity outstanding. Dividends Bancorp declared a special dividend of 8 cents per share to shareholders of record March 8, 1996. The dividend was paid on March 29, 1996. Item 6. Selected Financial Data Selected financial data for the five years 1992 through 1996 is incorporated by reference from page 3 of the 1996 Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated by reference from pages 4 through 14 of the 1996 Annual Report. Item 8. Financial Statements and Supplementary Data The Report of Independent Auditors and the Consolidated Financial Statements of Bancorp are incorporated by reference from pages 15 through 36 of the 1996 Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure During fiscal years 1996 and 1995, Bancorp neither changed its accountants nor reported a disagreement on Form 8-K on any matter of accounting principles or practices or financial statements disclosure. PART III Item 10. Directors and Executive Officers of the Registrant The following table sets forth the names of and certain information with respect to the Board of Directors and Executive Officers of Bancorp. Age and other biographical data for each person as of December 31, 1996, is included. Business Experience Name Age Position During Past Five Years James A. Babcock 61 Director and Chairman of Architect; President of Bancorp and Director of Sandy and Babcock Inc., the Bank since 1983. San Francisco, since 1970. Eddy S. F. Chan 49 Director of Bancorp and Banker; President, Chief the Bank, and President Executive Officer of and Chief Executive Bancorp since 1983; Officer of Bancorp since Chairman of the Board of 1983; Chief Executive the Bank since 1983; Officer of the Bank President and Chief since 1984. Executive Officer of the Bank since 1984. Dennis B. Jang 33 Chief Financial Officer Banker; Chief Financial of Bancorp and the Bank Officer of Bancorp and since 1996. the Bank since 1996; Vice President of the Bank since 1994; Assistant Vice President of the Bank since 1990. Frankie G. Lee 52 Director of Bancorp and Civil Engineer; Executive the Bank since 1983, Vice President and Chief Vice Chairman of Bancorp Executive Officer, SOH & since 1983. Associates, Structural Engineers, San Francisco, since 1969; Vice President MTL Construction, Richmond, CA, 1983-1995; brother of John K. Lee. John K. Lee 46 Director of Bancorp and Certified Public the Bank since 1983, Accountant; President, Vice Chairman of the John K. Lee CPA, PC since Bank since 1983. 1983; brother of Frankie G. Lee. Masayuki Nakahira 49 Director of Bancorp Architect; General since 1983. Contractor, real estate development; President and Director, New Century Investments Inc. since 1983. John T. Stewart 55 Director of Bancorp and Attorney; Partner, Broad, the Bank since 1983, Schulz, Larson & Wineberg, Secretary of Bancorp and San Francisco 1973-1994; a Vice Chairman of the Partner, Hovis, Larson, Bank since 1983. Stewart, Lipscomb, Cross since 1994. Simon S. Teng 54 Director of Bancorp and Certified Public the Bank since 1983; Accountant; Vice President Treasurer, since 1983. John R. McKean, Accountants, PC, San Francisco since 1967. Frank K. W. Wong 58 Director of Bancorp and Advertising and Visual the Bank since 1983. Merchandising Director, National Dollar Stores Ltd., San Francisco from 1962 to 1995. Retail consultant since 1996. John K. Wong 48 Director of Bancorp Banker; Executive Vice since 1983; Director of President/International the Bank since 1984; Department of the Bank Executive Vice since 1995. Senior Vice President/International President of the Bank Department of the Bank from 1989 to 1995. since 1995. Item 11. Executive Compensation Cash Compensation Bancorp and the Bank pay fees to directors to attend meetings of the Boards of Directors and committees of the Board of Bancorp and the Bank. In 1996, directors were paid $225 per Board meeting attended. Non-employee directors serving on committees also received $150 per meeting attended, except for Loan Committee, which received $175 per meeting. Bancorp had no full-time salaried employees during the fiscal year ended December 31, 1996. No remuneration was paid to or accrued for the account of any person serving in his or her capacity as an officer of Bancorp for services rendered during the fiscal year ended December 31, 1996. The following table sets forth the aggregate cash remuneration (including bonuses and deferred compensation) paid to the following named executive officers of the Bank for services provided during the fiscal year ended December 31, 1996. No other executive officers' remuneration exceeded $100,000. Summary Compensation Table Long-Term Annual Compensation Compensation Name and Principal Position Year Salary Bonus Other ESOP Options (#) Eddy S. F. Chan 1996 $113,000 $ 66,447 * $ - - President/CEO 1995 113,000 32,605 * 2,679 1,500 1994 110,500 - * 2,897 20,000 Robert A. Hinkle 1996 $ 84,000 $ 24,426 * $ - - Executive Vice 1995 84,000 13,047 * 1,983 - President 1994 82,000 - * 1,867 5,000 * Less than 10% of the total of salary and bonus reported for each named executive officer. Compensation Pursuant to Plans Employee Stock Option Plan In 1984, Bancorp adopted the Trans Pacific Bancorp Stock Option Plan (the "Plan"), a stock option plan providing for the grant of options for up to an aggregate of 100,000 shares of Bancorp's Common Stock to executive officers and certain key employees of Bancorp and its subsidiaries, including the Bank. Options are to be granted at not less than 100% of the fair market value of the Common Stock on the date of grant of the option. Under the Plan, no option may be granted after August 1994, the tenth anniversary of the Plan adoption. Accordingly, no options were granted pursuant to this Plan in 1996. The number of shares of Common Stock pursuant to options vested under the Plan as of December 31, 1996 was 40,500. The exercise price of all outstanding employee stock options is $5.00 per share. Non Qualified Stock Option Plan Certain executive officers also serve as directors of Bancorp or the Bank and are eligible for grants under the Trans Pacific Bancorp 1990 Non- Qualified Stock Option Plan. No options were granted under this plan in 1996. Effects of Change in Control on Stock Option Plans Under the agreement pursuant to which TRP Acquisition Corp. will acquire all of the issued and outstanding shares of Bancorp, all outstanding stock options will be converted into the right to receive a cash payment equal to the difference between the strike price and $8.19 per share at closing and a possible subsequent payment from escrowed funds of up to $0.42 per share following the resolution of certain pending contingencies. The following table sets forth aggregate stock options held by the following named executive officers at December 31, 1996: Number of Un- Value of Un- Number of Exercised Exercised In- Shares Options at End The-Money Options Acquired of 1996 (Exer- at End of 1996* Name of on Value cisable/Un- (Exercisable/Un- Individual Exercise Realized Exercisable) Exercisable) Eddy S. F. Chan none none 24,000 / none $63,125 / $0 Robert A. Hinkle none none 3,000 / 2,000 $ 7,875 / $5,250 * Based on an estimated market value of $7.625 for Bancorp Common Stock at December 31, 1996. Employee Stock Ownership Plan In 1990, Bancorp adopted the Trans Pacific Bancorp Employee Stock Ownership Plan and Trust (ESOP). The ESOP, sponsored by Bancorp for the benefit of its employees and those of the Bank, is a non-contributory plan intended to further the growth, development, and financial success of Bancorp and its subsidiaries by providing additional incentives to employees of Bancorp and its subsidiaries by assisting them to acquire shares of Common Stock and to benefit directly from Bancorp's growth, development, and financial success. The ESOP is designed to invest primarily in Bancorp Stock. All employees who have worked for Bancorp or any of its subsidiaries for a period of one year or more are eligible to participate in the ESOP. As of December 31, 1996, there were thirty-two (32) employees eligible to participate in the ESOP. All amounts credited to an ESOP Participant's account will become distributable to the Participant upon his or her retirement at age 65; however, a participant may postpone retirement until a later date, in which case the Participant may continue to participate in and receive allocations under the ESOP. In the event of termination of the Participant's employment for reasons other than death or disability, the Participant is entitled to payment of the entire vested portion or his or her account on or after December 31st following the termination of employment. Shares are vested under a five year period. The ESOP was terminated in December 1996. Annual Incentive Awards In 1995, the Bank adopted the Management Incentive Plan. Under the plan, executive officers receive cash awards based on a formula established by the Board of Directors. Other Compensation Except as set forth above under the captions "Cash Compensation" and "Compensation Pursuant to Plans", and below under "Termination of Employment Arrangements", no other compensation was paid or distributed during the last fiscal year to the named individuals specified above. Termination of Employment Arrangements There are no compensatory plans or arrangements, including payments to be received from Bancorp, with respect to any individual named in the paragraph captioned "Executive Compensation" herein for the last fiscal year where such plan or arrangement results or will result from the resignation, retirement, or any other termination of such individual's employment. Item 12. Security Ownership of Certain Beneficial Owners and Management Security Ownership Of Certain Beneficial Owners The following table sets forth the security ownership as of February 28, 1997 of Bancorp's voting securities with respect to any person (including any "group" as that term is used in section 13(d)(3) of the Exchange Act) who is the beneficial owner of more than 5 percent of such voting securities outstanding. Name and Address of Amount and Nature of Percent Title of Class Beneficial Owner Beneficial Ownership of Class Common Stock James A. Babcock 57,583 shares (1) 5.12% 1349 Larkin Street San Francisco, CA 94109 (1) Includes 32,083 shares held with sole voting and investment power; 20,000 shares held with shared voting and/or investment power; and 5,500 shares pursuant to options. Security Ownership Of Management The following table sets forth as of February 28, 1997 the ownership of each class of Bancorp's equity securities of the directors and executive officers, and each of the named executive officers as defined in Item 402(a)(3) of Regulation S-K, individually, and of the directors and executive officers of Bancorp and the Bank as a group. Amount and Nature of Beneficial Percent Title of Class Name of Beneficial Owner Ownership of Class Common Stock James A. Babcock 57,583 (1) 5.12% Common Stock Eddy S. F. Chan 56,380 (2) 4.94% Common Stock Robert A. Hinkle 11,085 (3) 0.99% Common Stock Dennis B. Jang 5,659 (4) 0.50% Common Stock Frankie G. Lee 28,833 (5) 2.57% Common Stock John K. Lee 27,333 (6) 2.43% Common Stock Masayuki Nakahira 25,833 (7) 2.30% Common Stock John T. Stewart 24,683 (8) 2.20% Common Stock Simon S. Teng 30,843 (9) 2.74% Common Stock Frank K. W. Wong 26,833 (10) 2.39% Common Stock John K. Wong 48,954 (11) 4.32% Common Stock All Directors and Executive 344,019 28.59% Officers as a Group (11 persons) (1) Includes 32,083 shares held with sole voting and investment power; 20,000 shares held with shared voting and/or investment power; and 5,500 shares pursuant to options. (2) Includes 25,233 shares held with sole voting and investment power; 2,250 shares held with shared voting and/or investment power; 24,000 shares pursuant to options; and 4,897 shares allocated to the account of Eddy S. F. Chan as a Participant in the Trans Pacific Bancorp Employee Stock Ownership Plan ("ESOP") as of December 31, 1996. (3) Includes 5,000 shares held with sole voting and investment power; 5,000 shares pursuant to options; and 1,085 shares allocated to the account of Robert A. Hinkle as a Participant in the ESOP as of December 31, 1996. (4) Includes 1,000 shares held with sole voting and investment power; 2,500 shares pursuant to options; and 2,159 shares allocated to the account of Dennis B. Jang as a Participant in the ESOP as of December 31, 1996. (5) Includes 23,333 shares held with shared voting and/or investment power; and 5,500 shares pursuant to options. (6) Includes 21,833 shares held with shared voting and/or investment power; and 5,500 shares pursuant to options. (7) Includes 21,333 shares held with sole voting and investment power; and 4,500 shares pursuant to options. (8) Includes 19,183 shares held with sole voting and investment power; and 5,500 shares pursuant to options. (9) Includes 18,583 shares held with sole voting and investment power; 6,760 shares held with shared voting and/or investment power; and 5,500 shares pursuant to options. (10) Includes 21,333 shares held with shared voting and/or investment power; and 5,500 shares pursuant to options. (11) Includes 2,833 shares held with sole voting and investment power; 29,300 shares held with shared voting and/or investment power; 14,000 shares pursuant to options; and 2,821 shares allocated to the account of John K. Wong as a Participant in the ESOP as of December 31, 1996. Change in Control Bancorp has entered into and the shareholders have approved the principal terms of a definitive agreement pursuant to which TRP Acquisition Corp., a Delaware corporation owned by a private investor group led by Chicago banker, Denis Daly, Sr., would be merged with and into Bancorp with Bancorp as the survivor and the shareholders of TRP being the sole shareholders of Bancorp. The transaction was completed on March 14, 1997. Item 13. Certain Relationships and Related Transactions Indebtedness of Management Bancorp, through its subsidiary Trans Pacific National Bank ("Bank"), has had and expects to have in the future, banking transactions consisting of loans made in the ordinary course of business with directors, officers, Shareholders, and persons associated with them. In the opinion of management, such loans to any such persons were made in the ordinary course of the Bank's business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the usual risk of collectibility or present other unfavorable features. Transactions with Management and Others and Certain Business Relationships There were no transaction or series of similar transactions since January 1, 1996, nor are there any currently proposed transactions to which Bancorp or the Bank is a party, in which any director or executive officer, any 5 percent or more security holder or any member of the immediate family of any such person had or will have a material interest, direct or indirect. There are no business relationships regarding any director requiring disclosure under 404(b) of Regulation S-K. Compliance with Section 16(a) of the Exchange Act Bancorp does not have a class of equity securities registered pursuant to Section 12 of the Exchange Act (15 USC 781), nor is it a closed-end investment company registered under the Investment Company Act of 1940 or a holding company registered pursuant to the Public Utility Holding Company Act of 1935. Accordingly its directors, officers, and beneficial owners of more than 10 percent of any class of equity securities have no obligations pursuant to Section 16(a) of the Exchange Act, including any obligation to file Forms 3, 4, or 5 pursuant thereto. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Document filed as part of this report: 1. Financial Statements The Consolidated Financial Statements, Notes thereto, and Independent Auditors' Report are incorporated herein by reference from pages 15 through 36 of the 1996 Annual Report. 2. Financial Statement Schedules All schedules for which provision is made in the applicable accounting regulations of the Securities Exchange Commission are not required under the related instructions or are not applicable and, therefore, have been omitted. 3. Exhibits EXHIBIT NUMBER DESCRIPTION 3.1 Articles of Incorporation of Trans Pacific Bancorp, incorporated by reference to Exhibit 3.1 to Bancorp's Registration Statement on Form S-1 (No. 2-86902). 3.2 Amended By-Laws of Trans Pacific Bancorp, incorporated by reference to Exhibit 3.2 to Bancorp's Registration Statement on Form S-1 (No. 2-86902). 3.3 Amendment to Articles of Incorporation, incorporated by reference to Exhibit 3.3 to Bancorp's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. 3.4 Amendment to Articles of Incorporation, incorporated by reference to Exhibit 3.4 to Bancorp's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. 4.1 Specimen Stock Certificate, incorporated by reference to Exhibit 4.1 to Bancorp's registration Statement on Form S-1 (No. 2-86902). 10.2 Employee Stock Option Plan, incorporated by reference to Exhibit 10.2 to Bancorp's Registration Statement on Form S-1 (No. 2- 86902). 10.10 Amendment to Employee Stock Option Plan incorporated by reference to Exhibit 10.10 to Bancorp's Annual Report on Form 10-K for the fiscal year ended December 31, 1987. 10.11 Amendment to Employee Stock Option Plan dated September 21, 1989 incorporated by reference to Exhibit 10.11 to Bancorp's Annual Report on Form 10-K for the fiscal year ended December 31, 1989. 10.12 Trans Pacific Bancorp Employee Stock Ownership Plan and Trust is incorporated by reference to Exhibit 4.1 to Bancorp's Registration Statement on Form S-8 (No. 33-39190). 10.13 Trans Pacific Bancorp Non Qualified Stock Option Plan is incorporated by reference to Exhibit 4.1 to Bancorp's Registration Statement on Form S-8 (No. 33-39191). 13 1996 Annual Report to Shareholders 22.1 Subsidiaries of the Registrant, incorporated by reference to Exhibit 22.1 to Bancorp's Registration Statement on Form S-1 (No. 2-86902). 23 Consent of KPMG Peat Marwick LLP. 27 Financial Data Schedule. 99.1 Proxy Statement dated November 15, 1996, filed as Supplmental Information pursuant to the instructions on Form 10-K and furnished to the Commission for its information only and shall not be deemed to be "filed" with the Commission or otherwise subject to the liabilities of Section 18 of the Securities and Exchange Act of 1934, as amended. (b) Reports on Form 8-K On October 25, 1996, Bancorp filed a report on Form 8-K. The report filed, pursuant to items 5 and 7 of the report, a copy of the Agreement and Plan of Merger and a copy of the press release titled "Private Investor Group Led by Chicago Banker Denis Daly, Sr. Announces Agreement to Acquire Trans Pacific Bancorp." On November 19, 1996, Bancorp filed a report on Form 8-K. The report filed, pursuant to items 5 and 7 of the report, a copy of the press release titled "Cyrus Tang Withdraws from Investor Group Formed by Chicago Banker Denis Daly, Sr. which will Acquire Trans Pacific Bancorp." SIGNATURES Pursuant to the requirements of Section 15 (c) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRANS PACIFIC BANCORP EDDY S.F. CHAN (Eddy S.F. Chan) President Date: March 10, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on the 10th day of March 1997. Signature Title JAMES A. BABCOCK Director and Chairman of the Board (James A. Babcock) EDDY S.F. CHAN Director, President and CEO (Eddy S.F. Chan) (Principal Executive Officer) JOHN T. STEWART Director and Secretary (John T. Stewart) SIMON S. TENG Director and Treasurer (Simon S. Teng) (Principal Financial & Accounting Officer) FRANKIE G. LEE Director and Vice Chairman (Frankie G. Lee) JOHN K. LEE Director (John K. Lee) MASAYUKI NAKAHIRA Director (Masayuki Nakahira) FRANK K.W. WONG Director (Frank K.W. Wong) JOHN K. WONG Director (John K. Wong) EX-13 2 Exhibit 13 1996 Annual Report About The Company Trans Pacific Bancorp is the holding company of Trans Pacific National Bank, an independent commercial bank with branches in San Francisco and Alameda, California. Trans Pacific National Bank has been providing financial services to local middle-market businesses, professional companies, and import/export companies since 1984. Trans Pacific Bancorp is listed on the NASDAQ Bulletin Board system under the symbol TPAE. TABLE OF CONTENTS FINANCIAL HIGHLIGHTS 3 LETTER TO SHAREHOLDERS 4 FIVE YEAR FINANCIAL SUMMARY 5 RESULTS OF OPERATIONS 6 Net Interest Income 6 Provision for Loan Losses 9 Non-Interest Income 9 Non-Interest Expense 10 Provision for Income Taxes 10 ASSET QUALITY 11 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES 12 ASSET/LIABILITY MANAGEMENT 15 CAPITAL RESOURCES 17 REPORT OF THE INDEPENDENT AUDITORS 19 CONSOLIDATED FINANCIAL STATEMENTS 20 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 26 TRANS PACIFIC BANCORP BOARD OF DIRECTORS 47 TRANS PACIFIC NATIONAL BANK PRINCIPAL OFFICERS 47 FINANCIAL HIGHLIGHTS 1996 1995 Increase For the year Net Income $ 633,052 $ 445,382 +42% Earnings Per Share 0.57 0.40 +43% At year end Loans, Net $ 47,016,335 $ 38,340,437 +23% Total Assets 77,133,275 64,826,520 +19% Deposits 68,411,575 57,563,988 +19% Shareholders' Equity 7,066,567 6,531,971 +8% Ratios Return on Average Equity 9.31% 7.14% Return on Average Assets 0.89% 0.73% Risk-Based Capital Ratio 14.17% 16.81% LETTER TO SHAREHOLDERS Financial Results We are pleased to report that 1996 was a year of record earnings for Trans Pacific Bancorp. In the best performance in our 12 year history, Bancorp had net income of $633,052, or $0.57 per share. As discussed in detail under the "Results of Operations" beginning on page 7, this 42 percent increase in earnings was due to an increasing customer base and continued good asset quality. As always, our results have been a direct reflection of the trends in California banking and the California economy, and 1996 was no exception. We believe that the local economy will continue its slow and steady improvement in 1997 and this will lead to further job growth, increased personal income and additional capital spending by businesses, which is favorable for us. Merger Agreement As you are undoubtedly aware, Bancorp has entered into a definitive agreement pursuant to which a private investor group led by Chicago banker Denis Daly, Sr. will acquire all of the issued and outstanding shares of Bancorp. The shareholders of Bancorp approved the acquisition in December 1996; the acquisition of Bancorp is pending approval by regulatory authorities. We expect the regulators to approve the agreement in the near future and that the transaction will be completed by March 31, 1997. Our new owners share our commitment to serving the needs of local businesses, especially for smaller import/export companies. You can be assured that the vision of personalized service for small business will continue under the Trans Pacific National Bank name and under the current management team. We would like thank all our shareholders, especially those who have been with us since the beginning, for their support throughout the years. James A. Babcock Eddy S.F. Chan Chairman Chief Executive Officer FIVE YEAR FINANCIAL SUMMARY Summary of Consolidated Operations Years ended December 31, (in thousands except share data) 1996 1995 1994 1993 1992 Interest income $ 5,539 4,855 4,259 4,433 5,920 Interest expense 2,109 1,799 1,369 1,617 2,646 Net interest income 3,430 3,056 2,890 2,816 3,274 Provision (recovery) for possible loan losses (40) 40 173 889 662 Other income 640 598 664 855 887 Other expense 3,037 2,962 3,088 3,567 3,579 Income (loss) before taxes 1,073 652 293 (785) (80) Income tax expense (benefit) 440 207 113 (171) 20 Net income (loss) $ 633 445 180 (614) (100) Net income (loss) per share 0.57 0.40 0.16 (0.54) (0.09) Average # of common shares outstanding 1,119,094 1,118,195 1,127,305 1,143,195 1,141,247 Year-End Financial Position Years Ended December 31, (in thousands) 1996 1995 1994 1993 1992 Cash and cash equivalents $ 9,624 9,916 7,377 6,538 4,313 Investment securities 17,801 14,359 14,508 12,812 11,314 Loans, net 47,016 38,340 32,368 39,566 50,033 Premises and equipment, net 876 933 1,037 1,015 1,281 Other assets 1,816 1,279 1,481 5,078 5,430 Total assets $ 77,133 64,827 56,771 65,009 72,371 Deposits $ 68,412 57,564 49,800 57,823 63,916 Long Term Debt - - 26 71 116 Other Liabilities 1,654 731 994 1,188 1,863 Total liabilities 70,066 58,295 50,820 59,082 65,895 Stockholders' equity 7,067 6,532 5,951 5,927 6,476 Total liabilities and equity $ 77,133 64,827 56,771 65,009 72,371 MANAGEMENT DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Bancorp earned $633 thousand in 1996. This represented an improvement over net income in 1995 of $445 thousand, and of $180 thousand in 1994. The 1996 net income reflects the effects of an improving California economy and the strengthening financial condition of the Bank's customers, which led to improved asset quality compared to previous years. On a per share basis, the 1996 net income was $0.57, compared to net income of $0.40 and of $0.16 in 1995 and 1994, respectively. In addition to the factors discussed above, the improvement in 1996 reflects improved net interest income, a decreased provision for loan losses and higher non-interest income. The improvement in 1995 over 1994 was mostly due to higher net interest income, a decreased provision for loan losses and lower non-interest expense. Bancorp's return on average total assets (ROA) was 0.89 percent in 1996, an increase from 0.73 percent and 0.30 percent in the previous two years. Return on equity (ROE) in 1996 was 9.31 percent, compared with 7.14 percent in 1995 and 3.03 percent in 1994. Components of Net Income (percentage of average earning assets) 1996 1995 1994 Net interest income 5.45% 5.74% 5.35% Recovery (provision) for loan losses 0.06 (0.08) (0.32) Non-interest income 1.02 1.12 1.23 Non-interest expense (4.83) (5.55) (5.72) Income tax expense (0.70) (0.39) (0.21) Net income 1.00 0.84 0.33 Net income as a percentage of average total assets 0.89 0.73 0.30 Net Interest Income Net interest income is the difference between interest income (which includes yield-related net loan fees) and interest expense. The following table details the components of net interest income: Components of Net Interest Income (in thousands) 1996 1995 1994 Interest Income $ 5,539 4,855 4,259 Interest Expense 2,109 1,799 1,369 Net interest income $ 3,430 3,056 2,890 Average earning assets $ 62,930 53,212 53,987 Net interest margin 5.45% 5.74% 5.35% Net interest income in 1996 increased by $374 thousand, or 12 percent from 1995 to $3.4 million. Separately, interest income increased $684 thousand, or 14 percent, and interest expense increased $310 thousand, or 17 percent in 1996. The increase in interest expense was caused by an overall increase in deposits and an increase in cost of funds due to competitive pressures in market rates. The increase in interest income was due to increased earning assets, net of the effects of a lower average prime rate in 1996. The net interest margin, which represents the average net yield on earning assets was 5.45 percent for 1996 versus 5.74 percent and 5.35 percent for 1995 and 1994, respectively. The following table is a summary of the changes in net interest income attributable to changes in either average balances or average rates for both interest-earning assets and interest-bearing liabilities in thousands for the years ended December 31, 1996 and 1995. Because of the numerous simultaneous volume and rate changes during any period, it is not possible to precisely allocate changes between volume and rate. For this table, the changes in interest earned and interest paid due to both rate and volume have been allocated to changes due to volume and rate in proportion to the relationship of absolute dollar amounts in each. Rate and Volume Analysis Years ended December 31, 1996 versus 1995 1995 versus 1994 Volume Rate Total Volume Rate Total Increase (decrease) in interest income due to interest earning assets: Loans $ 710 (198) 512 56 489 545 Investment securities 69 22 91 73 10 83 Federal funds sold 85 (14) 71 (78) 59 (19) Interest-bearing deposits with banks 8 2 10 (12) (1) (13) Total interest-earning assets $ 872 (188) 684 39 557 596 Increase (decrease) in interest expense due to interest-bearing liabilities: Deposits: Demand, interest-bearing $ 186 29 215 23 222 245 Savings (4) - (4) (11) 1 (10) Time 64 25 89 (70) 295 225 Other short-term borrowings 15 (5) 10 (27) (3) (30) Total interest-bearing liabilities $ 261 49 310 (85) 515 430 Net interest-earning assets $ 611 (237) 374 124 42 166 The following table lists the average amounts, in thousands, outstanding for major categories of interest-earning assets (excluding non-accrual loans) and interest-bearing liabilities and the average interest rates earned, including loan fee income, and paid for the periods indicated. Average Balances and Rates Years ended December 31, 1996 1995 Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Earning Assets: Loans $42,762 4,355 10.18% $ 35,866 3,844 10.72% Investment securities 13,859 831 5.99% 12,694 739 5.82% Federal funds sold 5,816 320 5.50% 4,283 249 5.82% Interest-bearing deposits with banks 493 33 6.78% 369 23 6.29% Total interest-earning assets $ 62,930 5,539 8.80% $ 53,212 4,855 9.12% Interest-Bearing Liabilities: Deposits: Demand, interest-bearing $ 28,768 1,003 3.49% $ 23,421 788 3.37% Savings 999 23 2.25% 1,179 26 2.22% Time 19,685 1,057 5.37% 18,481 969 5.24% Other short-term borrowings 558 26 4.67% 251 16 6.36% Total interest-bearing liabilities $ 50,010 2,109 4.22% $ 43,332 1,799 4.15% Net interest income $ 3,430 $ 3,056 Net interest-earning assets yield 5.45% 5.74% 1994 Interest Average Average Income/ Yield/ Balance Expense Rate Earning Assets: Loans $ 35,275 3,299 9.35% Investment securities 11,442 656 5.73% Federal funds sold 6,722 268 3.99% Interest-bearing deposits with banks 548 36 6.57% Total interest-earning assets $ 53,987 4,259 7.89% Interest-Bearing Liabilities: Deposits: Demand, interest-bearing $ 22,505 544 2.42% Savings 1,680 36 2.14% Time 20,616 743 3.60% Other short-term borrowings 885 46 5.20% Total interest-bearing liabilities $ 45,686 1,369 3.00% Net interest income $ 2,890 Net interest-earning assets yield 5.35% Provision for Loan Losses The level of the provision for loan losses during the past three years reflects continuous efforts to improve loan quality by enforcing strict underwriting and administration procedures and aggressively pursuing collection efforts with troubled debtors. The determination of the provision for loan losses and, correspondingly, the level of the allowance for loan losses is based on evaluation of changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, prior loan loss experiences and current economic conditions which may affect the borrowers' ability to pay. The provision for loan losses was a net recovery of $40 thousand in 1996, compared to a provision of $40 thousand in 1995 and of $173 thousand in 1994. The decrease in the provision for loan losses reflected the effects of improving asset quality, due in part to positive California economic trends and recoveries of previously charged-off loans. For further discussion related to the provision for loan losses, see the section below entitled "Asset Quality". Non-Interest Income Components of Non-Interest Income (in thousands) 1996 1995 1994 Deposit account fees $ 237 282 268 Other charges and fees 379 316 312 Other real estate - - 84 Gain on sale of loans 24 - - $ 640 598 664 Non-interest income increased 7 percent in 1996 to $640 thousand. The improvement was due mainly to higher commissions collected on export letters of credit transactions. In 1995, non-interest income decreased 10 percent from the previous year, due mainly to zero income for other real estate owned, which includes rental income and the net gain on sales of other real estate owned (OREO), as the Bank had no foreclosed properties during 1995. Non-Interest Expense Components of Non-Interest Expense (in thousands) 1996 1995 1994 Salaries and employee benefits $ 1,661 1,720 1,627 Occupancy 276 296 325 Data processing 107 120 119 Amortization of deposit premium 99 99 99 Furniture and equipment 71 97 95 Accounting and audit 110 85 81 Federal deposit insurance 2 58 142 Legal 147 36 38 Other real estate owned - - 107 Other expenses 564 450 456 $ 3,037 2,961 3,089 Non-interest expense increased to $3.04 million in 1996, an increase of 3 percent as compared to 1995. Salaries and employee benefits were down 3 percent during the year, as full time equivalent employees were down by 1 and the salary expense offset of loan originating was up by 6 percent due to higher loan origination activities in 1996. Also, no ESOP contribution was made in 1996. These decreases in salary expense were offset by additional expenses accrued for potential payments under a management incentive plan which were higher than the previous year due to higher net income. Federal deposit insurance was decreased to $2 thousand, a reduction of 97 percent over the previous year, due to a decrease in premiums for banks classified as well capitalized. Accounting and legal fees were increased by approximately $97 thousand due to the acquisition. Other operating expenses were $564 thousand, up 25 percent compared to 1995, primarily due to approximately $81 thousand in operations losses. In 1995, non-interest expense decreased 4 percent as compared to 1994, due primarily to a decrease in the Federal deposit insurance and in the expenses related to other real estate owned properties. Salaries and employee benefits rose 5.7 percent over 1994; which included incentive payments made under a management incentive plan implemented in 1995. Occupancy and furniture and equipment expense were lower by 12 percent and 24 percent, respectively, due to reduced depreciation as certain assets became fully depreciated in 1995 and 1994. Provision for Income Taxes The 1996 income tax expense was $440 thousand compared to $207 thousand in 1995 and $113 thousand in 1994. The effective tax rate for 1996 was 41 percent, versus 32 percent in 1995 and 38 percent in 1994. The effective rate in 1996 was higher due to merger-related expenses incurred in 1996, which are not deductible for tax purposes, and the recognition of deferred tax assets. ASSET QUALITY Bancorp closely monitors the markets in which it conducts its lending operations. The two primary areas of lending for Bancorp are commercial and real estate loans, which in total comprise 95 percent of loans outstanding as of December 31, 1996. To control its exposure and concentration in real estate loans, Bancorp has established limits by type of collateral and purpose. To increase diversification of credit risk in commercial loans, Bancorp monitors commercial loans by business type and location. Asset reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Assets receiving lesser grades are called classified assets and include all potential problem loans. These occur when known information about possible credit problems of borrowers cause management to have doubts as to the ability of such borrowers to comply with loan repayment terms. These loans have varying degrees of uncertainty and may become non-performing assets. While historically only a relatively small amount of classified assets have resulted in losses, such assets receive an elevated level of Management attention to ensure collection. All non- performing assets are included in classified assets. Other classified assets consist of other real estate owned and securities. Classified assets at December 31, 1996, 1995 and 1994 are summarized below: (in thousands) 1996 1995 1994 Classified loans $ 2,041 1,443 2,208 Other classified assets 303 - - Total classified assets $ 2,344 1,443 2,208 Reserve for loan losses as a percentage of classified loans 25% 28% 18% During 1996, classified assets increased from $1.4 million to $2.3 million due to one corporate bond downgraded to non-investment grade during 1996 and higher classified loans at December 31, 1996 due primarily to one additional large loan downgraded. During 1995, classified loans decreased from $2.2 million to $1.4 million, due to successful classified loan collections. The performance of any individual loans can be impacted by external factors such as the interest rate environment or factors particular to the borrower. Non-Performing Assets and Restructured Loans During the years ended December 31, 1996 and 1995 there were no other restructuring of loans, foreign outstandings, loan concentrations or potential problem loans except as discussed below or in the Consolidated Financial Statements and related footnotes. See Note 1 of the Notes to Consolidated Financial Statements for a discussion of the Bank's policy on non-accrual loans. Non-performing assets include non-accrual loans and other real estate owned. Loans are placed on non-accrual status upon reaching 90 days or more delinquent, unless the loan is well secured and in the process of collection. Interest previously accrued on loans placed on non-accrual status is charged against interest income. Loans secured by real estate, with temporarily impaired values and commercial loans to borrowers experiencing financial difficulties, may be placed on non-accrual status even if the borrowers continue to repay the loans as scheduled. Such loans are reinstated to an accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period, and there is a sustained period of repayment performance in accordance with the contractual terms. When the ability to fully collect non-accrual loan principal is in doubt, cash payments received are applied against the principal balance of the loans until such time as full collection of the remaining recorded balance is expected, at which point any additional payments received are recorded as interest income on a cash basis. Loans 90 days or more past due and still accruing, restructured loans, and non-performing assets are as follows for December 31, 1996, 1995, and 1994: December 31, (in thousands) 1996 1995 1994 Loans 90 days or more past due and still accruing interest $ 3 - 66 Restructured loans 635 635 635 Non-performing assets: Non-accrual loans 6 45 352 Other real estate owned - - - $ 6 45 352 Total $ 644 680 1,053 The levels of non-performing assets has decreased over the past three years due to both internal factors such as improved underwriting and monitoring of loans, and external factors such as an improving Bay Area economy and more stable real estate values. Non-performing assets were $6 thousand at December 31, 1996, down 87 percent from $45 thousand at December 31, 1995, due primarily to the resolution of non-accrual loans during the year. At December 31, 1996, other real estate owned was $0 and there were no foreclosure activity during the year. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The Bank has an established process to determine the adequacy of the allowance for loan losses based upon the risk of loss inherent in its portfolio. This process uses two complementary allocation procedures: Specific credit allocations for problem loans; and an unallocated portion provided for the remaining loan portfolio. While management has made specific and general allocations to various portfolio segments, the total allowance for loan losses is general in nature and is available for the portfolio in its entirety. The Bank's determination of the level of the allowance rests upon various judgments and assumptions, including portfolio composition and concentrations, lending policies, delinquency trends and general economic conditions. The Bank has a credit review and evaluation program which continuously reviews loan quality, incorporating internal and external credit review. The results of these reviews are reported to the Board of Directors. Such reviews also assist management in establishing the level of the allowance. The table below provides a breakdown of the allowance for loan losses by loan category. Although management has allocated the allowance to specific loan categories, the adequacy of the allowance must be considered in its entirety. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgement of information available to them at the time of their examination. December 31, (in thousands) 1996 1995 Allowance % of Loans Allowance % of Loans Domestic: Commercial $ 260 1.41% 226 1.22% Real Estate - Construction - - - - Real Estate - Mortgage 108 0.40% 82 0.45% Consumer 9 0.38% 9 0.40% Foreign - - - - Unallocated 142 - 87 - $ 519 1.09% 404 1.04% Effective January 1, 1995, Bancorp adopted Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, (SFAS No. 114), as amended by Standard of Financial Accounting Standards No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures (SFAS No. 118). Under SFAS No. 114 a loan is considered impaired when, based on current information and events, it is "probable" that a creditor will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. The measurement of impairment may be based on (i) the present value of the expected cash flows of the impaired loan discounted at the loan's original effective interest rate, (ii) the observable market price of the impaired loans, or (iii) the fair value of the collateral of a collateral-dependent loan. SFAS No. 114, as amended by SFAS No. 118, does not apply to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment. Bancorp generally identifies loans to be reported as impaired when such loans are in non accrual status or are considered troubled debt restructurings due to the granting of a below-market rate of interest or a partial forgiveness of indebtedness on an existing loan. In measuring impairment for the purpose of establishing specific loan loss reserves, Bancorp reviews all impaired commercial and construction loans classified "Substandard" and "Doubtful". All "loss" classified loans are fully reserved under Bancorp's standard loan loss reserve methodology. Commercial and real estate loans that are not classified, groups of non-classified, smaller balance loans such as installment loans and preferred lines of credit, are evaluated collectively for impairment under Bancorp's standard loan loss reserve methodology and are, therefore, excluded from the specific evaluation using SFAS No. 114. The following summarizes Bancorp's impaired loans at December 31, 1996: Non-Accrual Troubled Debt Total Impaired Specific (in thousands) Loans Restructurings Loans Reserves $ 6 - 6 1 The average balances of Bancorp's impaired loans for the year ended December 31, 1996 was $29 thousand. In general, Bancorp does not recognize any interest income on loans that are classified as impaired. Changes in the allowance for loan losses for the years 1996 and 1995 were as follows: (in thousands) 1996 1995 Balance, beginning of year $ 404 390 Charge-offs: Domestic: Commercial, financial and agricultural - 63 Real estate: construction - - Real estate: mortgage - 221 Installment loans to individuals 4 - Lease financing - - Foreign - - Total charge-offs 4 284 Recoveries: Domestic: Commercial, financial and agricultural 109 255 Real estate: construction - - Real estate: mortgage 44 3 Installment loans to individuals 6 - Lease financing - - Foreign - - Total Recoveries 159 258 Net recoveries (charge-offs) 155 (26) Provision (recovery) for loan losses (40) 40 Balance at end of year $ 519 404 Ratio of net charge-offs (recoveries) during the year to average loans outstanding during the year (0.36)% 0.08% Bancorp has experienced reduced levels of chargeoffs over the past three year period due to both internal factors such as improved underwriting and monitoring of loans, and external factors such as an improving Bay Area economy and more stable real estate values. Net recoveries in 1996 were $155 thousand or 0.36 percent of average total loans, compared with net chargeoffs of $26 thousand or 0.08 percent in 1995 and $453 thousand or 1.24 percent in 1994. The decrease in net chargeoffs was due to successful efforts in collecting previously charged off loans. ASSET/LIABILITY MANAGEMENT The fundamental objectives of Bancorp's asset/liability management policy are to: (1) maintain liquidity and (2) minimize interest rate risk. Liquidity Liquidity is the ability to meet the present and future needs of customers for funds, primarily the funding of loans and deposit withdrawals. Liquidity is measured and managed at both the parent and banking subsidiary levels. Bancorp is funded by dividend income from the Bank, as well as income from outside sources and through the issuance of equity. Bancorp uses its proceeds primarily to pay the Bank for administrative expenses. In general, the primary source of liquidity for the Bank is the growth of core deposits (particularly demand deposits), and the orderly repayment of the Bank's loan portfolio. Because of the Bank's emphasis on relationship banking, the establishment of both loan and deposit relationships with customers, the Bank has a relatively stable, local deposit base, and brokering deposits is not considered necessary. To supplement short-term liquidity needs, the Bank maintains Fed Funds sold, time deposits with other financial institutions, short-term money market and securities available for sale that totalled approximately $23.6 million, or 31 percent of assets, at December 31, 1996. Additionally, the Bank has established unsecured line of credits with correspondent banks and reverse repurchase facilities with securities dealers. These credit facilities are subject to periodic review. As shown in the Consolidated Statements of Cash Flows, liquidity, or cash and cash equivalents decreased to $9.6 million at December 31, 1996 compared to $9.9 million at December 31, 1995. Net cash flows of $687 thousand, $843 thousand, and $896 thousand were provided by operating activities in 1996, 1995, and 1994, respectively. Net cash flows of $11.2 million and $7.4 million were provided by financing activities in 1996 and 1995, respectively, primarily due to increases in deposits, while $8.1 million was used in financing activities in 1994, principally to fund customer withdrawals of time deposits. Net cash flows of $12.2 million and $5.7 million were used in investing activities in 1996 and 1995, respectively, primarily due to the funding of loans and purchases of investment securities. In 1994, $8.0 million was provided by investing activities, primarily from loan principal repayments and the sales of other real estate owned. Interest Rate Risk Bancorp evaluates its interest rate risk exposure by analyzing the interest rate sensitivity of its balance sheet accounts. Interest rate sensitivity measures the interval of time before interest-earning assets and interest- bearing liabilities respond to changes in market rates of interest. The difference between the amount of assets and amount of liabilities which may be re-priced in the same time period is referred to as the "gap". If more assets than liabilities are re-priced at a given time, net interest income tends to improve in a rising rate environment and to decline with lower interest rates. If more liabilities than assets are re-priced under the same conditions, the opposite tends to prevail. The table below shows the interest rate sensitivity of Bancorp based on asset and liability repricing characteristics, excluding non-accruing loans, at December 31, 1996 (in thousands). For this table, assets and liabilities are assumed to reprice or mature according to contractual repricing or maturity dates, except for market rate accounts which may be repriced at any time at Bancorp's discretion. Re-pricing Immediately 90 days 91-180 181-365 Over Opportunity Adjustable or less days days 365 days Total Rate sensitive assets: Federal funds sold $ 6,200 - - - - 6,200 Interest-bearing deposits - 199 - - 194 393 Securities 165 1,545 797 2,292 12,609 17,408 Loans 27,019 3,574 1,531 1,597 13,808 47,529 Interest earning assets $ 33,384 5,318 2,328 3,889 26,611 71,530 Rate sensitive liabilities: Market rate accounts $ 31,087 - - - - 31,087 Savings 1,074 - - - - 1,074 Time deposits 2,564 8,271 5,121 3,639 1,656 21,251 Other borrowed funds - 331 275 - - 606 Interest paying liabilities $ 34,725 8,601 5,397 3,639 1,656 54,018 Gap $ (1,341) (3,283) (3,069) 250 24,955 17,512 Cumulative gap $ (1,341) (4,624) (7,693) (7,443) 17,512 The table indicates that overall, Bancorp re-prices more assets than liabilities i.e., is asset-sensitive, and, therefore, generally earns a greater interest spread as interest rates increase and earns a lower interest spread as rates decrease. In the short-term, Bancorp reprices more liabilities than assets, and is liability-sensitive. Depending on interest rate trends and forecasts, Bancorp has the opportunity to modify asset pricing or liability rates offered in a particular time frame in order to reduce interest rate sensitivity. The ability to manage these changes is affected by economic conditions, the competitive environment, and the policies of governmental and regulatory authorities. Additionally, certain assets and liabilities have option-like characteristics that may affect net interest income through the exercise of those options as interest rates change. Hedging strategies using interest rate futures and swaps, while available, are generally not used by Bancorp. CAPITAL RESOURCES The capital position of Bancorp represents the level of capital needed to support the operation and expansion of Bancorp and the Bank and to protect depositors and the deposit insurance fund from potential losses. Management regularly reviews capital adequacy to ensure that capital is consistent with Bancorp's and the Bank's expected growth. On February 23, 1996, a special dividend was declared to shareholders of record on March 8, 1996. The first- ever dividend of 8 cents per share was paid on March 29, 1996 . Bancorp has no current plans to pay regular dividends. Stockholder's equity totalled $7.1 million at December 31, 1996, up from $6.5 million at December 31, 1995 and $5.95 million at December 31, 1994. The increase in stockholder's equity was due to Bancorp's net income for 1996. Bancorp and the Bank are subject to risk-based capital adequacy requirements which call for a minimum 8 percent total risk-based capital ratio, including a Tier 1 capital ratio of 4 percent. There are two categories of capital under the guidelines. Tier 1 capital includes common stockholders' equity and qualifying preferred stock, less certain intangible assets. Tier 2 capital generally includes, subject to limitations, preferred stock not qualifying as Tier 1 capital, mandatory convertible debt, subordinated and unsecured senior debt and the allowance for loan losses. The risk-based capital ratio is determined by weighing assets and off-balance sheet exposures according to their relative credit risks. The Federal Reserve has also established a minimum capital requirement ratio. This ratio, Tier 1 capital to quarterly average total assets, operates in conjunction with the risk-based capital guidelines and limits the amount of leverage a bank can undertake. Currently, all banks must maintain at least a 3 percent leverage ratio. In general, however, only the top-ranked banking organizations may operate at the minimum capital levels. Other institutions will be expected to maintain ratios that are at least 100 to 200 basis points above the minimum levels of capital. It is management's intent to maintain capital ratios for Bancorp and the Bank above the regulatory well-capitalized levels, which are 6 percent for the Tier 1 capital ratio, 10 percent for the total risk-based capital ratio, and 5 percent for the Tier 1 leverage ratio. Between December 1992 and September 1994, the Bank was required to maintain a Tier 1 capital ratio of at least 10 percent, and a leverage ratio of at least 6 percent, levels higher than the regulatory minimum, under the terms of the Bank's Formal Agreement with the Office of the Comptroller of the Currency. The Formal Agreement was terminated in September 1994. Bancorp's and the Bank's capital ratios continued to exceed the minimum levels required and were above the regulatory well-capitalized levels throughout 1996. Bancorp's and the Bank's capital ratios for 1996, 1995, and 1994 were: December 31, Capital Ratios 1996 1995 1994 Trans Pacific Bancorp: Tier 1 Capital Ratio 13.19% 15.81% 15.99% Risk-Based Capital Ratio 14.17% 16.81% 17.06% Leverage Ratio 9.39% 9.85% 9.80% Trans Pacific National Bank: Tier 1 Capital Ratio 13.48% 16.06% 16.08% Risk-Based Capital Ratio 14.46% 17.05% 17.14% Leverage Ratio 9.62% 10.03% 9.90% The most recent notification from the OCC categorized the Bank as well capitalized under the FDICIA regulatory framework for prompt corrective action. Management believes that, as of December 31, 1996, Bancorp and the Bank met all capital adequacy requirements to which they were subject. There are no known trends, events, or uncertainties that will have or that are reasonably likely to have a material effect on Bancorp's capital resources, liquidity, asset quality, or results of operations. REPORT OF THE INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Trans Pacific Bancorp: We have audited the accompanying consolidated balance sheets of Trans Pacific Bancorp and Subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of Bancorp's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Trans Pacific Bancorp and Subsidiary as of December 31, 1996 and 1995, and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/KPMG Peat Marwick LLP San Francisco, California February 7, 1997 CONSOLIDATED FINANCIAL STATEMENTS Trans Pacific Bancorp and Subsidiary CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995 Assets 1996 1995 Cash and due from banks (note 2) $ 3,423,798 5,190,611 Federal funds sold 6,200,000 4,725,000 Interest-bearing deposits with banks 393,000 489,713 Securities available for sale, at fair value (note 3) 17,407,901 13,870,220 Loans, net (notes 4, 10 and 11): Commercial 18,419,932 18,555,335 Real estate 26,829,533 17,982,782 Installment 171,892 167,443 Preference lines 2,102,342 1,997,955 Other 11,445 40,573 Total loans 47,535,144 38,744,088 Allowance for loan losses 518,809 403,651 Loans, net 47,016,335 38,340,437 Premises and equipment, net (note 5) 876,471 932,553 Customer acceptances outstanding 116,694 50,393 Deferred tax asset, net (note 6) 50,900 - Intangible assets 338,167 437,141 Other assets 1,310,009 790,452 Total assets $ 77,133,275 64,826,520 continued . . . Trans Pacific Bancorp and Subsidiary CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995 Liabilities and Stockholders' Equity 1996 1995 Liabilities: Non-interest-bearing demand deposits $ 14,999,909 10,453,322 Interest-bearing demand deposits 31,086,544 26,913,507 Savings 1,073,892 1,023,815 Time deposits (note 7) 21,251,230 19,173,344 Total deposits 68,411,575 57,563,988 Accrued interest payable 204,792 178,430 Other short-term borrowings 606,086 186,432 Acceptances outstanding 116,694 50,393 Deferred tax liability, net (note 6) - 30,700 Other liabilities 727,561 284,606 Total liabilities 70,066,708 58,294,549 Commitments and contingencies (notes 11 and 16) Stockholders' equity: Common stock, no par value; 10,000,000 shares authorized, 1,120,195 and 1,118,195 shares issued and outstanding (note 8) 5,794,323 5,784,323 Retained earnings 1,312,244 768,648 Net unrealized losses on securities available for sale (note 3) (40,000) (21,000) Total stockholders' equity 7,066,567 6,531,971 Total liabilities and stockholders' equity $ 77,133,275 64,826,520 Trans Pacific Bancorp and Subsidiary CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1996, 1995 and 1994 1996 1995 1994 Interest income: Loans $ 4,355,304 3,843,432 3,298,910 Investment securities, including dividends 830,661 739,133 655,848 Deposits with banks 33,411 23,240 36,481 Federal funds sold 320,101 249,237 268,166 Total interest income 5,539,477 4,855,042 4,259,405 Interest expense: Deposits (note 7) 2,083,455 1,783,252 1,323,044 Other borrowed funds (note 9) 26,034 15,958 46,149 Total interest expense 2,109,489 1,799,210 1,369,193 Net interest income before provision (recovery) for loan losses 3,429,988 3,055,832 2,890,212 Provision (recovery) for loan losses (note 4) (40,000) 40,000 173,000 Net interest income after provision (recovery) for loan losses 3,469,988 3,015,832 2,717,212 Non-interest income: Gain on sale of loans 23,625 - - Service charges on deposit accounts 237,084 282,349 267,998 Other real estate owned - - 83,982 Other charges and fees 378,850 315,416 312,013 Total non-interest income 639,559 597,765 663,993 Non-interest expense: Salaries and employee benefits (note 9) 1,660,556 1,719,503 1,626,665 Occupancy 275,550 295,734 325,051 Furniture and equipment 71,691 96,514 94,793 Other real estate owned - 214 106,885 Other operating 1,028,697 849,250 935,120 Total non-interest expense 3,036,494 2,961,215 3,088,514 Income before income taxes 1,073,052 652,382 292,691 Income tax expense (note 6) 440,000 207,000 112,500 Net income $ 633,052 445,382 180,191 Net income per share $ 0.57 0.40 0.16 Average common shares outstanding (note 8) 1,119,094 1,118,195 1,127,305 Trans Pacific Bancorp and Subsidiary CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years ended December 31, 1996, 1995 and 1994 Deferred Unrealized Compensation- Gains (losses) Employee on Securities Total Stock Available Stock- Common Stock Retained Ownership For Sale holder Shares Amount Earnings Plan Net of Tax Equity Balance at Dec. 31, 1993 1,143,195 $5,834,827 $ 143,075 $ (71,250) $20,250 $5,926,902 Net income - - 180,191 - - 180,191 Repurchase of common stock (25,000) (50,504) - - - (50,504) Debt reduction of ESOP - - - 45,000 - 45,000 Change in unrealized gains (losses) on securities available for sale, net of tax - - - - (150,750) (150,750) Balance at Dec. 31, 1994 1,118,195 5,784,323 323,266 (26,250) (130,500) 5,950,839 Net income - - 445,382 - - 445,382 Debt reduction of ESOP - - - 26,250 - 26,250 Change in unrealized gains (losses) on securities available for sale, net of tax - - - - 109,500 109,500 Balance at Dec. 31, 1995 1,118,195 5,784,323 768,648 - (21,000) 6,531,971 Net income - - 633,052 - - 633,052 Dividends paid ($0.08 per share) - - (89,456) - - (89,456) Stock options exercised 2,000 10,000 - - - 10,000 Change in unrealized gains (losses) on securities available for sale, net of tax - - - - (19,000) (19,000) Balance at Dec. 31, 1996 1,120,195 $5,794,323 $1,312,244 $ - $ (40,000) $7,066,567 Trans Pacific Bancorp CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1996, 1995 and 1994 1996 1995 1994 Cash flows from operating activities: Net income $ 633,052 445,382 180,191 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 204,644 225,133 250,431 Provision (recovery) for loan losses (40,000) 40,000 173,000 Provision for real estate owned - - 75,000 Gain on sale of other real estate owned - - (48,135) Deferred tax expense (benefit) (60,600) 37,700 - Increase in accrued interest payable 26,362 71,267 11,183 Increase (decrease) in other liabilities 442,955 31,390 (45,734) (Increase) decrease in other assets (519,557) (8,150) 300,556 Total adjustments 53,804 397,340 716,301 Net cash provided by operating activities 686,856 842,722 896,492 Cash flows from investing activities: (Increase) decrease in loans funded, net of principal collected (8,635,898) (6,012,070) 6,843,566 Proceeds from principal repayments and matured investment securities 10,802,834 4,265,543 7,725,811 Purchase of securities held to maturity - - (8,031,885) Purchase of securities available for sale (14,380,515) (4,169,277) (1,556,485) Net decrease (increase) in interest-bearing deposits with banks 96,713 197,304 (33,848) Purchase of premises and equipment (49,588) (22,116) (173,409) Proceeds from sale of other real estate owned - - 3,482,593 Purchase of other real estate owned - - (221,328) Net cash (used in) provided by investing activities (12,166,454) (5,740,616) 8,035,015 continued . . . Trans Pacific Bancorp and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 Cash flows from financing activities: Net increase (decrease) in demand deposits and savings $ 8,769,701 5,458,872 (1,650,467) Net increase (decrease) in time deposits 2,077,886 2,304,879 (6,372,769) Proceeds from other short-term borrowings 1,028,326 186,432 3,169,448 Repayment of other short-term borrowings (608,672) (513,917) (3,187,665) Repurchase of common stock - - (50,504) Dividends paid (89,456) - - Proceeds from stock options exercised 10,000 - - Net cash provided by (used in) financing activities 11,187,785 7,436,266 (8,091,957) Net (decrease) increase in cash and cash equivalents (291,813) 2,538,372 839,550 Cash and cash equivalents at beginning of year 9,915,611 7,377,239 6,537,689 Cash and cash equivalents at end of year $ 9,623,798 9,915,611 7,377,239 Supplemental Disclosures of Cash Flow Information Non-cash investing and financing activities: Real estate acquired in settlement of loans $ - - 181,431 Reduction of guaranteed ESOP obligation - 26,250 45,000 Change in unrealized gains (losses) on securities available for sale, net of taxes (19,000) 109,500 150,750 Transfer of held-to-maturity securities to available-for-sale - 6,594,663 - Cash paid for: Interest $ 2,933,591 1,799,210 1,358,010 Income taxes 152,400 147,400 800 Trans Pacific Bancorp and Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 1. Business and Significant Accounting Policies Trans Pacific Bancorp, a registered banking holding company (Bancorp), provides a full range of banking services to individual and corporate customers in Northern California through its wholly-owned subsidiary bank, Trans Pacific National Bank (the Bank). The Bank is subject to competition from other financial institutions and to regulations of certain agencies and undergoes periodic examinations by those regulatory agencies. Summary of Significant Accounting Policies The consolidated financial statements include the accounts of Bancorp and the Bank, and are prepared in conformity with generally accepted accounting principles and general practices within the banking industry. The following is a summary of significant policies used in the preparation of the accompanying financial statements. In preparing the financial statements, Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of income and expenses for the periods presented, in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Certain reclassifications have been made to balances in preceding years to conform to the current year presentation. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for a one day period. Marketable Investment Securities Marketable investment securities consist of US Treasury, mortgage-backed, corporate debt securities, and Federal Reserve stock. Bancorp adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities at December 31, 1993. Under SFAS No. 115, Bancorp classifies its debt and marketable equity securities in one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities in which Bancorp has the ability and intent to hold the security until maturity. All other securities not included in trading or held- to-maturity are classified as available-for-sale. The Bancorp engages in no securities trading activities. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. Unrealized gains and losses associated with transfer of securities from held-to-maturity to available-for-sale are recorded as a separate component of stockholders' equity. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale and held-to-maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. A decline in the market value of any available for sale or held to maturity security below cost that is deemed other than temporary, results in a charge to earnings and the establishment of a new cost basis for the security. Loans and Allowance for Loan Losses Loans are stated at the amount of unpaid principal, net of deferred fees, and reduced by an allowance for loan losses. Accrual of interest is discontinued on loans which are more than 90 days delinquent when Management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful unless the loans are well-secured and in the process of collection. When a loan is placed on non-accrual status, all interest previously accrued but not collected is charged against current period income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Non-refundable fees and direct loan origination costs are deferred and amortized to income or expense over the expected loan period using a method that approximates the interest method. The allowance for loan losses is established through periodic provisions for possible loan losses. Loans are charged against the allowance for loan losses when Management believes that the collectibility of the principal is unlikely. The allowance is a reserve to absorb possible losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations include consideration of changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. Management believes that the allowance for loans losses is adequate. While Management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review Bancorp's allowance for loan losses. Such agencies may require Bancorp to recognize additions to the allowance based on their judgment of information available to them at the time of their examination. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation, which is computed using the straight-line method over the estimated useful lives of the assets (3 to 20 years). Leasehold improvements are amortized over their estimated useful lives or the terms of the respective leases, whichever is shorter. Fully depreciated assets are removed from Bancorp's Balance Sheet. Impairment of Long-Lived Assets In 1995, the Financial Accounting Standard Board issued the Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Under the provisions of SFAS No. 121, long-lived assets and certain identifiable intangibles to be held and used by an entity are required to be reviewed for impairment whenever events or changes indicate that the carrying amount of an asset may not be recoverable. Bancorp implemented SFAS No. 121 in January 1996. The impact of the adoption of SFAS No. 121 was not material to Bancorp's financial statements. Stock Option Plan Prior to January 1, 1996, Bancorp accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, Bancorp adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period, the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and related Interpretations, and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair value based method defined in SFAS No. 123 had been applied. Bancorp has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. The results of the fair value based method defined in SFAS No. 123 did not have a material impact on Bancorp's financial statements. Other Real Estate Owned Other real estate owned, consisting of real estate acquired in the settlement of loans is carried at the lower of cost or the fair value less estimated selling costs. Fair value represents the amount that could be reasonably expected in a current sale (other than a forced or liquidation sale) between a willing buyer and a willing seller and is generally based upon an independent property appraisal. When the property is acquired, any excess of the loan balance over fair value of the property is charged to the related allowance for loan losses. Subsequent write-downs due to the declines in independent property appraisals, and routine holding costs are included in other real estate owned expense. Core Deposit Intangibles Core deposit intangibles are amortized over the estimated average life (10 years) of the acquired deposit base using the straight line method which is a basis that approximates the anticipated deposit runoff. Net Income per Share Net income per share is computed by dividing net income by the average number of shares outstanding during the period. The impact of common stock equivalents, primarily stock options, is not material. Income Taxes Bancorp and its subsidiaries file consolidated tax returns. For financial reporting purposes, the income tax effects of transactions are recognized in the year in which they enter into the determination of recorded income, regardless of when they are recognized for income tax purposes. Accordingly, the provisions for income taxes in the consolidated statements of income include charges or credits for deferred income taxes relating to temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. Note 2. Restricted Cash Balances Federal Reserve Board regulations require reserve balances on deposits to be maintained by the Bank with the Federal Reserve Bank. The required reserve balances were $252,000 and $279,000 at December 31, 1996 and 1995, respectively. As compensation for check clearing and other services, compensating balances of approximately $2,800,000 and $4,900,000 were maintained with correspondent banks at December 31, 1996 and 1995, respectively. Note 3. Investment Securities The amortized cost, unrealized gains and losses, and estimated fair value of major components of available for sale securities at December 31, 1996 and 1995 were as follows: Amortized Unrealized Unrealized 1996 Cost Gains Losses Fair Value Available for sale: US Treasury securities $ 3,281,761 12,027 (5,429) 3,288,359 Government Agency securities 8,294,103 3,437 (54,111) 8,243,429 Mortgage-backed securities 4,552,100 21,698 (34,796) 4,539,002 Corporate debt securities 807,530 - (10,825) 796,705 Federal Reserve stock and other securities 540,406 - - 540,406 $ 17,475,900 37,162 (105,161) 17,407,901 Amortized Unrealized Unrealized 1995 Cost Gains Losses Fair Value Available for sale: US Treasury securities $ 6,785,849 22,822 (9,687) 6,798,984 Government Agency securities 2,500,000 2,650 - 2,502,650 Mortgage-backed securities 2,690,646 24,340 (15,788) 2,699,198 Corporate debt securities 1,366,002 - (52,337) 1,313,665 Federal Reserve stock and other securities 555,723 - - 555,723 $ 13,898,220 49,812 (77,812) 13,870,220 The amortized cost and estimated fair value of investment securities at December 31, 1996 and 1995, by contractual maturity are shown below, except for mortgage-based securities, Federal Reserve stock and other securities which are presented in total. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 1996 Amortized Cost Fair Value Due in one year or less $ 2,976,313 2,960,060 Due after one year through five years 9,071,686 9,053,039 Due after five years through ten years 500,000 480,000 Mortgage-backed securities 4,552,100 4,539,002 Federal Reserve Stock and other securities 375,800 375,800 $ 17,475,900 17,407,901 1995 Amortized Cost Fair Value Due in one year or less $ 5,237,875 5,242,447 Due after one year through five years 5,605,299 5,564,175 Mortgage-backed securities 2,690,646 2,699,198 Federal Reserve Stock and other securities 364,400 364,400 $ 13,898,220 13,870,220 There were no sales of securities during 1996 or 1995. In November 1995, the Financial Accounting Standards Board issued a special report, A Guide to Implementation of Statement No. 115, on Accounting for Certain Investments in Debt and Equity Securities -- Questions and Answers (the Special Report). The Special Report allowed companies to reassess the appropriateness of the classifications of all securities held and account for any resulting reclassification at fair value. Bancorp adopted the reclassification provision stated in the Special Report prior to December 31, 1995 and transferred approximately $6.6 million of held-to-maturity securities into available-for- sale. The unrealized pretax gain upon transfer was approximately $15,000 as of December 31, 1995. Investment securities with an amortized cost of approximately $2,740,000 and $2,835,000 at December 31, 1996 and 1995, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Note 4. Loan Concentrations and Allowance for Loan Losses The majority of the Bank's business is done with customers located in Northern California, specifically in the San Francisco Bay Area. The Bank has a significant amount of credit arrangements that are secured by real estate collateral. Generally, the Bank attempts to maintain loan to value ratios no greater than 65 percent on commercial and multi-family real estate loans and no greater than 80 percent on single-family residential real estate loans. At December 31, 1996 and 1995, the Bank had loans outstanding of approximately $26,830,000 and $17,983,000 respectively, that were collateralized by local real estate. Changes in the allowance for loan losses were as follows: 1996 1995 1994 Balance, beginning of year $ 403,651 390,465 670,116 Provision (recovery) for loan losses (40,000) 40,000 173,000 Loan charge-offs (3,769) (284,860) (641,849) Recoveries of loan charge-offs 158,927 258,046 189,198 Balance, end of year $ 518,809 403,651 390,465 Net loan chargeoffs (recoveries) as a percentage of average total loans (0.36)% 0.08% 1.24% Non-accrual loans were $6,199, $45,199, and $352,330, at December 31, 1996, 1995, and 1994, respectively. At December 31, 1996, there were no additional loan commitments to borrowers whose loans were identified as non-accrual. No loans were restructured during 1996, 1995, and 1994. The following is a summary of interest foregone on non-accrual and restructured loans for the years ended December 31: (in thousands) 1996 1995 1994 Interest income that would have been recognized had the loans performed in accordance with their original terms $ 2,774 4,474 18,837 Less: Interest income recognized on non-accrual and restructured loans - - - Interest foregone on non-accrual and restructured loans $ 2,774 4,474 18,837 Bancorp adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures, effective January 1, 1995. SFAS No. 114 required entities to measure certain impaired loans based on the present value of future cash flows discounted at the loan's effective interest rate, or at the loan's market value or the fair value of collateral if the loan is collateral dependent. A loan is considered impaired when, based on current information and events, it is probable that Bancorp will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Bancorp generally identifies loans to be reported as impaired when such loans are in non accrual status or are considered troubled debt restructurings due to the granting of a below-market rate of interest or a partial forgiveness of indebtedness on an existing loan. If the measurement of the impaired loans is less than the recorded investment in the loan, impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses. The adoption of SFAS No. 114 did not have a material effect on Bancorp's financial statements, as Bancorp's policy of measuring loan impairment was consistent with methods prescribed in these standards. At December 31, 1996, the recorded investment in loans for which impairment was recognized in accordance with SFAS No. 114 totaled $6,199, of which there was a related reserve for loan losses of $1,240. The average balances of Bancorp's impaired loans for the year ended December 31, 1996, was $29,177. In general, Bancorp does not recognize any interest income on loans that are classified as impaired. Note 5. Premises and Equipment The following presents the cost of premises and equipment including leasehold improvements and the related accumulated depreciation and amortization at December 31: 1996 1995 Premises and leasehold improvements $ 2,142,446 2,142,446 Furniture, fixtures and equipment 871,951 822,368 3,014,397 2,964,814 Less accumulated depreciation and amortization (2,137,926) (2,032,261) Premises and equipment, net $ 876,471 932,553 Depreciation and amortization expense related to premises and equipment amounted to $103,026, $126,153, and $151,443 in 1996, 1995 and 1994, respectively. Note 6. Income Taxes Income tax expense (benefit) for the years ended December 31, 1996, 1995, and 1994 consists of: 1996 1995 1994 Current: Federal $ 395,600 166,900 94,500 State 105,000 2,400 18,000 500,600 169,300 112,500 Deferred: Federal (77,600) (33,700) - State 17,000 71,400 - (60,600) 37,700 - $ 440,000 207,000 112,500 A reconciliation of the tax computed at the Federal statutory tax rate to the actual income tax rate on income is as follows: 1996 1995 1994 Income tax expense at the statutory tax rate 34.0% 34.0% 34.0% State income taxes, net 7.5 7.5 4.0 Merger-related expenses 3.2 - - Other, net (0.6) 3.9 0.4 Change in deferred tax asset valuation allowance (3.1) (13.7) - 41.0% 31.7% 38.4% The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1996 and 1995 are presented below: 1996 1995 Deferred tax assets: Book provision for loan losses in excess of tax $ - 2,800 State taxes 42,600 800 Premises and equipment, principally due to differences between depreciation and amortization charged to income and amount deducted for tax purposes 60,000 42,200 Adjustment for available-for-sale securities market valuation 28,000 7,000 Other, net 11,700 8,000 142,300 60,800 Less: valuation allowance - (33,700) Total deferred tax assets 142,300 27,100 Deferred tax liabilities: Tax reserve in excess of book provision for loan loss 15,800 - Difference between accrual and cash taxable income 75,600 57,800 Total deferred tax liabilities 91,400 57,800 Net deferred tax asset (liability) $ 50,900 (30,700) Bancorp believes a valuation allowance is not needed to reduce the net deferred tax assets as it is more likely than not that the net deferred tax assets will be realized through recovery of taxes previously paid and/or future taxable income. Note 7. Deposits Time deposits of $100,000 or more and their remaining maturities at December 31 are approximately as follows: 1996 1995 Three months or less $ 6,419,000 6,992,000 Four through six months 3,416,000 1,971,000 Seven through twelve months 2,341,000 759,000 Over twelve months 408,000 967,000 $ 12,584,000 10,689,000 Interest expense on time deposits of $100,000 or more was approximately $603,985, $578,000, and $437,000 for the years ended December 31, 1996, 1995 and 1994 respectively. Note 8. Common Stock and Stock Options Bancorp has adopted a qualified stock option plan for officers and key employees (the Plan) under which a maximum of 100,000 shares of Bancorp's common stock may be issued. The Plan calls for the exercise prices of the options to be equal to or greater than the fair market value of the stock at date of the grant. Since 1984, options for a total of 92,500 shares of common stock have been granted with an option price of $5.00 per share, with full vesting generally occurring within five to seven years of the grant date. The expiration period of vested options ranges from the years 1997 through 2000, or within six months of termination. The number of shares of common stock subject to options and exercisable at December 31, 1996 was 40,500. In 1990, Bancorp adopted a non-qualified stock option plan for certain of its directors. Persons eligible to receive grants of options under this plan are directors of Bancorp and the Bank. The amount of shares of stock that may be subject to options granted under the plan is limited to 10% of the total number of issued and outstanding shares of Bancorp stock. In October 1990, stock options to acquire 35,000 shares of common stock were granted to the directors with an option price of $5.25 per share. In December 1995, stock options to acquire 28,750 shares of common stock were granted to the directors with an option price of $4.50 per share. These options are immediately exercisable and expire in ten years from the date of grant, or within six months of resignation. No options were granted in 1996 and no options had been exercised as of December 31, 1996. The number of shares of common stock subject to these options and exercisable at December 31, 1996 was 56,250. The following is a summary of transactions which occurred during 1994, 1995 and 1996: Options Outstanding Officers & Employees Directors December 31, 1993 57,500 27,500 Options granted 35,000 - Options expired/forfeited (30,000) - December 31, 1994 62,500 27,500 Options granted - 28,750 Options expired/forfeited - - December 31, 1995 62,500 56,250 Options granted - - Options expired/forfeited (13,000) - Options exercised (2,000) - December 31, 1996 47,500 56,250 Options exercisable at December 31, 1996 40,500 56,250 On October 23, 1995, the Financial Accounting Standards Board issued Statement No. 123, Accounting for Stock-Based Compensation, (SFAS No. 123). Bancorp adopted this statement in 1996 and retained its current method of accounting for stock compensation. Accordingly, no compensation cost has been recognized for either plan. Bancorp did not issue any options in 1996. In 1995, Bancorp issued 28,750 options under the non-qualified stock option plan. Had compensation cost for Bancorp's stock-based compensation plans been determined consistent with SFAS No. 123, Bancorp's net income and earnings per share would have been $388,466 and $0.35, respectively, compared to the as reported amounts of $445,382 and $0.40, respectively, for the year ended December 31, 1995. The fair value of each option grant for 1995 was estimated on the date of grant using an option pricing model with the following weighted average assumptions: dividend yield of 0 percent, expected volatility of 36 percent, risk-free interest rate of 7.9 percent, and expected life of 10 years. The weighted average fair value of the options granted during 1995 was $2.90. Under the definitive agreement pursuant to which a private investor group will acquire all of the issued and outstanding shares of Bancorp discussed in Note 17, outstanding options will be converted into the right to receive a cash payment equal to the difference between the strike price and $8.00 per share at closing and a possible subsequent payment from escrowed funds of up to $0.61 per share following the resolution of certain pending contingencies. Note 9. Employee Stock Ownership Plan In July, 1990, Bancorp created an Employee Stock Ownership Plan (ESOP) for the benefit of all employees who have worked for the Bank for one or more years. The ESOP borrowed $180,000 at a variable interest rate from a third party financial institution, to be repaid over a 5 year period. The loan was paid off in 1995. The proceeds from the borrowing were used to purchase 48,400 shares of Bancorp common stock for the ESOP which was pledged as collateral for the borrowing. For the years ended December 31, 1996, 1995, and 1994, the Bank provided cash contributions of $0, $26,250, and $45,000, respectively, which were included in salaries and employee benefits. Interest expense on ESOP debt was $0, $2,600, and $6,300 for 1996, 1995 and 1994, respectively. The ESOP Plan was terminated in December 1996. Note 10. Related Party Transactions In the ordinary course of business, the Bank makes loans to directors, officers, shareholders and their associates on substantially the same terms, including interest rates, origination and commitment fees, and collateral, as comparable transactions with unaffiliated persons, and such loans do not involve more than the normal risk of collectibility. At December 31, 1996, no related party loans were on non-accrual or classified for regulatory reporting purposes. Total loans made to or guaranteed by the Bank's directors and officers and their related companies totaled $1,934,832 and $2,546,172 at December 31, 1996 and 1995, respectively. Activity related to loans to directors, officers and principal shareholders and their associates for the year ended December 31, 1996 and 1995 is as follows: 1996 1995 Balance at December 31, 1995 $ 2,546,172 2,641,733 New loans or disbursements 1,145,162 276,500 Principal repayments (1,251,670) (372,061) Loans of former related parties (504,832) - Balance at December 31, 1996 $ 1,934,832 2,546,172 Note 11. Commitments and Contingencies Bancorp leases certain banking premises under an operating lease that expires April 1, 2001, with a renewal option under similar terms until April 1, 2004. Minimum rental commitments for future years under this noncancelable lease are as follows at December 31, 1996: 1997 $ 120,000 1998 120,000 1999 120,000 2000 120,000 2001 30,000 $ 510,000 The total rental expense was $120,000 for each of the years ended December 31, 1996, 1995, and 1994. Additionally, the Bank is involved in various claims and lawsuits in the normal course of its business. In the opinion of management, after review with independent legal counsel, the ultimate liability resulting from such claims and lawsuits will not have a material adverse effect on the financial position, results of operations, or liquidity of the Bank. Note 12. Financial Instruments with Off-Balance-Sheet Risk The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on- balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management's credit evaluation. Collateral held varies but may include cash, securities, accounts receivable, inventory, property, plant and equipment, residential real estate and income-producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Financial instruments whose contract amounts represent credit risk at December 31: 1996 1995 Commitments to extend credit $ 14,539,000 12,949,000 Standby letters of credit $ 1,258,000 775,000 Note 13. Fair Value of Financial Instruments The following table presents the carrying amounts and estimated fair values of Bancorp's financial instruments at December 31, 1996. The fair value of financial instruments does not represent actual amounts that may be realized upon any sale or liquidation of the related assets or liabilities. In addition, these values do not give effect to discounts to fair value which may occur when financial instruments are sold in larger quantities. The fair values presented represent Bancorp's best estimate of fair value using the methodologies discussed below. The respective carrying values of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash and due from banks, interest-bearing deposits in banks, federal funds sold, customers' acceptance liability, accrued interest receivable, other short-term borrowings, acceptances outstanding and accrued interest payable. Carrying values were assumed to approximate fair values for these financial instruments as they are short term in nature and their recorded amounts approximate fair values or are receivable or payable on demand. Bancorp does not use derivative financial instruments. 1996 1995 Carrying Fair Carrying Fair Amount Value Amount Value Financial Assets Securities available for sale $ 17,407,901 17,407,901 13,870,220 13,870,220 Loans 47,535,144 47,151,954 38,744,088 38,561,377 Financial Liabilities Deposits $ 68,411,575 68,421,931 57,563,988 57,607,208 The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Securities: The fair values of securities classified as available-for-sale are based on quoted market prices at the reporting date for those or similar investments. Loans: The fair value of fixed rate loans is determined as the present value of expected future cash flows discounted at the interest rate currently offered by Bancorp, which approximates rates currently offered by local lending institutions for loans of similar terms to companies with comparable credit risk. Variable rate loans which reprice frequently with changes in market rates, were valued using the outstanding principal balance. The estimated fair value of loan commitments and contingent liabilities at December 31, 1996, approximated current book values. Deposits: The fair values of demand deposits, savings deposits, and money market deposits without defined maturities were the amounts payable on demand. For substantially all deposits with defined maturities, the fair values were calculated using discounted cash flow models based on market interest rates for different product types and maturity dates. For variable rate deposits where Bancorp has the contractual right to change rates, carrying value was assumed to approximate fair value. The discount rates used were based on rates for comparable deposits. Note 14. Condensed Financial Information of Trans Pacific Bancorp (Parent Company Only) Condensed Balance Sheets December 31, 1996 1995 Assets: Cash and due from banks $ 62,803 27,884 Investment in subsidiary 7,274,521 6,511,607 Total assets $ 7,337,324 6,539,491 Liabilities: Other liabilities 65,625 7,520 Stockholders' Equity: Common stock 5,794,323 5,784,323 Retained Earnings 1,517,376 768,648 Net unrealized losses on available for sale securities (40,000) (21,000) Total liabilities and stockholders' equity $ 7,337,324 6,539,491 Condensed Statements of Operations Years Ended December 31, 1996 1995 1994 Income $ 978 1,363 2,932 Expenses 194,707 65,297 55,045 Net loss before equity in undistributed loss of subsidiary (193,729) (63,934) (52,113) Equity in undistributed income of subsidiary 826,781 509,316 232,304 Net income $ 633,052 445,382 180,191 Condensed Statements of Cash Flows Years ended December 31, 1996 1995 1994 Cash flows from operating activities: Net income $ 633,052 445,382 180,191 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Decrease in other assets - 5,000 - Increase (decrease) in other liabilities 58,105 (553) (2,533) Equity in undistributed income of subsidiary (826,781) (509,316) (232,304) Total adjustments (768,676) (504,869) (234,837) Net cash used in operating activities: (135,624) (59,487) (54,646) Net cash provided by investing activities - - - Cash flows from financing activities: Repurchase of common stock - - (50,504) Dividends paid (89,457) - - Proceeds from stock options exercised 10,000 - - Dividend from subsidiary 250,000 - - Net cash provided by (used in) financing activities 170,543 - (50,504) Net increase (decrease) in cash and cash equivalents 34,919 (59,487) (105,150) Cash and cash equivalents at beginning of year 27,884 87,371 192,521 Cash and cash equivalents at end of year $ 62,803 27,884 87,371 Note 15. Capital Adequacy Bancorp and the Bank are subject to various regulatory capital adequacy requirements administered by the Federal Reserve Board (FRB) and the Office of the Comptroller of the Currency (OCC), respectively. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required that the federal regulatory agencies adopt regulations defining five capital tiers for banks: well-capitalized, adequately capitalized, under capitalized, significantly undercapitalized, and critically undercapitalized. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, would have a direct material effect on Bancorp's financial statements. Quantitative measures, established by the regulators to ensure capital adequacy, require that Bancorp and the Bank maintain minimum ratios (set forth in the table on the next page) of capital to risk-weighted assets. There are two categories of capital under the guidelines. Tier 1 capital includes common stockholders' equity and qualifying preferred stock less certain intangible assets and certain other deductions. Tier 2 capital includes preferred stock not qualifying as Tier 1 capital, mandatory convertible debt, subordinated debt, certain unsecured senior debt issued by the Parent and the allowance for loan losses, subject to limitations by the guidelines. Tier 2 capital is limited to the amount of Tier 1 capital (i.e., at least half of the total capital must be in the form of Tier 1 capital). Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of four risk weights (0, 20, 50, and 100 percent) is applied to the different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Management believes that, as of December 31, 1996, Bancorp and the Bank met all capital adequacy requirements to which they were subject. The most recent notification from the OCC categorized the Bank as well capitalized under the FDICIA regulatory framework for prompt corrective action. To be categorized as well capitalized, the institution must maintain a total risk-based capital ratio as set forth in the following table and not be subject to a capital directive order (such as a Formal Agreement). There are no conditions or events since that notification that management believes have changed the Bank's risk-based capital category. To Be Well Capitalized Under the FDICIA For Capital Prompt Corrective (Amount in thousands) Actual Adequacy Purposes: Action Provisions: Amount Ratio Amount Ratio Amount Ratio As of December 31, 1996: Total capital (to risk weighted assets) Bank 7,694 14.46% >= 4,257 >= 8.00% >= 5,322 >= 10.00% Bancorp 7,486 14.17% >= 4,226 >= 8.00% >= 5,283 >= 10.00% Tier 1 capital (to risk weighted assets) Bank 7,175 13.48% >= 2,129 >= 4.00% >= 3,193 >= 6.00% Bancorp 6,967 13.19% >= 2,113 >= 4.00% >= 3,170 >= 6.00% Tier 1 capital (to average assets) (Leverage ratio) Bank 7,175 9.62% >= 2,982 >= 4.00%(1) >= 3,728 >= 5.00% Bancorp 6,967 9.39% >= 2,966 >= 4.00%(1) >= 3,708 >= 5.00% As of December 31, 1995: Total capital (to risk weighted assets) Bank 6,915 17.05% >= 3,244 >= 8.00% >= 4,055 >= 10.00% Bancorp 6,759 16.81% >= 3,216 >= 8.00% >= 4,020 >= 10.00% Tier 1 capital (to risk weighted assets) Bank 6,511 16.06% >= 1,622 >= 4.00% >= 2,433 >= 6.00% Bancorp 6,355 15.81% >= 1,608 >= 4.00% >= 2,412 >= 6.00% Tier 1 capital (to average assets) (Leverage ratio) Bank 6,511 10.03% >= 2,596 >= 4.00%(1) >= 3,245 >= 5.00% Bancorp 6,355 9.85% >= 2,582 >= 4.00%(1) >= 3,227 >= 5.00% (1) The leverage ratio consists of Tier 1 capital divided by quarterly average assets, excluding intangible assets and certain other items. The minimum leverage ratio guideline is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings and, in general, are considered top-rated, strong banking organizations. Between December 1992 and September 1994, the Bank was required to maintain a Tier 1 capital ratio of at least 10 percent, and a leverage ratio of at least 6 percent, levels higher than the regulatory minimums shown above, under the terms of the Bank's Formal Agreement (see Note 16). Note 16. Regulatory Matters On December 17, 1992, the Bank entered into a Formal Agreement (the Agreement) with the Office of the Comptroller of the Currency (OCC). The Formal Agreement required the Bank to maintain Tier 1 capital of at least 10 percent of risk- weighted assets and Tier 1 capital of at least 6 percent of adjusted total assets. The Agreement also required the following of the Bank: (1) develop a program to improve the effectiveness of Board supervision; (2) develop a program to improve the Bank's loan administration and underwriting; (3) develop and implement an asset review program to ensure the timely identification of problem loans, other real estate owned and other assets; (4) develop and implement a written program to collect or strengthen criticized and classified loan assets; (5) submit a 3 year capital plan for OCC approval; and (6) develop a plan to improve liquidity management. The Agreement also restricted the Bank's ability to pay dividends to Bancorp. On September 8, 1994, the Bank's Formal Agreement with the OCC was terminated, as the Bank had achieved full compliance with the Agreement. On July 22, 1993, Bancorp and the Federal Reserve Bank, Bancorp's primary regulator, signed a Memorandum of Understanding (MOU). This MOU required Bancorp to: (1) report on measures taken to improve the financial condition of Trans Pacific National Bank, (2) report on measures taken to improve the Directors' supervision of Trans Pacific National Bank, and (3) furnish quarterly progress reports that shall include financial statements and information detailing the form and manner of all actions to attain compliance with the MOU. Additionally, Bancorp was required to obtain Federal Reserve approval before: (1) paying cash dividends to shareholders, (2) incurring additional debt, (3) repurchasing outstanding stock, and (4) adding or replacing a Director or senior executive officer. On February 27, 1995, Bancorp's MOU with the Federal Reserve Bank was terminated. Under the National Bank Act, the Bank is subject to prohibitions on the payment of dividends in certain circumstances and to restrictions on the amount that can be paid to Bancorp without the prior approval of the Office of the Comptroller of the Currency (OCC). Without the Comptroller's approval, dividends for a given year cannot exceed the Bank's net profits, as defined by national bank laws, for that year and retained from the preceding two years. Under this formula, the Bank could have declared dividends to Bancorp of $1,568,000. The Bank paid dividends of $250,000, $0, and $0 to Bancorp in 1996, 1995 and 1994, respectively. Note 17. Merger Agreement On October 18, 1996, Bancorp entered into a definitive agreement pursuant to which a private investor group led by Chicago banker Denis Daly, Sr. will acquire all of the issued and outstanding shares of Bancorp. Subject to certain terms and conditions, each outstanding share of Bancorp will be converted into the right to receive a cash payment of $8.00 per share at closing and a possible subsequent payment from escrowed funds of up to $0.61 per share following the resolution of certain pending contingencies. The merger will be treated as a purchase for accounting purposes. The shareholders of Bancorp approved the acquisition in December 1996; the acquisition of Bancorp is now subject to approval by regulatory authorities. The transaction is expected to be completed by March 31, 1997. TRANS PACIFIC BANCORP BOARD OF DIRECTORS JAMES A. BABCOCK President Sandy & Babcock, Inc. EDDY S.F. CHAN Banker, Chairman Trans Pacific National Bank FRANKIE G. LEE Partner, SOH & Associates Structural Engineers JOHN K. LEE President, John K. Lee, C.P.A. A Professional Corporation BRUCE NAKAHIRA President New Century Investments, Inc. JOHN T. STEWART Attorney, Partner Hovis, Larson, Stewart, Lipscomb, Cross SIMON S. TENG Partner John R. McKean Accountants FRANK K.W. WONG Private Investor JOHN K. WONG Banker, Executive Vice President Trans Pacific National Bank DIRECTORS EMERITI MERLE S. KONIGSBERG President (Retired) Shaff Furniture Company WARREN K. MILLER Transportation Consultant (Retired) TRANS PACIFIC NATIONAL BANK PRINCIPAL OFFICERS EDDY S.F. CHAN Chairman, President Chief Executive Officer Director ROBERT A. HINKLE Executive Vice President Chief Lending Officer INTERNATIONAL TRADE DIVISION JOHN K. WONG Executive Vice President Senior Lending Officer Director BONNIE L. HAO Senior Vice President SAN FRANCISCO BRANCH GRANT BARNEY SCHLEY Senior Vice President Regional Branch Manager EAST BAY BUSINESS BANKING CENTER LORRAINE S. BRAUD Vice President Branch Manager TRANS PACIFIC NATIONAL BANK SAN FRANCISCO BRANCH COMMERCIAL AND INTERNATIONAL TRADE DIVISIONS 46 Second Street San Francisco, CA 94105-3440 Tel: (415) 543-3377 Fax: (415) 495-5154 E-mail info@tpnb.com Telex: RCA 210903 TPNB EAST BAY BUSINESS BANKING CENTER 1442 Webster Street Alameda, CA 94501-3339 Tel: (510) 769-1000 Fax: (510) 769-1180 ADMINISTRATION HEADQUARTERS 46 Second Street San Francisco, CA 94105-3440 Tel: (415) 543-3377 Fax: (415) 495-5154 Telex: RCA 210903 TPNB EX-23 3 Exhibit 23 The Board of Directors Trans Pacific Bancorp: We consent to the incorporation by reference in the registration statement (Form S-8 No. 33-39190) pertaining to the Trans Pacific Bancorp Employee Stock Ownership Plan and Trust and in the registration statement (Form S-8 No. 33- 39191) pertaining to the Trans Pacific Bancorp Non Qualified Stock Option Plan, of our report dated February 7, 1997, relating to the consolidated balance sheets of Trans Pacific Bancorp and Subsidiary as of December 31, 1996, and 1995, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three- year period ended December 31, 1996, which report appears in the December 31, 1996 annual report of Trans Pacific Bancorp incorporated by reference in this annual report on Form 10-K for the year ended December 31, 1996. /s/KPMG Peat Marwick LLP San Francisco, California March 10, 1997 EX-27 4
9 12-MOS DEC-31-1996 DEC-31-1996 3423798 393000 6200000 0 17407901 0 0 47535144 518809 77133275 68411575 606086 1049047 0 0 0 5794323 1272244 77133275 4355304 830661 353512 5539477 2083455 2109489 3429988 (40000) 0 3036494 1073052 633052 0 0 633052 0.57 0 5.45 6000 3000 0 0 403651 3769 158927 518809 376375 0 142434
EX-99.1 5 SUPPLEMENTAL INFORMATION-PROXY STATEMENT This proxy statement dated November 15, 1996, is filed as Supplemental nformation pursuant to the instructions on Form 10-K and furnished to the Commission for its information only and shall not be deemed to be "filed" with the Commission or otherwise subject to the liabilities of Section 18 of the Securities and Exchange Act of 1934, as amended. November 14, 1996 Dear Shareholder: You are cordially invited to attend the Special Meeting of Shareholders of Trans Pacific Bancorp ("Bancorp"), the parent company for Trans Pacific National Bank, to be held at Bancorp's offices located at 46 Second Street, San Francisco, California, on December 19, 1996, at 4:30 p.m., Pacific Time. The primary purpose of the meeting is to consider and vote on a proposal to approve and adopt the Agreement and Plan of Merger by and between Bancorp and TRP Acquisition Corporation, a Delaware corporation, and the transactions contemplated by these documents (the "Merger"). On completion of the Merger, the existing shareholders of Bancorp will receive a cash payment of $8.00 per share and a right to share, pro rata, in a possible additional distribution from an escrow account of up to $0.61, and Bancorp will become wholly owned by shareholders of TRP Acquisition Corporation. Details of the proposed Merger and other important information are described in the accompanying Notice of Special Meeting and Proxy Statement. You are urged to give these important documents your prompt attention. YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE AGREEMENT AND PLAN OF MERGER. Approval of the Agreement and Plan of Merger requires the affirmative vote of at least a majority of the outstanding shares of Bancorp Common Stock. A failure to vote, either by not returning the enclosed proxy or by checking the "Abstain" box thereon, will have the same effect as a vote against approval of the Agreement and Plan of Merger. IN ORDER TO ENSURE THAT YOUR VOTE IS REPRESENTED AT THE MEETING, THE BOARD OF DIRECTORS URGES YOU TO SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE AS SOON AS POSSIBLE EVEN IF YOU CURRENTLY PLAN TO ATTEND THE MEETING. THIS WILL NOT PREVENT YOU FROM VOTING IN PERSON, BUT WILL ASSURE THAT YOUR VOTE IS COUNTED IF YOU ARE UNABLE TO ATTEND THE MEETING. PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. Your thoughtful attention to this Merger proposal and the support that you have given us in the past are greatly appreciated. Sincerely, /s/ Eddy S.F. Chan President and Chief Executive Officer TRANS PACIFIC BANCORP 46 Second Street San Francisco, CA 94105 (415) 543-3377 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON DECEMBER 19, 1996 NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders ("Meeting") of TRANS PACIFIC BANCORP ("Bancorp" or the "Company") will be held at the offices of Bancorp and its wholly owned subsidiary, Trans Pacific National Bank (the "Bank"), located at 46 Second Street, San Francisco, California, on December 19, 1996, at 4:30 p.m., Pacific Time. A proxy card and a Proxy Statement for the Meeting are enclosed. The Meeting is for the purpose of considering and voting upon: 1. A proposal to approve and adopt the Agreement and Plan of Merger, dated as of October 18, 1996 (the "Agreement"), by and between TRP ACQUISITION CORP. ("TRP"), a Delaware corporation, and the Company, pursuant to which (i) TRP would merge with and into Bancorp, with Bancorp surviving that merger wholly owned by the shareholders of TRP; (ii) each outstanding share of Bancorp common stock (other than certain shares for which any dissenters' rights may have been perfected) would be converted into the right to receive $8.00 in cash, without interest, plus possible subsequent payments up to a maximum of $0.61 which are being held back pending the resolution of certain bank loans and other contingencies. A copy of the Agreement is attached as Appendix A to the Proxy Statement (collectively these merger transactions are known as "the Merger"); and 2. Such other matters as may properly come before the Meeting or any adjournments or postponements thereof. Your Board of Directors has carefully reviewed and considered the terms and conditions of the proposed Merger and has received the opinion of Baxter, Fentriss and Company ("Baxter Fentriss") as to the fairness of the Merger from a financial point of view. The full text of the opinion of Baxter Fentriss is attached to the Proxy Statement as Appendix E. Based on the opinion of Baxter Fentriss, your Board of Directors believes that the Merger is fair from a financial point of view and in the best interest of Bancorp shareholders, and recommends that you vote "FOR" the approval of the Agreement and the Merger. Any action may be taken on the foregoing proposal at the Meeting on the date specified above or any adjournment or postponement thereof. Shareholders of record at the close of business on October 31, 1996 are the shareholders entitled to vote at the Meeting and any adjournment or postponement thereof. The Board of Directors can authorize any adjournment or postponement of the Meeting. The Board of Directors is not aware of any other business to come before the Meeting. Upon completion of the Merger, Bancorp will be wholly owned by the stockholders of TRP. The affirmative vote of the holders of a majority of the outstanding shares of Bancorp common stock is required to approve the proposal to adopt the Agreement. You are requested to vote, sign and date the enclosed form of proxy, which is solicited by the Board of Directors, and to mail it promptly in the enclosed envelope. The proxy will not be used if you attend and vote at the meeting in person. Any shareholders who wish to perfect dissenters' appraisal rights for their shares of Bancorp common stock must comply with the requirements of Sections 1300, 1301, 1302, 1303 and 1304 of Chapter 13 of the California General Corporation Law ("CGCL"), which is set forth as Appendix F to the accompanying Proxy Statement. See "DISSENTERS' APPRAISAL RIGHTS" for a summary of Sections 1300, 1301, 1302, 1303 and 1304 of the CGCL and Appendix F for a full statement of Chapter 13 of the CGCL. A shareholder's failure to follow exactly the procedures specified will result in a loss of such shareholder's dissenter's appraisal rights, should they otherwise exist in the Merger. San Francisco, California November 15, 1996 BY ORDER OF THE BOARD OF DIRECTORS: Corporate Secretary IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE EXPENSE OF FURTHER REQUESTS FOR PROXIES IN ORDER TO INSURE A QUORUM. A POSTAGE PREPAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. TRANS PACIFIC BANCORP 46 Second Street San Francisco, California 94105 (415) 543-3377 PROXY STATEMENT SPECIAL MEETING OF SHAREHOLDERS December 19, 1996 INTRODUCTION This Proxy Statement and the accompanying proxy card are being furnished to the holders of common stock, no par value per share ("Bancorp Common Stock" or "Common Stock" herein), of Trans Pacific Bancorp. ("Bancorp" or the "Company") in connection with the solicitation of proxies by the Board of Directors of Bancorp for use at a special meeting of shareholders ("Meeting") to be held on December 19, 1996, or at any adjournment or postponement thereof. The Meeting will be held at the offices of Bancorp and Trans Pacific National Bank (the "Bank"), located at 46 Second Street, San Francisco, California on December 19, 1996, at 4:30 p.m., Pacific Time. This Proxy Statement and the proxy card are first being mailed on or about November 22, 1996 to shareholders of record on October 31, 1996 ("Record Date"). At the Meeting, shareholders will be asked to consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger, dated as of October 18, 1996 (together with the annexes thereto, the "Agreement"), by and between Bancorp, a California corporation which is registered as a bank holding company, and TRP Acquisition Corp. ("TRP"), a Delaware Corporation. A copy of the Agreement is attached to this Proxy Statement as Appendix A. Pursuant to the Agreement: (i) on the Effective Time, as hereinafter defined, TRP will merge with and into Bancorp, with Bancorp being the Surviving Corporation, wholly owned by the stockholders of TRP (the "Surviving Corporation"); (ii) each share of Bancorp Common Stock outstanding at the Effective Time of the Merger (other than certain shares, if any, that may be held by TRP and shares for which possible dissenters' rights may have been perfected) will be converted into the right to receive $8.00 in cash, without interest; plus an amount equal to (a) a pro rata share of net collections and/or recoveries between July 31, 1996 and the Closing (as hereinafter defined), if any, on certain loans of the Bank identified in and pursuant to the Escrow Agreement (as hereinafter defined), which amount, together with the foregoing $8.00 is referred to herein as the "Cash Consideration"), and (b) a pro rata share of the net collections and/or recoveries following the Closing, if any, on certain loans of and a claim against the Bank, represented by the Escrow Fund (as hereinafter defined), less costs incurred in connection with the resolution of such loans, claims and account, payable to shareholders of the Company pursuant to the terms of the Escrow Agreement between the Company and TRP, dated October 18, 1996 (the "Escrow Agreement"). Collectively, the Cash Consideration and the amount representing that pro rata share of the Escrow Fund payable to each shareholder of the Company are referred to herein as the "Merger Consideration." See "THE MERGER - Termination of Agreement" for information regarding a possible increase in the Cash Consideration if the Closing is delayed. Subject to obtaining any necessary consents, each outstanding stock option granted under plans maintained by Bancorp will be terminated, and each grantee will be entitled to receive in lieu thereof payment in cash of the difference between the Cash Consideration and the per share exercise price of such option. Each grantee shall also be entitled to receive a pro rata share of the Escrow Fund pursuant to the terms of the Escrow Agreement. See "THE MERGER-Interests of Certain Persons in the Merger." For a more complete description of the Agreement and the terms of the Merger, see "THE MERGER" and Appendix A. In addition, Bancorp and its Board of Directors and TRP have entered into other agreements, namely the Voting Agreement and the Option Agreement described below, which are material to the transaction describe herein. THIS PROXY STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Proxy Statement is November 15, 1996. TABLE OF CONTENTS Page SUMMARY OF PROXY STATEMENT 5 Parties to the Merger 5 The Meeting 6 The Merger 7 Directors' Approval and Recommendation of the Merger 8 Opinion of Financial Advisor 8 Effective Time 9 Interests of Certain Persons in the Merger 9 Certain Federal Income Tax Consequences 9 Surrender of Stock Certificates 10 Conditions to Consummation; Termination 10 Regulatory Approvals 10 No Solicitation of Alternative Transactions 11 Escrow Agreement 11 Voting Agreement 12 Option Agreement 12 Dissenters' Appraisal Rights 13 Accounting Treatment 13 Market Prices and Dividends on Bancorp Common Stock 13 SELECTED CONSOLIDATED FINANCIAL DATA FOR BANCORP 15 SPECIAL MEETING OF SHAREHOLDERS 15 SOLICITATION, VOTING AND REVOCABILITY OF PROXIES 16 VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF 18 Security Ownership of Management 18 Security Ownership of Certain Beneficial Owners 19 THE MERGER 20 General 20 Background of the Merger 22 Reasons for the Merger 25 Factors Considered by the Board of Directors of Bancorp 26 Opinion of Financial Advisor 27 Closing; Effective Time of the Merger 32 Interests of Certain Persons in the Merger 32 Certain Federal Income Tax Consequences 34 Surrender of Stock Certificates 37 Regulatory Approvals 39 Closing Conditions to the Merger 41 Representations and Warranties. 44 Business Pending Consummation 46 Waiver and Amendment 49 No Solicitation of Alternative Transactions 49 Liquidated Damages 50 Access to Information 51 Restructure of the Transaction 51 Termination of the Agreement 52 TABLE OF CONTENTS (cont.) Page THE ESCROW AGREEMENT 53 THE VOTING AGREEMENT 56 THE OPTION AGREEMENT 57 CERTAIN EFFECTS OF THE VOTING AND OPTION AGREEMENTS 61 DISSENTERS' APPRAISAL RIGHTS 62 EXPENSES 66 ACCOUNTING TREATMENT 67 OPERATIONS AFTER THE MERGER 67 BUSINESS OF THE PARTIES TO THE MERGER 67 Bancorp 67 TRP 68 INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 68 CERTAIN INFORMATION REGARDING BANCORP 69 OTHER MATTERS 70 SUMMARY OF PROXY STATEMENT The following is a brief summary of certain information relating to the Merger contained elsewhere in this Proxy Statement. This summary is not intended to be a complete description of all material facts regarding TRP or Bancorp and the matters to be considered at the Meeting, and is qualified in all respects by the more detailed information appearing elsewhere herein and the Appendices hereto. A copy of the Agreement, the Escrow Agreement, the Voting Agreement and the Option Agreement are set forth as Appendices to this Proxy Statement, and reference is made thereto for a complete description of the terms of the Merger. Parties to the Merger TRP. TRP is a closely held Delaware corporation incorporated on September 27, 1996 for the purpose of entering into the Merger. TRP will file an application with the Federal Reserve System to become a bank holding company for the Bank. See "THE MERGER - Regulatory Approvals." The principal and controlling shareholder of TRP is Denis Daly, Sr., a Chicago banker. The address and telephone number of TRP are: 803 Burr Ridge Club Drive, Burr Ridge, Illinois 60521; (630) 789-0439. See "BUSINESS OF THE PARTIES TO THE MERGER - TRP" for more information. TRP has obtained a commitment from a Chicago bank for a loan slightly in excess of $5 million, the proceeds of which will be used to finance a portion of the Merger Consideration to be paid by TRP in connection with the Merger. The remainder of the funds necessary to finance the Merger Consideration will come from equity investments to be made in TRP prior to the Closing and dividends from the Bank upon Closing. Mr. Daly has guaranteed the obligations of TRP pursuant to the Agreement if the Merger is not consummated for certain specified reasons, which obligations are limited to a maximum of $150,000. See "THE MERGER - Liquidated Damages." Bancorp. Bancorp, a California corporation, was organized on or about June 1, 1983, for the purpose of becoming the holding company for the Bank, which transaction became effective on August 21, 1984. At September 30, 1996, Bancorp had total assets of approximately $73 million, total deposits of approximately $65 million, and shareholders' equity of approximately $6.9 million. Bancorp's primary business activity is its investment in the stock of the Bank. The address and telephone number of Bancorp are: 46 Second Street, San Francisco, CA 94105; telephone: (415) 543-3377. The Bank. The Bank was organized in 1983 as a national bank and commenced operations on August 21, 1984. The Bank is regulated by the Office of the Comptroller of the Currency ("OCC"), and its deposits are insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC") up to applicable limits permitted by the FDIC. The Bank also is a member of the Federal Reserve Bank of San Francisco. The Bank operates offices in the City and County of San Francisco and in the City of Alameda, County of Alameda, California. The Bank's business consists principally of attracting customer deposits from the general public and investing those funds in business and industrial loans, trade finance, and construction and commercial real estate loans. The principal sources of funds for the Bank's lending and investment activities are repayment of loans, loan sales, customer deposits and borrowed funds. See "BUSINESS OF THE PARTIES TO THE MERGER" and "CERTAIN INFORMATION REGARDING BANCORP." The Meeting Place, Time and Date; Purpose. The Meeting will be held at 4:30 p.m., Pacific Time, on December 19, 1996, at the offices of the Company and the Bank located at 46 Second Street, San Francisco, California. The purpose of the Meeting is to consider and vote on a proposal to approve the Agreement and the Merger. Record Date; Shares Entitled to Vote. The presence, in person or by proxy, of the holders of a majority of the outstanding shares of Bancorp's Common Stock is required for a quorum. As of the Record Date, which is October 31, 1996, there were 1,120,195 shares of Bancorp Common Stock issued and outstanding and entitled to vote. At such date, shares of Common Stock were held of record by approximately 300 persons. Vote Required. Approval of the Agreement will require the affirmative vote of the holders of a majority of the outstanding shares of Bancorp Common Stock entitled to vote. Shareholders who execute proxies retain the right to revoke them at any time prior to their being voted at the Meeting. Bancorp shareholders are entitled to one vote at the Meeting for each share of Bancorp Common Stock held of record at the close of business on the Record Date. As of the Record Date, the Directors and executive officers of Bancorp, together with affiliates, beneficially owned 331,934 shares of Bancorp Common Stock, or 27.8% of the outstanding shares, including shares subject to outstanding options exercisable within sixty days held by such persons. The Directors of Bancorp, who beneficially own an aggregate of 27.4% of the outstanding shares of Bancorp, have entered into an agreement (the "Voting Agreement"), a copy of which is attached to this Proxy Statement as Appendix C, whereby they have agreed to vote their shares of Bancorp "FOR" approval of the Agreement and the Merger. See "THE VOTING AGREEMENT." If a majority of the votes eligible to be cast do not vote in favor of the Agreement, Bancorp will continue to act as a separate entity and a going concern, with the Bank as its wholly owned subsidiary. A failure to vote, either by not returning the enclosed Proxy or by checking the "Abstain" box thereon, will have the same effect as a vote against approval of the Agreement. Any shareholder of record who seeks to perfect dissenters' appraisal rights must not cast a vote, in person or by proxy, in favor of the approval of the Agreement. See "DISSENTERS' APPRAISAL RIGHTS". Revocability of Proxies. Shareholders who execute proxies retain the right to revoke them at any time. Proxies may be revoked by written notice to the Corporate Secretary of Bancorp at 46 Second Street, San Francisco, California 94105, or, by the filing of a later dated proxy prior to a vote being taken at the Meeting, or by attending the Meeting and voting in person. The Merger The Agreement, a copy of which is attached hereto as Appendix A and is hereby incorporated by reference in this Proxy Statement, provides for the merger of TRP with and into Bancorp, with Bancorp being the Surviving Corporation, wholly owned by the stockholders of TRP. For a more detailed description of the Merger, see "THE MERGER." At the Effective Time (as hereinafter defined) of the Merger, each of the shares of Bancorp Common Stock outstanding immediately prior to the Effective Time (other than certain shares, if any, that may be held by TRP and shares for which possible dissenters' rights have been perfected) will be converted into the right to receive $8.00 in cash, without interest; plus an amount equal to (a) a pro rata share of net collections and/or recoveries between July 31, 1996 and the Closing (as hereinafter defined), if any, on certain loans of the Bank identified in and pursuant to the Escrow Agreement (as hereinafter defined), which amount, together with the foregoing $8.00 is referred to herein as the "Cash Consideration", and (b) a pro rata share of the net collections and/or recoveries following the Closing, if any, on certain loans of and a claim against the Bank, represented by the Escrow Fund (as hereinafter defined), less costs incurred in connection with the resolution of such loans, claims and account, payable to shareholders of the Company pursuant to the terms of the Escrow Agreement between the Company and TRP, dated October 18, 1996 (the "Escrow Agreement"). Collectively, the Cash Consideration and the amount representing that pro rata share of the Escrow Fund payable to each shareholder of the Company are referred to herein as the "Merger Consideration." See "THE MERGER - Termination of Agreement" for information regarding a possible increase in the Cash Consideration if the Closing is delayed. As of the Record Date, there were 1,120,195 shares of Bancorp Common Stock issued and outstanding and outstanding stock options to acquire 103,750 shares of Bancorp Common Stock, for an aggregate maximum Merger Consideration on that date of approximately $10.1 million. Upon completion of the Merger, Bancorp will be wholly owned by the stockholders of TRP. Directors' Approval and Recommendation of the Merger At a Board of Directors meeting held on October 17, 1996, after considering the terms and conditions of the Agreement and obtaining the advice of its financial advisor, the Agreement was unanimously approved by Directors who were present at the meeting. The Board of Directors recommends that shareholders of Bancorp vote "FOR" approval of the Agreement. In addition each of the Directors has signed the Voting Agreement discussed below, whereby each such Director has agreed to vote his shares of Common Stock of the Company in favor of the Agreement and the Merger. See "THE VOTING AGREEMENT" for more information. For a discussion of the circumstances surrounding the Merger and the factors considered by the Bancorp Board of Directors in making its recommendation, see "THE MERGER - Background of the Merger," "THE MERGER - Reasons for the Merger" and "THE MERGER - Factors Considered by the Board of Directors" for more information. Opinion of Financial Advisor The Board of Directors of Bancorp retained the firm of Baxter Fentriss and Company, Richmond, Virginia ("Baxter Fentriss") to assist in the negotiation of the Merger and to act as financial advisor in connection therewith. Baxter Fentriss rendered its opinion to the Board of Directors of Bancorp, that the Merger Consideration is fair to Bancorp's shareholders from a financial point of view. A copy of Baxter Fentriss' opinion dated November 15, 1996, is set forth as Appendix E and should be read by shareholders in its entirety. For further information regarding the opinion of Baxter Fentriss, see "THE MERGER- Opinion of Financial Advisor." Effective Time The Merger will become effective at the time the form of Agreement of Merger which is Exhibit B to the Agreement and a Certificate of Merger which is Exhibit A to the Agreement are filed with the Secretary of State of the State of California and the Secretary of State of the State of Delaware, or at such other time as set forth in such Agreement of Merger and the Certificate of Merger ("Effective Time"). Assuming the timely receipt of all regulatory and shareholder approvals, the expiration of all statutory waiting periods and the satisfaction or waiver of all conditions in the Agreement, it is currently anticipated that the Merger will be consummated on approximately February 28, 1997. Interests of Certain Persons in the Merger In considering the recommendation of Bancorp's Board of Directors with respect to the Merger, shareholders of Bancorp should be aware that certain officers of Bancorp have interests in the Merger that are in addition to their interests as shareholders generally. See "THE MERGER-Interests of Certain Persons in the Merger." Certain key employees of Bancorp and the Bank have been granted options to purchase shares of Bancorp Common Stock under the 1984 Employee Stock Option Plan and Nonqualified Stock Option Plan. The Agreement provides that, in consideration of the cancellation of such options, each holder of an outstanding option (whether or not then exercisable) will receive a lump sum cash payment equal to the product of (i) the excess of the Cash Consideration over the exercise price of such option and (ii) the number of shares subject to such option; as well as a pro rata share, if any, of the Escrow Fund pursuant to the Escrow Agreement. Certain Federal Income Tax Consequences The exchange of shares of Bancorp Common Stock for cash by a Bancorp shareholder pursuant to the Merger (or, in the case of a dissenting shareholder pursuant to any appraisal proceedings) will be a taxable transaction to such shareholder for federal income tax purposes. As a result of the Merger, a shareholder of Bancorp will generally recognize a gain or loss equal to the difference, if any, between the fair market value of the Merger Consideration to be received pursuant to the Agreement in exchange for his or her shares of Bancorp Common Stock and such shareholder's adjusted tax basis in such shares (except, in the case of any dissenting shareholders, for any amount constituting interest, which will be taxable as ordinary income). Any such gain or loss will be treated as a long-term capital gain or loss if the shares of Bancorp Common Stock are held as a capital asset by the shareholder, and at the Effective Time said shares have been held for more than one year since their acquisition date. All shareholders should read carefully the discussion in "THE MERGER-Certain Federal Income Tax Consequences" of this Proxy Statement. EACH SHAREHOLDER SHOULD CONSULT WITH HIS OR HER TAX ADVISOR AS TO THE SPECIFIC CONSEQUENCES TO THE SHAREHOLDER OF THE MERGER UNDER STATE, LOCAL, FOREIGN AND OTHER APPLICABLE TAX LAWS. Surrender of Stock Certificates Promptly after consummation of the Merger, an Exchange Agent selected by TRP will mail instructions to each Bancorp shareholder concerning the proper method of surrendering certificates formerly representing shares of Bancorp Common Stock in exchange for the Merger Consideration. DO NOT SEND STOCK CERTIFICATES AT THIS TIME. Conditions to Consummation; Termination The respective obligations of the parties to consummate the Merger are subject to, among other things: (i) approval of the Agreement by Bancorp's shareholders holding not less than a majority of the outstanding shares of Bancorp Common Stock; (ii) receipt of all necessary regulatory approvals, consents or waivers; (iii) satisfaction of all other necessary requirements prescribed by law; and (iv) the absence of any order prohibiting Bancorp or TRP to consummate the Merger. See "THE MERGER - Closing Conditions to the Merger" and "-Regulatory Approvals." The Agreement may be terminated at any time by mutual consent of TRP and Bancorp and may also be terminated by either Bancorp or TRP if the Merger is not consummated by March 31, 1997 (subject to extension for a period not to exceed June 30, 1997 if certain regulatory approvals have not been obtained and provided that, in such event, the Cash Consideration shall, under certain circumstances, be increased by $0.07 per share for each full month which elapses between March 31, 1997 and the Closing), or if certain conditions set forth in the Agreement are not met. See "THE MERGER - Termination of the Agreement." Under certain circumstances termination of the Merger may give rise to the payment of liquidated damages either by the Company or TRP. See "THE MERGER - Liquidated Damages." Regulatory Approvals The Merger is subject to approval by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board" herein) pursuant to sections 3 and 4 of the Bank Holding Company Act ("the BHC Act") and any other bank regulatory authority that may be necessary or appropriate (the Federal Reserve Board, Office of the Comptroller of the Currency, and any other bank regulatory agency that may be necessary or appropriate are collectively referred to herein as "Regulatory Authorities"). In reviewing the merger, the Regulatory Authorities will consider various factors, including possible anti-competitive effects of the Merger, and will examine the financial and managerial resources and future prospects of TRP and the combined organization. There can be no assurance that the requisite regulatory approvals will be granted or as to the timing of such approvals. SEE "THE MERGER - Regulatory Approvals." No Solicitation of Alternative Transactions The Agreement provides that Bancorp and the Bank will not directly or indirectly initiate, solicit or encourage any inquiries, proposals or offers with respect to a merger, consolidation or certain similar transactions involving Bancorp or the Bank or engage in any negotiations concerning or discussions with or provide information to any person relating to such a transaction, except if Bancorp's Board of Directors, upon written advice from its counsel, determines that it is required to do so in the discharge of each Director's fiduciary duty with respect to an unsolicited offer from a third party. See "THE MERGER - No Solicitation of Alternative Transactions" for more information. Escrow Agreement The Escrow Agreement has been entered into between Bancorp, the Bank and TRP and sets forth the requirements for retention and ultimate distribution of escrow funds to the shareholders and/or TRP of amounts of not less than $ 0.00 and not more (subject to adjustment for gain or loss on investment) than $740,626. See "THE ESCROW AGREEMENT" for more information regarding the Escrow Agreement. The purpose of the Escrow Agreement is to set aside funds to cover certain possible losses in the Bank's loan portfolio (which may be offset by net collections and/or recoveries, if any, on certain designated loans and claims of the Bank) and with respect to possible losses with respect to a certain deposit account carried on the books of the Bank as of the date of the Agreement. To the extent that such recoveries exceed the sum of (i) loan write-offs and attendant costs, and (ii) losses on that certain account and costs attendant thereto (or if there are no further write-offs, losses, costs or liabilities with respect to such loans and deposit account), any remaining funds in such escrow net of any income or loss incurred arising from investment of escrow funds, will be distributed to the shareholders and option holders at specified dates in the future. However, there can be no assurance that all or any portion of the escrow funds will ultimately be payable to the shareholders and option holders. See "THE ESCROW AGREEMENT" for more information about the terms of the Escrow. Voting Agreement As an inducement to TRP to enter into the contemplated transactions, each member of Bancorp's Board of Directors has individually entered into a Voting Agreement dated as of October 18, 1996 (the "Voting Agreement") wherein they have agreed to vote the outstanding shares held by them in favor of the Agreement and the Merger. See "THE VOTING AGREEMENT" for more information. The Voting Agreement constitutes a personal obligation of each of the Directors signing it with respect to each such Director's personal shares, and is not a commitment of the Board to take any action which would be in violation of its fiduciary duty to take steps which are in the best interest of all the shareholders. The Voting Agreement is intended to increase the likelihood that the shareholders of Bancorp will approve the Agreement and the Merger. See "CERTAIN EFFECTS OF THE VOTING AND OPTION AGREEMENTS." Option Agreement As a condition to TRP's entering into the Agreement, Bancorp entered into a Option Agreement with TRP ("Option Agreement"), dated as of October 18, 1996, pursuant to which Bancorp granted to TRP an option to purchase up to 19.9% of the issued and outstanding shares of Bancorp Common Stock, at an exercise price of $8.00 per share, subject to the terms and conditions set forth therein. The exercise price of the stock option is equal to the fixed $8.00 portion of the Cash Consideration, subject to any adjustments thereto described elsewhere in the Option Agreement. The option may be exercised in whole or in part, in the event that certain conditions have occurred. The Option Agreement may discourage competing offers for Bancorp and is intended to increase the likelihood that the Merger is consummated in accordance with the terms of the Agreement. See "THE OPTION AGREEMENT" and "CERTAIN EFFECTS OF THE VOTING AND OPTION AGREEMENTS" for more information. A copy of the Option Agreement is attached to this Proxy Statement as Appendix D. Dissenters' Appraisal Rights Chapter 13 of the California General Corporation Law ("CGCL"), which is set forth as Appendix F to this proxy statement, provides that shareholders of record who do not vote in favor of the approval of the Agreement, in person or by proxy, at the meeting and who have filed a written demand that has actually been received by Bancorp or its transfer agent not later than 30 days after the date on which a notice of approval of the Agreement and Merger by the outstanding shares was mailed to the shareholder, for payment of a specified number of shares at a specific price which the shareholder claims to be the fair market value of those shares, as of October 18, 1996, may be entitled to dissenters' appraisal rights, provided that such written demands are properly given (and received by Bancorp). Thereupon, dissenters' appraisal rights will be created with respect to the Merger under the provisions of Sections 1300 and 1301 of the CGCL and be available to such shareholders of record as to such shares, if their rights are further perfected as required by the terms of Sections 1302, 1303 and 1304 of the CGCL. See "DISSENTERS' APPRAISAL RIGHTS" and Appendix F for a more complete description of dissenters' rights that may be applicable to the Merger. A shareholder's failure to follow exactly the procedures specified will result in a loss of such shareholder's dissenter's rights. In view of the complicated nature of the California law pertaining to dissenters' rights, shareholders desiring to perfect those rights should consult their own legal advisors. Accounting Treatment The Merger will be treated as a purchase for accounting purposes. Accordingly, under generally accepted accounting principles, the assets and liabilities of Bancorp will be recorded on the books of TRP at their respective fair values at the time of consummation of the Merger. Market Prices and Dividends on Bancorp Common Stock Bancorp Common Stock is listed on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") Bulletin Board under the symbol "TPAE." The table below sets forth, for the quarters indicated, the high and low sales prices of Bancorp Common Stock as reported on the NASDAQ Bulletin Board (and, prior to June 1995, as reported on the NASDAQ "Pink Sheets") and the dividends paid per share on Bancorp Common Stock in each such quarter. Prices Cash Dividends High Low Paid Per Share Fiscal Year Ended December 31, 1994 First Quarter ..................... $2.00 $2.00 none Second Quarter .................... $2.00 $2.00 none Third Quarter ..................... $2.00 $2.00 none Fourth Quarter .................... $2.25 $2.00 none Fiscal Year Ended December 31, 1995 First Quarter ..................... $2.50 $2.25 none Second Quarter .................... $2.75 $2.25 none Third Quarter ..................... $4.50 $2.50 none Fourth Quarter .................... $4.88 $4.50 none Fiscal Year Ended December 31, 1996 First Quarter...................... $5.25 $4.50 $0.08 Second Quarter..................... $5.63 $4.88 none Third Quarter...................... $6.50 $5.25 none The closing asking price per share for Bancorp Common Stock as reported on the NASDAQ Bulletin Board on October 18, 1996, the last full trading day prior to the public announcement of the execution of the Agreement, was $6.25. On November 15, 1996, which is the most recent date for which it was practical to obtain market data prior to the printing of this Proxy Statement, the closing asking price of Bancorp Common Stock was $7.625. Holders of Bancorp Common Stock are urged to obtain current market quotations. SELECTED CONSOLIDATED FINANCIAL DATA FOR BANCORP The following table sets forth certain information concerning the consolidated financial position and results of operations of Bancorp at the dates and for the periods indicated. This information is qualified in its entirely by reference to the detailed information in the Consolidated Financial Statements and Notes thereto appearing in Bancorp's Annual Report on Form 10-K for the year ended December 31, 1995 and in Bancorp's Form 10-Q for the quarter ended September 30, 1996 included as Appendix G to this Proxy Statement. Selected Financial Data* (unaudited) At September 30 At December 31 Description 1996 1995 1995 1994 1993 1992 1991 Financial Condition: Total Assets $ 73,482 64,490 64,827 56,771 65,009 72,371 78,788 Securities, held to maturity - 6,628 - 9,743 8,829 9,162 10,021 Securities, available for sale 15,202 6,189 13,870 4,078 3,329 1,504 - Loans receivable, net 42,923 37,567 38,340 32,368 39,566 50,033 54,165 Deposits 64,701 57,346 57,564 49,800 57,823 63,916 68,398 Long-term debt - - - 26 71 116 161 Stockholders' Equity 6,908 6,394 6,532 5,951 5,927 6,476 6,509 (unaudited) Nine Months Ended September 30 Year Ended December 31 1996 1995 1995 1994 1993 1992 1991 Operations: Interest income $ 4,020 3,500 4,855 4,259 4,433 5,920 7,550 Interest expense 1,549 1,284 1,799 1,369 1,617 2,646 4,183 Net interest income 2,471 2,216 3,056 2,890 2,816 3,274 3,367 Provision (recovery) for loan losses (40) 40 40 173 889 662 349 Non-interest income 499 429 598 664 855 887 866 Non-interest expense 2,168 2,151 2,962 3,088 3,567 3,579 3,458 Income (loss) before taxes 842 454 652 293 (785) (80) 426 Income tax expense (benefit) 339 139 207 113 (171) 20 228 Net income (loss) 503 315 445 180 (614) (100) 198 Earnings (loss) per share $ 0.45 0.28 0.40 0.16 (0.54) (0.09) 0.17 Cash dividends declared per share $ 0.08 none none none none none none * In thousands, except per share data. SPECIAL MEETING OF SHAREHOLDERS This Proxy Statement is being furnished in connection with the solicitation of proxies by the Board of Directors of Bancorp to be used at the Meeting to be held at the offices of Bancorp and the Bank, located at 46 Second Street, San Francisco, California, on December 19, 1996 at 4:30 p.m., Pacific Time, and at any adjournment or postponement thereof. The accompanying Notice of Special Meeting of Shareholders and this Proxy Statement are first being mailed to shareholders on or about November 22, 1996. At the Meeting, shareholders will be asked to consider and vote on a proposal to approve the Agreement. The Agreement provides for the merger of TRP with and into Bancorp with Bancorp being the Surviving Corporation, wholly owned by the shareholders of TRP. Pursuant to the Agreement, each share of Bancorp Common Stock outstanding immediately prior to the Effective Time of the Merger will be canceled and converted into the right to receive the Merger Consideration, without any interest thereon. See "THE MERGER" and Appendix A. The Board of Directors of Bancorp has concluded that the Merger is in the best interest of Bancorp and its shareholders and recommends that shareholders vote "FOR" approval and adoption of the Agreement and the transactions contemplated thereby. SOLICITATION, VOTING AND REVOCABILITY OF PROXIES Shareholders of record as of the close of business on the Record Date are entitled to one vote for each share then held. As of the Record Date, 1,120,195 shares of Bancorp Common Stock were issued and outstanding. At that date, such shares were held of record by approximately 300 shareholders. The presence, in person or by proxy, of at least a majority of the total number of outstanding shares of Bancorp Common Stock entitled to vote is necessary to constitute a quorum at the Meeting. The affirmative vote of the holders of a majority of the outstanding shares of Bancorp Common Stock is required in order to approve and adopt the Agreement. A failure to return a properly executed proxy card or to vote in person at the Meeting will have the same effect as a vote against approval of the Agreement. Abstentions will be counted as shares present at the Meeting for purposes of determining the presence of a quorum and will have the same effect as a vote against approval of the Agreement. Broker nonvotes will not be considered present at the Meeting and will have the same effect as a vote against approval of the Agreement. The foregoing does not pertain to perfection of any dissenters' rights, which are described in the Proxy Statement under "DISSENTERS' APPRAISAL RIGHTS" and in Appendix F hereto. As of the Record Date, the Directors and executive officers of Bancorp (10 persons) together with their affiliates, beneficially owned a total of 254,934 shares of Bancorp Common Stock, or 24.5% of the outstanding shares of Bancorp's Common Stock, not including 77,000 shares of Bancorp Common Stock subject to outstanding options held by such persons exercisable within 60 days of the Record Date. Except with respect to the Voting Agreement described elsewhere herein there are no agreements or understandings among TRP, Directors or executive officers of Bancorp or any beneficial owner of more than 5% of Bancorp Common Stock as to how their shares will be voted. See "THE VOTING AGREEMENT" for more information. To the best knowledge of Bancorp, as of the Record Date, other than the right to purchase shares of Common Stock of the Company pursuant to the Option Agreement discussed below, the Directors and executive officers of TRP and its subsidiaries did not own of record or beneficially any outstanding shares of Bancorp Common Stock. See "THE OPTION AGREEMENT" for more information regarding the right of TRP to acquire shares of the Company under certain circumstances. Shares of Bancorp Common Stock represented by properly executed proxies will be voted in accordance with the instructions indicated on the proxies or, if no instructions are indicated, will be voted FOR approval of the Agreement. Properly executed proxies will be voted in accordance with the determination of the proxy holders as to any other matter which may properly come before the Meeting or any adjournment or postponement thereof; however, proxies voting against approval of the Agreement will not be voted in favor of adjournment of the Meeting. Shareholders who execute proxies retain the right to revoke them at any time. Proxies may be revoked by written notice to the Corporate Secretary of Bancorp, by the filing of a later dated proxy prior to a vote being taken at the Meeting or by attending the Meeting and voting in person. A proxy will not be voted if a shareholder attends the Meeting and votes in person. Eddy S.F. Chan and James A. Babcock have been appointed by the Board of Directors as proxy holders. The cost of solicitation of proxies will be borne by Bancorp. In addition to solicitations by mail, Directors, officers and employees of Bancorp may solicit proxies personally or by telegraph or telephone without additional compensation. Bancorp will request persons, firms and corporations holding shares in their names or in the names of their nominees, which shares are beneficially owned by others, to send proxy materials to, and to obtain proxies from, such beneficial owners and will reimburse such holders for their reasonable expenses in doing so. VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF Security Ownership of Management The following table sets forth as of the time of preparation of this Proxy Statement the ownership of each class of Bancorp's equity securities of the Directors, and each of the named executive officers, individually, and of the directors and executive officers of Bancorp as a group, without naming them. Amount and Name of Beneficial Nature of Owner and Beneficial Percent Title of Class Position with Company Ownership of Class Common Stock James A. Babcock, 57,583 (1) 5.12% Director and Chairman Common Stock Eddy S. F. Chan, Director, 56,380 (2) 4.94% President and CEO Common Stock Frankie G. Lee, Director 28,833 (3) 2.57% and Vice-Chairman Common Stock John K. Lee, Director 27,333 (4) 2.43% Common Stock Masayuki Nakahira, 25,833 (5) 2.30% Director Common Stock John T. Stewart, 24,683 (6) 2.20% Director and Secretary Common Stock Simon S. Teng, Director 30,843 (7) 2.74% and Treasurer Common Stock Frank K. W. Wong, Director 26,833 (8) 2.39% Common Stock John K. Wong, Director 48,954 (9) 4.32% Common Stock All Directors and 331,934 27.77% Executive Officers as a Group (10 persons) (1) Includes 32,083 shares held with sole voting and investment power; 20,000 shares held with shared voting and/or investment power; and 5,500 shares pursuant to options. (2) Includes 25,233 shares held with sole voting and investment power; 2,250 shares held with shared voting and/or investment power; 24,000 shares pursuant to options; and 4,897 shares allocated to the account of Eddy S. F. Chan as a Participant in the Trans Pacific Bancorp Employee Stock Ownership Plan ("ESOP") as of October 31, 1996. (3) Includes 23,333 shares held with shared voting and/or investment power; and 5,500 shares pursuant to options. (4) Includes 21,833 shares held with shared voting and/or investment power; and 5,500 shares pursuant to options. (5) Includes 21,333 shares held with sole voting and investment power; and 4,500 shares pursuant to options. (6) Includes 19,183 shares held with sole voting and investment power; and 5,500 shares pursuant to options. (7) Includes 18,583 shares held with sole voting and investment power; 6,760 shares held with shared voting and/or investment power; and 5,500 shares pursuant to options. (8) Includes 21,333 shares held with shared voting and/or investment power; and 5,500 shares pursuant to options. (9) Includes 2,833 shares held with sole voting and investment power; 29,300 shares held with shared voting and/or investment power; 14,000 shares pursuant to options; and 2,821 shares allocated to the account of John K. Wong as a Participant in the ESOP as of October 31, 1996. Security Ownership of Certain Beneficial Owners The following table sets forth the security ownership as of the time of preparation of these materials of Bancorp's voting securities with respect to any person (including any "group" as that term is used in section 13(d)(3) of the Exchange Act) who is the beneficial owner of more than 5% of such voting securities outstanding. Amount and Nature of Name and Address of Beneficial Percent Title of Class Beneficial Owner Ownership of Class Common Stock Arthur M. Auerbach, MD 73,000 shares (1) 6.53% 3300 Webster Street Oakland, CA 94609 James A. Babcock 57,583 shares (2) 5.12% 1349 Larkin Street San Francisco, CA 94109 (1) Includes 72,000 shares held with sole voting and investment power and 1,000 held with shared voting and/or investment power. (2) Includes 32,083 shares held with sole voting and investment power; 20,000 shares held with shared voting and/or investment power; and 5,500 shares pursuant to options. THE MERGER The following information concerning the Merger, insofar as it relates to matters contained in the Agreement, the Escrow Agreement, the Voting Agreement and the Option Agreement, is qualified in its entirety by reference to those agreements, which are attached hereto as Appendices A through D respectively. Bancorp shareholders are urged to read these agreements carefully. General The Agreement provides that TRP will be merged with and into Bancorp, with Bancorp being the Surviving Corporation, wholly owned by the shareholders of TRP. Each share of Bancorp Common Stock outstanding at the Effective Time (other than (i) shares for which any dissenters' rights are perfected and (ii) shares, if any, which may be held directly or indirectly by TRP (which will be canceled), will be automatically converted into the right to receive the Cash Consideration, without interest plus the holder's pro rata share of the Escrow Fund (as hereinafter defined), if any, payable to stockholders of the Company pursuant to the terms of the Escrow Agreement (which amounts in cash and escrow shall hereinafter be collectively referred to as the "Merger Consideration"). Until surrendered, certificates for the shares of Bancorp Common Stock shall represent the right to receive the Merger Consideration. The maximum Merger Consideration to be paid to Bancorp shareholders and option holders in the Merger is approximately $10.1 million. This amount is based on the total number of shares of Bancorp Common Stock outstanding as of the Record Date and the consideration to be paid in respect of options on Bancorp Common Stock outstanding on that date, assuming the entire Escrow Fund is paid to the former stockholders and Option Holders of Bancorp. See "THE MERGER - Interests of Certain Persons in the Merger." The Merger is subject to (i) approval by the holders of at least a majority of the outstanding shares of Bancorp Common Stock; (ii) the receipt of all necessary regulatory approvals, consents and waivers; (iii) satisfaction of all necessary requirements prescribed by law; and (iv) the absence of any order prohibiting Bancorp or TRP to consummate the Merger. See "THE MERGER - Regulatory Approvals" and "THE MERGER - Closing Conditions to the Merger." The Agreement provides that TRP may elect to specify that, before or after the merger, Bancorp, TRP and any subsidiary or affiliate of Bancorp or TRP shall enter into other transactions in order to effect the Merger, provided, however, that TRP shall not have the right to require any such transaction that will result in any change in the Merger Consideration or alter the tax treatment of the transactions contemplated or otherwise materially adversely effect the rights and obligations of any party to the Agreement. Promptly after the Effective Time, an exchange agent ("the Exchange Agent") selected by TRP will mail to holders of Bancorp Common Stock a letter of transmittal and instructions for surrendering certificates evidencing Bancorp Common Stock. Upon delivery to the Exchange Agent of a properly executed letter of transmittal and such certificates, a shareholder will receive a check for the Cash Consideration for the shares of Bancorp Common Stock represented by the certificates and the certificates so surrendered will be canceled. No interest will be paid or accrued on the Cash Consideration to which the shareholder became entitled at the Effective Time. DO NOT SEND STOCK CERTIFICATES AT THIS TIME. At the Effective Time as defined herein, TRP will deposit in trust with the Bank as Escrow Agent, cash in an amount equal to $740,626, allocated to Fund A ($300,000) and to Fund B ($440,626) less any recoveries which will increase the Cash Consideration paid to shareholders. Funds A and B will be held and maintained by the Escrow Agent pending resolution regarding certain loans and a deposit account of the Bank on its books as of the date of the Agreement. Upon resolution of such account, or the running of applicable statutes of limitations, and upon the resolution of such loans (but in no event more than three years from the Effective Time of the Merger), the Escrow Agent shall pay (i) out of Fund A to TRP an amount equal to any amount assessed against or any liability charged to the Bank relating to the account, net of Tax Effect (as defined in the Escrow Agreement) and costs incurred by TRP or the Bank in resolution of the account, net of Tax Effect, and the balance of Fund A shall be paid to the former stockholders and option holders; (ii) out of Fund B to TRP an amount equal to (x) gross loan charge-offs - in excess of amounts previously reserved and certain payments on loan guarantees actually received - - during the term of Fund B on certain loans identified in Exhibit C to the Escrow Agreement, net of Tax Effect, less the aggregate gross amount of loans collected or recovered by the Bank, net of Tax Effect, from the Closing to the third anniversary thereof for loans previously charged off and listed on Exhibit B to the Escrow Agreement and (y) all fees, costs and expenses incurred by TRP or the Bank in connection therewith, net of Tax Effect, and the balance shall be paid to the former stockholders and former option holders; and (iii) in the case of Funds A and B, the amount paid to the former shareholders and former option holders shall be increased by any income received on investment of amounts held in such funds and reduced by any losses more information. Background of the Merger Sales Negotiations with TRP During 1995, officers and the Board of Directors of Bancorp had discussions with at least four investment banking firms regarding a possible merger or acquisition transaction involving the Company. In May 1995, representatives of Bancorp met with representatives of Baxter Fentriss and Company ("Baxter Fentriss" herein), an investment banking and financial services consulting firm to discuss strategic options presently available to Bancorp and the Bank. Following the meeting with representatives of the Company, Baxter Fentriss was invited to speak with the Board of Directors in May, 1995, at which time Baxter Fentriss provided its views regarding strategic options, including sale and discussed the approach Baxter Fentriss might take to market the institution. Thereafter, Bancorp selected Baxter Fentriss as its financial advisor because of Baxter Fentriss' reputation and substantial experience in transactions such as the Merger. The Board of Directors also considered the range of possible values to Bancorp shareholders that could potentially be achieved by remaining independent and realizing possible future earnings. Factors considered by the Board of Directors which could affect those values include the following: the increasing competitiveness for loan originations and deposit funds within the Bank's marketplace; the general health and long term well being of California's economy; the volatility of interest rates and capital markets in general affecting Bancorp's stock price; the entrance into California of large financial institutions and unregulated financial intermediaries with greater resources than the Bank that are able to price a wide range of financial products significantly below existing competition; and the increasing consolidation of financial institutions on a national, regional and local level. Following completion of these discussions and deliberations, the Board of Directors approved the retention of Baxter Fentriss and entered into an Agreement with Baxter Fentriss on June 12, 1995 (the "Engagement Letter") permitting Baxter Fentriss to conduct a discreet and targeted marketing effort. Pursuant to the Engagement Letter, Bancorp agreed to pay Baxter Fentriss a fee (the "Merger Fee") of one and one half (1.5%) percent of the total Merger Consideration. The Merger Fee is payable upon consummation of the Merger. In addition, Bancorp agreed to reimburse Baxter Fentriss for all reasonable travel, legal and other out of pocket expenses incurred in connection with its engagement. The Engagement Letter also contains provisions relating to an indemnity of Baxter Fentriss against liabilities related to or arising out of Baxter Fentriss' engagement or the Merger, unless any claim, loss or expense arose from Baxter Fentriss' negligence or willful misconduct in performing its services. During the period between July 1995 and September 1995, Baxter Fentriss prepared an offering memorandum (the "Offering Memorandum") and contacted over 90 potential acquirers of Bancorp. Potential buyers were contacted on a "no names" basis to protect the confidentiality of Bancorp. Those potential buyers that expressed an interest, and had the financial capacity to acquire, executed a confidentiality agreement (the "Confidentiality Agreement") and received a copy of the Offering Memorandum. Between October 1995 and June 1996, Baxter Fentriss received four offers to acquire the Company. Following extensive negotiations with each such party and following a preliminary financial investigation of the ability of each of such offerors to complete the transactions contemplated, Baxter Fentriss concluded that a group led by Denis Daly, Sr., a Chicago banker and businessman and including Cyrus Tang, a Chicago businessman and industrialist (the "Daly Group" herein) had the most potential to provide a favorable proposal to the Company's shareholders. Following execution of the Agreement, Mr. Tang and Mr. Daly had discussions regarding the structuring of their ownership of TRP, as a result of which Mr. Tang has withdrawn from the Daly Group. As discussed elsewhere herein, Mr. Daly has made other arrangements to finance TRP in order to finance the purchase of the Company. See "SUMMARY OF PROXY STATEMENT - Parties to the Merger" and "BUSINESS OF THE PARTIES TO THE MERGER - TRP" for more information. In response to a request from Baxter Fentriss for an updated and detailed proposal outlining price, consideration type, organizational issues and other relevant issues, which letter requested a response no later than June 6, 1996, legal counsel to the Daly Group, by letter dated June 3, 1996, set out a proposal to buy the outstanding shares of the Company for a multiple of the book value of the Company within a range of 1.4 to 1.6 times book value. This was a nonbinding letter of intent and preliminary proposal, not intended to bind the Company or the Daly Group. On July 1, 1996, at the invitation of the Daly Group, Eddy S.F. Chan, President and Chief Executive Officer of Bancorp, visited Chicago in order to meet with the principals of the Daly Group. Following this meeting further negotiations were conducted among representatives of the Company, Baxter Fentriss and representatives of the Daly Group. Toward the end of July, a specific price per share was proposed by the Daly Group and on August 1, 1996, the Board of Directors of the Company met to consider the proposal and to give direction to Baxter Fentriss regarding further negotiation of the Agreement. Baxter Fentriss recommended to the Board of Directors on August 1, 1996, that the Daly Group be permitted to conduct a preliminary due diligence examination of the Bank and the Company. Following the conduct of such due diligence by representatives of the Daly Group, Baxter Fentriss met with representatives of the Daly Group on August 21, 1996 to conduct further negotiations and to seek to improve the terms of the proposal. Following this meeting, the Daly Group conducted additional due diligence and began preparation of a definitive agreement which was delivered in draft form to the Board of Directors and its legal counsel on September 19, 1996. On October 3, 1996, Baxter Fentriss met with the Board and Bancorp's legal counsel for the purpose of reviewing the preliminary definitive agreement and in order to obtain direction from the Board regarding further negotiation of the terms of the agreement. At that meeting, Baxter Fentriss delivered in oral and draft written form, a preliminary Fairness Opinion, stating that the terms of the preliminary draft of the definitive agreement were fair to the shareholders of Bancorp from a financial point of view. See "THE MERGER - Opinion of the Financial Advisor" for more information regarding Baxter Fentriss' analysis of the proposed transaction. At that meeting the Board directed Baxter Fentriss to seek to increase the per share price offered and to seek to resolve certain open issues. Concurrent with negotiation of pricing and other issues, and pursuant to the terms of the Confidentiality Agreement and certain timing constraints imposed by the Daly Group, Baxter Fentriss, the Board and the Daly Group also negotiated the Escrow Agreement, which sets forth the terms and conditions under which a certain portion of the Merger Consideration would be held back pending the resolution of certain matters regarding loans and a certain deposit account of the Bank; the Voting Agreement, pursuant to which the Directors would agree to vote their shares for the Merger; and the Option Agreement, which would grant an option to the Daly Group to buy shares of Bancorp under certain circumstances. See the following sections of "THE MERGER" for more information on the terms and conditions of the Agreement; see "THE ESCROW AGREEMENT" for more information on the terms and conditions of the Escrow Agreement; see "THE VOTING AGREEMENT" for more information on the terms and conditions of the Voting Agreement; and see "THE OPTION AGREEMENT" for more information on the terms and conditions of the Option Agreement. Between October 3 and October 17, 1996, negotiation of issues related to price and terms of the Agreement, the Escrow Agreement, the Option Agreement and the Voting Agreement continued among representatives of the Company and the Daly Group and on October 17, 1996, revised, final drafts of the above agreements were delivered to representatives of the Company for review and consideration by the Board of Directors. On October 17, 1996, the Board of Directors met and reviewed the terms and conditions of final draft versions of the Agreement, the Escrow Agreement, the Voting Agreement and the Option Agreement with legal counsel and considered a presentation by Baxter Fentriss in which Baxter Fentriss confirmed its preliminary Fairness Opinion. Thereafter the Board of Directors approved the Agreement and the related agreements and authorized Mr. Chan to proceed with signatures. The Directors present at the meeting each executed the Voting Agreement and execution copies of the Agreement, the Escrow Agreement, and the Option Agreement were signed on Friday, October 18, 1996 by Mr. Chan. The transaction was publicly announced on the same date, following the close of the NASDAQ markets. Reasons for the Merger Prior to having authorized Baxter Fentriss to initiate negotiations with prospective merger candidates, the issue of whether to remain independent was evaluated by the Bank and Bancorp's Boards of Directors. The Board reviewed Bancorp's and the Bank's Business Plan projections and updates, actual 1995 operating results and prospective earnings forecasts for 1996 through 1998. That review led to the conclusion that although improved earnings during the three year period were indicated, they would not, when compared to other investment opportunities, reach the level sufficient to support enhanced shareholder value. While the Bank is categorized by OCC as a "well capitalized" institution, longer term forces operating in the Bank's marketplace, such as the expanding array of alternative investment opportunities for depositors' funds and, as noted previously, the increasingly competitive market for new loan originations have had and will continue to have an impact on the Bank' asset growth and profitability. While Bancorp currently has the capital resources to realistically consider the acquisition of or merger with one or more suitably sized and profitable financial institutions as a means to gain assets and improve earnings, such an acquisition or merger would require extensive restructuring of the institution's method of doing business and would not assure any increase of shareholder value. After review and evaluation of these and other factors (see "Factors Considered by the Board of Directors of Bancorp" below) as well as the opinion of Baxter Fentriss, it was the Board of Directors' conclusion that in the long term there is reasonable doubt that Bancorp could produce shareholder value in excess of that represented by the Merger Consideration, and that the Merger Consideration was fair, from a financial point of view, to the shareholders of Bancorp. Accordingly, the Board of Directors determined that the Merger was in the best interests of Bancorp's shareholders and approved the Agreement and the transactions contemplated thereby. THEREFORE, THE BOARD OF DIRECTORS OF BANCORP RECOMMENDS THAT THE SHAREHOLDERS OF BANCORP VOTE FOR APPROVAL AND ADOPTION OF THE AGREEMENT. Factors Considered by the Board of Directors of Bancorp The terms of the proposed Merger are the result of arms-length negotiations. In arriving at its decision to approve and recommend the Agreement, the Board of Directors of Bancorp considered a number of factors, including, but not limited to, the following: (i) The general economic and competitive conditions of the market in which the Bank operates and trends in the consolidation of banking institutions. These conditions relate largely to excess capacity in the banking industry and active competition from nonbanking entities for deposits and loan products. (ii) The volatility in levels of interest rates and the impact of such changes on the Bank's earnings performance and other prospects. (iii) The costs of restructuring the Bank with no indication that a major restructuring would significantly alter current profitability or provide assurance of achieving higher stockholder value long term. (iv) The managerial and financial resources of TRP and the likelihood of receiving the requisite regulatory approvals in a timely manner. (v) The fact that the Merger would be a taxable transaction to the shareholders of Bancorp. (vi) The opinion of Baxter Fentriss in draft form, and orally confirmed by Baxter Fentriss at the Board meeting on October 17, 1996, that the Merger Consideration per share is fair, from a financial point of view, to the holders of Bancorp Common Stock, and considering current market values, book values, earnings per share, and the prices and premiums paid in certain other similar transactions involving financial institutions. See "-Opinion of Financial Advisor." (vii) The Directors' views that it was not likely that a better offer could be obtained in the short-term and that there could be no assurance that the TRP principals would not withdraw their proposal if Bancorp were to continue soliciting other potential acquirers, or that any other offers would be better than TRP's offer. (viii) The interests of certain officers, which are discussed in another section of this Proxy Statement under "THE MERGER - Interests of Certain Persons in the Merger". (ix) The facts and circumstances set forth above in this section entitled "THE MERGER - Background of the Merger". In reaching its determination to approve and recommend the Merger, the Board of Directors of Bancorp did not assign any relative or specific weights to the foregoing factors, and individual Directors may have given different weights to different factors. Opinion of Financial Advisor Baxter Fentriss has acted as financial advisor to Bancorp in connection with the acquisition. Baxter Fentriss assisted Bancorp in identifying prospective acquirers. See "THE MERGER - Background of the Merger - Sales Negotiations with TRP" for more information in this regard. On October 3, 1996, and updated and confirmed as of November 15, 1996, Baxter Fentriss delivered to Bancorp its opinion that on the basis of matters referred to therein, the offer is fair, from a financial point of view, to the holders of Bancorp Common Stock (such opinion and update are referred to collectively as the "Fairness Opinion" herein.) In rendering its opinion, Baxter Fentriss consulted with the management of Bancorp and the Daly Group; reviewed the Agreement and certain publicly available information on the parties; and reviewed certain additional materials made available by management of the respective parties. In addition, Baxter Fentriss discussed with the management of the Company and the Daly Group their respective businesses and outlook. Baxter Fentriss was involved in the negotiations with the Daly Group and initiated merger discussions at the request of Bancorp. No limitations were imposed by Bancorp's Board of Directors upon Baxter Fentriss with respect to the investigation made or procedures followed by it in rendering its opinion. The full text of Baxter Fentriss' written opinion is attached as Appendix E to this Proxy Statement and should be read in its entirety with respect to the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by Baxter Fentriss in connection therewith. Baxter Fentriss' opinion is directed to the Company's Board of Directors only, and is directed only to the fairness, from a financial point of view, of the consideration received. It does not address the Company's underlying business decision to effect the proposed transaction, nor does it constitute a recommendation to any shareholder as to how such shareholder should vote with respect to the Agreement and the Merger or as to any other matter. Baxter Fentriss' opinion was one of several factors taken into consideration by the Company's Board of Directors in making its determination to approve the Agreement and the Merger, and the receipt of Baxter Fentriss' opinion is a condition precedent to the Company's consummation of the Merger. The opinion of Baxter Fentriss does not address the relative merits of the Merger as compared to any alternative business strategies that might exist for Bancorp or the effect of any other business combination in which Bancorp might engage. Baxter Fentriss, as part of its investment banking business, is continually engaged in the valuation of financial institutions and their securities in connection with mergers and acquisitions and valuations for estate, corporate and other purposes. Baxter Fentriss is a nationally recognized advisor to firms in the financial service industry on mergers and acquisitions. The Company selected Baxter Fentriss as its financial advisor because Baxter Fentriss is an investment banking firm focusing on banking transactions, and because of the firm's extensive experience and expertise in transactions similar to the Merger. Baxter Fentriss is not affiliated with the Daly Group or Bancorp. In connection with the rendering of its opinion, Baxter Fentriss performed a variety of financial analyses. In conducting its analyses and arriving at its opinion, Baxter Fentriss considered such financial and other factors as it deemed appropriate under the circumstances, including, among others, the following (i) the historical and current financial condition and results of operations of the Company including interest income, interest expense, interest sensitivity, noninterest income, noninterest expense, earnings, book value, return on assets and equity, capitalization, the amount and type of nonperforming asset, the impact of holding certain nonearning real estate assets, the reserve for loan losses and possible tax consequences resulting from the transaction; (ii) the business prospects of the Company and the Daly Group; (iii) the economies of the Company's market areas; (iv) the historical and current market for Bancorp Common Stock; and (v) the nature and terms of certain other merger transactions that it believes to be relevant. Baxter Fentriss also considered its assessment of general economic, market, financial and regulatory conditions, as well as its knowledge of the financial institutions industry, its experience in connection with similar transactions, its knowledge of securities valuation generally, and its knowledge of merger transactions in California. In connection with rendering its opinion, Baxter Fentriss reviewed (i) the Agreement; (ii) drafts of this Proxy Statement; (iii) the Annual Reports to shareholders, including the audited financial statements of the Company for the years ended December 31, 1993, 1994 and 1995, and the unaudited quarterly report of the Company for the nine month period ended September 30, 1996; and (iv) certain additional financial and operating information with respect to the business, operations, and prospects of the Daly Group and the Company as it deemed appropriate. Baxter Fentriss also (a) held discussions with members of senior management of the Company regarding the historical and current business operation, financial condition and future prospects of their respective companies; (b) reviewed the historical market prices and trading activity for the Common Stock of the Company; (c) compared the results of operations of the Company with that of certain banking companies that it deemed to be relevant; (d) analyzed the pro forma financial impact of the Merger on the Company; and (e) conducted such other studies, analyses, inquiries and examinations as Baxter Fentriss deemed appropriate. The preparation of the Fairness Opinion involved various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to partial analysis or summary description. Moreover, the evaluation of fairness from a financial point of view of the Merger Consideration to the shareholders of Bancorp Common Stock was to some extent a subjective one based on the experience and judgment of Baxter Fentriss and not merely the result of mathematical analysis of financial data. Accordingly, notwithstanding the separate factors summarized below, Baxter Fentriss believes that its analysis must be considered as a whole and that selecting portions of its analysis and of the factors considered by it, without considering all analyses and factors, could create an incomplete view of the evaluation process underlying its opinion. The ranges of valuation resulting from any particular analysis described below should not be taken to be Baxter Fentriss' view of the actual value of the Company. In performing its analysis, Baxter Fentriss made numerous assumptions with respect to industry performance, business and economic conditions and other matters, many of which are beyond the control of the Company or the Daly Group. The analyses performed by Baxter Fentriss are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by the analysis. Additionally, analyses relating to the values of businesses do not purport to be appraisals or to reflect the prices at which businesses actually may be sold. In rendering its opinion, Baxter Fentriss assumed that, in the course of obtaining the necessary regulatory approvals of the Merger, no conditions will be imposed that will have a material adverse effect on the contemplated benefits of the Merger, on a pro forma basis, to Bancorp. The following is a summary of selected analyses performed by Baxter Fentriss in connection with its opinion: (i) Stock Price History. Baxter Fentriss studied the history of the trading prices and volume for Bancorp Common Stock and compared that to publicly traded banks in California and to the price offered by the Daly Group. As of September 30, 1996, the Company's fully diluted book value was $5.64 and its tangible fully diluted book value was $5.35; (ii) Comparative Analysis. Baxter Fentriss compared the price to earnings multiple, price to book multiple, and price to assets multiple of the Daly Group offer with other comparable merger and acquisition transactions in California, after considering the Company's nonperforming assets and other variables. The comparative multiples included both bank and savings and loan association sales during the last three years; (iii) Discounted Cash Flow Analysis. Baxter Fentriss performed a discounted cash flow analysis to determine hypothetical present values for a share of Bancorp's Common Stock as a five and ten year investment. Under this analysis, Baxter Fentriss considered various scenarios for the performance of the Common Stock using a range from six percent (6%) to twelve percent (12%) in the growth of the Company's earnings and dividends, and a range from eight times to sixteen times earnings as the terminal value of Bancorp Common Stock. A range of discount rates from 12% to 15% was applied to these alternative growth and terminal value scenarios. These ranges of discount rates, growth alternatives, and terminal values were chosen based upon what Baxter Fentriss, in its judgment, considered to be appropriate taking into account, among other things, the Company's past and current performance, the general level of inflation, rates of return for fixed income and equity securities in the marketplace generally and for companies of similar risk profiles. In most of the scenarios considered, the present value of the Bancorp Common Stock was calculated at less than the value of the Daly Group offer. Thus, Baxter Fentriss' discounted cash flow analysis indicated that Bancorp shareholders would be in a better financial position by receiving the Merger Consideration rather than continuing to hold Bancorp Common Stock. Baxter Fentriss has relied, without any independent verification, upon the accuracy and completeness of all financial and other information reviewed. Baxter Fentriss has assumed that all estimates, including those as to possible economies of scale, were reasonably prepared by management, and reflect their best current judgments. Baxter Fentriss did not make an independent appraisal of the assets or liabilities of either the Company or the Daly Group, and had not been furnished such an appraisal. Baxter Fentriss will be paid an amount equal to 1.5% of the Merger Consideration plus reasonable out-of-pocket expenses for its services. Bancorp has agreed to indemnify Baxter Fentriss against certain liabilities, including, to the extent permitted by applicable law, certain liabilities under the federal securities laws. THE FULL TEXT OF THE OPINION OF BAXTER FENTRISS DATED AS OF THE DATE OF THIS PROXY STATEMENT, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN BY BAXTER FENTRISS, IS ATTACHED HERETO AS APPENDIX E. SHAREHOLDERS ARE URGED TO READ THIS OPINION IN ITS ENTIRETY. BAXTER FENTRISS' OPINION IS DIRECTED ONLY TO THE CONSIDERATION TO BE RECEIVED IN THE MERGER BY THE HOLDERS OF BANCORP COMMON STOCK AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE SPECIAL MEETING. THE SUMMARY OF THE OPINION OF BAXTER FENTRISS SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. Closing; Effective Time of the Merger The closing of the transactions contemplated by the Agreement shall take place at the offices of Bell, Boyd & Lloyd, legal counsel to TRP, 70 West Madison Street, Chicago, Illinois, at 10:00 a.m., local time, on the last business day of the month following the day on which the latest of the following occurs: (i) the date of the stockholders' meeting at which the stockholders of Bancorp vote on the Agreement or (ii) the day on which the last of the conditions set forth in Article Six of the Agreement is fulfilled or waived, or at such other time and place and on such other date as Bancorp and TRP agree ("Closing").The Merger will become effective upon the filing of a certificate of merger and such other documents as are required by the Delaware General Corporation Law ("DGCL") to be filed and the agreement of merger and such other documents as are required by the California General Corporation Law ("CGCL") to be filed (the "Effective Time"). If the Closing has not occurred on or before March 31, 1997 (unless due to a delay in regulatory approval, including but not limited to the Justice Department or the FRB, in which case the Cash Consideration shall be increased by $0.07 per month for each full month which elapses between March 31, 1997 and the Closing), the Agreement shall be terminated and the Merger shall be abandoned. The right to terminate the Agreement and the right to receive additional Cash Consideration shall not be available to any party whose material breach of the Agreement has been the cause of, or resulted in, the failure of the Merger to occur on or before March 31, 1997, and in no event shall the Agreement remain in effect if the Closing has not occurred on or before June 30, 1997. Interests of Certain Persons in the Merger The Directors and executive officers of Bancorp (ten persons) together with their affiliates, beneficially owned a total of 331,934 shares of Bancorp Common Stock (representing 27.8% of all outstanding shares of Bancorp Common Stock) on October 31, 1996. The Directors and executive officers will receive the same consideration for their shares, including any shares which they may acquire prior to the Effective Time pursuant to the exercise of stock options, as the other shareholders of Bancorp. See "-Stock Options" discussed below. Certain members of Bancorp's management have certain interests in the Merger that are in addition to their interests as shareholders of Bancorp generally. The Board of Directors was aware of these interests and considered them, among other matters, in approving the Agreement and the transactions contemplated thereby. Employment Agreements. Neither the Bank nor the Company has employment agreements with its executive officers. However as a condition to the Agreement, TRP has represented and warranted that it will enter into employment agreements with Eddy S.F. Chan, the Bank's Chairman, Chief Executive Officer and President, and Chief Executive Officer and President of Bancorp, and with John K. Wong, Executive Vice President of the Bank and a Director of Bancorp prior to the Effective Time of the Merger. Negotiation of these agreements had not been completed at the time of preparation of the Proxy Statement; however, the parties anticipate that such agreements will be for a period of years and contain a compensation package at a level comparable to the employees' existing compensation, including salary, stock options and other benefits. Stock options. Certain key employees of Bancorp and the Bank have been granted options to purchase shares of Bancorp Common Stock under the Bancorp 1984 Employee Stock Option Plan, as amended. In addition, each of the Directors of Bancorp has been granted an option or options under the Non Qualified Stock Option Plan. The aggregate number of shares of Bancorp purchasable upon exercise of such options is 103,750 shares of Common Stock. The Agreement provides that, in consideration of the cancellation of such options, each holder of an outstanding option (whether or not then exercisable) will receive in settlement thereof, a cash payment from the Surviving Corporation in an amount equal to the product of (i) the excess of the Cash Consideration over the per share exercise price of such option and (ii) the total number of shares of Company Common Stock which the Option Holder is entitled to purchase under such option (the "Number of Options"); whereupon such options to purchase shares shall be canceled. The Option Holders shall also be entitled to receive a pro rata share of any amount payable pursuant to the terms of the Escrow Agreement. The following table sets forth the number of shares subject to options held by each Director and executive officer of Bancorp and the Bank and the aggregate value to be received by all option holders upon cancellation. # shares aggregate subject to cancellation Name Title options amount ($8.00)* Eddy S.F. Chan President, CEO and Director, Bancorp 24,000 $ 72,125 John K. Wong Executive Vice President, Bank and Director, Bancorp 14,000 $ 42,125 James A. Babcock Director, Chairman, Bancorp 5,500 $ 17,375 Frankie G. Lee Director, Vice-Chair, Bancorp 5,500 $ 17,375 John K. Lee Director, Bancorp 5,500 $ 17,375 John T. Stewart Director, Secretary, Bancorp 5,500 $ 17,375 Simon S. Teng Director, Treasurer, Bancorp 5,500 $ 17,375 Frank K.W. Wong Director, Bancorp 5,500 $ 17,375 Robert A. Hinkle Executive Vice President, Bank 5,000 $ 15,000 Bruce Nakahira Director, Bancorp 4,500 $ 13,875 G. Barney Schley Senior Vice President, Bank 2,500 $ 7,500 Kiran C. Mehta Senior Vice President, Bank 2,500 $ 7,500 Bonnie L. Hao Senior Vice President, Bank 2,500 $ 7,500 Crystal Z. Hundahl Vice President, Bank 2,500 $ 7,500 Dennis B. Jang Vice President, CFO, Bank and Bancorp 2,500 $ 7,500 Daniel Y. Lee Director, Bank 750 $ 2,625 93,750 $ 287,500 Directors and Executive Officers of Bancorp as a group: 10 persons 78,000 Other officers and employees of Bancorp and the Bank as a group**: 8 persons 25,750 Total: 18 persons 103,750 * Does not include additional consideration that may be received from the Escrow Fund. ** Includes Directors Emeritus. Certain Federal Income Tax Consequences The following discussion of material federal income tax consequences of the Merger to certain holders of Bancorp Common Stock is based on present law and does not purport to be a complete analysis of all tax consequences that may be relevant to any particular shareholder. The state, local, foreign, estate and alternative minimum tax consequences to shareholders of Bancorp are not discussed. Certain holders (including, but not limited to, insurance companies, tax exempt organizations, financial institutions, securities dealers, broker dealers, employee shareholders, foreign corporations, persons who are not citizens or residents of the United States and persons who acquired shares of Bancorp Common Stock as part of a straddle or conversion transaction) may be subject to special rules not discussed below. The discussion assumes that each shareholder holds shares of Bancorp Common Stock as a capital asset. However, certain shareholders who are employees or Directors may not be entitled to treat certain of the shares which they may have acquired from Bancorp as capital assets and may be required to report any gain on the sale of the shares as taxable compensation from Bancorp. The discussion is based on laws, regulations, rulings, practice and judicial decisions now in effect, all of which are subject to change (possibly with retroactive effect) by legislation, administrative action or judicial decision. The receipt of the Merger Consideration for Bancorp Common Stock pursuant to the Merger or, in the case of any dissenting shareholder, pursuant to any appraisal proceedings, if written demands for payment of fair market value are made therefor by record holders thereof (see "DISSENTERS' APPRAISAL RIGHTS"), will be treated as a sale or exchange of those shares for federal income tax purposes. A holder of Bancorp Common Stock (and if dissenters' rights exist following the meeting, including a dissenting shareholder) will recognize a gain or loss for federal income tax purposes generally in an amount equal to the difference, if any, between (a) the Merger Consideration, consisting of the cash received plus the fair market value of the shareholder's pro rata share of the Escrow Fund distributions, if any, and (b) the adjusted tax basis of his, her or its shares of Bancorp Common Stock surrendered (except, in the case of dissenting shareholders, if any, for any amount constituting interest, which will be taxable as ordinary income). Except for gain attributable to certain shares owned by employees or Directors of Bancorp, as described above, gain or loss on the sale of the shares will be long term capital gain or loss if the shares of Bancorp Common Stock have been held by the shareholder for one year or more and were capital assets in the hands of the shareholder. The receipt of the Merger Consideration by a shareholder of Bancorp may not be reported as an installment sale since the Bancorp Common Stock is considered to be traded on an "established securities market" and is thus not eligible for such tax reporting method. Instead, the shareholder may report the receipt of Merger Consideration, for the taxable year encompassing the Effective Time, either by (a) determining the fair market value of the pro rata share of the expected Escrow Fund distributions and adding it to the Cash Consideration or (b) only reporting the Cash Consideration by determining that the Escrow Fund distributions are so contingent and speculative so as to make it impossible to value them, and thus qualifying for the "open transaction" doctrine under Burnet v. Logan, 283 U.S. 404 (1931). If the shareholder reports the Merger Consideration under the former method (valuing the expected Escrow Fund distributions) to the extent that the actual distributions from the Escrow Fund differ from their estimated value, the shareholder will be required to report a loss or a gain in future year(s) depending on whether the actual amounts were less than, or in excess of, their original estimated value. If the shareholder reports the receipt of Merger Consideration under the "open transaction" method, the Cash Consideration received at the Effective Time would be reported, reduced by the total adjusted tax basis in the stock surrendered. The amounts that thereafter may be received from the Escrow Fund distributions are reportable, under the "open transaction" method, when received in subsequent year(s). It is possible that the Internal Revenue Service ("Service") may not agree that the "open transaction" method is available and assess penalties and interest, plus additional taxes for the year of receipt of the Merger Consideration. Accordingly, any shareholder contemplating the use of the "open transaction" method of reporting to the Service should consult with his, her or its tax advisor in order to determine which tax reporting method to use. It is also possible that the Service may attempt to recharacterize the $0.07 per month additional amount to be added to the Cash Consideration if the Closing has not occurred by March 31, 1997, as an item of interest income and thus not subject to the potentially smaller long-term capital gain rates. If so recharacterized, the shareholder will potentially incur a greater tax than if characterized as part of the Cash Consideration for the shares. The Escrow Fund may earn taxable income while held by the Escrow Agent and prior to distributions, if any, to the shareholders. Such income, net of expenses and investment losses, will be taxable to the Escrow Fund and not to the shareholders. The shareholders may only be taxed on the Escrow Fund distributions, if any, as explained above. The cash payments due the holders of Bancorp Common Stock upon the exchange of such Bancorp Common Stock pursuant to the Merger (other than certain exempt persons or entities) will be subject to "backup withholding" for federal income tax purposes unless certain requirements are met. Under federal law, the third party Exchange Agent must withhold 31% of the cash payments to holders of Bancorp Common Stock to whom backup withholding applies, and the federal income tax liability of such persons will be reduced by the amount so withheld. To avoid backup withholding, a holder of Bancorp Common Stock must provide the third party Exchange Agent with his or her taxpayer identification number and complete a form in which he or she certifies that he or she has not been notified by the Internal Revenue Service that he or she is subject to backup withholding as a result of a failure to report interest and dividends. The taxpayer identification number of an individual is his or her Social Security number. It is expected that each shareholder will be requested by the Exchange Agent, at the appropriate time to complete the necessary form. No ruling has been or will be requested from the Internal Revenue Service as to any of the tax effects to Bancorp's shareholders of the transactions discussed in this Proxy Statement, and no opinion of counsel has been or will be rendered to Bancorp's shareholders with respect to any of the tax effects of the Merger to shareholders. THE TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE PARTICULAR CIRCUMSTANCES OF EACH SHAREHOLDER; THEREFORE, EACH SHAREHOLDER IS URGED TO CONSULT HIS OR HER TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES OF THE MERGER TO SUCH HOLDER, INCLUDING THOSE RELATING TO STATE AND/OR LOCAL TAXES. Surrender of Stock Certificates At the Effective Time, TRP will deposit in trust with a bank or trust company designated by it (the "Exchange Agent") cash in an aggregate amount equal to the product of (i) the number of shares of Company Common Stock issued and outstanding at the Effective Time (excluding such shares owned beneficially or of record by TRP, shares held by any subsidiary of the Company and shares which are Dissenting Shares [as defined herein]), and (ii) the Cash Consideration (such amount being herein defined as the "Exchange Fund"). As soon as practicable after the Effective Time, TRP shall deposit in trust in the Exchange Fund in cash such further aggregate amount equal to the product of (i) the number of shares of Company Common Stock as to which the holders thereof forfeited the right to demand purchase pursuant to the exercise of their dissenters' rights and (ii) the Cash Consideration. The Exchange Agent shall, pursuant to irrevocable instructions, make the Cash Consideration payments provided under the Agreement out of the Exchange Fund. The Exchange Fund shall not be used for any other purpose. In addition, at the Effective Time, TRP shall deposit in trust with the Escrow Agent (as defined in the Escrow Agreement) cash in an amount equal to $740,626, less the amount by which the escrow deposit may be reduced pursuant to the provisions of the Escrow Agreement (the "Escrow Reduction Amount"). The $740,626 less the Escrow Reduction Amount (the "Escrow Fund") shall be divided into two separate funds pursuant to the Escrow Agreement. The Bank, as escrow agent, will administer the Escrow Fund and release, in cash, portions of the Escrow Fund promptly as such amounts become payable pursuant to the terms of the Escrow Agreement. Promptly after the Effective Time, the Exchange Agent shall mail to each record holder as of the Effective Time (other than TRP and any subsidiary of the Company), of an outstanding certificate or certificates which immediately prior to the Effective Time represented shares of Company Common Stock (the "Certificates") a form letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent) and instructions for use in effecting the surrender of the Certificates for payment therefor. Upon surrender by such record holder to the Exchange Agent of a Certificate, together with such letter of transmittal duly executed, the holder of the Certificate (the "Former Stockholder") shall be entitled to receive in exchange therefor cash in an amount equal to the product of (i) the number of shares of Company Common Stock represented by such Certificate and (ii) the Cash Consideration, and such Certificate shall forthwith be canceled. No interest will be paid or accrued on the cash payable on surrender of the Certificates. Former Stockholders will also be entitled to receive any amounts payable pursuant to the terms of the Escrow Agreement. SHAREHOLDERS OF BANCORP ARE REQUESTED NOT TO SURRENDER THEIR CERTIFICATE(S) FOR EXCHANGE UNTIL THEY HAVE RECEIVED SUCH INSTRUCTIONS AND LETTER OF TRANSMITTAL AND HAVE COMPLETED THE TRANSMITTAL MATERIALS ACCORDINGLY. If payment is to be made to a person other than the person in whose name the Certificate surrendered is registered, it shall be a condition of payment that the Certificate so surrendered shall be properly endorsed or otherwise in proper form for transfer and that the person requesting such payments shall pay any transfer or other taxes required by reason of the payment to a person other than the registered holder, or such person shall establish to the satisfaction of the Surviving Corporation that such tax has been paid or is inapplicable. Until surrender in accordance with the foregoing, each Certificate (other than Certificates representing shares owned beneficially or of record by TRP, Certificates representing shares held by any subsidiary of Bancorp and Certificates representing Dissenting Shares) shall represent, for all purposes, the right to receive the Merger Consideration in cash multiplied by the number of shares evidenced by such Certificate, without interest. From and after the Effective Time, there will be no transfers on the stock transfer records of Bancorp of shares of Bancorp Common Stock that were outstanding immediately prior to the Effective Time. If, after the Effective Time, a certificate representing such shares is presented to TRP, the certificate shall be canceled and exchanged for the Merger Consideration deliverable in respect thereof in accordance with the procedures set forth in the Agreement. In the event that a Certificate is lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate, the Surviving Corporation will pay or cause to be paid in exchange therefor, the Merger Consideration deliverable with respect thereof. In connection therewith, the Board of Directors of the Surviving Corporation may require the owner to give the Surviving Corporation a bond in such sum as it may direct in indemnity against any claim that may be made against the Surviving Corporation with respect thereto. Any portion of the aggregate Merger Consideration or the proceeds of any investments thereof that remain unclaimed by the shareholders of Bancorp for 18 months after the Effective Time shall be repaid by the Exchange Agent to the Surviving Corporation. Any shareholders of Bancorp who have not theretofore complied with the procedures regarding payment for shares in accordance with the Agreement shall thereafter, subject to applicable escheat and other laws, look only to the Surviving Corporation for payment of the Merger Consideration deliverable in respect of each share of Bancorp Common Stock such shareholder holds as determined pursuant to the Agreement without any interest thereon. Regulatory Approvals The Merger is subject to approval by the Federal Reserve Board under Sections 3 and 4 of the BHC Act. As a new bank holding company, TRP is subject to regulation under the BHC Act. The Merger cannot proceed in the absence of the requisite regulatory approvals. There can be no assurance that such requisite regulatory approvals will be obtained, and, if obtained, there can be no assurance as to the date of such approvals. Regulations under the BHC Act provide that actions processed by the local Federal Reserve Bank will normally be acted upon within a thirty calendar day period after the application has been accepted as informationally complete, although the applicable Federal Reserve Bank may at any time determine to refer the application to the Federal Reserve Board, in which case the processing of the application could be extended an additional thirty days or longer. Assuming Federal Reserve Board approval, the Merger may not be consummated until thirty days after such approval, during which time the Department of Justice may challenge the Merger on antitrust grounds. With the approval of the Federal Reserve Board and Department of Justice, the waiting period may be reduced to no less than 15 days. In reviewing TRP's application in connection with the Merger under applicable provisions of the BHC Act, the Federal Reserve Board will consider the financial and managerial resources of TRP, the Company and Bank and the convenience and needs of the communities to be served. As part of, or in addition to, consideration of the above factors it is anticipated the Federal Reserve Board will consider the overall capital structure and leverage of TRP, the Company and the Bank, and any special dividends that the Bank may pay upon Closing to finance a portion of the Merger Consideration. See "BUSINESS OF THE PARTIES TO THE MERGER - TRP." The Federal Reserve Board in examining the future prospects of TRP, the Company, and the Bank has the authority to deny an application if it concludes the combined organization would have inadequate regulatory capital. The Federal Reserve Board will furnish notice and a copy of the application for approval of the Merger to the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. These agencies have thirty days to submit their views and recommendations to the Federal Reserve Board. Furthermore, the BHC Act and Federal Reserve Board Regulations require publication of, and the opportunity for public comment on, the application submitted by TRP. Any such comments provided by third parties could prolong the period during which the application is subject to review by the Federal Reserve Board. TRP's right to exercise its option under the Option Agreement is also subject to the prior approval of the Federal Reserve Board to the extent that the exercise of the option under the Option Agreement would result in TRP owning more than 5 percent of the outstanding shares of Common Stock. In considering whether to approve TRP's right to exercise it option, including its right to purchase more than 5 percent of the outstanding shares of Common Stock, the Federal Reserve Board would generally apply the same statutory criteria it would apply to its consideration of approval of the Merger. The Company and TRP are not aware of any other governmental approvals or actions that are required for approval of the Merger. Should any such approvals or actions be required, it is currently contemplated that such approvals or actions would be sought, but there can be no assurance that such other approvals, if any, would be received. Should the Merger not be consummated, Bancorp and the Bank will continue as separate going concerns. Assuming shareholder approval, it is anticipated that the Merger will be consummated on or about February 28, 1997. The Agreement provides that either party may terminate the Agreement if the Merger has not been consummated by March 31, 1997, unless, due to a delay in regulatory approval, in which case the Cash Consideration shall be increased. In no event shall the Agreement remain in effect if the Closing has not occurred on or before June 30, 1997. See "THE MERGER-Termination of the Agreement." Closing Conditions to the Merger Consummation of the Merger is subject to various specific conditions in the Agreement. While it is anticipated that all such conditions will be satisfied or (when permissible) be waived, there can be no such assurance. Conditions to Each Party's Obligations. The respective obligations of each party to effect the Merger are subject to the satisfaction or waiver prior to the Effective Time of the following conditions: (i) the Agreement and the transactions contemplated thereby shall have been approved by vote of the holders of at least a majority of the outstanding shares of Common Stock of Bancorp in accordance with applicable law; (ii) all necessary regulatory approvals, consents and waivers required to consummate the transactions contemplated by the Agreement shall have been obtained and all statutory waiting periods in respect thereof shall have expired; (iii) Baxter Fentriss shall have rendered its written opinion to the Company that the Merger Consideration is fair to the Stockholders of the Company (other than those persons owning, or holding a right to acquire TRP shares immediately prior to or immediately after the Effective Time) from a financial point of view; (iv) neither TRP, the Company nor the Bank shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits the consummation of the Merger; and the Closing shall take place on or before March 31, 1997. Conditions to the Obligations of TRP. The obligations of TRP to effect the Merger shall be subject to the satisfaction or waiver prior to the Effective Time of the following conditions: (i) each of the agreements, covenants and obligations of the Company required to be performed by it prior to the Closing pursuant to the terms of the Agreement shall have been duly performed and complied with in all material respects, and the representations and warranties of the Company in the Agreement shall be true and correct in all material respects as of the date of the Agreement and as of the Effective Time as though made at and as of the Effective Time (except as to any representation or warranty which specifically relates to an earlier date) and TRP shall have received a certificate to that effect signed by the president and senior financial officer of the Company; (ii) there shall not have occurred after the date of the Agreement, any Material Adverse Change (as defined herein) in the business, operations, properties, prospects, condition, assets, liabilities or reserves of the Company and the Bank taken as a whole or of the Bank taken individually; (iii) all action required to be taken by or on the part of the Company to authorize execution, delivery and performance of the Agreement by the Company and the consummation by the Company of the transactions contemplated thereby shall have been duly and validly taken by the Board of Directors of the Company and the Stockholders of the Company, and TRP shall have received certified copies of the resolutions evidencing such authorization; (iv) any and all permits, consents, waivers, clearances, approvals and authorizations of all third parties and governmental bodies required to be obtained by the Company or the Bank shall have been obtained by the Company and the Bank which are necessary in connection with the consummation of the Merger and the other transactions contemplated thereby. None of such approvals shall contain any term or condition which would materially impair the value of the Company and the Bank taken as a whole or of the Bank individually; (v) TRP shall have received an opinion, dated as to the Closing in form satisfactory to TRP from Nossaman, Guthner, Knox & Elliott, LLP, counsel to the Company; (vi) stockholders of Dissenting Shares shall hold no more than 10% of the outstanding shares of the Company; (vii) TRP shall have received written resignations of each of the Company's and Bank's Directors and the written resignation of each of the Company's officers, effective as of the Closing; (viii) TRP shall have received current Phase I and Phase II environmental assessments of the properties of the Company and the Bank satisfactory to it in its sole discretion; (ix) the Directors of the Company shall have executed the Voting Agreement substantially in the form of Exhibit D to the Agreement; (x) the Company shall have delivered an option agreement (the "Option Agreement") substantially in the form of Exhibit E to the Agreement; (xi) the Company shall have delivered to TRP audited financial statements as of and for the year ended December 31, 1996, which financial statements (a) will be prepared in accordance with generally accepted accounting principles consistently applied, (b) fairly reflect the Company's consolidated financial position as of such date, and the consolidated results of operations and cash flows, for the period then ended; (xii) the Company shall have delivered to TRP surveys and a satisfactory title policy insuring title to all real property; (xiii) the Company shall have delivered a list, certified by the Secretary of the Company, of loans which have been collected and have been recovered pursuant to the Escrow Agreement; (xiv) the Company shall have received a Fairness Opinion of Baxter Fentriss that the terms of the Merger are fair to the stockholders of the Company from a financial point of view. As defined in the Agreement, "Material Adverse Change" or "Material Adverse Effect" means any change in or effect on the business, operations, prospects, properties, assets, or liabilities of the Company and the Bank taken as a whole or the Bank taken individually on one hand, or TRP or the other hand, that would be materially adverse to the business, operations, properties, prospects, condition (financial or otherwise), assets or liabilities of the Company and the Bank taken as a whole or of the Bank taken individually on one hand, or TRP on the other hand, respectively. Conditions to the Obligations of Bancorp. The obligations of Bancorp to effect the Merger shall be subject to the satisfaction or waiver prior to the Effective Time of the following additional conditions: (i) each of the agreements, covenants and obligations of TRP required to be performed by it prior to the Closing shall have been duly performed and complied with in all material respects, and the representations, warranties and covenants of TRP contained in the Agreement shall be true and correct (subject to an exception generally for any condition, event, change or occurrence that would not have a Material Adverse Effect on Bancorp) as of the date of the Agreement and as of the Effective Time (as though made at and as of the Effective Time except as to any representation or warranty which specifically relates to an earlier date) and the Company shall have received a certificate to that effect signed by the president and chief financial officer of TRP; (ii) there shall not have occurred after the date of the Agreement any Material Adverse Change in the business, operations, properties, prospects, condition (financial or otherwise), assets, liabilities or reserves of TRP; (iii) all action required to be taken by, or on the part of, TRP to authorize the execution, delivery and performance of the Agreement by TRP and the consummation by it of the transactions contemplated thereby, shall have been duly and validly taken by the Board of Directors of TRP and the Company shall have received certified copies of the resolutions evidencing such authorizations; (iv) any and all permits, consents, waivers, clearances, approvals and authorizations of all third parties and governmental bodies required to be obtained by TRP shall have been obtained which are necessary in connection with the consummation of the Merger and the other transactions contemplated thereby; (v) the Company shall have received an opinion of Bell, Boyd & Lloyd, as counsel to TRP, in form satisfactory to the Company dated the date of the Closing; (vi) the Company shall have received the Fairness Opinion. Representations and Warranties. Bancorp, on the one hand, and TRP, on the other hand, have made certain representations and warranties to each other in the Agreement. Representations and Warranties of the Company Pursuant to the Agreement, the Company has made representations and warranties as to, among other things, the organization and good standing of Bancorp and the Bank, the authorization to own properties and carry on their business; the authorization of the Company to execute and deliver and to perform its obligations under the Agreement, and potential conflicts with other agreements and obligations; the capitalization of the Company, the number of outstanding shares of the Company, and any agreements or other commitments to issue additional shares by way of option or otherwise; the ownership of any subsidiaries of the Company, including the Bank; the existence and status of consents and approvals required to consummate the transactions contemplated by the Agreement; the delivery of financial statements and the status thereof. In addition, the Company has made representations and warranties as to the agreement to deliver copies of proxy statements and other reports filed with regulators and the accuracy and completeness of such reports; the accuracy and completeness of the Proxy Statement; the absence of undisclosed liabilities of the Company and the Bank; the absence of certain changes from August 31, 1996 to the Closing; the maintenance of and any claims against certain fidelity bonds, Directors' and officers' liability insurance and general liability insurance; the existence and terms of agreements and memoranda of understanding with the Company's and the Bank's regulators; the promptness and accuracy of reports filed by the Company and the Bank with their respective regulators; the obtaining and the terms of the Fairness Opinion; the existence and status of litigation or administrative proceedings involving or threatened against the Company or the Bank which may reasonably have a Material Adverse Effect; the status of title to all properties and other assets of the Company and the Bank and the existence of liens or other encumbrances against such properties and assets; the effect of the transactions contemplated by the Agreement on the Articles of Incorporation or Association and Bylaws of the Company and the Bank and on any contracts, instruments, mortgages, notes, security agreements, leases, agreements or other understandings. The Company has also made representations and warranties as to the existence and status of employee benefit plans of the Company and the Bank; the existence and status of tax returns filed by the Company and of tax liens against the Company; the existence and status of any actions, claims, demands, liability, investigation, notice or other pending or threatened action arising from or related to federal, state or local environmental, health or safety laws or regulations with respect to properties owned by the Company or the Bank; compliance with applicable laws and regulations; the existence and status of any labor difficulties; the status of transactions with affiliates of the Company and the Bank; the status of the Bank's loan portfolio; the status of the Company as a reporting company pursuant to Section 15(d) of the Securities Exchange Act of 1934; and the accuracy and completeness of the disclosures made by the Company to TRP in connection with the transactions contemplated by the Agreement. Representations and Warranties of TRP Pursuant to the Agreement, TRP has made representations and warranties as to, among other things, the organization and good standing of TRP, and the authorization to own properties and carry on its business; the authorization to execute and deliver and to perform its obligations under the Agreement, and potential conflicts with other agreements and obligations; the existence and status of consents and approvals required to consummate the transactions contemplated by the Agreement; the accuracy and completeness of information provided by TRP to be included in this Proxy Statement; its commitment to enter into employment agreements with Eddy S.F. Chan and John K. Wong prior to the Effective Time; and the accuracy and completeness of the disclosures made to the Company by TRP in connection with the transactions contemplated by the Agreement. The representations and warranties of the parties generally are subject to an exception for any condition, event, change or occurrence that would not have a Material Adverse Effect on the party making such representation or warranty. The representations and warranties of the parties do not survive beyond the Effective Time if the Merger is consummated unless otherwise stated, and, if the Agreement is terminated without consummation of the Merger, there will be no liability on the part of any party or its respective officers or Directors, provided, however, that such termination may give rise to liquidated damages ("Liquidated Damages") as discussed herein. See "THE MERGER - Liquidated Damages." Business Pending Consummation Pursuant to the Agreement, Bancorp has agreed that during the period from the date of the Agreement to the Effective Time (except as expressly provided in the Agreement or as disclosed to TRP pursuant to the Agreement or as agreed to by TRP), Bancorp shall and shall cause the Bank to conduct its business and maintain its books and records in the usual, regular and ordinary course consistent with past practice, use its reasonable efforts to maintain and preserve intact its business organization, assets, prospects, and advantageous business relationships, keep available the services of its officers and employees and maintain satisfactory relationships with suppliers, contractors, customers and others having business relationships with the Company or the Bank. In addition, pursuant to the Agreement, during the period from the date of the Agreement to the Effective Time (except as otherwise specifically provided in the Agreement or the Option Agreement or as disclosed to TRP pursuant to the Agreement), Bancorp has agreed that it shall not, and shall not permit the Bank to, without the prior written consent of TRP, take certain actions, including the following: (i) split, combine or reclassify any share of its capital stock, declare, pay or set aside for payment any dividend or other distribution in respect of its capital stock or redeem, purchase or otherwise acquire any shares of its capital stock; (ii) authorize for issuance, issue, sell, pledge, dispose of or encumber, deliver, or agree or commit to do any of the foregoing with respect to any stock of any class of the Company or the Bank or any securities convertible or exchangeable for such stock, other than shares issuable upon exercise of currently outstanding options of the Company exercisable for up to 103,750 shares; (iii) take any action to cause the shares of the Company to cease to be quoted on the NASDAQ Bulletin Board, or fail to promptly notify TRP as to any notification received by the Company to the effect that action has been or is intended to be taken to terminate authorization for quotation; (iv) incur any liability or obligation or assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other individual or entity other than in the usual course of business, or issue any debt securities or change any assumption underlying, or method of calculation of any bad debt, contingency or other reserve, except as required by generally accepted accounting principles or applicable law; (v) adopt or amend any bonus, profit sharing, compensation, stock option, pension, retirement or similar employee benefit plan, or grant or become obligated to grant any increase in compensation, except for increases in the ordinary course of business consistent with past practices, or make any change in any such plan or other employee benefit or welfare arrangement, or enter into any similar arrangement; (vi) acquire by merger or other means, any corporation, partnership or other business organization or division thereof, or acquire any equity interest in any such business organization, except for such interests acquired in a fiduciary capacity or in the ordinary course of business consistent with past practice; (vii) except as required to consummate the Merger, pay, discharge or satisfy any claim or liability, other than in the ordinary course of business and consistent with past practices, of liabilities reflected or reserved against on the balance sheet included in interim financial statements or incurred in the ordinary course of business and consistent with past practices since the date thereof; (viii) except as contemplated by the Agreement, amend the Articles of Incorporation of Bylaws of the Company; (ix) make any capital expenditure other than in the ordinary course of business and consistent with past practices except for capital expenditures which do not individually exceed $25,000; (x) waive, release, terminate, grant or transfer any material rights arising under any material credit agreement or lease or take any such action with respect to any right of material value or modify or change in any material respect any other existing material license, contract or document, or enter into a material contract or agreement other than in the usual course of business and consistent with past practice; (xi) allow any material insurance policy to be canceled or terminated except in the ordinary course; (xii) make any change in accounting principle, methods or practices except as may be required by generally accepted accounting principles or applicable law; (xiii) agree to take or omit to take any of the foregoing actions or any action which would make any representation or warranty undertaken by the Company untrue or incorrect in any material respect; (xiv) make or commit to make, any loan or extension of credit in excess of $250,000 except for renewal loans to existing borrowers, and home equity loans made in accordance with the Company's published standards. No extensions may be granted to classified borrowers other than renewals not to exceed six months in connection with workouts conducted in the ordinary course of business and approved by TRP; (xv) declare or pay any dividend or make any other distribution in respect of the Company's Common Stock; (xvi) make any borrowing for more than one year, other than certificates of deposit and other time deposits maintained at the Company by customers of the Company, consistent with past practice; (xvii) lower the loan loss reserve of the Bank below 1%; or (xviii) sell, discount or otherwise dispose of any loan (excluding loans listed on Exhibit B to the Escrow Agreement, but including loans listed on Exhibit C to the Escrow Agreement) for an amount less than the outstanding balance on the books of the Bank as of the date of such sale, discount, settlement or disposal. Waiver and Amendment Prior to the Effective Time, any condition of the Agreement (to the extent allowed by law) may be waived by the party benefited by the provision or may be amended or modified (including the structure of the transaction) by an agreement in writing approved by the Boards of Directors of TRP and Bancorp; except that, after the vote by the shareholders of Bancorp, no amendments may be made that reduce the amount of the Merger Consideration or which adversely effect the Company's stockholders (other than one which eliminates any or all of the Escrow Fund, prior to closing, in exchange for an increase in the Cash Consideration, to the extent permitted by law) without approval of such shareholders. No Solicitation of Alternative Transactions Bancorp has agreed that neither it nor the Bank nor any of their respective officers and Directors shall, (and Bancorp will direct and use its best efforts to cause its employees, agents and representatives not to), directly or indirectly, initiate, solicit, or encourage, subject to fiduciary duties, any inquiries or the making of any proposal or offer (including, without limitation, any proposal or offer to shareholders of Bancorp) with respect to a merger, consolidation or similar transaction involving, or any purchase of all or any substantial portion of the assets, deposits or 10% or more of any equity securities of, Bancorp or the Bank (any such proposal or offer being an "Acquisition Proposal"). However, Bancorp may engage in any negotiations concerning, or provide any confidential information or data to, or have discussions with, any person relating to an Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal, if Bancorp's Board of Directors, after consultation with, and based on the written advice of its counsel with respect to an unsolicited offer from a third party, determines in the exercise of its fiduciary duties that such discussions, negotiations or actions are legally required. Bancorp has agreed to notify TRP immediately if any such inquiries, proposals or offers are received by, any such information is requested from, or any such negotiations or discussions are sought to be initiated or continued with Bancorp or the Bank. Liquidated Damages The Agreement provides that if it is not consummated for specified reasons, the party terminating the Agreement shall be entitled to liquidated damages in a fixed amount, which shall be the limit of liability for the other party under the Agreement. Liquidated Damages Payable to TRP In the event that the Merger is not consummated for one of the following reasons and TRP has not failed in any material respect to perform its obligations under the Agreement, the Company will pay TRP the sum of $250,000: (i) there has been a breach by the Company of any material representation, warranty or covenant; (ii) any person or "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934 (the "Exchange Act"), other than TRP, becomes the beneficial owner of more than 20% of the shares of Company Common Stock; (iii) the Company withdraws, modifies or amends in any respect adverse to TRP its recommendation of the Merger or fails to reconfirm its recommendation of the Merger within a reasonable time after formal request; or (iv) the Board of Directors of the Company or the Bank resolves to take any action than would result in any of the foregoing; and such event occurs on or prior to the date of termination. In the event that the Merger is not consummated and one of the following events occurs within four (4) months thereafter and TRP has not failed in any material extent to perform its obligations under the Agreement, the Company shall pay to TRP the sum of $250,000: (i) the Company or the Bank enters into an agreement or plan of merger, consolidation, reorganization, exchange, recapitalization or other similar agreement or plan, including an agreement in principal or letter of intent, other than with TRP; (ii) the Company or the Bank enters into one or more agreements or plans which, individually or in the aggregate would result in the sale of more than 25% of its total assets or earning power; or (iii) the Board of Directors of the Company or the Bank resolves to take any action that would result in any of the foregoing. Liquidated Damages Payable to Bancorp In the event that the Merger is not consummated because there is a breach by TRP of any material representation, warranty or covenant contained in the Agreement on or prior to the date of termination and Company has not failed to any material extent to perform its obligations under the Agreement, TRP shall pay the Company the sum of $150,000. Payment of such liquidated damages has been personally guaranteed by Mr. Daly. Manner of Payment The party owing liquidated damages shall make the payment to the other party in immediately available funds within 30 days following the date on which the other party notifies the party owing liquidated damages that the event has occurred. No payment shall be due if the Agreement is terminated by mutual consent, if the Merger is prevented by court or administrative action or if the Closing has not taken place by March 31, 1997 (unless extended as provided in the Agreement to a date not later than June 30, 1997, in which case, in the event that the Closing has not occurred by such date, no liquidated damages shall be payable.) The payment of liquidated damages by either party for any of the reasons set forth above shall be a one time event, r(ix) make any capital expenditure other than in the ordinary course of business and consistent with past practices except for capital expenditures which do not individually exceed $25,000; (x) waive, release, terminate, grant or transfer any material rights arising date of the Agreement to the Closing, the Company will give TRP access to the properties and books and records of the Company and the Bank and will allow TRP and its authorized representatives to make such investigations and inspections as it may require, provided that the representations and warranties made by the Company shall not be deemed waived by such investigations. Information provided is to be kept confidential by TRP and shall be used only in connection with the transactions contemplated by the Agreement. Restructure of the Transaction If necessary to expedite or facilitate the Closing and any other transactions contemplated in connection therewith, the parties have agreed that they will take or perform such additional reasonably necessary or advisable steps to restructure the transaction, provide that such restructuring will not result in any change in the Merger Consideration or alter the tax treatment of the transactions contemplated hereunder or otherwise materially adversely effect the rights and obligations of any party. Termination of the Agreement The Agreement sets forth the circumstances under which both or one or other of the parties may terminate. The Agreement may be terminated, and the Merger abandoned, prior to the Effective Time either before or after its approval by the shareholders of Bancorp and TRP: (i) by the mutual consent of the Boards of Directors of Bancorp and TRP; (ii) by TRP if (a) the Company shall have withdrawn or modified in a manner adverse to TRP, its approval or recommendation of the Agreement or the Merger, the Company's Board of Directors shall have formally resolved to do any of the foregoing, or, upon a written request to reaffirm the Company's approval or recommendation of the Agreement or the Merger, the Board fails or refuses to do so within two (2) days of the request; or (b) if the Company fails to perform in any material respect any of its material obligations under the Agreement and such failure has not been remedied within three days after receipt of notice specifying the nature of the breach and requesting that it be remedied; (iii) by the Company if TRP fails to perform in any material respect any of its material obligations under the Agreement and such failure shall not have been remedied within three business days after receipt by TRP of notice in writing from the Company specifying the nature of the breach and requesting that it be remedied; (iv) by either the Company or TRP: (a) if a court of competent jurisdiction or governmental, regulatory or administrative agency or commission has issued an order, decree or ruling or taken any other action in each case permanently restraining, enjoining, or otherwise prohibiting the transactions contemplated by the Agreement, and such order, decree, ruling or other action has become final and nonappealable; (b) if the Closing has not occurred on or before March 31, 1997 unless due to a delay in regulatory approval, in which case the Cash Consideration shall be increased by $0.07 per month for each full month which elapses between March 31, 1997 and the Closing; provided that the right to terminate the Agreement and the right to receive additional Cash Consideration shall not be available to any party whose material breach of the Agreement was the cause of, or resulted in, the failure of the Merger to occur on or before March 31, 1997, and provided further, that in no event shall the Agreement remain in effect if the Closing has not occurred on or before June 30, 1997; or (c) if the Company's stockholders fail to approve the Merger by the affirmative vote of a majority of the outstanding shares of Company Common Stock at the meeting held for that purpose. THE ESCROW AGREEMENT This is a summary of the provisions of the Escrow Agreement dated October 18, 1996 between Bancorp, TRP and Trans Pacific National Bank (the "Escrow Agent" or "Bank" herein), which governs the manner in which the Escrow Consideration (as hereinafter defined) shall be held, invested and, if applicable, distributed to shareholders and option holders (referred to herein as "Former Stockholders" and "Option Holders" respectively) after the Closing. The description which follows is qualified in its entirety by the Escrow Agreement which is attached to this Proxy Statement as Appendix B (Exhibit C to the Agreement.) Establishment of the Escrow Funds At the Effective Time, TRP will deposit in trust with the Escrow Agent cash in an amount equal to the sum of $300,000 ("Fund A") and $440,626 less any and all Recoveries (as defined in the Escrow Agreement) ("Fund B"). The funds held in trust and available for the purposes described below collectively the "Escrow Funds" or the "Escrow Consideration") consist of the initial amounts in cash deposited with the Escrow Agent by TRP, plus the income earned thereon net of tax effect at an effective Federal and State tax rate of 39% (the "Tax Effect") less the amount of any payment from the Escrow Funds and any investment losses net of Tax Effect. Recoveries shall equal the sum of the aggregate gross amount of loans collected or recovered by the Bank from July 31, 1996 to the Closing, net of Tax Effect, for those loans previously charged off on the books and records of the Bank and listed on Exhibit B to the Escrow Agreement and any principal payments, net of Tax Effect, made to the Bank, from the date of the Escrow Agreement to the Closing, on any or all loans identified on Exhibit C to the Escrow Agreement. Such Recoveries shall increase the amount of Cash Consideration received by holders of the Company's Common Stock and Options pursuant to the Agreement. Investment and Accounting for Escrow Funds The Escrow Agent will hold and maintain Funds A and B in its name as Escrow Agent under the Escrow Agreement. The Escrow Agent shall separately invest and reinvest Funds A and B in its sole discretion in any one or more of the following: (i) marketable obligations of or guaranteed by the United States; or (ii) a savings account in, or certificates of deposit or bankers acceptances issued by, any national bank, including the Bank. The maturity date of any investment shall not extend beyond 60 days from the date of the investment. Events Giving Rise to Escrow Payments and Payments to TRP. Upon the complete resolution of the status of Account No. 01-212456 carried on the books of the Bank on the date of the Agreement (the "Account"), the Escrow Agent shall pay out of Escrow Fund A to TRP or its assignee an amount equal to any judgment, settlement or award assessed against or other liability charged to the Bank relating to the Account, net of the Tax Effect, and any costs which TRP or the Bank shall have reasonably incurred in the resolution of the matter, net of Tax Effect. Upon such resolution, the Escrow Agent shall pay to the Former Stockholders and Option Holders, Fund A, less amounts paid to TRP. Upon the running of all applicable statutes of limitations[if not previously resolved as set forth above], the Escrow Agent shall pay out of Fund A to TRP or its assignees an amount equal to any judgment, settlement or award assessed against or other liability charged to the Bank relating to the Account net of Tax Effect, and any costs which TRP or Bank has reasonably incurred in the resolution or settlement of the matter, net of Tax Effect. Upon the running of the statute of limitations, the Escrow Agent shall pay to the Former Stockholder and Option Holders, Fund A less liabilities and costs paid to TRP. Within 30 days of the third anniversary of the Closing, the Escrow Agent shall pay out of Fund B to TRP or its assignees an amount equal to (i) gross loan chargeoffs -- in excess of the amount previously reserved as of July 31, 1996 as shown on Exhibit C to the Escrow Agreement, and those payments on associated loan guarantees actually received -- as recorded on the books and records of the Bank, during the term of Fund B, on any or all loans identified on Exhibit C to the Escrow Agreement, net of Tax Effect, less the aggregate gross amount of loans collected or recovered by the Bank, net of Tax Effect, from the Closing until the third anniversary thereof, for those loans previously charged off and listed on Exhibit B and (ii) all fees, costs and expenses incurred by TRP and the Bank relating to the collection, recovery or attempt thereof of the loans identified in Exhibit B and C, net of Tax Effect. Within 30 days after the third anniversary of the Closing, the Escrow Agent shall pay to the Former Stockholders and Option Holders, Fund B, less those amounts paid to TRP. Illustrative examples of calculations are attached to the Escrow Agreement to assist in the payment calculation, however the language of the Escrow Agreement shall take precedence over the examples in all circumstances. Escrow Payments to Former Stockholders and Option Holders Escrow Payments are payable to Former Stockholders and Option Holders in the following proportions: (i) the Former Stockholders shall receive that portion determined by multiplying the Escrow Payment by a fraction the numerator of which is the number of shares of Company Common Stock Owned by all Former Stockholders ("Number of Shares") and the denominator of which is the Number of Shares plus the sum of all the Number of Options held by all the Option Holders (the "Former Stockholder Sum"); and (ii) the Option Holders shall receive that portion equal to the Escrow Payment less the Former Stockholder Sum (the "Option Holder Sum"). Upon the occurrence of an event giving rise to an Escrow Payment, the Escrow Agent shall disburse to each Former Stockholder a pro rata share of the Former Stockholders Sum determined by multiplying the Former Stockholders Sum by a fraction the numerator of which is the number of shares of Company Common Stock owned by the Former Stockholder and the denominator of which is the Number of Shares. Upon the occurrence of an event giving rise to an Escrow Payment, the Escrow Agent shall disburse to each Option Holder a pro rata share of the Option Holders Sum determined by multiplying the Option Holders Sum by a fraction the numerator of which is the Number of Options held by the Option Holder and denominator of which is the sum of all the Number of Options held by all the Option Holders. Periodic Reports For so long as any of the Escrow Funds remain in effect, TRP shall, not less than annually, provide a written report to the Former Stockholders regarding the status of judgments, settlements or awards assessed against the Bank pursuant to the Account and collections, recoveries, write-offs and write downs on the loans identified in Exhibits B and C to the Escrow Agreement. The first such report shall be due within 30 days after the first anniversary of the Closing and thereafter within 30 days of any subsequent anniversary. Each report shall be certified by the Chief Financial Officer and the Senior Loan Officer of the Bank as true and correct. At the written request of Former Stockholders who, in the aggregate, held a minimum of 20% of the outstanding shares of Company Common Stock, the cost of which shall be charged against Fund B, TRP shall retain an independent loan analyst not otherwise retained by or affiliated with TRP or the Bank to review and report to Former Stockholders on the status of the loans in Exhibits B and C. No more than one such request need be honored by TRP in a 12 month period. Fees and Expenses, Best Efforts and Intended Beneficiaries Fees and expenses of the Escrow Agent shall be paid by the Surviving Corporation. TRP and the Bank agree to use their best efforts, consistent with reasonable and fiscally prudent collection practices, to collect the maximum amount on loans identified in Exhibit C to the Escrow Agreement and to maximize recoveries on loans listed in Exhibit B. The Escrow Agreement specifically provides that it is intended to be for the primary benefit of the Former Stockholders and it is agreed that it may be enforced by the Former Stockholders or any one or more of them. A copy of the Escrow Agreement and Exhibits thereto is attached hereto as Appendix B (Exhibit C to the Agreement.) THE VOTING AGREEMENT This is a summary of the provisions of the Voting Agreement entered into among TRP and each of the Directors of Bancorp and dated as of October 18, 1996 (the "Voting Agreement"), whereby the Directors of Bancorp have agreed to vote their shares of Common Stock of the Company in favor of the Merger and the Agreement. Each of the Directors who has signed the Voting Agreement has agreed to vote all shares of the Company's Common Stock held by him or controlled by him in favor of the Merger and the Agreement at the meeting of shareholders of the Company called and held for the purpose of voting on the Agreement and Merger or with respect to the solicitation of written consents for such purpose. Each of such Directors has agreed further not to vote his shares in favor of any acquisition of stock or of all or substantially all the assets of the Company by any party other than TRP prior to termination of the Agreement. Each of the Directors agrees that none of his shares will be transferred to a third party unless as a condition of such transfer, the third party agrees to execute a voting agreement in form satisfactory to TRP. Subject to the Director's fiduciary duty as a Director, at TRP's request, each Director will use his best efforts to cause a necessary meeting of stockholders of the Company to be called and held for the purpose of approving the Agreement and Merger. The Voting Agreement will terminate on the earlier of the date of termination of the Agreement or the Effective Time. A copy of the Voting Agreement is attached hereto as Appendix C (Exhibit D to the Agreement.) THE OPTION AGREEMENT The following is a summary of the material provisions of the Option Agreement, entered into between Bancorp and TRP, dated October 18, 1996 (the "Option Agreement") whereby Bancorp grants an option to TRP to buy shares of Bancorp Common Stock in an amount up to 19.9% of the total outstanding shares at time of grant of the Option (the "Option"). The following summary is qualified in its entirety by reference to the Option Agreement, a copy of which is appended hereto as Appendix D. Execution of the Option Agreement was a condition to TRP's willingness to enter into the transactions contemplated by the Agreement. Grant of Option. Pursuant to the Option Agreement, Bancorp has granted TRP an unconditional, irrevocable option to purchase up to 229,919 fully paid and nonassessable shares of Common Stock of the Company, which number of shares equals 19.9% of the number of outstanding shares of Common Stock at the date of grant of the Option, at the price of $8.00 per share (the "Initial Price"), provided that if the Company issues or agrees to issue additional Common Stock at a price less than the Initial Price (other than any shares issued upon exercise of current options for up to 103,750 shares), such price shall be the lesser price (such price, as adjusted if applicable, is the "Option Price"). Exercise of Option TRP may exercise the Option in whole or part at any time following the occurrence of a Purchase Event (as defined below); provided that the Option will terminate and be of no further force and effect upon the earliest to occur of the following: (i) the time immediately prior to the Effective Time; (ii) 12 months after the first occurrence of a Purchase Event; (iii) upon the termination of the Agreement in accordance with its terms prior to a Purchase Event (other than a termination of the Agreement by TRP under certain conditions; or (iv) 12 months after the termination of the Agreement by TRP as a result of any material breach of the Agreement by Company. Each of the foregoing is an "Exercise Termination Event." Purchase Events Each of the following events which occurs after the date of the Option Agreement and prior to an Exercise Termination Event, and which is not a violation of the Company's Articles of Incorporation, is a Purchase Event: (i) the Company without TRP's prior consent, has entered into a letter of intent or definitive agreement to engage in an Acquisition Transaction (as defined below) with any person other than TRP or any of its subsidiaries or the Board of Directors of the Company has recommended that its stockholders approve or accept any Acquisition Transaction with a person (as defined in Section 3(a)9 and Section 13(d)3 of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules and regulations thereunder) other than TRP or its subsidiaries. Acquisition Transaction means a merger, consolidation or other business combination involving the Company or the Bank; a purchase, lease or other acquisition of more than 25% of the consolidated assets of the Company and the Bank, in a single transaction or series thereof; or a purchase or other acquisition of Beneficial Ownership (as defined in Regulation 13d- 3(a) of the Exchange Act, except that for purposes of the Option, such term shall not include voting stock held by a reporting person meeting the requirements for filing under Schedule 13G of the Exchange Act) of securities representing 20% or more of the voting power of the Company or the Bank; (ii) any person (other than TRP or any subsidiary thereof) has acquired beneficial ownership of 20% or more of the outstanding shares of the Company Common Stock or the voting stock of the Bank ("Bank Stock"); (iii) any person (other than TRP or any subsidiary) has made a Bona Fide proposal to the Company, or by a public announcement or written communication that is or becomes the subject of public disclosure, to the Company's stockholders to engage in an Acquisition Transaction, or shall have made a filing under applicable law, with respect to a tender offer or exchange offer to purchase any shares of Company Common Stock such that, upon consummation of such offer, such person would have beneficial ownership of 20% or more of the then outstanding shares of Company Common Stock; (iv) the meeting of the holders of Company Common Stock of the purpose of voting on the Agreement shall not have been held or shall have been canceled prior to termination of the Agreement, or Company's Board of Directors has withdrawn or modified in a manner adverse to TRP the recommendation that the stockholders approve the Agreement; or (v) any person (other than TRP or its subsidiaries) has filed an application or notice in draft or final form with the FRB for approval to engage in an Acquisition Transaction. Company shall notify TRP promptly in writing of the occurrence of any Purchase Event, provided that the giving of such notice is not a condition to TRP's right to exercise the Option. Manner of Exercise of the Option; Payment and Closing. In the event that TRP is entitled to and wishes to exercise the Option, it shall send to the Company a written notice (the "Option Notice") the date of which is referred to herein as the "Notice Date", specifying the total number of shares it intends to purchase; the time (which shall be not less than three and not more than ten business days from the date of the Option Notice) on which the closing of the purchase shall take place (the "Option Closing Date"); such closing to take place at the principal office of the Company, provided that if prior notification or approval of any governmental authority is required (a "Notification" or "Approval"), TRP will promptly file and process the required notice or application. In the event that any such Notification or Approval is required, the Option Closing Date shall be a date which is not less than three and not more than ten days from the date of approval and the expiration of any applicable waiting period. On or prior to the Option Closing Date, TRP shall have the right to revoke its exercise of the Option by written notice to the Company given not less than three days prior to the Option Closing Date. At the Option Closing Date TRP shall pay the Company the aggregate purchase price for the number of shares specified in the Option Notice in immediately available funds by wire transfer to a bank account designated by the Company, provided that the failure or refusal of the Company to designate such an account shall not preclude TRP from exercising the Option. At such closing, simultaneously with the delivery of immediately available funds, the Company shall deliver to TRP a certificate or certificates representing the number of shares of Common Stock specified in the Option Notice, and if the Option is exercised in part only, a new Option evidencing the right to purchase the balance of the shares purchasable under the Option. The certificate or certificates shall contain a legend restriction stating that the shares are subject to resale restrictions. Upon the exercise of the Option and the tender of the purchase price of the shares in accordance with the foregoing, unless prohibited by applicable law, TRP shall be deemed to be the holder of record of the purchased shares, notwithstanding that the stock transfer books shall then be closed, or that the certificate or certificates shall not then be actually delivered. Reservation of Shares for Issuance Upon Exercise of Option. The Company has agreed that at all times until termination of the Option, that it shall have reserved for issuance upon exercise of the Option, sufficient shares to issue the maximum number of shares issuable upon exercise of the Option and that upon issuance in accordance with the Option Agreement, such shares shall be fully paid, non-assessable and delivered free and clear of claims, liens and encumbrances and not subject to any preemptive rights. The Company in the Option Agreement has further agreed not, by amendment to the Articles of Incorporation or through reorganization, consolidation, merger, dissolution or sale of assets, or otherwise, to avoid or seek to avoid the observation of the covenants and agreements to be performed by it under the Option Agreement, and to cooperate with TRP in the preparation and providing of information in connection with any approval required to issue the Option shares. The Option Agreement is exchangeable by TRP for other agreements providing for Options of different denominations entitling the holder to purchase the same number of shares under the same terms and conditions as set forth in the Option Agreement. If the Option Agreement is subject to loss, theft, destruction or mutilation, upon receipt of satisfactory indemnification, the Company, upon surrender or cancellation of the Agreement, will execute and deliver a new agreement of like tenor and date. The number of shares of Company Common Stock purchasable on exercise of the Option will be subject to adjustment in the event of any change in the Common Stock by reason of stock dividend, split-up, merger or recapitalization or similar event (other than pursuant to an exercise of the Option or pursuant to the exercise of presently outstanding options to purchase up to 103,750 shares of the Common Stock) such that the number of shares subject to the Option equals 19.9% of the number of shares of Common Stock outstanding immediately following such event. In such event, the purchase price of the shares shall also be appropriately adjusted. Piggy-back Registration Rights. Following the occurrence of a Purchase Event that occurs prior to an Exercise Termination Event, the Company shall notify TRP in the event that the Company is in the process of registration with respect to an underwritten public offering of Common Stock, and TRP or any permitted assignee shall have the right to have any shares issued and issuable pursuant to the Option included in the registration statement with respect to such offering, in order to permit the sale or other disposition of any shares of the Common Stock issued upon a total or partial exercise of the Option, provided that if in the good faith judgment of the managing underwriter or managing underwriters of such offering, the inclusion of the Option shares in such registration would interfere materially with the successful marketing of the shares offered by the Company, the number of Option shares otherwise covered in the registration statement may be reduced, provided, however that after any such required reduction the number of Option share to be included in such offering for the account of TRP shall constitute at least 20% of the total number of shares of TRP and the Company covered in the offering. TRP shall provide all information reasonably requested by the Company for inclusion in the registration statement. If requested by TRP, TRP and the Company shall become parties to the underwriting agreement relating to the sale of such shares, but only to the extent of obligating themselves in respect of representations, warranties, indemnities and other agreements customarily included in such underwriting agreements. The expenses of any such registrations, except for underwriting discounts, brokers' fees, and commissions and fees and disbursements of TRP's counsel related thereto, shall be paid by the Company. A copy of the Option Agreement is attached hereto as Appendix D (Exhibit E to the Agreement.) CERTAIN EFFECTS OF THE VOTING AND OPTION AGREEMENTS The Voting Agreement and the Option Agreement are intended to increase the likelihood that the Merger will be consummated in accordance with the terms of the Agreement. Consequently, certain aspects of these agreements may have the effect of discouraging persons who might now or prior to the Effective Time be interested in acquiring all of, or a significant interest in, Bancorp from considering or proposing such an acquisition, even if such persons were prepared to pay a higher price per share for Bancorp Common Stock than the then current market price of such shares. The acquisition of, or an interest in, Bancorp, or an agreement to do either, could cause the Option to become exercisable. The Voting Agreement makes it less likely the shareholders will reject the Agreement and the Merger in favor of another transaction, and the existence of the Option Agreement could significantly increase the cost to a potential acquirer of acquiring Bancorp compared to its cost had the Option Agreement not been entered into. Such increased cost might discourage a potential acquirer from considering or proposing an acquisition or might result in a potential acquirer proposing to pay a lower per share price to acquire Bancorp than it might otherwise have proposed to pay. DISSENTERS' APPRAISAL RIGHTS Under the California General Corporation Law ("CGCL"), rights are created under limited circumstances and subject to specific conditions to allow a Bancorp shareholder of record not voting in favor of the Agreement and the Merger, to seek judicial appraisal of and/or purchase by Bancorp of his or her shares at their fair market value, determined as of the day before the first public announcement of the proposed Merger (exclusive of any appreciation or depreciation in consequence of the proposed Merger), rather than accept the Merger Consideration. Such rights are known as "dissenters' appraisal rights." If any shareholder seeks to perfect dissenters' rights and demand purchase by Bancorp or judicial appraisal of his or her shares, rather than accept the Merger Consideration: (i) the record shareholder must deliver and Bancorp or its transfer agent must have received not later than 30 days after the date on which the notice of approval of the Agreement and Merger by the outstanding shares was mailed to the shareholder (Section 1301 of the CGCL) a written demand which must state the number of shares held of record by the shareholder which the shareholder demands that Bancorp purchase and contain a statement of what such shareholder claims to be the fair market value of those shares as of the day before the public announcement by Bancorp of the proposed Merger. The statement of fair market value constitutes an offer by the shareholder to sell the shares to Bancorp at such price (Section 1301(b) and (c)). The date of the public announcement of the proposed Merger by Bancorp was Friday, October 18, 1996. (ii) the shareholder of record must not vote in favor of the Merger. An abstention or failure to vote will satisfy this requirement. (Section 1300(b)(2)(B)). If any shareholder of record fails to comply exactly with either of these conditions and the Merger becomes effective, the shareholder will be entitled to receive the Merger Consideration as provided for in the Agreement but will have no dissenters' appraisal rights with respect to Bancorp shares, even if dissenters' appraisal rights are otherwise applicable. All written demands for payment by shareholders of record under Section 1301 of the CGCL should be addressed to the Corporate Secretary, Trans Pacific Bancorp, 46 Second Street, San Francisco, California 94105, or to the transfer agent at the address below, and must be received by Bancorp or its transfer agent within 30 days after the date on which the notice of the approval of the Agreement and the Merger by the outstanding shares was mailed to the shareholder. (Section 1301(b)). If written demands are being delivered to the transfer agent, they should be addressed to ChaseMellon Shareholder Services, LLC, 50 California Street, 10th Floor, San Francisco, California 94111; attention: Joseph W. Thatcher, Jr. To be effective, a demand for payment for Bancorp shares must be made by the record holder, fully and correctly, as the shareholder's name appears on his or her stock certificate(s) and cannot be made by the beneficial owner if he or she does not also hold the shares of record. The beneficial holder must, in such cases, have the record owner submit the required demand in respect of such shares. (Section 1300(c)). If shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of a demand for payment should be made in such capacity; and if the shares are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be executed by or for all joint owners. An authorized agent, including one for two or more joint owners, may execute the demand for payment for a shareholder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, he or she is acting as agent for the record owner. A record owner, such as a broker, who holds shares as a nominee for others, may file a demand for payment with respect to all or a portion of the shares held for one or more beneficial owners, while not demanding payment for other beneficial owners or other shares of a beneficial owner on behalf of whom a demand for payment is made. In such case, the written demand must state the number of shares held of record as to which the demand is made and a statement of what such record holder claims to be the fair market value of those shares as of the day before the public announcement by Bancorp of the proposed Merger. Persons who hold their shares of Bancorp Common Stock in brokerage accounts or in other nominee forms and who wish to make the demand for payment should consult with their brokers or such other nominees to determine the appropriate procedures for the making of a demand by such nominee. Within ten (10) days after the approval of the Agreement by a majority of the outstanding Common Stock of Bancorp at the Meeting or any adjournment thereof, Bancorp must mail to each Bancorp shareholder of record a notice of the approval of the Merger, accompanied by a copy of Sections 1300, 1301, 1302, 1303 and 1304 of Chapter 13 of the CGCL, a statement of the price determined by Bancorp to represent the fair market value of the dissenting shares, and a brief description of the procedure to be followed if the shareholder desires to exercise the shareholder's right under such sections. Such statement of price will constitute an offer by Bancorp to purchase at the price stated any dissenting shares as defined by Section 1300(b), unless they lose their status as dissenting shares under Section 1309. Within 30 days after the date on which notice by Bancorp is mailed to dissenting shareholders (if any) of the approval of the Agreement by at least a majority of the outstanding shares of Common Stock of Bancorp, each dissenting shareholder shall submit to Bancorp at the office of its transfer agent, ChaseMellon Shareholder Services, LLC, 50 California Street, 10th Floor, San Francisco, California 94111, attention: Joseph W. Thatcher, Jr., the shareholder's certificates representing the shares which that shareholder demands that Bancorp purchase, to be stamped or endorsed with a statement that the shares are dissenting shares or to be exchanged for certificates of appropriate denomination so stamped or endorsed (Section 1302, CGCL). If Bancorp and the dissenting shareholder agree that the shares are dissenting shares and agree upon the price of the shares, the dissenting shareholder is entitled to the agreed price with interest thereon at the legal rate on judgments from the date of the agreement. Any agreements fixing the fair market value of any dissenting shares as between Bancorp and the holders thereof shall be filed with the corporate secretary of Bancorp. If any such agreement is arrived at between Bancorp and a shareholder, payment of the fair market value of such dissenting shares shall be made within the later of 30 days after the amount thereof has been agreed or 30 days after all statutory and contractual conditions to the Agreement are satisfied, and subject to surrender of the certificates therefor unless provided otherwise by agreement (Section 1303, CGCL). If Bancorp denies that shares are properly dissenting shares, or Bancorp and the shareholder do not agree upon the fair market value of shares, then the shareholder who has demanded purchase of such shares as dissenting shares or Bancorp, within six months after the date of the mailing of notice to dissenting shareholders of the approval of the Agreement by the requisite majority of the outstanding Common Stock of Bancorp, but not thereafter, may file a complaint in the superior court of the proper county requesting the court to determine whether the shares are dissenting shares or the fair market value of the dissenting shares or both or may intervene in any action pending on such a complaint. Bancorp does not presently intend to file such a complaint in the event there are dissenting shareholders and has no obligation to do so. Accordingly, the failure of a shareholder to file such a complaint within the period specified could nullify such shareholder's previously written demands for payment (Section 1304, CGCL). The court shall determine the issues on the trial of the action, and if the status of the shares as dissenting shares is in issue, the court shall first determine that issue. If the fair market value is in issue, the court shall determine, or shall appoint one or more impartial appraisers to determine the fair market value of the shares. If the court appoints an appraiser or appraisers, they will determine the fair market value per share and make a report to the court. The court may confirm the report if it finds it to be reasonable. Judgment shall then be rendered against Bancorp for payment of the fair market value in favor of any dissenting shareholder who is a party in the suit, or who has intervened, with interest thereon from the date of entry of the judgment. Payment of the judgment is due upon endorsement and delivery of certificates for the shares. Any party may appeal such a judgment (Section 1305, CGCL). Shareholders considering seeking appraisal should be aware that the fair market value of their shares as determined by the court could be more, the same or less than the value of the Merger Consideration they are entitled to receive pursuant to the Agreement if they do not seek appraisal of their shares. The cost of the appraisal action, including reasonable compensation to the appraisers, shall be assessed or apportioned as the court considers equitable, but, if the appraisal exceeds the price offered by Bancorp, it shall pay the costs (including in the discretion of the court attorneys' fees, fees of expert witnesses and interest from the date of compliance by a shareholder with Sections 1300,1301 and 1302 of the CGCL if the value awarded by the court for the shares is more than 125 percent of the price offered by Bancorp in its notice that was mailed to dissenting shareholders not more than 10 days following the approval of the Agreement and the Merger by the outstanding Common Stock of Bancorp) (Section 1305, CGCL). Holders of dissenting shares continue to have all the rights and privileges incident to their shares, until the fair market value of their shares is agreed upon or determined. A dissenting shareholder may not withdraw a demand for payment unless Bancorp consents thereto. Any cash dividends declared and paid by Bancorp upon any dissenting shares after the date of approval of the Agreement and the Merger by the requisite majority of the outstanding Common Stock of Bancorp and prior to payment by Bancorp for the shares are credited against the total amount to be paid by Bancorp therefor (Sections 1307 and 1308 of CGCL). If no complaint for appraisal is filed in superior court within six months of the date notice was mailed to dissenting shareholders of the approval of the Agreement and the Merger, or if a dissenting shareholder, with the consent of Bancorp, withdraws the shareholder's demand for payment by Bancorp, or Bancorp or TRP terminates the proposed Merger (in which event, Bancorp is required to pay on demand to any dissenting shareholder who has initiated proceedings in good faith all necessary expenses incurred in such proceedings and reasonable attorneys' fees), or the dissenting shares are transferred prior to their submission for endorsement within 30 days after the date of mailing of the notice to dissenting shareholders of approval of the Agreement and the Merger, the dissenting shares lose their status as dissenting shares and cease to be entitled to require their purchase by Bancorp, and such shareholder will be entitled to receive the Merger Consideration without any interest thereon (Section 1309, CGCL). The foregoing is intended as a summary of the material provisions of the California statutory procedures required to be followed by a Bancorp shareholder in order to dissent from the Merger and obtain any dissenters' appraisal rights. This summary, however, is not a complete statement of all applicable requirements and is qualified in its entirety by reference to Chapter 13 of the CGCL, the full text of which is set forth in Appendix F hereto. In view of the complexity of Chapter 13 of the CGCL, shareholders of Bancorp who may wish to dissent from the Merger and pursue possible appraisal rights should consult their legal advisors. EXPENSES The Agreement provides that TRP and Bancorp will each pay their own expenses in connection with the Agreement and the transactions contemplated thereby. ACCOUNTING TREATMENT The Merger, if completed as proposed, will be treated as a purchase in accordance with generally accepted accounting principles. Accordingly, the consolidated assets and liabilities of Bancorp will be recorded on the books of the Surviving Corporation at their respective fair values at the time of consummation of the Merger. OPERATIONS AFTER THE MERGER At the Effective Time, TRP will merge with and into Bancorp, with Bancorp being the Surviving Corporation. All assets and property (real, personal and mixed, tangible and intangible, chooses in actions, rights and credits) then owned by Bancorp and the Bank shall immediately become the property of the Surviving Corporation which shall be deemed to be a continuation of Bancorp, the rights and obligations of which shall become the rights and obligations of the Surviving Corporation, including the duties and liabilities connected therewith. BUSINESS OF THE PARTIES TO THE MERGER Bancorp Bancorp, a California stock corporation, was organized in June, 1983 for the purpose of becoming a holding company for the Bank. At September 30, 1996, Bancorp, on a consolidated basis, had total assets of $73 million, total deposits of $65 million, and stockholders equity of $6.9 million. Bancorp's primary business activity is its investment in the stock of the Bank. Bancorp's executive offices are located at 46 Second Street, San Francisco, CA 94105; its telephone number is (415) 543-3377. The Bank, a national banking association, was organized in 1983 and commenced operations as a wholly owned subsidiary of Bancorp on August 21, 1984. The Bank is regulated by the Office of Comptroller of the Currency, and its deposits are insured to the applicable limits under the BIF of the FDIC. The Bank is also a member of the Federal Reserve System. The Bank's business consists principally of attracting customer deposits from the general public and investing those funds in business and industrial loans, trade finance, and construction and commercial real estate loans. The principal sources of funds for the Bank's lending and investment activities are repayment of loans, loan sales, customer deposits and borrowed funds. The Bank operates branches in the cities of San Francisco and Alameda, California. For a more detailed discussion of the business of Bancorp and the Bank, see Bancorp's Annual Report on SEC Form 10-K for the year ended December 31, 1995 included as Appendix G hereto. TRP TRP. TRP is a closely held Delaware corporation incorporated on September 27, 1996 for the purpose of entering into the Merger. TRP will file an application with the Federal Reserve System to become a bank holding company for the Bank. See "THE MERGER - Regulatory Approval." The principal and controlling shareholder of TRP is Denis Daly, Sr., a Chicago banker. The address and telephone number of TRP are: 803 Burr Ridge Club Drive, Burr Ridge, Illinois 60521; (630) 789-0439. TRP has obtained a commitment from a Chicago bank for a loan slightly in excess of $5 million, the proceeds of which will be used to finance a portion of the merger consideration to be paid by TRP in connection with the Merger. The remainder of the funds necessary to finance the merger consideration will come from equity investments to be made in TRP prior to the Closing and dividends from the Bank upon Closing. Mr. Daly has guaranteed the obligations of TRP pursuant to the Agreement if the Merger is not consummated for certain specified reasons, which obligations are limited to a maximum of $150,000. See "THE MERGER - Liquidated Damages." Mr. Daly is presently a 22% owner of a control group of the Pullman Group, a bank holding company, which owns two Illinois state chartered banks, Pullman Bank & Trust Company and Pullman Bank of Commerce and Industry, both of Chicago, Illinois. Mr. Daly is Chairman of the Executive Committees of the Boards of Directors of both banks. Mr. Daly is also a member of the Board of Directors of Rosary College, Oak Park, Illinois, and is a member of the Operating Committee of the Loyola Medical Center, Hinsdale, Illinois. Prior to 1994, Mr. Daly was a majority owner of Suburban Trust and Savings Bank, Oak Park, Illinois and Chairman of the Board and Chief Executive Officer of the bank and its holding company, Acorn Financial. INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS A representative of KPMG Peat Marwick LLP, Bancorp's independent certified public accountants, is expected to be present at the Meeting, will have an opportunity to make a statement if he or she desires to do so, and will be available to respond to questions raised at the Meeting. CERTAIN INFORMATION REGARDING BANCORP Bancorp is subject to the informational requirements of the Exchange Act pursuant to Section 15(d) thereof, and in accordance therewith files reports and other information with the SEC. Copies of such reports and other information can be obtained, upon payment of prescribed fees, from the SEC at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. In addition, such reports and other information can be inspected at the SEC's facilities referred to above and at the SEC's Regional Offices at 7 World Trade Center (13th Floor), New York, New York 10048, the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036. Bancorp's Annual Report on Form 10K for the year ended December 31, 1995, which incorporates and includes Bancorp's 1995 Annual Report to shareholders (together, Appendix G hereto), includes the audited consolidated statements of financial condition of Bancorp as of December 31, 1995 and 1994 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three year period ended December 31, 1995 and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations. Appendix G hereto also includes Bancorp's Quarterly Report on Form 10Q at and for the period ended September 30, 1996. Such Appendix G (excluding any documents incorporated by reference therein or exhibits thereto) is a part of this Proxy Statement and should be carefully reviewed for the information regarding Bancorp contained therein. OTHER MATTERS The Bancorp Board of Directors is not aware of any business to come before the Meeting other than those matters described in this Proxy Statement. However, if any other matters should properly come before the Meeting, it is intended that proxies in the accompanying form will be voted in respect thereof in accordance with the judgment of the person or persons voting the proxies. While there is no present intention or need to do so, the Board is empowered to adjourn the Meeting from time to time. BY ORDER OF THE BOARD OF DIRECTORS Corporate Secretary AGREEMENT AND PLAN OF MERGER By and Between TRP Acquisition Corp. and Trans Pacific Bancorp TABLE OF CONTENTS Page ARTICLE I - THE MERGER 1 SECTION 1.01 THE MERGER 1 SECTION 1.02 ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION 1 SECTION 1.03 BYLAWS OF THE SURVIVING CORPORATION 1 SECTION 1.04 BOARD OF DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION 1 SECTION 1.05 EFFECTIVE TIME OF THE MERGER 2 SECTION 1.06 SUPPLEMENTARY ACTION 2 ARTICLE II - CONVERSION OF SHARES AND ESCROW PROVISIONS 2 SECTION 2.01 COMPANY COMMON STOCK 2 SECTION 2.02 DISSENTING SHARES 3 SECTION 2.03 ACQUISITION COMMON STOCK 3 SECTION 2.04 EXCHANGE OF SHARES 4 SECTION 2.05 TREATMENT OF EMPLOYEE STOCK OPTIONS 5 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE COMPANY 6 SECTION 3.01 CORPORATE ORGANIZATION 6 SECTION 3.02 AUTHORIZATION: NO VIOLATION 6 SECTION 3.03 CAPITALIZATION OF THE COMPANY 7 SECTION 3.04 SUBSIDIARIES 7 SECTION 3.05 CONSENTS AND APPROVALS 8 SECTION 3.06 FINANCIAL STATEMENTS 8 SECTION 3.07 REPORTS 9 SECTION 3.08 PROXY STATEMENT 9 SECTION 3.09 ABSENCE OF UNDISCLOSED LIABILITIES 9 SECTION 3.10 ABSENCE OF CERTAIN CHANGES 10 SECTION 3.11 FIDELITY BONDS AND INSURANCE 10 SECTION 3.12 AGREEMENTS WITH BANKING AUTHORITIES 10 SECTION 3.13 REPORTS 10 SECTION 3.14 FAIRNESS OPINION 11 SECTION 3.15 LITIGATION 11 SECTION 3.16 TITLE TO PROPERTIES: ENCUMBRANCES 11 SECTION 3.17 CONTRACTS AND LEASES 12 SECTION 3.18 EMPLOYEE BENEFIT PLANS 12 SECTION 3.19 TAXES 14 SECTION 3.20 ENVIRONMENTAL PROTECTION 15 SECTION 3.21 COMPLIANCE WITH APPLICABLE LAW 16 SECTION 3.22 LABOR DIFFICULTIES 16 SECTION 3.23 TRANSACTIONS WITH AFFILIATES 16 SECTION 3.24 LOAN PORTFOLIO: REPORTS 17 SECTION 3.25 REPORTING COMPANY STATUS 17 SECTION 3.26 DISCLOSURE 17 ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF ACQUISITION 17 SECTION 4.01 ORGANIZATION 17 SECTION 4.02 AUTHORIZATION: NO VIOLATION 18 SECTION 4.03 CONSENTS AND APPROVALS 18 SECTION 4.04 PROXY STATEMENT 19 SECTION 4.05 EMPLOYMENT AGREEMENT. 19 SECTION 4.06 DISCLOSURE 19 ARTICLE V - COVENANTS AND OTHER AGREEMENTS 19 SECTION 5.01 CONDUCT OF BUSINESS OF THE COMPANY 19 SECTION 5.02 NO SOLICITATION 22 SECTION 5.03 LIQUIDATED DAMAGES 22 SECTION 5.04 ACCESS TO INFORMATION 23 SECTION 5.05 PUBLIC ANNOUNCEMENTS 23 SECTION 5.06 PROXY STATEMENT 24 SECTION 5.07 OTHER REGULATORY MATTERS 24 SECTION 5.08 QUALITY OF INFORMATION SUPPLIED IN CONNECTION WITH OTHER REGULATORY FILINGS 25 SECTION 5.09 CURRENT INFORMATION 25 SECTION 5.10 APPROVAL OF COMPANY STOCKHOLDERS 25 SECTION 5.11 DISCLOSURE SUPPLEMENTS 25 SECTION 5.12 RESTRUCTURE OF TRANSACTION 26 SECTION 5.13 FAIRNESS OPINION 26 SECTION 5.14 ADDITIONAL AGREEMENTS 26 SECTION 5.15 NOTICES 26 SECTION 5.16 EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST 26 ARTICLE VI - CLOSING CONDITIONS 26 SECTION 6.01 CONDITIONS TO EACH PARTY'S OBLIGATIONS UNDER THIS AGREEMENT 26 SECTION 6.02 CONDITIONS TO THE OBLIGATIONS OF ACQUISITION UNDER THIS AGREEMENT 27 SECTION 6.03 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY UNDER THIS AGREEMENT 29 ARTICLE VII - CLOSING 30 SECTION 7.01 CLOSING 30 SECTION 7.02 DELIVERIES AT THE CLOSING 30 SECTION 7.03 FILINGS AT THE CLOSING 30 ARTICLE VIII - TERMINATION AND ABANDONMENT 30 SECTION 8.01 TERMINATION 30 SECTION 8.02 PROCEDURE AND EFFECT OF TERMINATION 31 ARTICLE IX - MISCELLANEOUS PROVISIONS 32 SECTION 9.01 OFFICERS OF THE SUBSIDIARY AFTER THE EFFECTIVE TIME 32 SECTION 9.02 INVESTIGATION: SURVIVAL OF WARRANTIES 32 SECTION 9.03 WAIVER OF COMPLIANCE: CONSENTS 32 SECTION 9.04 VALIDITY 32 SECTION 9.05 BROKERAGE FEES AND COMMISSIONS 32 SECTION 9.06 EXPENSES AND OBLIGATIONS 33 SECTION 9.07 OPTION AGREEMENT 33 SECTION 9.08 PARTIES IN INTEREST 33 SECTION 9.09 NOTICES 33 SECTION 9.10 GOVERNING LAW 34 SECTION 9.11 COUNTERPARTS 34 SECTION 9.12 HEADINGS 34 SECTION 9.13 CERTAIN DEFINITIONS 34 SECTION 9.L4 SPECIFIC PERFORMANCE 35 SECTION 9.15 ENTIRE AGREEMENT: ASSIGNMENT 35 SECTION 9.16 AMENDMENT AND MODIFICATION 35 SECTION 9.17 ARBITRATION 35 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of Friday October 18, 1996 (the "Agreement"), between TRP Acquisition Corp., a Delaware corporation ("Acquisition"), and Trans Pacific Bancorp, a California corporation (the "Company"). WHEREAS, the Boards of Directors of the Company and Acquisition deem it advisable and in the best interests of the stockholders of such corporations to effect a merger of Acquisition and the Company (the "Merger") pursuant to the terms of this Agreement; and WHEREAS, the Boards of Directors of the Company and Acquisition have approved the transactions provided for in this Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual covenants, representations, warranties and agreements herein contained, the parties hereto agree as follows: ARTICLE I THE MERGER SECTION 1.01 The Merger. Upon the terms and subject to the conditions hereof, and in accordance with the provisions of the Delaware General Corporation Law (the "DGCL") and the California Corporation Code (the "CCC"), Acquisition shall be merged with and into the Company on the date of the Closing (as hereinafter defined). Following the merger, the separate existence of Acquisition shall cease, and the Company shall continue as the surviving corporation in the Merger (the "Surviving Corporation"). SECTION 1.02 Articles of Incorporation of the Surviving Corporation. The Articles of Incorporation of the Company shall be the Articles of incorporation of the Surviving Corporation. SECTION 1.03 Bylaws of the Surviving Corporation. At the Effective Time (as defined in Section 1.05) the Bylaws of the Company shall be the Bylaws of the Surviving Corporation and thereafter may be amended or repealed in accordance with their terms, the Articles of Incorporation of the Surviving Corporation and as provided by law. SECTION 1.04 Board of Directors and Officers of the Surviving Corporation. At the Effective Time, the directors and officers of Acquisition immediately prior to the Effective Time shall be the directors and officers of the Surviving Corporation. Each of such directors and officers shall hold office in accordance with the Articles of Incorporation and Bylaws of the Surviving Corporation. SECTION 1.05 Effective Time of the Merger. Company will cause a certificate of merger, attached as Exhibit A and such other documents as are required by the DGCL to be duly filed with the Secretary of State of the State of Delaware and an agreement of merger, attached as Exhibit B and such other documents as are required by the CCC to be duly filed with the Secretary of State of the State of California. The Merger shall become effective upon the filing of the certificate of merger and such other documents as are required by the DGCL to be filed and the certificate of merger and such other documents as are required by the CCC to be filed (the time of completion of such filings being the "Effective Time"). SECTION 1.06 Supplementary Action. If at any time after the Effective Time, any further assignments or assurances in law or any other things are necessary or desirable to vest or to perfect or to confirm of record or to otherwise secure in the Surviving Corporation the title to any property or rights of Company or to carry out the provisions of this Agreement, the officers and directors of the Surviving Corporation are hereby authorized and empowered on behalf of the Company, in the name of and on behalf of the Company, to execute and deliver any and all things necessary or proper to vest or to perfect or to confirm title to such property or rights in the Surviving Corporation, and otherwise to carry out the purposes and provisions of this Agreement. ARTICLE II CONVERSION OF SHARES AND ESCROW PROVISIONS SECTION 2.01 Company Common Stock. (a) Each share of common stock, no par value per share, of the Company (the "Company Common Stock") issued and outstanding immediately prior to the Effective Time (except for shares of Company Common Stock then owned beneficially or of record by Acquisition, shares held by any subsidiary of the Company and any shares which are Dissenting Shares (as hereinafter defined) shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into the right to receive $8.00 in cash, plus an amount equal to (i) the Escrow Reduction Amount (as hereinafter defined), divided by (ii) the sum of (x) the total number of shares issued and outstanding immediately prior to the Closing and (z) the Number of Options (as hereinafter defined) (such $8.00 plus the increase, if any, from the Escrow Reduction Amount per share shall be referred to as the "Cash Consideration") payable to the holder thereof, without interest thereon, upon surrender of the certificate representing such share, and such holder's pro rata share of the Escrow Fund (as hereinafter defined), if any, payable to stockholders of the Company pursuant to the terms of the Escrow Agreement between the Company and Acquisition, dated the date hereof (the "Escrow Agreement"), attached as Exhibit C (such amounts in cash and escrow shall be hereinafter collectively referred to as the "Merger Consideration"). (b) Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time which is then owned beneficially or of record by Acquisition shall, by virtue of the Merger and without any action on the part of the holder thereof, be canceled and retired and cease to exist, without any conversion thereof. (c) Each share of Company Common Stock held by any subsidiary of the Company immediately prior to the Effective Time shall, by virtue of the Merger, be canceled and retired and cease to exist, without any conversion thereof. SECTION 2.02 Dissenting Shares. Notwithstanding anything in this Agreement to the contrary, shares of Company Common Stock which are outstanding immediately prior to the Effective Time and which are held by stockholders (other than Acquisition) who shall not have voted such shares in favor of the Merger and who shall deliver to the Company a written demand for purchase of such shares of Company Common Stock in the manner provided in Section 1301 of the California Corporation Code ("CCC") (such shares to be referred to as "Dissenting Shares") shall not be converted into or be exchangeable for the right to receive the consideration provided in Section 2.01 (a) of this Agreement, but the holders thereof shall be entitled to payment of the fair market value of such shares in accordance with the provisions of Section 1303 and 1304 of the CCC; provided, however, that (i) if any holder of Dissenting Shares shall subsequently deliver a written withdrawal of his demand for purchase of such shares (with the written approval of the Company), or (ii) if any holder fails to establish the status of his shares of Company Common Stock as "dissenting shares" as provided in such Section 1300, or (iii) if the Company denies that the shares are Dissenting Shares, or the Company or any Stockholder fail to agree upon the fair market value of the shares, and neither any holder of Dissenting Shares nor any interested corporation has filed a complaint demanding a determination of the fair market value of the Dissenting Shares within the time provided in Section 1304 of the CCC, such holder or holders (as the case may be) shall forfeit the right to demand purchase of such shares and such shares shall thereupon be deemed to have been converted into and to have become exchangeable for, as of the Effective Time, the right to receive the consideration provided in Section 2.01(a) of this Agreement, without any interest thereon (and such shares shall not, for purposes hereof, be deemed to be "Dissenting Shares"). SECTION 2.03 Acquisition Common Stock. Each share of common stock, par value $0.01 per share, of Acquisition (the "Acquisition Common Stock"), issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into and exchangeable for one fully paid and non-assessable share of common stock, no par value per share, of the Surviving Corporation (the "Surviving Corporation Common Stock") or such other number of shares of Surviving Corporation Common Stock as Acquisition shall determine prior to the Effective Time of the Merger. From and after the Effective Time, each outstanding certificate theretofore representing shares of Acquisition Common Stock shall be deemed, for all purposes, to evidence ownership of and to represent the number of shares of Surviving Corporation Common Stock into which such shares of Acquisition Common Stock shall have been converted. Promptly after the Effective Time, the Surviving Corporation shall issue, on a share-for-share basis, to the stockholders of Acquisition a stock certificate or certificates representing shares of Surviving Corporation Common Stock upon tender of the certificate or certificates which formerly represented shares of Acquisition Common Stock, which shall be canceled. SECTION 2.04 Exchange of Shares. (a). At the Effective Time, Acquisition shall deposit in trust with a bank or trust company designated by it (the "Exchange Agent"), cash in an aggregate amount equal to the product of (i) the number of shares of Company Common Stock issued and outstanding at the Effective Time (excluding such shares owned beneficially or of record by Acquisition, shares held by any subsidiary of the Company and share which are Dissenting Shares), and (ii) the Cash Consideration (such amount being hereinafter referred to as the "Exchange Fund"). As soon as practicable after the Effective Time, Acquisition shall deposit in trust in the Exchange Fund in cash such further aggregate amount equal to the product of (i) the number of shares of Company Common Stock as to which the holders thereof forfeited the right to demand purchase pursuant to the provisions of Section 2.02 of this Agreement and (ii) the Cash consideration. The Exchange Agent shall, pursuant to irrevocable instructions, make the payments provided for in Section 2.01 (a) of this Agreement out of the Exchange Fund. The Exchange Fund shall not be used for any other purpose, except as provided in this Agreement. (b) At the Effective Time, Acquisition shall deposit in trust with the Escrow Agent (as defined in the Escrow Agreement) cash in an amount equal to $740,626, less the amount by which the escrow deposit may be reduced pursuant to the provisions of the Escrow Agreement between the date hereof and the Closing (the "Escrow Reduction Amount"). The $740,626 less the Escrow Reduction Amount (the "Escrow Fund") shall be divided into two separate funds pursuant to the Escrow Agreement. The Subsidiary (as hereinafter defined), as escrow agent, will administer the Escrow Fund and release, in cash, portions of the Escrow Fund promptly as such amounts become payable pursuant to the terms of the Escrow Agreement. (c) Promptly after the Effective Time, the Exchange Agent shall mail to each record holder as of the Effective Time (other than Acquisition and any subsidiary of the Company), of an outstanding certificate or certificates which immediately prior to the Effective Time represented shares of Company Common Stock (the "Certificates") a form letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent) and instructions for use in effecting the surrender of the Certificates for payment therefor. Upon surrender by such record holder to the Exchange Agent of a Certificate, together with such letter of transmittal duly executed, the holder of such Certificate (the "Former Stockholder" and all such Former Stockholders collectively to be referred to as the "Former Stockholders") shall be entitled to receive in exchange therefor cash in an amount equal to the product of (i) the number of shares of Company Common Stock represented by such Certificate and (ii) the Cash Consideration, and such Certificate shall forthwith be canceled. No interest will be paid or accrued on the cash payable upon the surrender of the Certificates. If payment is to be made to a person other than the person in whose name the Certificate surrendered is registered, it shall be a condition of payment that the Certificate so surrendered shall be properly endorsed or otherwise in proper form for transfer and that the person requesting such payment shall pay any transfer or other taxes required by reason of the payment to a person other than the registered holder of the Certificate surrendered or such person shall establish to the satisfaction of the Surviving Corporation that such tax has been paid or is not applicable. Until surrendered in accordance with the provisions of this Section 2.04, each Certificate (other than Certificates representing shares owned beneficially or of record by Acquisition, Certificates representing shares held by any subsidiary of the Company and any Certificates representing Dissenting Shares) shall represent, for all purposes, the right to receive the Merger Consideration in cash multiplied by the number of shares evidenced by such Certificate, without any interest thereon. (d) In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed, the Surviving Corporation will pay or cause to be paid in exchange for such lost, stolen or destroyed Certificate the Merger Consideration deliverable in respect thereof as determined in accordance with this Article II. When authorizing such payment of the Merger Consideration in exchange therefor, the Board of Directors of the Surviving Corporation may, in its discretion and as a condition precedent to the payment thereof, require the owner of such lost, stolen or destroyed Certificate to give the Surviving Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Surviving Corporation with respect to the Certificate alleged to have been lost, stolen or destroyed. (e) After the Effective Time there shall be no transfers on the stock transfer books of the Surviving Corporation of the shares of Company Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation, they shall be canceled and exchanged for cash as provided in this Article II. (f) Any portion of the Exchange Fund that remains unclaimed by the stockholders of the Company for eighteen months after the Effective Time shall be repaid to the Surviving Corporation, upon demand, and any stockholders of the Company who have not theretofore complied with Section 2.04(b) shall thereafter look, subject to applicable escheat and other laws, only to the Surviving Corporation for payment of their claim for the Merger Consideration, without any interest thereon. The Exchange Agent shall retain the right to invest and reinvest the Exchange Fund on behalf of the Surviving Corporation in securities issued or guaranteed by the United States government or any agency or instrumentality thereof and the Surviving Corporation shall receive the interest earned thereon. SECTION 2.05 Treatment of Employee Stock Options. At the Effective Time, each holder of then outstanding options (the "Option Holder") to purchase up to 103,750 shares of Company Common Stock, heretofore granted under either the Company's Employee Stock Option Plan, as amended (the "Option Plan") or the Company's Non Qualified Stock Option Plan (the "Non Qualified Plan"), will receive (whether such option is immediately exercisable or not), in settlement thereof, a cash payment from the Surviving Corporation in an amount equal to the product of (i) the excess of the Cash Consideration over the per share exercise price of such option and (ii) the total number of shares of the Company Common Stock which the Option Holder is entitled to purchase under such option (the "Number of Options"); whereupon such options to purchase shares of Company Common Stock shall be canceled. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Acquisition that: SECTION 3.01 Corporate Organization. The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and is a duly registered bank holding company under the Bank Holding Company Act of 1956, as amended, (the "Holding Company Act"), with all requisite power and authority to own, operate and lease its properties and to carry on its business as it is now being conducted, and is qualified or licensed to do business and is in good standing in each jurisdiction in which the ownership or leasing of property by it or the conduct of its business requires such licensing or qualification, except for such failures to be so qualified or licensed which would not, individually or in the aggregate, have a Material Adverse Effect (as hereinafter defined). The Company's acquisition of the capital stock of the Subsidiary was duly approved by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") pursuant to applicable sections of the Holding Company Act. The Company has delivered to Acquisition complete and correct copies of its Articles of Incorporation and Bylaws. SECTION 3.02 Authorization: No Violation. The Company has full corporate power and authority to execute and deliver this Agreement and to carry out its obligations hereunder. The execution and delivery of this Agreement by the Company, the performance by the Company of its obligations hereunder and the consummation by the Company of the transactions contemplated hereby have been duly authorized by the Company's Board of Directors and no other corporate proceeding on the part of the Company is necessary to authorize this Agreement or to consummate the transactions contemplated hereby (other than the approval of the principle terms of this Agreement by stockholders holding at least a majority of the outstanding Company Common Stock entitled to vote thereon). This Agreement has been duly and validly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against it in accordance with its terms, except to the extent that such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights, and the remedy of specific performance and injunctive and other forms of equitable relief, may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Neither the execution and delivery of this Agreement by the Company and the performance by the Company of its obligations hereunder nor the consummation by the Company of the transactions contemplated hereby will (i) conflict with or result in any breach of any provision of the Articles of Incorporation or Bylaws of the Company or the Subsidiary, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default under, or permit the termination of, or require the consent of any other party to, or result in the acceleration of, or entitle any party to accelerate (whether as a result of a change in control of the Company or otherwise) or give rise to the creation of any lien, charge, security interest or encumbrance upon any of the respective properties or assets of the Company or the Subsidiary under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Company or the Subsidiary is a party or by which either of them or any of their respective properties or assets may be bound or affected or (iii) violate any order, writ, judgment, injunction, decree, statute, rule or regulation of any court or governmental authority applicable to the Company or the Subsidiary or any of their respective properties or assets, excluding from the foregoing clauses (ii) and (iii) violations, breaches or defaults which in the aggregate would not have a Material Adverse Effect and will not materially prevent or delay the consummation of the transactions contemplated hereby. SECTION 3.03 Capitalization of the Company. The authorized capital stock of the Company consists of 10,000,000 shares of no par value common stock. As of the date hereof, there were issued and outstanding 1,120,195 shares of the Company Common Stock, and options outstanding which are convertible into 103,750 shares of the Company Common Stock; and as of such date, no shares of common stock were held in the Company's treasury. All of the outstanding shares of common stock have been validly issued, were not issued in violation of any person's preemptive rights and are fully paid and nonassessable with no personal liability attaching to the ownership thereof. Since July 19, 1996 the Company has not issued any shares of its capital stock. Except as set forth above, there are not now, and at the Effective Time there will not be, any shares of capital stock issued or outstanding or any option, warrant, subscription, conversion or other rights, agreements or commitments obligating the Company to issue any additional shares of the capital stock or any other securities convertible into, exchangeable for or evidencing the right to subscribe for any shares of the capital stock of the Company. Following the Merger, the Company will have no obligation to issue any shares of its capital stock pursuant to any employee benefit plan or otherwise. SECTION 3.04 Subsidiaries. (a) The Company owns 100% of the outstanding capital stock of Trans Pacific National Bank (the "Subsidiary"). All such capital stock is owned free and clear of liens, claims, security interests, charges or other encumbrances. All such capital stock is validly issued, fully paid and nonassessable and was not issued in violation of any preemptive rights. There are not now, and at the Effective Time there will not be, any option, warrant, subscription, conversion or other rights, agreements or commitments obligating the Subsidiary to issue any additional shares of the capital stock or any other securities convertible into, exchangeable for or evidencing the right to subscribe for any shares of the capital stock of the Subsidiary. The Subsidiary is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and possesses full power and authority to carry on its business as it is now being conducted and to own, lease and operate its properties. The Company and the Subsidiary do not possess, directly or indirectly, any equity interest in any other corporation, joint venture or partnership, except for (i) equity interests held by the Company or the Subsidiary in a fiduciary capacity, and (ii) equity interests held in the investment portfolios of the Company and the Subsidiary. (b) The Company owns 100% of the outstanding capital stock of Trans Pacific Mortgage Corp., a California corporation (the "Shell Subsidiary"). All such capital stock is owned free and clear of liens, claims, security interests, charges or other encumbrances. All such capital stock is validly issued, fully paid and nonassessable and was not issued in violation of any preemptive rights. There are not now, and at the Effective Time there will not be, any assets or liabilities on the books, records or otherwise of the Shell Subsidiary and it is not in the process of carrying on any business. The Shell Subsidiary shall remain inactive until the Effective Time. There are not now, and at the Effective Time there will not be, any option, warrant, subscription, conversion or other rights, agreements or commitments obligating the Shell Subsidiary to issue any additional shares of the capital stock or any other securities convertible into, exchangeable for or evidencing the right to subscribe for any shares of the capital stock of the Shell Subsidiary. The Shell Subsidiary is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. SECTION 3.05 Consents and Approvals. Except for consents and approvals of or filings or registrations with the Federal Reserve Board, applicable requirements of the Office of the Comptroller of the Currency, the Securities and Exchange Commission (the "SEC"), the filing of a certificate of merger pursuant to the DGCL, the filing of a certificate of merger pursuant to the CCC, and requirements of federal and state securities laws, no filing or registration with, no notice to and no permit, authorization, consent or approval of any third party or any public or governmental body or authority is necessary for the consummation by the Company of the transactions contemplated by this Agreement or to enable the Company and the Subsidiary to continue to conduct its business after the Effective Time in a manner which is consistent with that in which it is presently conducted, except as set forth on Disclosure Schedule 3.05 or where the failure to make such filing or to obtain such permit, authorization, consent or approval will not in the aggregate have a Material Adverse Effect. SECTION 3.06 Financial Statements. The Company has heretofore delivered to Acquisition (i) audited consolidated Statements of Condition as of December 31, 1991, 1992, 1993, 1994 and 1995 and the related consolidated statements of income and changes in stockholders' equity and changes in financial position or statement of cash flows for the periods then ended (the "Audited Financial Statements"), and (ii) an unaudited consolidated Statement of Condition as of August 31, 1996, and related consolidated statements of income and changes in stockholders' equity and changes in financial position or statement of cash flows for the period then ended (the "Interim Financial Statements," and, together with the Audited Financial Statements, the "Financial Statements"). Such Financial Statements (i) were prepared in accordance with generally accepted accounting principles consistently applied (subject to exceptions, if any, specified in such Financial Statements or in the notes thereto and, in the case of the balance sheet included in the Interim Financial Statements subject to normal, recurring year-end adjustments), and (ii) fairly reflect the respective financial positions of the Company and the Subsidiary, as of such dates, the respective results of operations of the Company and the Subsidiary, for the periods then ended on such dates, and (iii) reflect in accordance with generally accepted accounting principles consistently applied, adequate provision for, or reserves against, the possible loan losses of the Company and the Subsidiary, as of such dates. The books and records of the Company have been, and are being, maintained in accordance with applicable legal and accounting requirements and reflect only actual transactions. SECTION 3.07 Reports. The Company will promptly furnish Acquisition with an accurate and complete copy of each registration statement, report and proxy statement filed by the Company with the SEC since June 30, 1993. The Company has filed all reports, statements, forms and documents with the SEC that it was required to file since June 30, 1993 (the "SEC Reports"). All of the documents filed by the Company with the SEC have complied when filed in all material respects with all applicable requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Except to the extent corrected by a subsequent filing, as of its date, each such report, statement, form or document, including, without limitation, any financial statements or schedules included therein, did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. No subsidiary of the Company is required to file any reports, statements, forms or other documents with the SEC. SECTION 3.08 Proxy Statement. None of the information relating to the Company and the Subsidiary included in any proxy statement, letter to stockholders, notice of meeting and form of proxy which is mailed to the stockholders of the Company in connection with any meeting of stockholders convened in accordance with Section 5.10 (collectively, the "Proxy Statement") will, (i) at the time the Proxy Statement is mailed, (ii) at the time of the meeting of stockholders to which the Proxy Statement relates or (iii) at the Effective Time, as then amended or supplemented, be false or misleading with respect to any material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. SECTION 3.09 Absence of Undisclosed Liabilities. To the best of the Company's and the Subsidiary's knowledge, there are no liabilities of the Company or the Subsidiary of any kind whatsoever (whether absolute, accrued, contingent, or otherwise, and whether due or to become due), and the Company knows of no valid basis for the assertion of any such liabilities, whether or not accrued and whether or not contingent or absolute, determined or determinable, nor any existing condition, situation or set of circumstances which is reasonably likely to result in such a liability, other than: (a) liabilities adequately reflected or reserved against on the Financial Statements referred to in Section 3.06; (b) liabilities disclosed in Disclosure Schedule 3.09 hereto; (c) normal liabilities incurred in the ordinary course of business consistent with past practice since August 31, 1996; or (d) liabilities which are not material to the business, operations, prospects, properties or assets of the Company and of the Subsidiary taken as a whole or of the Subsidiary taken individually. SECTION 3.10 Absence of Certain Changes. Except as disclosed in Disclosure Schedule 3.10, there has not been since August 31, 1996 any material adverse change in the business, operations, prospects, properties, assets or financial condition of the Company and of the Subsidiary taken as a whole or of the Subsidiary taken individually, and no condition exists which is known to the Company and may reasonably be expected to cause such a material adverse change in the future (excluding changes from factors generally affecting the industry in which the Company or the Subsidiary operates). SECTION 3.11 Fidelity Bonds and Insurance. Since January 1, 1993, the Company and the Subsidiary have continuously maintained (i) fidelity bonds insuring against acts of dishonesty by employees, (ii) directors' and officers' liability insurance, and (iii) general liability insurance in such amounts as have been heretofore disclosed in writing to Acquisition. Except as disclosed in Disclosure Schedule 3.11, since January 1, 1993, there have been no claims in excess of $25,000 with respect to the Subsidiary or the Company under such bonds or insurance and the Company and the Subsidiary are not aware of any acts of dishonesty or losses which would form the basis of a material claim under such bonds or insurance coverage. The Company and the Subsidiary have not been notified that their fidelity or insurance coverage will not be renewed by their carrier or continued on substantially the same terms (exclusive of increases in premium terms) as their existing coverage. SECTION 3.12 Agreements with Banking Authorities. The Company and the Subsidiary are not parties to any current agreement or memorandum of understanding with any federal or state governmental entity charged with the supervision or regulation of banks or bank holding companies or engaged in the insurance of bank deposits which restricts the conduct of their business, or in any manner relates to their capital adequacy, their credit policies or their management. SECTION 3.13 Reports. Since January 1, 1993, the Company and the Subsidiary have filed all reports and statements, together with any amendments required to be made with respect thereto, that they were required to file with (i) Office of the Comptroller of the Currency, (ii) the Federal Reserve Board, (iii) the Federal Deposit Insurance Corporation, and (iv) any other governmental or regulatory authority or agency having jurisdiction over their operations. Each of such reports and documents, including the Financial Statements, exhibits and schedules thereto, did not contain any statement which, at the time and in light of the circumstances under which it was made, was false or misleading with respect to any material fact or which omitted to state any material fact necessary in order to make the statements contained therein not false or misleading. The Company has previously delivered or made available to Acquisition accurate and complete copies of such reports. SECTION 3.14 Fairness Opinion. Baxter Fentriss & Company has orally advised the Board of Directors of the Company in substance satisfactory to the Board of Directors of the Company that the Merger Consideration is fair to the holders of Company Common Stock from a financial point of view. SECTION 3.15 Litigation. Except as set forth in Disclosure Schedule 3.15, as of the date hereof there is no action, suit, set of related actions or suits concerning a common issue, judicial or administrative proceeding or investigation pending or, to the best knowledge of the Company, threatened against or involving the Company, the Subsidiary, or any of their properties or rights before any court, arbitrator or administrative or governmental body, nor is there any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or arbitrator outstanding against the Company. As of the Closing Date, except as set forth in Disclosure Schedule 3.15 and except for dissenters rights exercised pursuant to applicable law, there will be no action, suit, set of related actions or suits concerning a common issue, judicial or administrative proceeding or investigation pending or, to the best knowledge of the Company, threatened against or involving the Company, the Subsidiary, or any of their properties or rights before any court, arbitrator or administrative or governmental body, nor will there be any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or arbitrator outstanding against the Company which may reasonably be expected to have a Material Adverse Effect. The Company and the Subsidiary are not in violation of any term of any judgments, decrees, injunctions or orders outstanding against them. There are no actions, suits or proceedings pending or, to the best knowledge of the Company, threatened against the Company or the Subsidiary arising out of or in any way related to this Agreement, the Merger or any of the transactions contemplated hereby or thereby. SECTION 3.16 Title to Properties: Encumbrances. (a) The Company and the Subsidiary each has good, valid and marketable title to all properties and assets (real, personal and mixed, tangible and intangible) which it purports to own, including, without limitation, all properties and assets reflected on the Interim Financial Statement or acquired after the date thereof, except for investments, loans or equipment sold since the date of the Interim Financial Statement in the ordinary course of business and consistent with past practice or except as set forth in Disclosure Schedule 3.16. Except as set forth in Disclosure Schedule 3.16, all properties and assets owned by the Company and the Subsidiary are free and clear of all title defects, liens, pledge claims, security interests, restrictions, mortgages, options or encumbrances of any kind (collectively, "Liens") and are not, in the case of real property, subject to any rights of way, building use restrictions, exceptions, variances, reservations or limitations of any nature whatsoever except, with respect to all such properties and assets, (a) statutory Liens not yet delinquent or the validity of which are being contested in good faith by appropriate actions, (b) Liens for taxes not yet delinquent or the validity of which are being contested in good faith by appropriate actions, (c) Liens reflected in the Financial Statements and (d) Liens which in the aggregate do not materially detract from the value or impair the use of the property of or otherwise materially impair the operations of the Company and the Subsidiary taken as a whole or of the Subsidiary taken individually. (b) Disclosure Schedule 3.16 hereto contains a list and description of all real property owned by the Company or the Subsidiary. The Company has delivered to Acquisition existing, effective policies of title insurance insuring the fee simple title in the Company or the Subsidiary of all real property owned by the Company or the Subsidiary, with copies of current available surveys, if any, for each such parcel, certified by a registered land surveyor. (c) Except as set forth in Disclosure Schedule 3.16, there are no proceedings, claims, disputes or conditions affecting any of the real property or leasehold interests of the Company or the Subsidiary which could reasonably be expected to materially curtail or interfere with the use of such property, nor is an action of eminent domain or condemnation pending or threatened for all or any portion of such property owned, leased or used by the Company or the Subsidiary. SECTION 3.17 Contracts and Leases. (a) Neither the Company nor the Subsidiary is in violation of any provision of its Articles of Incorporation or its Articles of Association, respectively, or their By-laws. (b) Except as set forth in Disclosure Schedule 3.17, each of the contracts, instruments, mortgages, notes, security agreements, leases, agreements or understandings, whether written or oral, to which the Company or the Subsidiary is a party which relates to or affects the assets or operations of the Company or the Subsidiary or to which the Company or the Subsidiary or their respective assets or operations may be bound or subject is valid and binding and in full force and effect, except where in the aggregate the failure to be in full force and effect would not have a Material Adverse Effect; there are no existing defaults by the Company or the Subsidiary thereunder or, to the best knowledge of the Company, any other party thereto, which default would likely result in a Material Adverse Effect; and no event of default has occurred which (whether with or without notice, lapse of time or the happening or occurrence of any other event) would constitute a default by the Company or the Subsidiary thereunder or, to the best knowledge of the Company, any other party thereto which default would likely result in a Material Adverse Effect; provided, however, that there shall be deemed to be a Material Adverse Effect if a default or event of default has occurred with respect to any indebtedness of the Company or the Subsidiary for borrowed money, whether by cross-default or otherwise. (c) Except as set forth in Disclosure Schedule 3.17, neither the Company nor the Subsidiary is a party to or bound by any contract, agreement or arrangement for the employment (including as a consultant) or severance from employment (except any at will employment arrangements), of any director, officer or employee of the Company or the Subsidiary or any "change in control" agreement. SECTION 3.18 Employee Benefit Plans. (a) Disclosure Schedule 3.18 hereof sets forth a true and complete list of each employee benefit plan, arrangement or agreement (other than employment, consulting and severance agreements set forth in Disclosure Schedule 3.17) that is maintained or contributed to, or was maintained or contributed to at any time during the three (3) calendar years preceding the date of this Agreement (the "Plans"), by the Company or by any trade or business, whether or not incorporated (an "ERISA Affiliate"), which together with the Company would be deemed a "single employer" within the meaning of Section 4001 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). A copy of each Plan as currently in effect and, if available, the most recent annual report, actuarial report, summary plan description, trust agreement and determination letter for each Plan have heretofore been made available to Acquisition. Neither the Company nor the Subsidiary has any material liability (including any material contingent liability) with respect to any plan, arrangement or agreement that would be described in this section 3.18(a) but for the fact that it was not maintained or contributed to within three calendar years preceding the date of this Agreement. (b) None of the Plans is a "multiemployer plan," as such term is defined in Section (3) (37) of ERISA; except as disclosed on Disclosure Schedule 3.18, each of the Plans that is subject to ERISA is in substantial compliance with ERISA; each of the Plans intended to be "qualified" within the meaning of Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code") is so qualified; no Plan has an accumulated or waived funding deficiency within the meaning of Section 412 of the Code; neither the Company nor an ERISA Affiliate has incurred directly or indirectly, any liability (including any material contingent liability) to or on account of a Plan pursuant to Title IV of ERISA; no proceedings have been instituted to terminate any Plan that is subject to Title IV of ERISA; no "reportable event," as such term is defined in Section 4043(b) of ERISA, has occurred with respect to any Plan; and no condition exists that presents a material risk to the Company or an ERISA Affiliate of incurring a liability to or on account of a Plan pursuant to Title IV of ERISA. (c) The current value of the assets of each of the Plans that are subject to Title IV of ERISA is equal to or exceeds the present value of the accrued benefits under each such Plan, taking into account projected salary increases and based upon the actuarial assumptions used for funding purposes in the most recent actuarial report prepared for such Plans; and all contributions or other amounts payable by the Company or its Subsidiaries as of the Effective Time with respect to each Plan in respect of current or prior plan years as of the Effective Time have been or will be either paid or accrued on the financial statements of the Company. To the knowledge of the Company or the Subsidiary, there are no pending, threatened or anticipated claims (other than routine claims for benefits) by, on behalf of or against any of the Plans or any trusts related thereto. (d) Except as disclosed in Disclosure Schedule 3.18, consummation of the transactions contemplated hereby will neither cause any amounts to become vested or payable under any of the Plans nor cause any amounts payable under the Plans to fail to be deductible for Federal income tax purposes by virtue of Section 280G of the Code. (e) Except for employment, consulting and severance agreements set forth in Disclosure Schedule 3.17, no Plan provides benefits, including without limitation death or medical benefits (whether or not insured), with respect to current or former employees for periods extending beyond their retirement or other termination of service (other than (i) coverage mandated by applicable law, (ii) death benefits or retirement benefits under any "employee pension plan," as that term is defined in Section 3(2) of ERISA, (iii) deferred compensation benefits accrued as liabilities on the books of the Company or the ERISA Affiliates or (iv) benefits the full cost of which is borne by the current or former employees (or their beneficiaries)). SECTION 3.19 Taxes. (a) The Company and the Subsidiary will timely file, or have timely filed (including permitted extensions) all returns, declarations, reports, information returns and statements (collectively, "Returns") required to be filed by them in respect to any Taxes (as defined in Section 3.19(k)). Except as set forth in Disclosure Schedule 3.19, (A) as of the time of filing, including the reserve for Taxes set forth in the Financial Statements, the foregoing Returns correctly reflected in all material respects the facts regarding the income, business, assets, operations, activities and status of the Company and the Subsidiary or any other information required to be shown thereon; and (B) the Company and the Subsidiary have not requested an extension of time within which to file any Return which Return has not since been filed. (b) The Company and the Subsidiary have timely paid and reserved on the respective Financial Statements of the Company and the Subsidiary all Taxes that are required to be shown as due and payable on their Returns and are not delinquent in the payment of any Taxes. The Company and the Subsidiary have established (and until the Effective Time will establish), on the books and records, reserves that are adequate for the payment of any Taxes not yet due and payable. The Company and the Subsidiary have made all payments of estimated taxes when due in amounts sufficient to avoid the imposition of any penalty. (c) The Company and the Subsidiary are not (nor will they become) parties to any tax indemnity or tax sharing agreement other than any tax indemnity or tax sharing agreement between the Company and the Subsidiary. (d) There are no liens for Taxes upon assets of the Company and the Subsidiary except liens for Taxes not yet due and liens for Taxes, if any, which are being contested in good faith by appropriate actions as set forth in Disclosure Schedule 3.19. (e) The Company and the Subsidiary are not parties to any agreement, contract, arrangement or Plan that could result, separately or in the aggregate, in the payment of any "excess parachute payments" within the meaning of Section 280G of the Code. (f) All transactions, if any, which could give rise to an understatement of Federal income tax (within the meaning of Section 6662 of the Code) were adequately disclosed (or, with respect to Returns filed before the Closing, will be adequately disclosed) on the Returns required in accordance with Section 6662(d)(2)(B) of the Code. (g) The Company and the Subsidiary have not filed (nor will they file) a consent pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of any asset owned by the Company or the Subsidiary. (h) After the date hereof, the Company and the Subsidiary will not make or agree to make any election for Federal income tax purposes, or for state, local or foreign income tax purposes if such election could reasonably be expected to have a Material Adverse Effect, without written consent of Acquisition. (i) The statute of limitations for the assessment of Federal and California income taxes, respectively, has expired for all income tax returns of the Company and the Subsidiary through and including December 31, 1992 (Federal), and December 31, 1991 (California), and there are no outstanding waivers regarding the application of the statute of limitations with respect to any Taxes or Returns. With respect to any taxable year for which the statute of limitations has not expired, no issues have been raised by any taxing authority, either in writing or by oral statement of such taxing authority to an officer of the Company that such taxing authority may take a position contrary to the Company's position with respect to any particular tax issue which could result in additional material Taxes, or that could give rise to a material change in the taxable income of the Company and the Subsidiary for any taxable year. No deficiency for any Taxes has been proposed, asserted or assessed against the Company and the Subsidiary which has not been resolved and paid in full. (j) Except as set forth in Disclosure Schedule 3.19, neither the Company nor the Subsidiary is required for the 1996 tax year or any tax year ended after the date of the Closing to include in income any adjustment pursuant to Section 481(a) of the Code by reason of a voluntary change in accounting method initiated by the Company or the Subsidiary or as a result of the Tax Reform Act of 1986, and the Company and the Subsidiary do not have knowledge that the Internal Revenue Service has proposed any such adjustment or change in accounting method which will affect the 1996 tax year or any tax year ended after the date of the Closing. (k) As used herein, "Taxes" means (A) all net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property or windfall profits taxes, customs duties or other taxes, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign) upon the Company and the Subsidiary and/or (B) any liability of the Company and the Subsidiary for the payment of any amounts of the type described in the immediately preceding clause (A) as a result of being a member of an affiliated, consolidated, combined or unitary group, but only (C) with respect to all periods or portions thereof ending on or before the date of the Effective Time. SECTION 3.20 Environmental Protection. (a) As of the date hereof, there is no civil, criminal or administrative action, claim, demand, liability, investigation, notice or other proceeding or suit pending or, to the best of the Company's and the Subsidiary's knowledge, threatened arising from or relating to Federal, state or local environmental, health or safety laws or regulations with respect to properties owned by the Company or the Subsidiary, or properties which the Company or the Subsidiary has acquired or is in the process of acquiring by means of foreclosure or similar action. To the best of the Company's and the Subsidiary's knowledge, except as set forth in Disclosure Schedule 3.20, there are no past, present or future actions, activities, circumstances, incidents or practices known to the Company or the Subsidiary which could give rise to such an action, claim, demand, liability, investigation, notice or other proceeding. As of the Closing Date, no civil, criminal or administrative action, claim, demand, liability, investigation, notice or other proceeding or suit will be pending or, to the best of the Company's and the Subsidiary's knowledge, threatened which arises from or relates to federal, state or local environmental, health or safety laws or regulations with respect to properties owned by the Company or the Subsidiary, or properties which the Company or the Subsidiary has acquired or is in the process of acquiring by means of foreclosure or similar action, which may reasonably be expected to have a Material Adverse Effect. (b) With respect to properties owned by the Company or the Subsidiary or properties which the Company or the Subsidiary have acquired or are in the process of acquiring by means of foreclosure or similar action, the Company and the Subsidiary each are in material compliance with all permits, conditions, limitations, obligations, prohibitions and other requirements contained in applicable Federal, state or local environmental, health or safety laws or regulations, non-compliance with which could reasonably be expected to result in a Material Adverse Effect. SECTION 3.21 Compliance with Applicable Law. The Company and the Subsidiary each holds, and at all times has held, all licenses, franchises, permits and authorizations necessary for the lawful conduct of its business under and pursuant to, and the business of each of the Company and the Subsidiary is not being conducted, nor has it ever been conducted, in violation of any provision of any Federal, state, local or foreign statute (including, without limitation, 31 U.S.C. Section 5311 et seq.), law, ordinance, rule (including, without limitation, the Financial Institutions Regulatory and Interest Rate Control Act of 1978 and 31 C.F.R. Part 103), regulation, judgment, decree, order, concession, grant, franchise, permit or license or other governmental authorization or approval applicable to the Company or the Subsidiary, except to the extent that the failure to hold any such licenses, franchises, permits or authorization, or any such violation, did not or may not reasonably be expected to have a Material Adverse Effect. SECTION 3.22 Labor Difficulties. Except to the extent set forth in Disclosure Schedule 3.22 (i) each of the Company and the Subsidiary is in material compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours and is not engaged in any unfair labor practice; (ii) there is no unfair labor practice complaint against the Company or the Subsidiary pending before the National Labor Relations Board; (iii) there is no labor strike, dispute, slowdown or stoppage actually pending or, to the best knowledge of the Company, threatened against or affecting the Company or the Subsidiary; (iv) to the best of Company's or Subsidiary's knowledge, no representation question exists respecting the employees of the Company or the Subsidiary; (v) no grievance or any arbitration proceeding arising out of or under collective bargaining agreements is pending, and no claim therefor exists; and (vi) neither the Company nor the Subsidiary is a party to or bound by any collective bargaining agreement, union contract or agreement with any labor union. SECTION 3.23 Transactions with Affiliates. Except as disclosed in Disclosure Schedule 3.23 and except for loans and commitments to loan which individually involve amounts not exceeding $25,000 made by the Subsidiary on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and which, in the opinion of management of the Subsidiary, did not involve more than a normal risk of collectability and except for normal employment compensation, no officer or director of the Company or the Subsidiary, or any member of the immediate family of any such person (i) has any direct or indirect ownership interest in (A) any entity which does business with the Company or the Subsidiary, or (B) any property or asset which is owned or used by either the Company or the Subsidiary in the conduct of its business, (ii) has any financial, business, or contractual relationship or arrangements with the Company or the Subsidiary other than such relationship as attaches to being such officer or director. SECTION 3.24 Loan Portfolio: Reports. As of the date hereof, except as set forth in Disclosure Schedule 3.24, all evidences of indebtedness reflected as assets in the Company's books and records are in all respects binding obligations of the respective obligors named therein and, to the best of the Company's knowledge, no material amount thereof is subject to any defenses which may be asserted against the Company or the Subsidiary except to the extent that the assertion of such defenses, individually or in the aggregate would not have a Material Adverse Effect. SECTION 3.25 Reporting Company Status. The Company is a reporting company pursuant to Section 15(d) of the Exchange Act and is not subject to the terms of Sections 13(d), 13(e) or 14 of the Exchange Act. SECTION 3.26 Disclosure. No representations or warranties by the Company in this Agreement and no statement contained in any document including, without limitation, financial statements, and the Disclosure Schedules, certificates or other writing furnished or to be furnished by the Company to Acquisition or any of its representatives pursuant to the provisions hereof or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of material fact or omits or will omit to state any material fact necessary, in light of the circumstances under which it was made, in order to make the statements herein or therein not misleading, it being understood that as used in this Section 3.26 "material" with respect to the Company means material to the Company and the Subsidiary taken as a whole or with respect to the Subsidiary means material to the Subsidiary taken individually. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ACQUISITION Acquisition hereby represents and warrants to the Company that: SECTION 4.01 Organization. Acquisition is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Acquisition has all requisite power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted. Acquisition is duly authorized and in good standing to do business in each jurisdiction in which the property owned, leased or operated by it, or the nature of the business conducted by them, makes such qualification necessary, except for such failures to be so qualified which would not, individually or in the aggregate, have a Material Adverse Effect. Acquisition has delivered to the Company complete and correct copies of its Certificate of Incorporation and Bylaws. SECTION 4.02 Authorization: No Violation. Acquisition has full corporate power and authority to execute and deliver this Agreement and to carry out their obligations hereunder. The execution and delivery of this Agreement by Acquisition, the performance by Acquisition of its obligations hereunder and the consummation by Acquisition of the transactions contemplated hereby have been duly authorized by Acquisition's Board of Directors and stockholders and no other corporate proceeding on the part of Acquisition is necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Acquisition and constitutes a valid and binding obligation of Acquisition, enforceable against it in accordance with its terms, except to the extent that such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights, and the remedy of specific performance and injunctive and other forms of equitable relief, may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Neither the execution and delivery of this Agreement by Acquisition and the performance by Acquisition of its obligations hereunder nor the consummation by Acquisition of the transactions contemplated hereby will (i) conflict with or result in any breach of any provision of the Certificate of Incorporation or Bylaws of Acquisition, (ii) except as set forth in Disclosure Schedule 4.02, result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default under, or permit the termination of, or require the consent of any other party to, or result in the acceleration of, or entitle any party to accelerate or give rise to the creation of any lien, charge, security interest or encumbrance upon any of the respective properties or assets of Acquisition under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Acquisition is a party or by which it or any of its properties for assets may be bound or affected or (iii) violate any order, writ, judgment, injunction, decree, statute, rule or regulation of any court or governmental authority applicable to Acquisition or any of its properties or assets, excluding from the foregoing clauses (ii) and (iii) violations, breaches or defaults which in the aggregate would not have a Material Adverse Effect and will not materially prevent or delay the consummation of the transactions contemplated hereby. SECTION 4.03 Consents and Approvals. Except for consents and approvals of or filings or registrations with the Federal Reserve Board, the Office of the Comptroller of the Currency, the SEC, and the filing of a certificate of merger pursuant to the DGCL and requirements of federal and state securities laws, no filing or registration with, no notice to and no permit, authorization, consent or approval of any third party or any public or governmental body or authority is necessary for the consummation by Acquisition of the transactions contemplated by this Agreement, except as set forth on Disclosure Schedule 4.03 or where the failure to make such filing or to obtain such permit, authorization, consent or approval will not in the aggregate have a Material Adverse Effect. SECTION 4.04 Proxy Statement. None of the information supplied or to be supplied, in either case in writing by Acquisition for inclusion in the Proxy Statement will, at the time the Proxy Statement is mailed be false or misleading with respect to any material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statement therein not misleading. Acquisition will advise the Company if prior to the time of the meeting of stockholders to which the Proxy Statement relates or the Effective Time it is necessary to amend or supplement the Proxy Statement to correct any statement supplied by Acquisition for inclusion in the Proxy Statement which has become false or misleading. SECTION 4.05 Employment Agreement. Acquisition represents and warrants that it will enter into Employment Agreements with Eddy S.F. Chan and John K. Wong prior to the Effective Time. SECTION 4.06 Disclosure. No representations or warranties by Acquisition in this Agreement and no statement contained in any document including, without limitation, financial statements, and the Disclosure Schedules, certificates or other writing furnished or to be furnished by Acquisition to the Company or any of its representatives pursuant to the provisions hereof or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of material fact or omits or will omit to state any material fact necessary, in light of the circumstances under which it was made, in order to make the statements herein or therein not misleading. ARTICLE V COVENANTS AND OTHER AGREEMENTS SECTION 5.01 Conduct of Business of the Company. Except as expressly contemplated by this Agreement, during the period from the date of this Agreement to the Effective Time, the Company will and will cause the Subsidiary to conduct its operations only in the ordinary and usual course of business and consistent with past practice, and the Company will and will cause the Subsidiary to use its reasonable efforts to preserve intact its business organization, assets, prospects and advantageous business relationships, to keep available the services of its officers and employees and to maintain satisfactory relationships with suppliers, contractors, customers and others having business relationships with the Company and the Subsidiary. Without limiting the generality of the foregoing, prior to the Effective Time, the Company will not, and will cause the Subsidiary not to, without the prior written consent of Acquisition: (a) split, combine or reclassify any shares of its capital stock, declare, pay or set aside for payment any dividend or other distribution in respect of its capital stock, or directly or indirectly, redeem, purchase or otherwise acquire any shares of its capital stock or other securities; (b) authorize for issuance, issue, sell, pledge, dispose of or encumber, deliver or agree or commit to issue, sell, pledge or deliver (whether through the issuance or granting of any options, warrants, commitments, subscriptions, rights to purchase or otherwise) any stock of any class of the Company or the Subsidiary or any securities convertible into or exercisable or exchangeable for shares of stock of any class of the Company or the Subsidiary, other than shares issuable upon exercise of currently outstanding options of the Company exercisable for an aggregate amount of 103,750 shares of the Company Common Stock; (c) take any action to cause shares of Company Common Stock to cease to be quoted on the National Association of Securities Dealers Automatic Quotation Bulletin Board, or fail to notify promptly Acquisition by telephone, and thereafter promptly follow such notification with confirmation in writing, or any oral or written notice received by the Company to the effect that the National Association of Securities Dealers has taken or intends to take any action to cease the authorization for quotation of the shares of Company Common Stock; (d) incur any liability or obligation (absolute, accrued, contingent or otherwise) or assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other individual or entity other than in the ordinary and usual course of business and consistent with past practice, or issue any debt securities or change any assumption underlying, or methods of calculating, any bad debt, contingency or other reserve except as may be required by generally accepted accounting principles or applicable law; (e) adopt or amend any bonus, profit-sharing, compensation, stock option, pension, retirement, deferred compensation, employment or other employee benefit plan (including, but not limited to vacation policy), agreement, trust, plan, fund or other arrangement, (collectively, "Compensation Plans"); grant, or become obligated to grant, any increase in the compensation of officers or employees (including any such increase pursuant to any Compensation Plan), except for increases in compensation in the ordinary course of business consistent with past practice with respect to employees other than officers; institute any new employee benefit, welfare program or Compensation Plan; make any change in any Compensation Plan or other employee welfare or benefit arrangement; or enter into any employment or similar agreement or arrangement with any employee (except any at will employment arrangements); (f) acquire (by merger, consolidation or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof or acquire, directly or indirectly, any equity interest in any corporation, partnership or joint venture, except for equity interests acquired (i) in a fiduciary capacity or (ii) in the ordinary course of business consistent with past practice; (g) except as required by the consummation of the Merger, pay, discharge or satisfy any claims or liabilities, other than the payment, discharge or satisfaction in the ordinary course of business and consistent with past practice of liabilities reflected or reserved against on the balance sheet included in the Interim Financial Statements or incurred in the ordinary course of business and consistent with past practice since the date thereof; (h) except as contemplated by this Agreement, amend the Articles of Incorporation or Bylaws of the Company; (i) make any capital expenditure other than in the ordinary course of business and consistent with past practice except for capital expenditures which, individually, do not exceed $25,000; (j) waive, release, terminate, grant or transfer any material rights arising under any material credit agreement or lease, or waive, release, terminate, grant or transfer any rights of material value or modify or change in any material respect any other existing material license, contract or other document, or enter into any material contract or agreement other than in the ordinary course of business and consistent with past practice and shall use all reasonable efforts to enforce the terms of any such contract, agreement, arrangement or understanding; (k) allow or permit any material insurance policy naming it as a beneficiary or a loss payable payee to be canceled or terminated except in the ordinary course of business; (l) make any change in accounting methods, principles or practices except as may be required by generally accepted accounting principles or applicable law; (m) agree to take or omit to take, in writing or otherwise, any of the foregoing actions or any action which would make any representation or warranty in Article Three hereof untrue or incorrect in any material respect; (n) make, or commit to make, any loan or other extension of credit in excess of $250,000 except for (1) renewal loans to borrowers who were customers of the Company on the date hereof and (2) home equity loans made in accordance with the terms of the Company's standard published brochure describing its home equity loan program. Extensions of credit will not be made to classified borrowers other than renewals of not more than six (6) months made in connection with workouts conducted in the ordinary course of business and approved by Acquisition; (o) declare or pay any dividends on or make other distributions in respect of the Company Common Stock; (p) make any long-term (more than one year) borrowings (exclusive of certificates of deposit issued by the Company and other time deposits maintained at the Company by customers of the Company, in either case consistent with past practice); (q) lower the loan loss reserve of the Subsidiary below 1% of its loans then outstanding (excluding unfunded loan commitments and unfunded letters of credit); or (r) sell, discount, settle or otherwise dispose of any loan (excluding those loans listed on Exhibit B of the Escrow Agreement but including those loans listed on Exhibit C of the Escrow Agreement), for an amount less than the outstanding balance on the books of the Subsidiary as of the date of such sale, discount, settlement or disposal. SECTION 5.02 No Solicitation. The Company shall not, and shall cause the Subsidiary not to, and each shall use its best efforts to cause its affiliates and each of its officers, directors, employees, representatives and agents not to, directly or indirectly, encourage, solicit, initiate, engage or participate in discussions or negotiations with, or provide any information to, any corporation, partnership, person or other entity or group other than Acquisition or their affiliates (a "Third Party") concerning the Company or the Subsidiary or concerning the business of the Company or this Subsidiary in connection with any tender offer (including a self-tender offer), exchange offer, merger, consolidation, sale of all or any substantial amount of assets, sale of securities, acquisition of beneficial ownership of or to vote securities representing 10% or more of the total voting power of the Company or the Subsidiary, liquidation, dissolution or similar transactions involving the Company or the Subsidiary, or any division of the Company or the Subsidiary (such proposals, announcements or transactions being referred to herein as "Acquisition Proposals"); provided, that the Board of Directors of the Company (the "Board") may furnish or cause to be furnished information and may engage or participate in such discussions or negotiations and may take any other actions if Nossaman, Guthner, Knox & Elliott, counsel to the Company, advises the Board, in writing, that the failure to provide such information or engage or participate in such discussions or negotiations will involve the members of the Board in a breach of their fiduciary duties. The Company shall promptly inform Acquisition of any inquiry (including the terms thereof and the identity of the Third Party making such inquiry) which it may receive in respect of an Acquisition Proposal and furnish to Acquisition a copy of any such written inquiry. SECTION 5.03 Liquidated Damages. (a) In the event that the Merger is not consummated by reason of one of the following events and Acquisition has not failed to any material extent to perform its obligations under this Agreement, the Company shall pay to Acquisition, as liquidated damages, the sum of $250,000: (i) there is a breach by the Company of any material representation, warranty or covenant contained herein; (ii) any person or "group" as defined in Section 13(d)(3) of the Exchange Act, other than Acquisition, becomes the beneficial owner after the date hereof of more than 20% of the shares of Company Common Stock; (iii) the Company withdraws or modifies or amends in any respect adverse to Acquisition its recommendation of the Merger or fails to reconfirm its recommendation of the Merger within a reasonable period of time after a formal request; or (iv) the Board of Directors of the Company or the Subsidiary resolves to take any action that would result in any of the foregoing; and such event occurs on or prior to the date of termination. (b) In the event that the Merger is not consummated and one of the following events occurs within four months thereafter and Acquisition has not failed to any material extent to perform its obligations under this Agreement, the Company shall pay to Acquisition, as liquidated damages, the sum of $250,000: (i) the Company or the Subsidiary enters into an agreement or plan of merger, consolidation, reorganization, exchange, recapitalization or other similar agreement or plan, including without limitation an agreement in principle or letter of intent, other than with Acquisition; (ii) the Company or the Subsidiary enters into one or more agreements or plans which, individually or in the aggregate would result in the sale of more than 25% of its total assets or earning power; or (iii) the Board of Directors of the Company or the Subsidiary resolves to take any action that would result in any of the foregoing. (c) In the event that the Merger is not consummated because there is a breach by Acquisition of any material representation, warranty or covenant contained herein on or prior to the date of termination and Company has not failed to any material extent to perform its obligations under this agreement, Acquisition shall pay to the Company, as liquidated damages, the sum of $150,000. (d) The party owing liquidated damages ("Paying Party") shall make such payment to that party which is owed liquidated damages ("Receiving Party") in immediately available funds within 30 days following the day on which the Receiving Party properly notifies the Paying Party in writing that one of the events described in Section 5.03(a), (b) or (c) hereof has occurred. The Paying Party shall make such payment as compensation and liquidated damages for the loss suffered by Receiving Party as a result of the failure of the Merger to be consummated and to avoid the difficulty of determining damages in that circumstance. (e) No payment shall be due under this Section 5.03 if this Agreement is terminated pursuant to Section 8.01(a), (d)(i) or (d)(ii) hereof. (f) The payment of liquidated damages to either the Company, pursuant to Section 5.03(c), or to Acquisition, pursuant to Section 5.03(a) or (b), shall be a one time payment regardless of the number of times an event occurs or the number of events which occur that would trigger payments. SECTION 5.04 Access to Information. (a) To the extent that it may lawfully do so, between the date of this Agreement and the Effective Time, the Company will give Acquisition and its authorized representatives full access during normal business hours to all personnel, offices and other facilities and to all books and records of the Company and the Subsidiary and will permit Acquisition to make such inspections as it may require and will cause its officers to furnish Acquisition such financial and operating data and other information with respect to the business and properties of the Company and the Subsidiary as Acquisition may from time to time reasonably request. The representations and warranties of the Company contained herein or in any certificate or other documents delivered to Acquisition shall not be deemed waived or otherwise affected by any such investigation made by Acquisition or any of its representatives. (b) Until the Effective Time, any information and documentation furnished by one party to the other and treated as confidential by the party furnishing the information (the "Confidential Information") shall be kept confidential by the representatives of the other and shall be used by the examining party only in connection with the Agreement and the transactions contemplated thereby, except to the extent the Confidential Information (i) was already known to the representatives of the examining party when received, (ii) hereafter becomes lawfully obtainable from other sources, or (iii) is disclosed by Acquisition or the Company in any document filed with any government agency or authority and such document is available for public inspection. SECTION 5.05 Public Announcements. Acquisition and the Company will consult with each other before issuing any press release or otherwise making any public statements with respect to the Merger or this Agreement and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by law. The Company shall cause the Subsidiary to comply with this Section 5.05. SECTION 5.06 Proxy Statement. (a) In connection with the Special Meeting (as defined in Section 5.10), the company shall prepare and Acquisition shall cooperate with the Company in the preparation of the Proxy Statement. The Proxy Statement shall contain the recommendation of the Board of Directors of the Company in favor of the Merger; provided, however, that notwithstanding the foregoing provisions of this sentence, the Board of Directors of the Company shall be free to take any position and any action which it determines upon advice of counsel to be required to ensure compliance with the fiduciary obligations of the Board under applicable law. (b) If, at any time prior to the Special Meeting, any event should occur which should be set forth in an amendment of, or a supplement to, the Proxy Statements so as to correct the information included therein or to avoid such proxy Statement being false or misleading in any material respect, Company and Acquisition, upon learning of such event, each shall promptly inform the other party and promptly cooperate with the other party in the preparation of any required amendment or supplement and the appropriate party shall mail such amendment or supplement. SECTION 5.07 Other Regulatory Matters. (a) Acquisition and the Company each will cooperate with one another and use their best efforts to prepare all necessary documentation, to effect all necessary filings and to obtain all necessary permits, consents, approvals and authorizations of all third parties and governmental bodies necessary to consummate the transactions contemplated by this Agreement. Acquisition and the Company each shall have the right to review and approve in advance all characterizations of the information relating to Acquisition or the Company, as the case may be, and any of their respective subsidiaries, which appear in any filing made in connection with the transactions contemplated by this Agreement with any governmental body. In exercising the foregoing right, each of Acquisition and the Company shall act as promptly as practicable, recognizing that time is of the essence to the transactions contemplated by this Agreement. (b) Acquisition and the Company will furnish each other with all information concerning itself, their subsidiaries, directors, officers and stockholders and such other matters as may be necessary or advisable in connection with such registration statement or proxy statement, filings under any state Blue Sky laws or any other statement or application made by or on behalf of Acquisition or the Company to any governmental body in connection with the Merger and the other transactions contemplated by this Agreement. (c) Each party will keep the other party apprised of the status of any inquiries made of such party by the Federal Trade Commission, the Antitrust Division of the U.S. Department of Justice or any other governmental agency or authority or members of their respective staffs with respect to this Agreement or the transactions contemplated hereby. SECTION 5.08 Quality of Information Supplied in Connection with Other Regulatory Filings. Each of the Company and Acquisition agree as to themselves (and in the case of the Company, as to the Subsidiary) that all information pertaining to the Company and the Subsidiary and to Acquisition, which is proposed to be set forth in any other documents to be filed with or submitted to any federal or state regulatory agency, in connection with the transactions contemplated herein will (a) be true and correct in all material respects, (b) comply in all material respects to the extent relevant with the requirements of all securities laws, and the Holding Company Act, the applicable rules and regulations of the Federal Reserve Board thereunder and any other applicable filing requirement, and (c) not include any statement which, on the date made, is false or misleading with respect to any material fact, or omit to include any material fact necessary to make the statements set forth therein not false or misleading. SECTION 5.09 Current Information. From the date of this Agreement to the Effective Time, the Company will cause one or more of its designated representatives to confer on a regular and frequent basis (not less than semi- monthly) with representatives of Acquisition and to report the general status of its ongoing consolidated operations and to deliver to Acquisition (not less than monthly) unaudited consolidated Statements of Condition and related consolidated Statements of Income, changes in stockholders' equity and changes in financial position for the period since the last such report. The Company will promptly notify Acquisition of any material change in the normal course of business or in the operation of the properties of the Company or the Subsidiary. SECTION 5.10 Approval of Company Stockholders. The Company will (a) on or before December 31, 1996 take all steps necessary to duly call, give notice of, convene and hold a meeting of its stockholders for the purpose of approving this Agreement and the transactions contemplated hereby and for such other purposes as may be necessary or desirable (the "Special Meeting"), (b) subject to the fiduciary duties of the Company's Board of Directors as advised by counsel, recommend to its stockholders the adoption and approval of this Agreement and the transactions contemplated hereby and such other matters as may be submitted to its stockholders in connection with this Agreement at the Special Meeting and (c) cooperate and consult with Acquisition with respect to each of the foregoing matters. Subject to the fiduciary duties of the Company's Board of Directors as advised by counsel, the Company will use its best efforts to obtain the necessary approvals by its stockholders of this Agreement and the transactions contemplated hereby. SECTION 5.11 Disclosure Supplements. From time to time prior to the Effective Time, the Company will promptly supplement or amend the Disclosure Schedules delivered in connection herewith with respect to any matter hereafter arising which, if existing, occurring or known at the date of this Agreement, would have been required to be set forth or described in such Disclosure Schedules or which is necessary to correct any information in such Disclosure Schedules which has been rendered inaccurate thereby. No supplement or amendment to such Disclosure Schedules shall have any effect for the purpose of determining satisfaction of the conditions set forth in Section 6.02(a) or 6.03(a) hereof, as the case may be, or the compliance by the Company with the covenants set forth in Section 5.01 hereof. SECTION 5.12 Restructure of Transaction. If necessary to expedite or facilitate the Closing of the Merger and any other transactions contemplated by this Agreement, the parties agree that each will take or perform any additional reasonably necessary or advisable steps to restructure the transaction, provided that any such restructuring will not result in any change in the Merger Consideration or alter the tax treatment of the transactions contemplated hereunder or otherwise materially adversely effect the rights and obligations of any party hereto. SECTION 5.13 Fairness Opinion. The Company undertakes that, as of the date of the Proxy Statement, Baxter Fentriss & Company, the investment banking firm engaged by it, will render a written opinion as to the fairness of the Merger to the stockholders of the Company from a financial point of view. SECTION 5.14 Additional Agreements. Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement. SECTION 5.15 Notices. Each party hereto shall promptly notify the other in writing of any outstanding or threatened claims, legal, administrative or other proceedings, suits, investigations, complaints, notices of violation or other process, or other judgments, orders, directives, injunctions or restrictions of which any executive officer thereof, after due inquiry, has knowledge, against or involving Acquisition, the Company or the Subsidiary or any material or against or involving any officer, director, employee, consultant or stockholder thereof, which could result in a Material Adverse Effect. SECTION 5.16 Employee Stock Ownership Plan and Trust. The Company shall terminate its Employee Stock Ownership Plan and Trust (the "Ownership Plan") at a time reasonably believed to be sufficient to wind up the affairs of the Ownership Plan prior to the Closing. The Company agrees that as of the date of this Agreement the Company will not issue any further securities of the Company under the Ownership Plan. ARTICLE VI CLOSING CONDITIONS SECTION 6.01 Conditions to Each Party's Obligations under this Agreement. The respective obligations of each party to consummate the Merger shall be subject to the fulfillment at or prior to the Effective Time of the following conditions: (a) This Agreement and the transactions contemplated hereby shall have been approved by the affirmative vote of the holders of outstanding shares of Company Common Stock in accordance with applicable law. (b) All necessary regulatory approvals required to consummate the transactions contemplated hereby shall have been obtained and shall remain in full force and effect and all statutory waiting periods in respect thereof shall have expired. (c) Baxter Fentriss & Company shall have rendered it written opinion to the Company that the Merger Consideration is fair to the stockholders of the Company (other than those persons owning, or holding a right to acquire, stock of Acquisition immediately prior to or immediately after the Effective Time) from a financial point of view. (d) Neither Acquisition, the Company nor the Subsidiary shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits the consummation of the Merger. (e) The closing of this transaction shall take place on or before March 31, 1997. SECTION 6.02 Conditions to the Obligations of Acquisition under this Agreement. The obligations of Acquisition to consummate the Merger shall be further subject to the satisfaction, at or prior to the Effective Time, of the following conditions, any one or more of which may be waived by Acquisition: (a) Each of the agreements, covenants and obligations of the Company required to be performed by it at or prior to the Closing pursuant to the terms of this Agreement shall have been duly performed and complied with in all material respects, and the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Effective Time as though made at and as of the Effective Time (except as to any representation or warranty which specifically relates to an earlier date), and Acquisition shall have received a certificate to that effect signed by the president and the senior financial officer of the Company. (b) There shall have not occurred after the date hereof any Material Adverse Change in the business, operations, properties, prospects, condition (financial or otherwise), assets, liabilities or reserves of the Company and the Subsidiary taken as a whole or of the Subsidiary taken individually. (c) All action required to be taken by or on the part of the Company to authorize the execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby shall have been duly and validly taken by the Board of Directors and stockholders of the Company, and Acquisition shall have received certified copies of the resolutions evidencing such authorization. (d) Any and all permits, consents, waivers, clearances, approvals and authorizations of all third parties and governmental bodies required to be obtained by the Company or the Subsidiary shall have been obtained by the Company and the Subsidiary which are necessary in connection with the consummation of the Merger and the other transactions contemplated hereby. None of the approvals contained in Section 6.01(b) hereof shall contain any term or condition which would materially impair the value of the Company and the Subsidiary taken as a whole or of the Subsidiary individually to Acquisition. (e) Acquisition shall have received an opinion, dated the date of the Closing in form satisfactory to Acquisition from Nossaman, Guthner, Knox & Elliott, counsel to the Company, to the effect set forth in the form of opinion delivered to Acquisition by the Company on the date hereof. (f) The Company shall have caused to be delivered to Acquisition letters from independent public accountants, with respect to the Company, dated the date on which the Proxy Statement is mailed to the stockholders of the Company, and dated the date of the Closing, and addressed to Acquisition, the Company and the Subsidiary, covering such matters as Acquisition shall reasonably request with respect to facts concerning the Company's financial condition. (g) Stockholders of Dissenting Shares shall hold no more than 10% of the outstanding shares of Company Common Stock. (h) Acquisition shall have received, the written resignations of each of the Company's and Subsidiary's directors and the written resignation of each of the Company's officers, effective as of the date of the Closing. (i) Acquisition shall have received current Phase I and Phase II environmental assessments of the properties of the Company and subsidiary satisfactory to it in its sole discretion. (j) The Directors of the Company shall have executed and delivered to Acquisition a form of Voting Agreement substantially in the form of Exhibit D attached hereto. (k) The Company shall have executed and delivered to Acquisition the Option Agreement substantially in the form of Exhibit E attached hereto. (l) The Company shall have delivered to Acquisition audited consolidated financial statements as of and for the fiscal year ended December 31, 1996, which financial statement (i) will be prepared in accordance with generally accepted accounting principles consistently applied, (ii) will fairly reflect the respective financial positions of the Company and the Subsidiary, as of such date, and the respective results of operation of the Company and the Subsidiary, for the period then ended on such date, and (iii) reflect in accordance with generally accepted accounting principles consistently applied, adequate provisions for, or reserves against, the possible loan losses of the Company and the Subsidiary, as of such date. (m) The Company shall have delivered to Acquisition a satisfactory title policy insuring title to all real property and Acquisition shall have received a survey or surveys of all real property reasonably satisfactory to Acquisition. (n) The Company shall deliver a list, certified by the secretary thereof, of those loans which have been collected and are considered recovered pursuant Section 3 of the Escrow Agreement between the Company and Acquisition dated the date hereof. (o) The Company shall have received a written opinion from Baxter Fentriss & Company (the "Fairness Opinion") that the terms of the Merger are fair to the stockholders of the Company from a financial point of view. The Company will furnish Acquisition with such other certificates of its officers or others and such other documents to evidence fulfillment of the conditions set forth in this Section 6.02 as Acquisition may reasonably request. SECTION 6.03 Conditions to the Obligations of the Company under this Agreement. The obligations of the Company to consummate the Merger shall be further subject to the satisfaction, at or prior to the Effective Time, of the following conditions, any one or more of which may be waived by the Company: (a) Each of the agreements, covenants and obligations of Acquisition required to be performed by it at or prior to the Closing pursuant to the terms of this Agreement shall have been duly performed and complied with in all material respects, and the representations and warranties of Acquisition contained in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Effective Time as though made at and as of the Effective Time (except as to any representation or warranty which specifically relates to an earlier date), and the Company shall have received a certificate to that effect signed by the president and chief financial officer of Acquisition. (b) There shall not have occurred after the date hereof any Material Adverse Change in the business, operations, properties, prospects, condition (financial or otherwise), assets, liabilities or reserves of Acquisition. (c) All action required to be taken by, or on the part of, Acquisition to authorize the execution, delivery and performance of this Agreement by Acquisition and the consummation by Acquisition of the transactions contemplated hereby shall have been duly and validly taken by the Board of Directors of Acquisition and the Company shall have received certified copies of the resolutions evidencing such authorizations. (d) Any and all permits, consents, waivers, clearances, approvals and authorizations of all third parties and governmental bodies required to be obtained by Acquisition shall have been obtained by Acquisition which are necessary in connection with the consummation of the Merger and the other transactions contemplated hereby. (e) The Company shall have received an opinion from Bell, Boyd & Lloyd in form satisfactory to the Company dated the date of the Closing, to the effect set forth in the forms of opinion delivered to the Company by Acquisition on the date hereof. (f) The Company shall have received the Fairness Opinion from Baxter Fentriss & Company in form satisfactory to its Board of Directors as to the fairness from a financial point of view to the stockholders of the Company of the transactions contemplated by this Agreement. Acquisition will furnish the Company with such certificates of their officers or others and such other documents to evidence fulfillment of the conditions set forth in this Section 6.03 as the Company may reasonably request. ARTICLE VII CLOSING SECTION 7.01 Closing. The closing of the transactions contemplated by this Agreement shall take place at the offices of Bell, Boyd & Lloyd, 70 West Madison Street, Suite 3200, Chicago, Illinois 60602, at 10:00 a.m., local time, on the last business day of the month following the day on which the latest of the following occur: (i) the date of the stockholders' meeting referred to in Section 5.10 or (ii) the day on which the last of the conditions set forth in Article Six is fulfilled or waived, or at such other time and place and on such other date as Acquisition and the Company shall agree (the "Closing"). SECTION 7.02 Deliveries at the Closing. Subject to the provisions of Articles Six and Eight hereof, at the Closing there shall be delivered to Acquisition and the Company the opinions, certificates and other documents and instruments to be delivered under Article Six hereof. SECTION 7.03 Filings at the Closing. Subject to the provisions of Articles Six and Eight hereof, Acquisition and the Company shall immediately after the closing cause a certificate of merger to be filed and recorded in accordance with the provisions of Section 251 of the DGCL, cause an agreement of merger to be filed and recorded in accordance with the provisions of Section 1103 of the CCC, and shall take any and all other lawful actions and do any and all other lawful things necessary to cause the Merger to become effective. ARTICLE VIII TERMINATION AND ABANDONMENT SECTION 8.01 Termination. This Agreement may be terminated and the Merger contemplated hereby may be abandoned at any time prior to the Effective Time, whether before or after approval of the Merger by the stockholders of the Company: (a) by mutual consent of the Board of Directors of Acquisition and of the Company, (b) by Acquisition: (i) if (A) the Company shall have withdrawn or modified, in a manner adverse to Acquisition, its approval or recommendation of this Agreement or the Merger, (B) the Board of Directors of the Company shall have formally resolved to do any of the foregoing or (C) upon a written request to reaffirm the Company's approval or recommendation of this Agreement or the Merger, the Board of Directors of the Company shall fail to do so within two business days after such request is made; or (ii) if the Company fails to perform in any material respect any of its material obligations under this Agreement and such failure shall not have been remedied within three business days after receipt by the Company of notice in writing from Acquisition specifying the nature of such breach and requesting that it be remedied; (c) by the Company if Acquisition fails to perform in any material respect any of its material obligations under this Agreement and such failure shall not have been remedied within three business days after receipt by Acquisition of notice in writing from the Company specifying the nature of such breach and requesting that it be remedied; or (d) by either Acquisition or the Company: (i) if a court of competent jurisdiction or governmental, regulatory or administrative agency or commission shall have issued an order, decree or ruling or taken any other action (which order, decree or ruling the parties hereto shall use their best efforts to lift), in each case permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, and such order, decree, ruling or other action shall have become final and nonappealable; (ii) if the Closing has not occurred on or before March 31, 1997 unless due to a delay in regulatory approval, including but not limited to, the Justice Department, the Federal Reserve Board or the Office of the Comptroller of the Currency, in which case the Cash Consideration shall be increased by $0.07 per month for each full month which elapses between March 31, 1997 and the Closing; provided, that the right to terminate this Agreement and the right to receive the additional Cash Consideration shall not be available to any party whose material breach of this Agreement has been the cause of, or resulted in, the failure of the Merger to occur on or before March 31, 1997; and, provided further, that in no event shall this Agreement remain in effect if the Closing has not occurred on or before June 30, 1997; or (iii) if the Company's stockholders fail to approve the Merger by the affirmative vote of a majority of the outstanding shares of Company Common Stock at the meeting held for that purpose. SECTION 8.02 Procedure and Effect of Termination. In the event of termination and abandonment of the Merger by the Company or Acquisition or each of them pursuant to Section 8.01 hereof, written notice thereof shall forthwith be given to the other and this Agreement shall terminate and the Merger shall be abandoned, without further action by any of the parties hereto. If this Agreement is terminated as provided herein: (a) upon request therefor, each party will redeliver all documents, work papers and other material of any other party relating to the transactions contemplated hereby, whether obtained before or after the execution hereof, to the party furnishing the same; and (b) No party hereto shall have any liability or further obligation to any other party to this Agreement, other than for liquidated damages provided pursuant to Section 5.03 hereof. ARTICLE IX MISCELLANEOUS PROVISIONS SECTION 9.01 Officers of the Subsidiary After the Effective Time. Upon the Merger becoming effective, all of the officers and employees of the Subsidiary shall continue in the same positions except as otherwise expressly agreed herein. SECTION 9.02 Investigation: Survival of Warranties. The respective representations and warranties of Acquisition and the Company contained herein or in any certificates or other documents delivered prior to or at the Closing shall not be deemed waived or otherwise affected by any investigation made by any party hereto. Each and every such representation and warranty shall expire with, and be terminated and extinguished by, the Merger. This Section 9.02 shall have no effect upon any other obligation of the parties hereto, whether to be performed before or after the Closing. SECTION 9.03 Waiver of Compliance: Consents. Any failure of Acquisition, on the one hand, or the Company, on the other hand, to comply with any obligation, covenant, agreement or condition contained herein may be waived in writing by the Company or Acquisition, respectively, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits consent by or on behalf of any party hereto, such consent shall be given in writing in a manner consistent with the requirements for a waiver of compliance as set forth in this Section 9.03. SECTION 9.04 Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. SECTION 9.05 Brokerage Fees and Commissions. The Company hereby represents and warrants to Acquisition with respect to the Company, and Acquisition hereby represents and warrants to the Company with respect to Acquisition, that no person or entity is entitled to receive from the Company, on the one hand, or Acquisition, on the other hand, respectively, any investment banking, brokerage or finder's fee or fees for financial consulting or advisory services in connection with this Agreement or the transactions contemplated hereby, except for fees owed Baxter Fentriss & Company which fees shall be paid by Company and shall not exceed $170,000 and the fees owed Peter Behr and Dan Hyland which fees shall be paid by Acquisition. SECTION 9.06 Expenses and Obligations. The parties agree that Acquisition and the Company shall each be responsible for its own costs and expenses relating to the negotiation and consummation of this Agreement whether the transaction is or is not closed; provided, however, that the Company covenants to Acquisition that only costs which are reasonable and necessary shall be incurred in connection with the consummation of this Agreement, including fees for attorneys, accountants or advisors or others; and provided further that Acquisition shall pay the costs of the Phase I and Phase II environmental assessments referred to in Section 6.02(i). SECTION 9.07 Option Agreement. Acquisition and the Company confirm that the execution and delivery of the Option Agreement (referred to in Section 6.02 (k)) constitutes a material inducement to them to enter into this Agreement and that absent the execution and delivery of the Option Agreement they would not enter into this Agreement on the terms and subject to the conditions contained herein. SECTION 9.08 Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement. SECTION 9.09 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, by telegram or telex or by facsimile transmission (upon receipt of confirmation of delivery thereof) or two business days after mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Acquisition, or to the Company after the Effective Time, to: TRP Acquisition Corp. 803 Burr Ridge Club Drive Burr Ridge, Illinois 60521 Attention: Denis Daly Telecopy: (630) 789-0439 with a copy to: Bell, Boyd & Lloyd Suite 3200 70 West Madison Street Chicago, Illinois 60602 Attention: James F. X. Fahy Telecopy: (312) 372-2098 (b) if to the Company prior to the Effective Time, to: Trans Pacific Bancorp 44 Second Street San Francisco, California 94105 Attention: Eddy S.F. Chan Telecopy: with a copy to: Nossaman, Guthner, Knox & Elliott 50 California, 34th Floor San Francisco, California 94111 Attention: Stanley S. Taylor Telecopy: (415) 398-2438 SECTION 9.10 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to the conflicts-of-laws rules thereof. SECTION 9.11 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. SECTION 9.12 Headings. The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties, and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 9.13 Certain Definitions. For purposes of this Agreement, the term: (a) "affiliate" means a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, another person; and (b) "person" shall mean an individual, corporation, partnership, association, trust, unincorporated organization or, as applicable, any other entity; and (c) "Material Adverse Change" or "Material Adverse Effect" shall mean any change in or effect on the business, operations, prospects, properties, assets or liabilities of the Company and the Subsidiary taken as a whole or of the Subsidiary taken individually on one hand, or Acquisition on the other hand, as applicable, that would be materially adverse to the business, operations, properties, prospects, condition (financial or otherwise), assets or liabilities of the Company and the Subsidiary taken as a whole or of the Subsidiary taken individually on one hand, or Acquisition on the other hand, respectively. SECTION 9.l4 Specific Performance. The parties hereto agree that, if for any reason any party hereto shall have failed to perform its obligations under this Agreement, then any other party hereto seeking to enforce this Agreement against such non-performing party shall be entitled to specific performance and injunctive and other equitable relief. This provision is without prejudice to any other rights that any party hereto may have against any other party hereto for any failure to perform its obligations under this Agreement. SECTION 9.15 Entire Agreement: Assignment. This Agreement, including the exhibits hereto and the documents and instruments referred to herein embody the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein or therein. There are no agreements, restrictions, promises, representations, warranties, covenants or undertakings other than those expressly set forth or referred to herein or therein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. This Agreement shall not be assigned by operation of law or otherwise, except that it may be assigned (other than the obligations in Article Two) by Acquisition to one or more of its wholly-owned subsidiaries which agree in writing to be bound by the provisions hereof, provided that Acquisition remains obligated under this Agreement. SECTION 9.16 Amendment and Modification. This Agreement may be amended by the Company and Acquisition at any time before or after the adoption of this Agreement by the stockholders of the Company, but after any such approval, no amendment shall be made which reduces the amount of the Merger Consideration or which adversely affects the Company's stockholders hereunder without the approval of such stockholders (other than one which eliminates any or all of the Escrow Fund, prior to closing, in exchange for an increase in the Cash Consideration, to the extent permitted by law). Any such amendment must be accomplished by an instrument in writing signed on behalf of all the parties. SECTION 9.17 Arbitration. Any dispute arising out of or in connection with the liquidated damages provisions of Section 5.03, including any question regarding its interpretation or validity, shall be referred to and definitively resolved by binding arbitration pursuant to the California Code of Civil Procedures Section 1280, et. seq., and in accordance with the commercial arbitration procedures of the American Arbitration Association, which procedures are deemed to be incorporated by reference into this Section 9.17. Discovery may be obtained by any party in accordance with the California Code of Civil Procedure Section 1283.05. The place of arbitration shall be San Francisco, California. The Judgment of the arbitration tribunal shall be accompanied by a written statement of the basis for such judgment and may be enforced by any court having proper jurisdiction. The provisions of this Section 9.17 shall survive the termination of this Agreement. * * * SIGNATURES ON FOLLOWING PAGE * * * IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. TRP ACQUISITION CORP., a Delaware corporation By: /s/ Denis Daly, Sr. Name: Title: President TRANS PACIFIC BANCORP, a California corporation By: /s/ Eddy S. F. Chan Name: Title: President CERTIFICATE OF MERGER OF TRP ACQUISITION, CORP. AND TRANS PACIFIC BANCORP It is hereby certified that: 1. The constituent business corporations participating in the merger are: (i) TRP Acquisition, Corp., which is incorporated under the laws of the State of Delaware; and (ii) Trans Pacific Bancorp which is incorporated under the laws of the State of California. 2. An agreement and plan of merger has been approved, adopted, certified, executed, and acknowledged by each of the constituent corporations in accordance with the provisions of subsection (c) of Section 252 of the Delaware General Corporation Law. 3. The name of the surviving corporation in the merger is Trans Pacific Bancorp which will continue its existence under its present name upon the effective date of the merger pursuant to the provisions of the California Corporation Code. 4. The Articles of Incorporation of the Trans Pacific Bancorp will be the articles of incorporation of the surviving corporation until amended and changed in accordance with the provisions of the California Corporation Code. 5. The executed agreement and plan of merger between the constituent corporations is on file at the principal place of business of the surviving corporation, the address of which is as follows: Trans Pacific Bancorp 44 Second Street San Francisco, CA 94105 6. The surviving corporation will furnish a copy of the agreement and plan of merger, on request and without cost, to any stockholder of the constituent corporations. 7. Trans Pacific Bancorp agrees that it may be served with process in the State of Delaware in any proceeding for enforcement of any obligation of any constituent corporation of the State of Delaware, as well as for enforcement of any obligation of the surviving or resulting corporation arising from the merger or consolidation, including any suit or other proceeding to enforce the right of any stockholders as determined in appraisal proceedings pursuant to the provisions of 262 of the Delaware General Corporation Law, and irrevocably appoints the Secretary of State as its agent to accept service of process in any suit or other proceedings and specifies that its address to which a copy of such process shall be mailed by the Secretary of State of Delaware is: Trans Pacific Bancorp, 44 Second Street, San Francisco, CA 94105. Dated: March __, 1997. TRP ACQUISITION, CORP., a Delaware corporation By: Denis J. Daly, Sr. President Dated: March __, 1997. TRANS PACIFIC BANCORP, a California corporation By: Eddy S.F. Chan President AGREEMENT OF MERGER OF TRP ACQUISITION CORP (a Delaware corporation) AND TRANS PACIFIC BANCORP (a California corporation) THIS AGREEMENT OF MERGER is made and entered into as of this ___th day of March, 1997, by and between TRP ACQUISITION CORP, a Delaware corporation ("Acquisition"), and TRANS PACIFIC BANCORP, a California corporation (the "Company"). W I T N E S S E T H: WHEREAS, the respective Boards of Directors and shareholders of Acquisition and the Company have approved as desirable and in the best interests of each corporation that Acquisition be merged with and into the Company by a statutory merger upon the terms and conditions hereinafter set forth. NOW, THEREFORE IT IS AGREED AS FOLLOWS: FIRST: Acquisition shall be merged with and into the Company by a statutory merger (the "Merger") in accordance with the General Corporation Law of California and on the terms and conditions hereinafter expressed. At the Effective Time of the Merger (as hereinafter defined), the separate existence of Acquisition shall cease and the Company shall be the surviving corporation (the "Surviving Corporation"). SECOND: The Merger shall be effective (the "Effective Time") as of March 14, 1997 or on such day and at such time as soon as possible thereafter on which this Agreement of Merger and appropriate certificates of its approval and adoption shall have been filed with the Secretary of State of the State of California in accordance with Section 1103 of the General Corporation Law of the State of California. THIRD: The manner of converting the shares of the capital stock of Acquisition upon the Merger shall, by virtue of the Merger and without any action on the part of the holders thereof, be as follows: (a) Each share of common stock, no par value per share, of the Company (the "Company Common Stock") issued and outstanding immediately prior to the Effective Time (except for shares of Company Common Stock then owned beneficially or of record by Acquisition, shares held by any subsidiary of the Company and any shares which are dissenting shares shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into the right to receive $8.00 in cash, plus an amount equal to (i) the Escrow Reduction Amount (as hereinafter defined), divided by (ii) the sum of (x) the total number of shares issued and outstanding immediately prior to the Closing and (z) the number of options outstanding, payable to the holder thereof, without interest thereon, upon surrender of the certificate representing such share, and such holder's pro rata share of the Escrow Fund (as hereinafter defined), if any, payable to stockholders of the Company pursuant to the terms of the Escrow Agreement between the Company and Acquisition, dated as of October 18, 1996 (the "Escrow Agreement"). (b) Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time which is then owned beneficially or of record by Acquisition shall, by virtue of the Merger and without any action on the part of the holder thereof, be canceled and retired and cease to exist, without any conversion thereof. (c) Each share of Company Common Stock held by any subsidiary of the Company immediately prior to the Effective Time shall, by virtue of the Merger, be canceled and retired and cease to exist, without any conversion thereof. (d) Each share of common stock of Acquisition issued and outstanding immediately prior to the Effective Time of the Merger shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into one share of the common stock of the Surviving Corporation. (e) At the Effective Time, Acquisition shall deposit in trust with the Escrow Agent (as defined in the Escrow Agreement) cash in an amount equal to $740,626, less the amount by which the escrow deposit may be reduced pursuant to the provisions of the Escrow Agreement between the date hereof and the Closing (the "Escrow Reduction Amount"). The $740,626 less the Escrow Reduction Amount (the "Escrow Fund") shall be divided into two separate funds pursuant to the Escrow Agreement. Trans Pacific National Bank, a wholly owned subsidiary of the Company, as escrow agent, will administer the Escrow Fund and release, in cash, portions of the Escrow Fund promptly as such amounts become payable pursuant to the terms of the Escrow Agreement. (f) If the Closing has not occurred on or before March 31, 1997 unless due to a delay in regulatory approval, including but not limited to, the Justice Department, the Federal Reserve Board or the Office of the Comptroller of the Currency, in which case the Cash Consideration shall be increased by $0.07 per month for each full month which elapses between March 31, 1997 and the Closing; provided, that the right to terminate this Agreement and the right to receive the additional Cash Consideration shall not be available to any party whose material breach of this Agreement has been the cause of, or resulted in, the failure of the Merger to occur on or before March 31, 1997. FOURTH: At the Effective Time of the Merger, the Articles of Incorporation of the Surviving Corporation shall be amended in its entirety to read in full as set forth on Exhibit A attached hereto and made a part hereof. FIFTH: Denis J. Daly, Sr, John H. Daly and James F.X. Fahy shall be the directors of the Surviving Corporation, each of whom shall serve until his death, resignation, removal, or until his successor shall be elected in accordance with law and the Articles of Incorporation and By-Laws of the Surviving Corporation. SIXTH: The shareholders of the Company have approved this Agreement of Merger in accordance with the General Corporation Law of the State of California. SEVENTH: Prior to the filing of this Agreement of Merger with the Secretary of State of the State of California, this Agreement of Merger may be terminated by the agreement of the Boards of Directors of Acquisition and the Company notwithstanding approval of this Agreement of Merger by the shareholders of the Company. * * * SIGNATURE ON FOLLOWING PAGE * * * IN WITNESS WHEREOF, Acquisition and the Company pursuant to the approval and authority duly given by resolutions adopted by their respective Boards of Directors, have caused these presents to be executed by the Chairman of the Board, President or Vice-President and by the Assistant Secretary or Secretary of each party hereto. TRP ACQUISITION CORP. By President By Secretary TRANS PACIFIC BANCORP By President By Secretary CERTIFICATE OF APPROVAL OF AGREEMENT OF MERGER The undersigned hereby certify as follows: (1) They are the President and Secretary, respectively, of TRP Acquisition Corp., a Delaware corporation ("Acquisition"). (2) The Agreement of Merger in the form attached was duly approved by the board of directors of Acquisition. (3) The shareholder approval of the principal terms of the Agreement of Merger in the form attached was by unanimous written consent of the shareholders held on due notice, by the holders of the outstanding shares of Acquisition having an aggregate number of votes which exceed the number of votes required for approval of the Agreement of Merger. (4) Acquisition has outstanding only one class of common stock, $0.01 par value, and the number of shares outstanding is 2,000, all of which were entitled to vote on the Agreement of Merger. Such class is the only class of acquisition stock entitled to vote on the Agreement of Merger. The percentage vote of such shareholders required to approve such Agreement of Merger is 50% plus one vote. President Secretary The undersigned declare under penalty of perjury that the matters set forth in the foregoing certificate are true of their own knowledge. Executed in the City of Chicago, County of Cook on __________, 199__. President Secretary CERTIFICATE OF APPROVAL OF AGREEMENT OF MERGER The undersigned hereby certify as follows: (1) They are the President and Secretary, respectively, of Trans Pacific Bancorp, a California corporation (the "Company"). (2) The Agreement of Merger in the form attached was duly approved by the board of directors of the Company. (3) The shareholder approval of the principal terms of the Agreement of Merger in the form attached was by a meeting of the shareholders held on due notice, by the holders of the outstanding shares of the Company having an aggregate number of votes which exceed the number of votes required for approval of the Agreement of Merger. (4) The Company has outstanding only one class of common stock, no par value, and the number of shares outstanding is 1,120,195, all of which were entitled to vote on the Agreement of Merger. Such class is the only class of Company stock entitled to vote on the Agreement of Merger. The percentage vote of such shareholders required to approve such Agreement of Merger is 50% plus one vote. President Secretary The undersigned declare under penalty of perjury that the matters set forth in the foregoing certificate are true of their own knowledge. Executed in the City of San Francisco, County of San Francisco on __________, 199__. President Secretary ESCROW AGREEMENT THIS ESCROW AGREEMENT (this "Agreement") is made this 18th day of October, 1996, by and among Trans Pacific Bancorp, a California corporation (the "Company"), TRP Acquisition Corp., a Delaware corporation ("Acquisition"), and Trans Pacific National Bank, as escrow agent (the "Escrow Agent" or "Bank"). Recitals WHEREAS the Company and Acquisition have entered into an Agreement and Plan of Merger dated the same date hereof (the "Merger Agreement"). A copy of the Merger Agreement is attached as Exhibit A, and is incorporated by this reference into, and thereby made a part of this Agreement. WHEREAS pursuant to the Merger Agreement Acquisition shall be merged with and into the Company on the date of the Closing. Following the merger, the separate existence of Acquisition shall cease, and the Company shall continue as the Surviving Corporation in the Merger. WHEREAS pursuant to the terms of the Merger Agreement each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (except for shares of Company Common Stock then owned beneficially or of record by Acquisition, shares held in the Company's treasury or by any subsidiary of the Company and any shares which are Dissenting Shares) shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into the right to receive the Cash Consideration and the Escrow Consideration (as hereinafter defined). Covenants In consideration of the mutual representations, warranties and covenants and subject to the conditions herein contained, the parties hereto agree as follows: SECTION 1 Preamble; Recitals. The Preamble and Recitals set forth above are hereby incorporated in and made a part of this Agreement. SECTION 2 Definitions. Capitalized terms used in this Agreement, unless otherwise defined, shall have the same meaning as in the Merger Agreement. SECTION 3 Establishment of Escrow; Escrow Fund. (a) At the Effective Time, Acquisition shall deposit in trust with the Escrow Agent cash in an amount equal to the sum of (i) $300,000 ("Fund A") and (ii) $440,626 less any and all Recoveries as defined in subsection (b) of this Section 3 below ("Fund B"), and any such reduction shall increase the consideration received by those holders of Company Common Stock immediately prior to the Closing pursuant to Section 2.01 of the Merger Agreement and the Option Holders pursuant to Section 2.05 of the Merger Agreement. The funds held in trust and available for the purposes hereinafter described (collectively the "Escrow Funds" or the "Escrow Consideration") shall consist of the initial amounts in cash deposited with the Escrow Agent by Acquisition, plus the income earned thereon net of the tax effect at an effective Federal and State tax rate of 39 percent (the "Tax Effect") less the amount of (i) any payment from the Escrow Funds made pursuant to this Agreement and (ii) any investment losses net of the Tax Effect. (b) Recoveries shall equal the sum of (i) the aggregate gross amount of loans collected or recovered by the Bank from July 31, 1996 until the Closing, net of the Tax Effect, for those loans previously charged off on the books and records of the Bank and listed on Exhibit B, attached hereto, and (ii) any principal payments, net of a 39% reduction, made to the Bank, from the date hereof until the Closing, on any or all of the loans identified on Exhibit C, attached hereto. SECTION 4 Investment of and Accounting for Escrow Funds. The Escrow Agent shall hold and maintain Escrow Funds A and B in its name as Escrow Agent under this Agreement. The Escrow Agent shall separately invest and reinvest the Escrow Funds A and B in its sole discretion in any one or more of the following: (i) Marketable obligations of or guaranteed by the United States of America, or (ii) A savings account in, or certificates of deposit or banker's acceptances issued by, any national bank including the Escrow Agent. The maturity date of any investment shall not extend beyond 60 days from the date of the investment. SECTION 5 Events Giving Rise to Escrow Payments and Payments to Acquisition. (a) Upon the complete resolution of the status of Account numbered 01-212456 on the books of the bank on the date hereof (the "Account"), whether by litigation, settlement or otherwise, the Escrow Agent shall pay out of Escrow Fund A to Acquisition or its assignees an amount equal to (i) any judgment, settlement or award assessed against or any other liability charged to the Subsidiary relating to the Account net of the Tax Effect and (ii) any costs which Acquisition or the Subsidiary shall have reasonably incurred in the resolution or settlement of the above matter, such cost shall include, but are not limited to, reasonable legal, accounting, investigative support, and other fees and expenses net of the Tax Effect. Upon such resolution the Escrow Agent shall pay to the Former Stockholders and Option Holders, pursuant to Section 6, Escrow Fund A, less those liabilities, costs, fees and expenses paid to Acquisition pursuant to the forgoing sentence. (b) Upon the running of all statute of limitations applicable to any and all claims related to the Account, the Escrow Agent shall pay out of Escrow Fund A to Acquisition or its assignees an amount equal to (i) any judgment, settlement or award assessed against or any other liability charged to the Subsidiary relating to the Account net of the Tax Effect and (ii) any costs which Acquisition or the Subsidiary shall have reasonably incurred in the resolution or settlement of the above matter, such cost shall include, but are not limited to, reasonable legal, accounting, investigative support, and other fees and expenses net of the Tax Effect. Upon the running of such statutes of limitation the Escrow Agent shall pay to the Former Stockholders and Option Holders, pursuant to Section 6, Escrow Fund A, less those liabilities, costs, fees and expenses paid to Acquisition pursuant to the forgoing sentence. (c) Within 30 days after the third anniversary of the Closing, the Escrow Agent shall pay out of Escrow Fund B to Acquisition or its assignees an amount equal to (i) gross loan charge-offs -- in excess of (x) the amount previously reserved as of July 31, 1996, as shown on Exhibit C, and (y) those payments on associated loan guarantees actually received (with the maximum amount of such guarantees shown on Exhibit C) -- as recorded on the books and records of the Bank, during the term of Escrow Fund B, on any or all of the loans identified on Exhibit C, net of the Tax Effect; less the aggregate gross amount of loans collected or recovered by the Bank, net of the Tax Effect, from the Closing until the third anniversary thereof, for those loans previously charged off on the books and records of the Bank and listed on Exhibit B, and (ii) all fees, costs and expenses reasonably incurred by Acquisition or the Subsidiary relating to the collection, recovery, or attempt thereof, of the loans identified on Exhibit B and C, net of the Tax Effect. Within 30 days after the third anniversary of the Closing, the Escrow Agent shall pay to the Former Stockholders and Option Holders, pursuant to Section 6, Escrow Fund B, less those amounts paid to Acquisition pursuant to the forgoing sentence. (d) Illustrative examples of calculations have been attached hereto to assist in the preparation of payment calculations, however the language of this Agreement shall take precedence over such examples in all circumstances. SECTION 6 Escrow Payment to Former Stockholders and Option Holders. (a) Each Escrow Payment shall be payable to the Former Stockholders and the Option Holders in the following portions: (i) The Former Stockholders shall receive that portion determined by multiplying the Escrow Payment by a fraction the numerator of which is (A) number of shares of Company Common Stock owned by all the Former Stockholders ("Number of Shares") and the denominator of which is (B) the Number of Shares plus the sum of all the Number of Options held by all the Option Holders (the "Former Stockholders Sum"); (ii) The Option Holders shall receive that portion equal to the Escrow Payment less the Former Stockholders Sum (the "Option Holders Sum"). (b) Upon the occurrence of an event giving rise to an Escrow Payment, the Escrow Agent shall disburse to each Former Stockholder a pro rata share of the Former Stockholders Sum determined by multiplying the Former Stockholders Sum by a fraction the numerator of which is (A) the number of shares of Company Common Stock owned by the a Former Stockholder and the denominator of which is (B) the Number of Shares. (c) Upon the occurrence of an event giving rise to an Escrow Payment, the Escrow Agent shall disburse to each Option Holder a pro rata share of the Option Holders Sum determined by multiplying the Option Holders Sum by a fraction the numerator of which is (A) the Number of Options held by an Option Holder and the denominator of which is (B) the sum of all the Number of Options held by all the Option Holders. SECTION 7 Periodic Reports to Former Stockholders. For so long as any of the Escrow Funds provided for herein remain in effect, Acquisition shall, not less than annually, provide a written report to the Former Stockholders regarding the status of judgments, settlements or awards assessed against the Bank pursuant to the Account and collections, recoveries, write offs and write downs of the loans identified on Exhibits B and C hereof. The first such report shall be due within thirty days after the first anniversary of the Closing and thereafter within 30 days of any subsequent anniversary. Reports shall be mailed to each Former Stockholder at the last address of record at the Bank. Each such report shall be certified by the Chief Financial Officer and the Senior Lending Officer of the Bank as true and correct in all material respects. At the written request of Former Stockholders who, in the aggregate, held a minimum of 20% of the outstanding shares of the Company Common Stock, the cost of which shall be charged against Escrow Fund B as an expense of the escrow, Acquisition shall retain an independent loan analyst not otherwise retained by or affiliated with Acquisition or any affiliate thereof, to review and report to the Former Stockholders, on the status of the loans identified on Exhibit B and C, on the efforts of Acquisition and the Subsidiary to maximize recoveries and collection of such loans, and on the reasonableness of expenses incurred by Acquisition and the Subsidiary in connection therewith. No more than one such request need be honored by Acquisition in any 12 month period. SECTION 8 Limitations on Liability of Escrow Agent; Indemnification. (a) The Escrow Agent shall have no responsibility or liability for any diminution of the Escrow Funds which may result from any investment made pursuant to Section 3 above. (b) The Escrow Agent shall not be responsible for the genuineness of any signature or document presented to it pursuant to this Agreement and may rely conclusively upon and shall be protected in acting upon any arbitration or judicial order or decree, certificate, notice, request, consent, statement, instruction or other instrument believed by it in good faith to be genuine or to be signed or presented by the proper person hereunder, or duly authorized by such person or properly made. The Escrow Agent may require such evidence, documents, certificates or opinions as it deems appropriate. (c) Before taking any action under this Agreement if in doubt regarding its obligations, the Escrow Agent may file an appropriate action with, and seek instruction from, an arbitrator or any court of competent jurisdiction in the State of California (the "Court") in accordance with the terms and provisions of this Agreement. (d) The Escrow Agent may retain counsel and act in reliance upon the advice of such counsel in all matters pertaining to this Agreement and shall not be liable for any action taken or omitted by it in good faith in accordance with such advice. (e) The duties and obligations of the Escrow Agent under this Agreement shall be governed solely by the provisions of this Agreement. The Escrowee shall have no duties other than the duties expressly imposed upon it in this Agreement and shall not be required to take any action other than in accordance with the terms hereof. (f) In the event of any controversy or dispute under this Agreement or with respect to any question as to the construction of this Agreement, or any action to be taken by the Escrow Agent hereunder, the Escrow Agent shall incur no liability for any action taken or suffered in good faith. The Escrow Agent shall be liable only for gross negligence or willful misconduct on its part. (g) The parties hereto jointly and severally shall forever indemnify, defend and hold harmless the Escrowee from and against any costs, losses, expenses (including reasonable attorneys' fees), damages, liabilities and judgments incurred by the Escrow Agent as a consequence of any action taken or omitted to be taken by it in the performance of its obligations under this Agreement, with the exception of any costs, losses, expenses, liabilities and damages arising from the Escrow Agent's gross negligence or willful misconduct. SECTION 9 Fees and Expenses of Escrowee. The Escrow Agent's fees shall be paid by the Surviving Corporation. The expense of an audit or review requested by the Former Stockholders, pursuant to Section 7, shall be paid for out of Escrow Fund B. SECTION 10 Notices and Communications. Any notice or other communication under this Agreement shall be in writing or by written telecommunication. A notice or other communication to a party shall be deemed to have been duly given or made on the earlier of (a) the date of receipt or (b) 4 business days after the date posted by registered or certified mail, return receipt requested, in any post office in the United States of America, postage prepaid, and addressed to the party at the address set forth in Section 9.08 of the Merger Agreement or at such other address as such party shall designate by written notice to the other parties. SECTION 11 Term; Amendments; Successors. This Agreement shall continue until the date on which all of the Escrow Funds have been distributed as provided in Sections 5 and 6 hereof. This Agreement may be amended only in writing by an instrument signed by all parties and shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. SECTION 12 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. In making proof of this Agreement it shall be necessary to produce or account for only one such counterpart signed by or on behalf of the party sought to be charged herewith. SECTION 13 Entire Agreement. This Agreement contains the entire agreement and understanding of the parties with respect to the transactions contemplated hereby. No prior agreement, either written or oral, shall be construed to change, amend, alter, repeal or invalidate this Agreement. SECTION 14 Best Efforts. Acquisition and the Subsidiary agree to use their best efforts, consistent with reasonable and fiscally prudent collection practices, to collect the maximum feasible amount of the loans identified in Exhibit C and to maximize the amount of recoveries on the loans identified in Exhibit B. SECTION 15 Intended Beneficiaries. This Agreement is intended to be for the primary benefit of the Former Stockholders, and it is expressly acknowledged and agreed by the parties hereto that its provisions may be enforced by such Former Stockholders, or any one or more of them, in accordance with its provisions. SECTION 16 Miscellaneous. (a) The headings set forth in this Agreement are for convenience of reference only and do not, and shall not be construed to, limit or otherwise define the terms or provisions of this Agreement or otherwise have any substantive effect. (b) As used in this Agreement, where appropriate, the singular shall include the plural, and the masculine, the feminine and neuter genders, and vice versa. (c) If any term or provision of this Agreement is held to be invalid as applied to any fact or circumstance, it shall be modified to the minimum extent necessary to render it valid and in any event shall not affect the validity of any other term or provision or of the same term or provision as applied to any other fact or circumstance. (d) This Agreement is made in, and shall be construed and enforced in accordance with, the internal (and not the conflicts) laws of the State of California. (e) The parties are entering into this Agreement in a spirit of good faith and shall cooperate with one another in making effective all the terms and provisions of this Agreement. Before, at and, as the case may be, after closing each party shall execute, acknowledge and deliver such documents and take any and all other actions necessary or proper to render all the terms and provisions of this Agreement effective and to enable the party requesting the cooperation to exercise and enjoy the rights granted to it in or contemplated by this Agreement. (f) No delay or failure (or repeated delays or failures) in exercising any right, power or privilege under this Agreement shall operate as a waiver of the right, power or privilege (or of any other right, power or privilege). No waiver of a breach of a provision shall constitute a waiver of a breach of any other provision or of a prior or subsequent breach of the same provision. No extension of time of performance of an act or obligation under this Agreement shall constitute an extension of time of performance of any other act or obligation. * * * SIGNATURES APPEAR ON FOLLOWING PAGE * * * IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. TRP ACQUISITION CORP., a Delaware corporation By: /s/ Denis Daly, Sr. Name: Title: President TRANS PACIFIC BANCORP, a California corporation By: /s/ Eddy S. F. Chan Name: Title: President TRANS PACIFIC BANK, N.A., a National Banking corporation By: Name: Title: Exhibit A: AGREEMENT AND PLAN OF MERGER is attached above to this Proxy Statement as Appendix A Exhibit B Certain Loans Previously Charged Off on the Books and Records of the Bank NET AMOUNT TO BE RECOVERED AS OF LOAN NUMBER JULY 31, 1996 1801736-3 22,962 1800469-7 6,186 1901059 4,440 1803475-6 92,818 1804235-9 101,094 1803611-2 106,169 1800180-9 and 10 437,194 Exhibit C Certain Loans Presently Outstanding on the Books and Records of the Bank LOAN LOSS RESERVES BALANCED OWED ALLOCATED GUARANTEED LOAN NUMBER JULY 31, 1996 JULY 31, 1996 PORTION 1800055-14 635,000 (127,847) 1802904-1 200,000 (1,500) 80,000 1804158-2 and 5 289,179 (14,815) Examples Illustrative Examples of Escrow Payment Calculation Example 1: Charge-offs (Exhibit C), net of reserves & taxes: $200,000 Recoveries, net of tax (from Exhibit B loans): $200,000 Expenses incurred, net of tax: $50,000 Escrow Payment Calculation: To Acquisition: Charge-offs less recoveries plus expenses $200,000 - $200,000 + $50,000 = $50,000 Payment to Acquisition is $50,000. To Former Stockholders and Option Holders: Escrow Fund B less payment to Acquisition $440,626 +/- any interest income or loss - $50,000 = $390,626 +/- any interest income or loss Payment to Former Stockholders and Option Holders is $390,626 +/- any interest income or loss Example 2: Charge-offs (Exhibit C), net of reserves & taxes: $200,000 Recoveries, net of tax (from Exhibit B loans): $250,000 Expenses incurred, net of tax: $75,000 Escrow Payment Calculation: To Acquisition: Charge-offs less recoveries plus expenses $200,000 - $250,000 + $75,000 = $25,000 Payment to Acquisition is $25,000. To Former Stockholders and Option Holders: Escrow Fund B less payment to Acquisition $440,626 +/- any interest income or loss - $25,000 = $415,626 +/- any interest income or loss - Payment to Former Stockholders and Option Holders is $415,626 +/- any interest income or loss Example 3: Charge-offs (Exhibit C), net of reserves & taxes: $100,000 Recoveries, net of tax (from Exhibit B loans): $300,000 Expenses incurred, net of taxes: $50,000 Escrow Payment Calculation: To Acquisition: Charge-offs less recoveries plus expenses $100,000 - $300,000 + $50,000 = -$150,000 Payment to Acquisition is $0. To Former Stockholders and Option Holders: Escrow Fund B less payment to Acquisition $440,626 +/- any interest income or loss - - $0 = $440,626 +/- any interest income or loss - Payment to Former Stockholders and Option Holders is $440,626 +/- any interest income or loss APPENDIX C - VOTING AGREEMENT THIS VOTING AGREEMENT (this "Agreement") dated as of the 18th day of October, 1996, is by and among TRP Acquisition Corp., an Delaware corporation ("Acquisition") and each of the shareholders and directors of Trans Pacific Bancorp, a California Corporation (the "Company") who has executed the signature page attached hereto (individually, the "Shareholder," and collectively, the "Shareholders"). R E C I T A L S: WHEREAS, as of the date hereof, there are 1,120,195 shares of voting stock of the Company, no par value per share (the "Company Common Stock"), issued and outstanding and each of the Shareholders is the owner of the number of shares of the Company Common Stock as is set forth opposite such Shareholder's name on the signature page attached hereto and such number of shares represents approximately the percentage of the issued and outstanding shares of the capital stock of the Company which is also set forth thereon opposite such Shareholder's name; WHEREAS, Acquisition desires to acquire the Company by means of a merger (the "Merger") with and into the Company pursuant to an Agreement and Plan of Merger dated as of the date herewith (the "Merger Agreement"); WHEREAS, Acquisition is unwilling to expend the substantial time, effort and expense necessary to implement the proposed Merger, including applying for and obtaining necessary approvals of federal banking authorities, unless each of the Shareholders enters into this Agreement; and WHEREAS, each of the Shareholders believes it is in his or her best interests as well as the best interests of the Company for the Merger to be consummated. A G R E E M E N T S: In consideration of the covenants and agreements of the parties herein contained and as an inducement to Acquisition to incur the expenses associated with the Merger, the parties hereto, intending to be legally bound, agree as follows: SECTION 1 Representations and Warranties. Each of the Shareholders represents and warrants that as of the date hereof he or she owns beneficially and of record the number of shares of the Company Common Stock as is set forth opposite such Shareholder's name on the signature page of this Agreement, and that as of the Closing (as defined in the Merger Agreement), all of such shares will be free and clear of all liens, pledges, security interests, claims, encumbrances, options and agreements to sell. Each of the Shareholders represents and warrants that such Shareholder has the sole voting power with respect to such shares of the Company Common Stock. SECTION 2 Voting Agreement. Each of the Shareholders hereby agrees to vote all shares of the Company Common Stock now or at any time hereafter owned or controlled by him or her (the "Subject Shares") in favor of the Merger Agreement and the Merger at any meeting of shareholders of the Company called, or in connection with the solicitation of any written shareholders' consents, for the purpose of approving the Merger Agreement and the Merger. Each of the Shareholders further agrees not to vote his or her Subject Shares in favor of any acquisition of stock or of all or substantially all of the assets of the Company by any party other than Acquisition or any wholly-owned subsidiary of Acquisition prior to the termination of this Agreement. Each of the Shareholders agrees that none of his or her Subject Shares shall be transferred to a third party transferee unless as a condition of such transfer the third party transferee shall execute a voting agreement in form acceptable to Acquisition (and substantially in the form of this Agreement) and such voting agreement shall be deemed a supplement to this Agreement to which all shares of the Company Common Stock then or thereafter acquired by the third party transferee shall be subject. Subject to the Shareholder's fiduciary duty as a director and as set forth in Section 5.02 of the Merger Agreement, at Acquisition's request, each of the Shareholders shall use his or her best efforts to cause any necessary meeting of shareholders of the Company to be duly called and held or any necessary consents of shareholders to be obtained for the purpose of approving the Merger Agreement and the Merger. SECTION 3 No Ownership Interest. Nothing contained in this Agreement shall be deemed to vest in Acquisition or any of its Affiliates (as such term is defined in Rule 144 promulgated under the Securities Act of 1933, as amended) any direct or indirect ownership or incidence of ownership of or with respect to any shares of the Company Common Stock. All rights, ownership and economic benefits of and relating to the Subject Shares owned by each of the Shareholders shall remain and belong to each such Shareholder and neither Acquisition nor any of its Affiliates shall have any authority pursuant to this Agreement to manage, direct, superintend, restrict, regulate, govern or administer any of the policies or operations of the Company or exercise any power or authority to direct any of the Shareholders in the voting of any of the shares of the Company Common Stock, except as otherwise expressly provided herein and in the Merger Agreement, or in the performance of his or her duties or responsibilities as a shareholder of the Company. SECTION 4 Amendment and Modification. This Agreement may be amended, modified or supplemented at any time by written approval of such amendment, modification or supplement by the Company, Acquisition and the Shareholders. SECTION 5 Entire Agreement. This Agreement evidences the entire agreement among the parties with respect to the matters provided for herein, superseding all prior oral or written agreements or understandings. There have been and are no promises, restrictions, agreements or understandings among the parties with respect to the subject matter hereof other than those set forth herein and in the Merger Agreement and written agreements related thereto. Except for the Merger Agreement and the other written agreements contemplated therein, this Agreement supersedes any agreements among any of the Company, its shareholders, or Acquisition concerning the acquisition, disposition or control of the Company Common Stock. SECTION 6 Remedies. Each of the Shareholders understands and acknowledges that if he or she should breach any of his or her covenants contained in this Agreement, the damage to Acquisition would be indeterminable in view of the inability to measure the ultimate value and benefit to Acquisition resulting from its contemplated future ownership and control of the Company, and that Acquisition therefore would not have an adequate remedy at law in respect of any such breach. Each of the Shareholders therefore agrees that in addition to any other remedy available to Acquisition at law or in equity, Acquisition shall be entitled to specific performance of this Agreement by such Shareholder upon application to any court having jurisdiction over the parties. SECTION 7 Severability. If any provision of this Agreement shall be deemed invalid or inoperative, or in the event a court of competent jurisdiction determines that any of the provisions of this Agreement contravene public policy in any way, this Agreement shall be construed so that the remaining provisions shall not be affected, but shall remain in full force and effect, and any such provisions which are invalid or inoperative or which contravene public policy shall be deemed, without further action or deed on the part of any person, to be modified, amended and/or limited, but only to the extent necessary to render the same valid and enforceable. SECTION 8 Successors; Assignment. This Agreement shall be binding upon and inure to the benefit of the Company and Acquisition, and their successors and permitted assigns, and each of the Shareholders and such Shareholder's spouse and their respective executors, personal representatives, administrators, heirs, legatees, guardians and other legal representatives. This Agreement shall survive the death or incapacity of any Shareholder. This Agreement may be assigned only by Acquisition, and then only to an Affiliate of Acquisition. Nothing in this Agreement, expressed or implied, is intended to confer upon any person other than a party to this Agreement any rights or remedies of any nature whatsoever under or by reason of this Agreement. SECTION 9 Waiver of Compliance; Consents. Any failure of Acquisition on the one hand, or the Shareholders, on the other hand, to comply with any obligation, covenant, agreement or condition herein may be waived in writing by the party entitled to the performance of such obligation, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits consent by or on behalf of any party hereto, such consent shall be given in writing in a manner consistent with the requirements for a waiver of compliance as set forth above. SECTION 10 Headings; Counterparts. The headings in this Agreement are for convenience only and shall not be considered a part of or affect the meaning, construction or interpretation of any provision of this Agreement. This Agreement may be executed in several counterparts each of which shall be deemed an original and shall bind the signatory, but all of which together shall constitute but one and the same instrument. SECTION 11 Governing Law. The validity, construction, enforcement and effect of this Agreement shall be governed by the internal laws of the State of California. SECTION 12 Termination. Notwithstanding any other provision of this Agreement, this Agreement shall automatically terminate on the earlier of: (a) the date of termination of the Merger Agreement as set forth in Article 8 thereof, as such termination provisions may be amended by the Company and Acquisition from time to time; or (b) the Effective Time, as defined in the Merger Agreement. * * * SIGNATURES ON FOLLOWING PAGE * * IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. TRP ACQUISITION CORP., a Delaware corporation By: /s/ Denis Daly, Sr. Name: Title: President ***SIGNATURES OF SHAREHOLDERS APPEARS ON FOLLOWING PAGES*** PERCENTAGE SHAREHOLDER SHARES OWNED OWNERSHIP 52,083 4.65% (Signature) James A. Babcock (Typed or Printed Name) 27,483 2.45% (Signature) Eddy S.F. Chan (Typed or Printed Name) 23,333 2.08% (Signature) Frankie G. Lee (Typed or Printed Name) 21,833 1.95% (Signature) John K. Lee (Typed or Printed Name) 21,333 1.90% (Signature) Masayuki Nakahira (Typed or Printed Name) 19,183 1.71% (Signature) John T. Stewart (Typed or Printed Name) 25,343 2.26% (Signature) Simon S. Teng (Typed or Printed Name) PERCENTAGE SHAREHOLDER SHARES OWNED OWNERSHIP 21,333 1.90% (Signature) Frank K. W. Wong (Typed or Printed Name) 32,133 2.87% (Signature) John K. Wong (Typed or Printed Name) APPENDIX D - OPTION AGREEMENT THE TRANSFER OF THE OPTION GRANTED BY THIS AGREEMENT IS SUBJECT TO RESALE RESTRICTIONS OPTION AGREEMENT, dated as of October 18, 1996 (the "Agreement"), between TRANS PACIFIC BANCORP., a California corporation ("Issuer"), and TRP ACQUISITION CORP., a Delaware corporation ("Grantee"). WITNESSETH: WHEREAS, Issuer and Grantee have entered into a Merger Agreement, dated as of October 18, 1996 (the "Merger Agreement"), which was executed by the parties hereto prior to the execution of this Agreement; and WHEREAS, as a condition and inducement to Grantee's entering into the Merger Agreement and in consideration therefor, Issuer has agreed to grant Grantee the Option (as defined below). NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein and in the Merger Agreement, the parties hereto agree as follows: SECTION 1. Issuer hereby grants to Grantee an unconditional, irrevocable option (the "Option") to purchase, subject to the terms hereof, up to 222,919 fully paid and non-assessable shares of common stock, no par value per share of Issuer ("Issuer Common Stock") (which number of shares is equal to 19.9% of the number of outstanding shares of Issuer Common Stock on the date hereof), at a price of $8.00 per share (the "Initial Price"); PROVIDED, HOWEVER, that in the event Issuer issues or agrees to issue any additional shares of Issuer Common Stock at a price less than the Initial Price (other than up to 103,750 shares pursuant to existing stock options), as adjusted pursuant to Section 5(b) hereof, such price shall be equal to such lesser price (such price, as adjusted, is hereinafter referred to as the "Option Price"). The number of shares of Issuer Common Stock that may be received upon the exercise of the Option and the Option Price are subject to adjustment as herein set forth. SECTION 2. (a) Grantee may exercise the Option, in whole or part, at any time and from time to time following the occurrence of a Purchase Event (as defined below); PROVIDED that the Option shall terminate and be of no further force and effect upon the earliest to occur of (i) the time immediately prior to the effective time of the Merger pursuant to Section 1.05 of the Merger Agreement, (ii) 12 months after the first occurrence of a Purchase Event, (iii) upon the termination of the Merger Agreement in accordance with the terms thereof prior to the occurrence of a Purchase Event (other than a termination of the Merger Agreement by Grantee pursuant to Sections 8.01(b) thereof), or (iv) 12 months after the termination of the Merger Agreement by Grantee pursuant to Sections 8.01(b) thereof as a result of any material breach of the Merger Agreement by Issuer. The events described in clauses (i) - (iv) in the preceding sentence are hereinafter collectively referred to as an "Exercise Termination Event." (b) The term "Purchase Event" shall mean any of the following events or transactions occurring on or after the date hereof and prior to an Exercise Termination Event, and which are not in violation of Issuer's articles of incorporation: (i) Issuer without having received Grantee's prior written consent, shall have entered into any letter of intent or definitive agreement to engage in an Acquisition Transaction (as defined below) with any person (as defined below) other than Grantee or any of its subsidiaries (each a "Grantee Subsidiary") or the Board of Directors of Issuer shall have recommended that the stockholders of Issuer approve or accept any Acquisition Transaction with any Person (as the term "person" is defined in Section 3(a)9 and 13(d)(3) of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules and regulations thereunder) other than Grantee or any Grantee Subsidiary. For purposes of this Agreement, "Acquisition Transaction" shall mean (x) a merger, consolidation or other business combination involving Issuer or Subsidiary (as defined in the Merger Agreement), (y) a purchase, lease or other acquisition of more than 25% of the consolidated assets of Issuer and Subsidiary, in a single transaction or series of transactions, or (z) a purchase or other acquisition (including by way of merger, consolidation, share exchange or otherwise) of Beneficial Ownership (as the term "beneficial ownership" is defined in Regulation 13d-3(a) of the Exchange Act, except that for purposes of this Agreement such term shall not include voting stock held by a reporting person meeting the requirements for a filing under Schedule 13G of the Exchange Act) of securities representing 20% or more of the voting power of Issuer or Subsidiary; (ii) Any Person (other than Grantee or any Grantee Subsidiary) shall have acquired Beneficial Ownership of 20% or more of the outstanding shares of Issuer Common Stock or the voting stock of Subsidiary ("Bank Stock"); (iii) Any Person (other than Grantee or any Grantee Subsidiary) shall have made a BONA FIDE proposal to Issuer or, by a public announcement or written communication that is or becomes the subject of public disclosure, to Issuer's stockholders to engage in an Acquisition Transaction (including, without limitation, any situation in which any Person other than Grantee or any Grantee Subsidiary shall have commenced (as such term is defined in Rule 14d-2 under the Exchange Act), or shall have made a filing under applicable securities laws, with respect to a tender offer or exchange offer to purchase any shares of Issuer Common Stock such that, upon consummation of such offer, such person would have Beneficial Ownership of 20% or more of the then outstanding shares of Issuer Common Stock (such an offer being referred to herein as a "Tender Offer" or an "Exchange Offer", respectively)); (iv) The meeting of the holders of Issuer Common Stock for the purpose of voting on the Merger Agreement, shall not have been held or shall have been canceled prior to termination of the Merger Agreement, or Issuer's Board of Directors shall have withdrawn or modified in a manner adverse to Grantee the recommendation of Issuer's Board of Directors that Issuer's stockholders approve the Merger Agreement; or (v) Any Person (other than Grantee or any Grantee Subsidiary) shall have filed an application or notice in draft or final form with the Office of the Comptroller of the Currency ("OCC"), or the Board of Governors of The Federal Reserve System ("FRB") for approval to engage in an Acquisition Transaction. (c) Issuer shall notify Grantee promptly in writing of the occurrence of any Purchase Event; PROVIDED, HOWEVER, that the giving of such notice by Issuer shall not be a condition to the right of Grantee to exercise the Option. (d) In the event that Grantee is entitled to and wishes to exercise the Option, it shall send to Issuer a written notice (the "Option Notice" and the date of which being hereinafter referred to as the "Notice Date") specifying (i) the total number of shares of Issuer Common Stock it will purchase pursuant to such exercise and (ii) the time (which shall be on a business day that is not less than three nor more than ten business days from the Notice Date) on which the closing of such purchase shall take place (the "Closing Date"); such closing to take place at the principal office of the Issuer; PROVIDED, THAT, if prior notification to or approval of the OCC, the FRB, the Federal Deposit Insurance Corporation ("FDIC") or any other Governmental Authority is required in connection with such purchase (each, a "Notification" or an "Approval," as the case may be), (a) Grantee shall promptly file the required notice or application for approval ("Notice/Application"), (b) Grantee shall expeditiously process the Notice/Application and (c) for the purpose of determining the Closing Date pursuant to clause (ii) of this sentence, the period of time that otherwise would run from the Notice Date shall instead run from the later of (x) in connection with any Notification, the date on which any required notification periods have expired or been terminated and (y) in connection with any Approval, the date on which such approval has been obtained and any requisite waiting period or periods shall have expired. For purposes of Section 2(a) hereof, any exercise of the Option shall be deemed to occur on the Notice Date relating thereto. On or prior to the Closing Date, Grantee shall have the right to revoke its exercise of the Option by written notice to the Issuer given not less than three business days prior to the Closing Date. (e) At the closing referred to in Section 2(d) hereof, Grantee shall pay to Issuer the aggregate purchase price for the number of shares of Issuer Common Stock specified in the Option Notice in immediately available funds by wire transfer to a bank account designated by Issuer; PROVIDED, HOWEVER, that failure or refusal of Issuer to designate such a bank account shall not preclude Grantee from exercising the Option. (f) At such closing, simultaneously with the delivery of immediately available funds as provided in Section 2(e) hereof, Issuer shall deliver to Grantee a certificate or certificates representing the number of shares of Issuer Common Stock specified in the Option Notice and, if the Option should be exercised in part only, a new Option evidencing the rights of Grantee thereof to purchase the balance of the shares of Issuer Common Stock purchasable hereunder. (g) Certificates for Issuer Common Stock delivered at a closing hereunder shall be endorsed with a restrictive legend substantially as follows: The transfer of the shares represented by this certificate is subject to resale restrictions arising under applicable federal and state securities laws and to certain provisions of a Merger Agreement by and between Trans Pacific Bancorp and TRP Acquisition Corp. dated as of October 18, 1996. A copy of such agreement is on file at the principal office of Trans Pacific Bancorp and will be provided to the holder hereof without charge upon receipt by Trans Pacific Bancorp of a written request therefor. It is understood and agreed that: (i) the reference to the resale restrictions in the above legend shall be removed by delivery of substitute certificate(s) without such reference if Grantee shall have delivered to Issuer a copy of a letter from the staff of the Securities and Exchange Commission or the Governmental Authority responsible for administering any applicable state securities laws or an opinion of counsel reasonably satisfactory to Issuer to the effect that such legend is not required for purposes of applicable federal or state securities laws; (ii) the reference to the provisions of this Agreement in the above legend shall be removed by delivery of substitute certificate(s) without such reference if the shares have been sold or transferred in compliance with the provisions of this Agreement and under circumstances that do not require the retention of such reference; and (iii) the legend shall be removed in its entirety if the conditions in the preceding clauses (i) and (ii) are both satisfied. In addition, such certificates shall bear any other legend as may be required by law. (h) Upon the giving by Grantee to Issuer of an Option Notice and the tender of the applicable purchase price in immediately available funds on the Closing Date, unless prohibited by applicable law, Grantee shall be deemed to be the holder of record of the number of shares of Issuer Common Stock specified in the Option Notice, notwithstanding that the stock transfer books of Issuer shall then be closed or that certificates representing such shares of Issuer Common Stock shall not then actually be delivered to Grantee. Issuer shall pay all expenses and other charges that may be payable in connection with the preparation, issuance and delivery of stock certificates under this Section 2 in the name of Grantee. SECTION 3. Issuer agrees: (i) that it shall at all times until the termination of this Agreement have reserved for issuance upon the exercise of the Option that number of authorized and reserved shares of Issuer Common Stock equal to the maximum number of shares of Issuer Common Stock at any time and from time to time issuable hereunder, all of which shares will, upon issuance pursuant hereto, be duly authorized, validly issued, fully paid, non- assessable, and delivered free and clear of all claims, liens, encumbrances and security interests and not subject to any preemptive rights; (ii) that it will not, by amendment of its articles of incorporation or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by Issuer; (iii) promptly to take all reasonable action as may from time to time be requested by the Grantee, at Grantee's expense (including (x) complying with all premerger notification, reporting and waiting period requirements specified in 15 U.S.C. Section 18a and regulations promulgated thereunder and (y) in the event prior approval of or notice to the OCC, the FRB, the FDIC or any other Governmental Authority, under the National Banking Act, the Bank Holding Company Act, the Change in Bank Control Act, or any other applicable federal or state banking law, is necessary before the Option may be exercised, cooperating with Grantee in preparing such applications or notices and providing such information to each such Governmental Authority as it may require in order to permit Grantee to exercise the Option and Issuer duly and effectively to issue shares of Issuer Common Stock pursuant hereto; and (iv) to take all action provided herein to protect the rights of Grantee against dilution. SECTION 4. This Agreement (and the Option granted hereby) are exchangeable, without expense, at the option of Grantee, upon presentation and surrender of this Agreement at the principal office of Issuer, for other agreements providing for Options of different denominations entitling the holder thereof to purchase, on the same terms and subject to the same conditions as are set forth herein, in the aggregate the same number of shares of Issuer Common Stock purchasable hereunder. The terms "Agreement" and "Option" as used herein include any agreements and related Options and options for which this Agreement (and the Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Agreement, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like tenor and date. SECTION 5. The number of shares of Issuer Common Stock purchasable upon the exercise of the Option shall be subject to adjustment from time to time as follows: (a) In the event of any change in the Issuer Common Stock by reason of stock dividends, split-ups, mergers, recapitalizations, combinations, subdivisions, conversions, exchanges of shares or the like, the type and number of shares of Issuer Common Stock purchasable upon exercise hereof shall be appropriately adjusted and proper provision shall be made so that, in the event that any additional shares of Issuer Common Stock are to be issued or otherwise become outstanding as a result of any such change (other than pursuant to an exercise of the Option or pursuant to the exercise of options for up to 103,750 shares of Issuer Common Stock pursuant to presently outstanding stock options), the number of shares of Issuer Common Stock that remain subject to the Option shall be increased so that, after such issuance and together with shares of Issuer Common Stock previously issued pursuant to the exercise of the Option (as adjusted on account of any of the foregoing changes in the Issuer Common Stock), it equals 19.9% of the number of shares of Issuer Common Stock then issued and outstanding. (b) Whenever the number of shares of Issuer Common Stock purchasable upon exercise hereof is adjusted as provided in this Section 5, the Option Price shall be adjusted by multiplying the Option Price by a fraction, the numerator of which shall be equal to the number of shares of Issuer Common Stock purchasable prior to the adjustment and the denominator of which shall be equal to the number of shares of Issuer Common Stock purchasable after the adjustment. SECTION 6. (a) Following the occurrence of a Purchase Event that occurs prior to an Exercise Termination Event, Issuer shall notify Grantee promptly in the event that Issuer is in the process of registration with respect to an underwritten public offering of shares of Issuer Common Stock, and Grantee (whether on its own behalf or on behalf of any subsequent holder of the Option (or part thereof) or of any of the shares of Issuer Common Stock issued pursuant hereto) shall have the right to have any shares issued and issuable pursuant to the Option included in the registration statement with respect to such offering, in order to permit the sale or other disposition of any shares of Issuer Common Stock issued upon total or partial exercise of the Option ("Option Shares") in accordance with any plan of disposition requested by Grantee; PROVIDED, HOWEVER, that if in the good faith judgment of the managing underwriter or managing underwriters, or, if none, the sole underwriter or underwriters, of such offering, the inclusion of the Option Shares in such registration would interfere materially with the successful marketing of the shares of Issuer Common Stock offered by Issuer, the number of Option Shares otherwise to be covered in the registration statement contemplated hereby may be reduced; PROVIDED, HOWEVER, that after any such required reduction the number of Option Shares to be included in such offering for the account of Grantee shall constitute at least 20% of the total number of shares of Grantee and Issuer covered in such registration statement. Grantee shall provide all information reasonably requested by Issuer for inclusion in any registration statement to be filed hereunder. In connection with any such registration, Issuer and Grantee shall provide each other with representations, warranties, indemnities and other agreements customarily given in connection with such registrations. If requested by Grantee in connection with such registration, Issuer and Grantee shall become a party to any underwriting agreement relating to the sale of such shares, but only to the extent of obligating themselves in respect of representations, warranties, indemnities and other agreements customarily included in such underwriting agreements. (b) Concurrently with the filing of a registration statement under Section 6(a) hereof, Issuer shall also make all filings required to comply with state securities laws in such states as Grantee may reasonably request. (c) The expenses of any registration or state securities law compliance under this Section 6, except for underwriting discounts, broker's fees and commissions and fees and disbursements of Grantee's counsel related thereto, shall be borne by Issuer. SECTION 7. Issuer hereby represents and warrants to Grantee as follows: (a) Issuer has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly approved by the Board of Directors of Issuer and no other corporate proceedings on the part of Issuer are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly executed and delivered by, and constitutes a valid and binding obligation of, Issuer, enforceable against Issuer in accordance with its terms, subject to any required Governmental Approval, and except as enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the enforcement of creditors' rights generally and except that the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding may be brought. (b) Issuer has taken all necessary corporate action to authorize and reserve and to permit it to issue, and at all times from the date hereof through the termination of this Agreement in accordance with its terms will have reserved for issuance upon the exercise of the Option, that number of shares of Issuer Common Stock equal to the maximum number of shares of Issuer Common Stock at any time and from time to time issuable hereunder, and all such shares, upon issuance pursuant hereto, will be duly authorized, validly issued, fully paid, non-assessable, and will be delivered free and clear of all claims, liens, encumbrances and security interests and not subject to any preemptive rights. (c) The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with or violate any provision of the certificate of incorporation or By-laws of Issuer or the equivalent organizational documents of the Subsidiary of Issuer or, subject to obtaining any of the Regulatory Approvals, violate, conflict with or result in any breach of any provisions of, constitute a default (or an event which with notice or lapse of time or both would constitute a default) under, result in the termination of, accelerate the performance required by, or result in the creation of any lien, security interest, charge or other encumbrance upon any of the respective properties or assets of the Issuer or such Subsidiary under any of the terms, conditions or provisions of any note, bond, capital note, debenture, mortgage, indenture, deed of trust, license, lease, agreement, obligation, instrument, permit, concession, franchise, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Issuer or such Subsidiary or their respective properties or assets. SECTION 8. (a) Neither of the parties hereto may assign any of its rights or delegate any of its obligations under this Agreement or the Option created hereunder to any other Person without the express written consent of the other party, except that Grantee may assign this Agreement to a wholly owned subsidiary of Grantee and Grantee may assign its rights hereunder in whole or in part after the occurrence of a Purchase Event. The term "Grantee" as used in this Agreement shall also be deemed to refer to Grantee's permitted assigns. (b) Any assignment of rights of Grantee to any permitted assignee of Grantee hereunder shall bear the restrictive legend at the beginning thereof substantially as follows: The transfer of the option represented by this assignment and the related option agreement is subject to resale restrictions arising under applicable federal and state securities laws and to certain provisions of a Merger Agreement by and between Trans Pacific Bancorp and TRP Acquisition Corp. dated as of October 18, 1996. A copy of such agreement is on file at the principal office of Trans Pacific Bancorp and will be provided to any permitted assignee of the Option without charge upon receipt of a written request therefor. SECTION 9. Each of Grantee and Issuer will use its reasonable efforts to make all filings with, and to obtain consents of, all third parties and Governmental Authorities necessary to the consummation of the transactions contemplated by this Agreement, including, without limitation, applying to the OCC, the FRB, the FDIC and any other Governmental Authority for approval to acquire the shares issuable hereunder. SECTION 10. The parties hereto acknowledge that damages would be an inadequate remedy for a breach of this Agreement by either party hereto and that the obligations of the parties hereto shall be enforceable by either party hereto through injunctive or other equitable relief. Both parties further agree to waive any requirement for the securing or posting of any bond in connection with the obtaining of any such equitable relief and that this provision is without prejudice to any other rights that the parties hereto may have for any failure to perform this Agreement. SECTION 11. If any term, provision, covenant or restriction contained in this Agreement is held by a court or a federal or state regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions and covenants and restrictions contained in this Agreement shall remain in full force and effect, and shall in no way be affected, impaired or invalidated. SECTION 12. All notices, requests, claims, demands and other communications hereunder shall be deemed to have been duly given when delivered in person, by cable, telegram, telecopy or telex, or by registered or certified mail (postage prepaid, return receipt requested) at the respective addresses of the parties set forth in the Merger Agreement. SECTION 13. This Agreement, the rights and obligations of the parties hereto, and any claims or disputes relating thereto shall be governed by and construed in accordance with the laws of the State of California (but not including the choice of law rules thereof). SECTION 14. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement and shall be effective at the time of execution and delivery. SECTION 15. Except as otherwise expressly provided herein, each of the parties hereto shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder. SECTION 16. Except as otherwise expressly provided herein or in the Merger Agreement, this Agreement contains the entire agreement between the parties with respect to the transactions contemplated hereunder and supersedes all prior arrangements or understandings with respect thereof, written or oral. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing in this Agreement, expressed or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein. SECTION 17. Capitalized terms used in this Agreement and not defined herein but defined in the Merger Agreement shall have the meanings assigned thereto in the Merger Agreement. SECTION 18. Nothing contained in this Agreement shall be deemed to authorize or require Issuer or Grantee to breach any provision of the Merger Agreement or any provision of law applicable to the Grantee or Issuer. SECTION 19. In the event that any selection or determination is to be made by Grantee or the Owner hereunder and at the time of such selection or determination there is more than one Grantee or Owner, such selection shall be made by a majority in interest of such Grantees or Owners. SECTION 20. In the event of any exercise of the option by Grantee, Issuer and such Grantee shall execute and deliver all other documents and instruments and take all other action that may be reasonably necessary in order to consummate the transactions provided for by such exercise. SECTION 21. Except to the extent Grantee exercises the Option, Grantee shall have no rights to vote or receive dividends or have any other rights as a shareholder with respect to shares of Issuer Common Stock covered hereby. * * * SIGNATURES ON FOLLOWING PAGE * * * IN WITNESS WHEREOF, each of the parties has caused this Option Agreement to be executed on its behalf by their officers thereunto duly authorized, all as of the date first above written. TRP ACQUISITION CORP., a Delaware corporation By: /s/ Denis Daly, Sr. Name: Title: President TRANS PACIFIC BANCORP, a California corporation By: /s/ Eddy S. F. Chan Name: Title: President APPENDIX E FAIRNESS OPINION The Following is on the Letterhead of Baxter Fentriss and Company, Richmond, Virginia. November 15, 1996 The Board of Directors Trans Pacific Bancorp 46 Second Street San Francisco, CA 94105-3440 Dear Members of the Board: Trans Pacific Bancorp, San Francisco, California ("TPB") and Denis Daly Private Investor Group, Chicago, Illinois ("Investor Group") have entered into an Agreement providing for the acquisition of TPB by Investor Group ("Acquisition"). The terms of the Acquisition are set forth in the Agreement and Plan of Merger dated October 18, 1996. The terms of the Acquisition provide that, with the possible exception of those shares as to which dissenters' rights may be perfected, each common share of TPB will be converted into the right to receive $8.61 cash subject to certain escrow arrangements ("Consideration"). You have asked our opinion as to whether the proposed transaction pursuant to the terms of the Acquisition are fair to the respective shareholders of TPB from a financial point of view. In rendering our opinion, we have evaluated the consolidated financial statements of TPB available to us from published sources. In addition, we have, among other things: (a) to the extent deemed relevant, analyzed selected public information of certain other financial institutions and compared TPB from a financial point of view to the other financial institutions; (b) considered the historical market price of the common stock of TPB; (c) compared the terms of the Acquisition with the terms of certain other comparable transactions to the extent information concerning such acquisitions was publicly available; (d) reviewed the Agreement and Plan of Merger and related documents; and (e) made such other analyses and examinations as we deemed necessary. We have met with various senior officers of TPB and Investor Group to discuss the foregoing as well as other matters that may be relevant. We have not independently verified the financial and other information concerning TPB, or Investor Group or other data which we have considered in our review. We have assumed the accuracy and completeness of all such information; however, we have no reason to believe that such information is not accurate and complete. Our conclusion is rendered on the basis of securities market conditions prevailing as of the date hereof and on the conditions and prospects, financial and otherwise, of TPB and Investor Group as they exist and are known to us as of September 30, 1996. We have acted as financial advisor to TPB in connection with the Acquisition and will receive from TPB a fee for our services, a significant portion of which is contingent upon the consummation of the Acquisition. It is understood that this opinion may be included in its entirety in any communication by TPB or the Board of Directors to the stockholders of TPB. The opinion may not, however, be summarized, excerpted from or otherwise publicly referred to without our prior written consent. Based on the foregoing, and subject to the limitations described above, we are of the opinion that the consideration is fair to the shareholders of TPB from a financial point of view. Very truly yours, (signed) Baxter Fentriss and Company APPENDIX F CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW CHAPTER 13 Dissenters' Rights Section 1300. Shareholder in short-form merger; Purchase at fair market value; "Dissenting shares"; "Dissenting shareholder" (a) If the approval of the outstanding shares (Section 152) of a corporation is required for a reorganization under subdivisions (a) and (b) or subdivision (e) or (f) of Section 1201, each shareholder of the corporation entitled to vote on the transaction and each shareholder of a subsidiary corporation in a short form merger may, by complying with this chapter, require the corporation in which the shareholder holds shares to purchase for cash at their fair market value the shares owned by the shareholder which are dissenting shares as defined in subdivision (b). The fair market value shall be determined as of the day before the first announcement of the terms of the proposed reorganization or short-form merger, excluding any appreciation or depreciation in consequence of the proposed action, but adjusted for any stock split, reverse stock split, or share dividend which becomes effective thereafter. (b) As used in this chapter, "dissenting shares" means shares which come within all of the following descriptions: (1) Which were not immediately prior to the reorganization or short-form merger either (A) listed on any national securities exchange certified by the Commissioner of Corporations under subdivision (o) of Section 25100 or (B) listed on the list of OTC margin stocks issued by the Board of Governors of the Federal Reserve System, and the notice of meeting of shareholders to act upon the reorganization summarizes this section and Sections 1301, 1302, 1303 and 1304; provided, however, that this provision does not apply to any shares with respect to which there exists any restriction on transfer imposed by the corporation or by any law or regulation; and provided, further, that this provision does not apply to any class of shares described in subparagraph (A) or (B) if demands for payment are filed with respect to 5 percent or more of the outstanding shares of that class. (2) Which were outstanding on the date for the determination of shareholders entitled to vote on the reorganization and (A) were not voted in favor of the reorganization or, (B) if described in subparagraph (A) or (B) of paragraph (1) (without regard to the provisos in that paragraph), were voted against the reorganization, or which were held of record on the effective date of a short-form merger; provided, however, that subparagraph (A) rather than subparagraph (B) of this paragraph applies in any case where the approval required by Section 1201 is sought by written consent rather than at a meeting. (3) Which the dissenting shareholder has demanded that the corporation purchase at their fair market value, in accordance with Section 1301. (4) Which the dissenting shareholder has submitted for endorsement, in accordance with Section 1302. (c) As used in this chapter, "dissenting shareholder" means the recordholder of dissenting shares and includes a transferee of record. Section 1301. Notice to holder of dissenting shares of reorganization approval; Demand for purchase of shares; Contents of demand (a) If, in the case of a reorganization, any shareholders of a corporation have a right under Section 1300, subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to purchase their shares for cash, such corporation shall mail to each such shareholder a notice of the approval of the reorganization by its outstanding shares (Section 152) within 10 days after the date of such approval, accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of the price determined by the corporation to represent the fair market value of the dissenting shares, and a brief description of the procedure to be followed if the shareholder desires to exercise the shareholder's right under such sections. The statement of price constitutes an offer by the corporation to purchase at the price stated any dissenting shares as defined in subdivision (b) of Section 1300, unless they lose their status as dissenting shares under Section 1309. (b) Any shareholder who has a right to require the corporation to purchase the shareholder's shares for cash under Section 1300, subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the corporation to purchase such shares shall make written demand upon the corporation for the purchase of such shares and payment to the shareholder in cash of their fair market value. The demand is not effective for any purpose unless it is received by the corporation or any transfer agent thereof (1) in the case of shares described in clause (i) or (ii) of paragraph (1) of subdivision (b) of Section 1300 (without regard to the provisos in that paragraph), not later than the date of the shareholders' meeting to vote upon the reorganization, or (2) in any other case within 30 days after the date on which the notice of the approval by the outstanding shares pursuant to subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder. (c) The demand shall state the number and class of the shares held of record by the shareholder which the shareholder demands that the corporation purchase and shall contain a statement of what such shareholder claims to be the fair market value of those shares as of the day before the announcement of the proposed reorganization or short-form merger. The statement of fair market value constitutes an offer by the shareholder to sell the shares at such price. Section 1302. Stamping or endorsing dissenting shares Within 30 days after the date on which notice of the approval by the outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, the shareholder shall submit to the corporation at its principal office or at the office of any transfer agent thereof, (a) if the shares are certificated securities, the shareholder's certificates representing any shares which the shareholder demands that the corporation purchase, to be stamped or endorsed with a statement that the shares are dissenting shares or to be exchanged for certificates of appropriate denomination so stamped or endorsed or (b) if the shares are uncertificated securities, written notice of the number of shares which the shareholder demands that the corporation purchase. Upon subsequent transfers of the dissenting shares on the books of the corporation, the new certificates, initial transaction statement, and other written statements issued therefor shall bear a like statement, together with the name of the original dissenting holder of the shares. Section 1303. Dissenting shareholder entitled to agreed price with interest thereon; When price to be paid (a) If the corporation and the shareholder agree that the shares are dissenting shares and agree upon the price of the shares, the dissenting shareholder is entitled to the agreed price with interest thereon at the legal rate on judgments from the date of the agreement. Any agreements fixing the fair market value of any dissenting shares as between the corporation and the holders thereof shall be filed with the secretary of the corporation. (b) Subject to the provisions of Section 1306, payment of the fair market value of dissenting shares shall be made within 30 days after the amount thereof has been agreed or within 30 days after any statutory or contractual conditions to the reorganization are satisfied, whichever is later, and in the case of certificated securities, subject to surrender of the certificates therefor, unless provided otherwise by agreement. Section 1304. Action by dissenters to determine whether shares are dissenting shares or fair market value of dissenting shares or both; Joinder of shareholders; Consolidation of actions; Determination of issues; Appointment of appraisers (a) If the corporation denies that the shares are dissenting shares, or the corporation and the shareholder fail to agree upon the fair market value of the shares, then the shareholder demanding purchase of such shares as dissenting shares or any interested corporation, within six months after the date on which notice of the approval by the outstanding shares (Section 152) or notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but not thereafter, may file a complaint in the superior court of the proper county praying the court to determine whether the shares are dissenting shares or the fair market value of the dissenting shares or both or may intervene in any action pending on such a complaint. (b) Two or more dissenting shareholders may join as plaintiffs or be joined as defendants in any such action and two or more such actions may be consolidated. (c) On the trial of the action, the court shall determine the issues. If the status of the shares as dissenting shares is in issue, the court shall first determine that issue. If the fair market value of the dissenting shares is in issue, the court shall determine, or shall appoint one or more impartial appraisers to determine, the fair market value of the shares. Section 1305. Duty and report of appraisers; Court's confirmation of report; Determination of fair market value by court; Judgment and payment; Appeal; Costs of action (a) If the court appoints an appraiser or appraisers, they shall proceed forthwith to determine the fair market value per share. Within the time fixed by the court, the appraisers, or a majority of them, shall make and file a report in the office of the clerk of the court. Thereupon, on the motion of any party, the report shall be submitted to the court and considered on such evidence as the court considers relevant. If the court finds the report reasonable, the court may confirm it. (b) If a majority of the appraisers appointed fail to make and file a report within 10 days from the date of their appointment or within such further time as may be allowed by the court or the report is not confirmed by the court, the court shall determine the fair market value of the dissenting shares. (c) Subject to the provisions of Section 1306, judgment shall be rendered against the corporation for payment of an amount equal to the fair market value of each dissenting share multiplied by the number of dissenting shares which any dissenting shareholder who is a party, or who has intervened, is entitled to require the corporation to purchase, with interest thereon at the legal rate from the date on which judgment was entered. (d) Any such judgment shall be payable forthwith with respect to uncertificated securities and, with respect to certificated securities, only upon the endorsement and delivery to the corporation of the certificates for the shares described in the judgment. Any party may appeal from the judgment. (e) The costs of the action, including reasonable compensation to the appraisers to be fixed by the court, shall be assessed or apportioned as the court considers equitable, but, if the appraisal exceeds the price offered by the corporation, the corporation shall pay the costs (including in the discretion of the court attorneys' fees, fees of expert witnesses and interest at the legal rate on judgments from the date of compliance with Sections 1300, 1301, and 1302 if the value awarded by the court for the shares is more than 125 percent of the price offered by the corporation under subdivision (a) of Section 1301). Section 1306. Prevention of payment to holders of dissenting shares of fair market value: Effect To the extent that the provision of Chapter 5 prevent the payment to any holders of dissenting shares of their fair market value, they shall become creditors of the corporation for the amount thereof together with interest at the legal rate on judgments until the date of payment, but subordinate to all other creditors in any liquidation proceedings, such debt to be payable when permissible under the provisions of Chapter 5. Section 1307. Disposition of dividends upon dissenting shares Cash dividends declared and paid by the corporation upon the dissenting shares after the date of approval of the reorganization by the outstanding shares (Section 152) and prior to payment for the shares by the corporation shall be credited against the total amount to be paid by corporation therefor. Section 1308. Rights and privileges of dissenting shares: Withdrawal of demand for payment Except as expressly limited in this chapter, holders of dissenting shares continue to have all the rights and privileges incident to their shares, until the fair market value of their shares is agreed upon or determined. A dissenting shareholder may not withdraw a demand for payment unless the corporation consents thereto. Section 1309. When dissenting shares lose their status Dissenting shares lose their status as dissenting shares and the holders thereof cease to be dissenting shareholders and cease to be entitled to require the corporation to purchase their shares upon the happening of any of the following: (a) The corporation abandons the reorganization. Upon abandonment of the reorganization, the corporation shall pay on demand to any dissenting shareholder who has initiated proceedings in good faith under this chapter all necessary expenses incurred in such proceedings and reasonable attorneys' fees. (b) The shares are transferred prior to their submission for endorsement in accordance with Section 1302 or are surrendered for conversion into shares of another class in accordance with the articles. (c) The dissenting shareholder and the corporation do not agree upon the status of the shares as dissenting shares or upon the purchase price of the shares, and neither files a complaint or intervenes in a pending action as provided in Section 1304, within six months after the date on which notice of the approval by the outstanding shares or notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder. (d) The dissenting shareholder, with the consent of the corporation, withdraws the shareholder's demand for purchase of the dissenting shares. Section 1310. Suspension of proceedings for compensation or valuation pending litigation If litigation is instituted to test the sufficiency or regularity of the votes of the shareholders in authorizing a reorganization, any proceedings under Sections 1304 and 1305 shall be suspended until final determination of such litigation. Section 1311. Shares to which chapter inapplicable This chapter, except Section 1312, does not apply to classes of shares whose terms and provisions specifically set forth the amount to be paid in respect to such shares in the event of a reorganization or merger. Section 1312. Attack on validity of reorganization or short-form merger; Rights of shareholders; Burden of proof (a) No shareholder of a corporation who has a right under this chapter to demand payment of cash for the shares held by the shareholder shall have any right at law or in equity to attack the validity of the reorganization or short-form merger, or to have the reorganization or short-form merger set aside or rescinded, except in an action to test whether the number of shares required to authorize or approve the reorganization have been legally voted in favor thereof; but any holder of shares of a class whose terms and provisions specifically set forth the amount to be paid in respect to them in the event of a reorganization or short-form merger is entitled to payment in accordance with those terms and provisions or, if the principal terms of the reorganization are approved pursuant to subdivision (b) of Section 1202, is entitled to payment in accordance with the terms and provisions of the approved reorganization. (b) If one of the parties to a reorganization or short-form merger is directly or indirectly controlled by, of under common control with, another party to the reorganization or short-form merger, subdivision (a) shall not apply to any shareholder of such party who has not demanded payment of cash for such shareholder's shares pursuant to this chapter; but if the shareholder institutes any action to attack the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded, the shareholder shall not thereafter have any right to demand payment of cash for the shareholder's shares pursuant to this chapter. The court in any action attacking the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded shall not restrain or enjoin the consummation of the transaction except upon 10 days' prior notice to the corporation and upon a determination by the court that clearly no other remedy will adequately protect the complaining shareholder or the class of shareholders of which such shareholder is a member. (c) If one of the parties to a reorganization or short-form merger is directly or indirectly controlled by, or under common control with, another party to the reorganization or short-form merger, in any action to attack the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded, (1) a party to a reorganization or short-form merger which controls another party to the reorganization or short-form merger shall have the burden of proving that the transaction is just and reasonable as to the shareholders of the controlled party, and (2) a person who controls two or more parties to a reorganization shall have the burden of proving that the transaction is just and reasonable as to the shareholders of any party so controlled. APPENDIX G TRANS PACIFIC BANCORP FORM 10-K, FINANCIAL STATEMENTS AND FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1995 ommission file number: 2-86902 TRANS PACIFIC BANCORP (Exact name of registrant as specified in its charter) California 94-2917713 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 46 Second Street, San Francisco, California 94105 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 543-3377 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of the voting stock held by non-affiliates of the registrant at February 29, 1996: Common Stock, no par value, $3,900,000 Number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Class Outstanding at February 29, 1996 Common Stock, no par value 1,118,195 Documents Incorporated by Reference: PARTS I, II, & IV - Annual Report to Shareholders for the year ended December 31, 1995 ("1995 Annual Report"). PART III - The Proxy Statement for the Annual Meeting of Stockholders will be filed by registrant within 120 days after the end of the fiscal year covered by this report. PART I Item 1. Business General Trans Pacific Bancorp, a California Corporation ("Bancorp") is the Bank holding company of Trans Pacific National Bank (the "Bank"), its wholly owned subsidiary, a national bank conducting a commercial banking business which opened for business on August 21, 1984. Other than acting as the holding company for the Bank and as the lessee of the Bank's premises, Bancorp does not currently conduct any other substantial activities. Accordingly, the reported consolidated net income for 1995 resulted primarily from the Bank's operations. The Bank is headquartered in the "South of Market" area of the City of San Francisco and is engaged in a wide variety of business operations customarily conducted by independent commercial banks in California, including the acceptance of checking and savings deposits, the issuance of certificates of deposit, and the making of loans. The Bank's primary lending activities are commercial loans, commercial lines of credit and short-term real estate- related loans. Additionally, the Bank continues to provide credit to the communities from which it draws deposits, with added emphasis on small business loans in low and moderate income areas. To a lesser extent, the Bank has engaged in consumer lending in the form of loans to individuals for household, family and other personal expenditures. As of December 31, 1995, the Bank had net loans totalling $38.3 million. Commercial loans and lines of credit represent 48 percent of the Bank's total loan portfolio and real estate loans represent 46 percent, and consumer and other loans 6 percent. The Bank also offers safe deposit boxes, ATM cards, traveler's checks, collection accounts and other customary bank services to its customers. The Bank's customers are generally individuals who live or work in the vicinity of the Bank's offices, small to medium size businesses and professional firms. As of December 31, 1995, most of the Bank's deposits had been obtained from local individuals, small businesses, professional firms, and state and local governments. The Bank had approximately 2,000 accounts totalling over $57 million in deposits as of December 31, 1995. Demand deposits, both interest- bearing and non-interest bearing represent 65 percent of the Bank's total deposits portfolio, time deposits represent 33 percent, and savings deposits 2 percent. In 1988, the Bank opened its International Department to provide banking products for customers dealing in international trade. The International Department provides a broad range of trade finance products, such as foreign exchange and foreign drafts, import and export letters of credit, documentary collections, standby letters of credit, and bankers acceptances. The International Department provides the Bank with an opportunity to offer trade finance services to U.S.-based small business and middle-market customers, a service which is generally not offered by community banks. Bancorp's headquarters location in San Francisco, a major international port city, is ideally located for trade activity with Pacific Rim countries. Also, in 1988, the Bank opened its second branch office, in downtown Alameda, in order to expand into the East Bay market of Northern California. To supplement the Alameda branch's deposit base, the Bank in 1990 acquired the deposits of the Webster Street branch of Southern California Savings and Loan in Alameda. This acquisition of a large base of retail time deposits and savings accounts enabled the Bank to increase its market share and customer base in Alameda and the surrounding areas. Competition The banking business in the Bank's market area, the San Francisco Bay Area, is extremely competitive and has become increasingly so in recent years as major California banks have entered the small-business loan market. Additionally, the Bank competes with agencies of foreign banks, savings and loans, credit unions, finance companies and other non-banking institutions, such as brokerage firms, insurance companies and investment banking firms, all who offer similar services to customers. Among the competitive advantages that larger financial institutions have are the resources and ability to conduct large-scale marketing campaigns and to allocate investment assets, including loans, to regions of higher demand and yield. The larger institutions also have higher lending limits available to customers with large credit needs. The Bank's current maximum legal lending limits to a single borrower and related parties was $1 million on an unsecured basis and $1.7 million on a fully secured basis. For borrowers requiring loans in excess of the Bank's legal lending limits, the Bank has underwritten and will continue to underwrite such loans on a participating basis with its correspondent banks and with other independent banks, retaining that portion of such loans that is within its lending limits. The Bank believes it can continue to successfully compete by emphasizing personal customer contact and by providing a higher degree of personalized banking service to its customers. While Management believes that its service approach can help build customer loyalty and can offset competitive disadvantages resulting from legal and regulatory constraints due to its size, no assurances can be given that the Bank will succeed in this extremely competitive industry. Federal Reserve Monetary Policy The earnings of Bancorp are not only affected by general economic conditions, but also by the policies of various governmental regulatory authorities in the United States and abroad. In particular, the Federal Reserve System exerts a significant influence on interest rates and credit conditions, primarily through open market operations in U.S. Government securities, varying the discount rate on member bank borrowings and setting reserve requirements against deposits. Federal Reserve monetary policies have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. Supervision and Regulation Under the Bank Holding Company Act (the Act), Bancorp is required to file reports of its operations with the Board of Governors of the Federal Reserve System (the Federal Reserve) and is subject to examination by regulators. Further, the Act restricts activities in which Bancorp may engage and the activities of any company in which the Bancorp owns more than 5 percent of the voting shares. Generally, permissible activities are limited to banking, the business of managing and controlling banks and activities closely related to banking as determined by the Federal Reserve. The Bank, as a national bank, is subject to regulation and examination by the Office of the Comptroller of the Currency (OCC), the Federal Reserve and the Federal Deposit Insurance Corporation. Additionally, there are numerous requirements and restrictions in the laws of the United States and the State of California affecting the Bank and its operations including: the requirement to maintain reserves against deposits; restrictions on the nature and amount of loans that it may make; requirements for community reinvestment; restrictions relating to its investments; restrictions relating to the places at which it may operate branches and its ability to acquire other banks and financial institutions. Throughout 1993 and for part of 1994, the Bank was operating under a Formal Agreement with the OCC, which required specific capital ratios and required management to implement certain steps to strengthen the Bank's operations. The Formal Agreement was terminated in September 1994, as the Bank had achieved full compliance with its terms. Additionally, for part of 1993 and throughout 1994, Trans Pacific Bancorp operated under a Memorandum of Understanding (MOU) with the Federal Reserve Bank, which required filing of progress reports and restricted certain operations, including the payment of cash dividends and issuance of additional debt. This MOU was terminated in February, 1995. Major regulatory changes affecting the Bank, and the financial services industry in general have occurred in the last several years and can be expected to occur increasingly in the future. The most significant recent change affecting banks was the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). In addition to providing for the recapitalization of the Bank Insurance Fund, this law makes a number of far- reaching changes in the legal environment for insured banks, including reductions in insurance coverage for certain kinds of deposits, increases in consumer-oriented requirements and disclosures, and major revisions to conform the process of supervision and examination of depository institutions, with an emphasis on risk-weighted capital levels. It is expected that this law and any other current proposals for regulatory change should not have a material effect on the operations, capital resources or liquidity of Bancorp or the Bank. Employees The Bank employed 35 full time equivalent persons at December 31, 1995. Management believes that its employee relations are excellent and that the compensation and benefits provided by the Bank to its employees are competitive. Benefits for Bank employees include stock options, an Employee Stock Ownership Plan and a 401(k) plan. Bancorp had no salaried employees at December 31, 1995. STATISTICAL DISCLOSURES I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential Information on the distribution of assets, liabilities, and stockholder equity and on interest rates and interest differential is incorporated by references from pages 8 and 9 of the 1995 Annual Report. II. Investment Portfolio Carrying Value of Investments, Maturity Ranges, Weighted Average Yield The following table list the carrying value, in thousands, and yield by expected remaining principal maturity date of the investment portfolio at December 31, 1995. The weighted average yield is calculated based on the amortized cost of securities. Weighted Average Available for sale securities Amortized Cost Fair Value Yield US Treasury securities and other government agency: Due within 1 year $ 4,511 $ 4,519 5.86% Due after 1 year through 5 years 4,775 4,784 5.75% 9,286 9,303 5.80% Mortgage-backed securities 2,692 2,699 6.65% Other securities: Due within 1 year 727 725 4.70% Due after 1 year through 5 years 830 780 4.86% Due after 10 years 365 365 4.96% 1,922 1,870 4.96% $ 13,900 $ 13,872 5.85% Other securities consist principally of corporate bonds. Expected remaining maturities may differ from remaining contractual maturities because borrowers have the right to prepay certain obligations with or without penalties. Information regarding the carrying value of investments at December 31, 1994 is incorporated by reference from pages 30 and 31 of the 1995 Annual Report. III. Loan Portfolio Loans Outstanding by Type Information regarding types of domestic loans and loan concentrations at December 31, 1995 and 1994 is incorporated by reference from pages 21, 32 and 33 of the 1995 Annual Report. The Bank had no foreign loans at December 31, 1995. Maturities and Sensitivity to Changes in Interest Rates Final loan maturities, in thousands, and rate sensitivities of the loan portfolio at December 31, 1995 are as follows: Within One-Five After One Year Years Five Years Total Loans at fixed interest rates: Commercial $ 5,124 2,753 - 7,877 Real Estate 18 2,552 500 3,070 Installment 7 140 - 147 Other 40 - - 40 Total fixed interest-rate loans 5,189 5,445 500 11,134 Loans at variable interest rates: Commercial 10,620 - - 10,620 Real Estate 12,627 2,345 - 14,972 Installment 20 - - 20 Preference Line 1,998 - - 1,998 Total variable interest-rate loans 25,265 2,345 - 27,610 Total $ 30,454 7,790 500 38,744 Non Performing Assets Information on non-performing assets and risk elements is incorporated by reference from pages 12 and 13 of the 1995 Annual Report. IV. Summary of Loan Loss Experience Allocation of the Allowance for Loan Losses Information on the allocation of the allowance for loan losses by loan type is incorporated by reference from pages 13 through 15 of the 1995 Annual Report. Annual Credit Loss Experience Information on annual credit loss experience is incorporated by reference from pages 15 and 16 of the 1995 Annual Report. V. Deposits Average Amount and Rates Paid Information on average deposits amounts and rates paid on domestic deposits is incorporated by reference from page 9 of the 1995 Annual Report. At December 31, 1995 and 1994, deposits of foreign depositors were not material. Time Certificates of Deposit Greater Than $100,000 Information on time certificates of deposits greater than $100,000 is incorporated by reference from page 36 of the 1995 Annual Report. VI. Return on Equity and Assets Years ended December 31, 1995 1994 1993 Return on average assets 0.73% 0.30% (.89)% Return on average equity 7.14% 3.03% (9.90)% Dividend payout ratio - - - Equity to assets ratio 10.08% 10.48% 9.12 % VII. Short-Term Borrowings Outstanding amounts, in thousands, of selected short-term borrowings were as follows: Years ended December 31, 1995 1994 1993 Federal funds purchased and repurchase agreements: Average amount outstanding $ 47 .3 293 Daily average rate 6.43% 4.81% 3.31% Highest month-end balance $ 900 - 2,049 Year-end balance $ - - - Rate on outstandings at year end - - - Other borrowed funds: Average amount outstanding $ 212 885 623 Daily average rate 6.10% 5.22% 5.46% Highest month-end balance $ 454 1,329 1,006 Year-end balance $ 186 540 603 Rate on outstandings at year end 5.24% 5.15% 4.61% Federal funds borrowed are repaid the following business day. Repurchase agreements and other borrowed funds generally have original maturities not exceeding 180 days. Item 2. Properties Bancorp and the Bank's headquarters are located at 46 Second Street in San Francisco, California in the city's downtown Financial District. The building, with 8,500 square feet of usable space is under lease, which expires in April, 2001, with a 3 year renewal option available under similar terms. The Bank maintains another branch at 1442 Webster Street in Alameda, California. The premises, purchased by Bancorp in 1988 and sold to the Bank in 1993, contains approximately 4,700 square feet. Bancorp believes that its facilities are well maintained and are generally adequate for its present and anticipated future needs. Item 3. Legal Proceedings The Company is involved in various claims and lawsuits incidental to its business. In the opinion of management, after review with independent legal counsel, the ultimate liability resulting from such claims and lawsuits will not have a material adverse effect on the financial position, results of operations, or liquidity of the Company. There were no material proceedings adverse to the Bank or Bancorp to which any director, officer, affiliate of the Bank or Bancorp, or 5 percent shareholder of the Bank or Bancorp, or any associate of any such director, officer, affiliate or 5 percent shareholder of the Bank or Bancorp, was a party adverse to the Bank or Bancorp. Additionally, none of the above persons had a material interest adverse to the Bank or Bancorp. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of Bancorp's fiscal year covered by this report. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Market Information The common stock of Trans Pacific Bancorp (symbol: TPAE) is publicly traded in limited and infrequent transactions on the NASDAQ Bulletin Board. According to information made available to Bancorp, the range of high and low bids for such common stock for each calendar quarter since January 1994 is as follows: Calendar Year 1995 High Low First Quarter $ 2.50 2.25 Second Quarter 2.75 2.25 Third Quarter 4.50 2.50 Fourth Quarter 4.88 4.50 Calendar Year 1994 High Low First Quarter $ 2.00 2.00 Second Quarter 2.00 2.00 Third Quarter 2.00 2.00 Fourth Quarter 2.25 2.00 The last bid price known to Bancorp for its common stock was $4.75. There are no current plans to offer any common stock of Bancorp in a public offering. Holders As of December 31, 1995, there were 301 holders of the common stock of Bancorp. There are no other classes of common equity outstanding. Dividends Through December 31, 1995, Bancorp had never paid a cash dividend to stockholders. On February 23, 1996 a special dividend was declared to shareholders of record March 8, 1996. Bancorp has no current plans to pay regular dividends. Item 6. Selected Financial Data Selected financial data for the five years 1991 through 1995 is incorporated by reference from page 6 of the 1995 Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated by reference from pages 7 through 19 of the 1995 Annual Report. Item 8. Financial Statements and Supplementary Data The Report of Independent Auditors and the Consolidated Financial Statements of Bancorp are incorporated by reference from pages 20 through 44 of the 1995 Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure During fiscal years 1995 and 1994, Bancorp neither changed its accountants nor reported a disagreement on Form 8-K on any matter of accounting principles or practices or financial statements disclosure. PART III Item 10. Directors and Executive Officers of the Registrant Information concerning directors and persons nominated to become directors of Bancorp is incorporated by reference to the text under the captions "Item 1: Election of Directors", "Security Ownership of Management", and "Executive Compensation" in the Proxy Statement for the May 23, 1996 Annual Meeting of Shareholders of Bancorp. Information concerning executive officers of the Bank as of March 1, 1996 is set forth below. Name Age Position with Registrant Eddy S.F. Chan 48 President and Chief Executive Officer Robert A. Hinkle 51 Executive Vice President and Chief Lending Officer John K. Wong 47 Executive Vice President Bonnie L. Hao 48 Senior Vice President Kiran C. Mehta 46 Senior Vice President Grant B. Schley 54 Senior Vice President Dennis B. Jang 33 Vice President and Chief Financial Officer Crystal Z. Hundahl 38 Vice President Lorraine S. Braud 50 Vice President Eddy S.F. Chan was appointed President and Chief Executive Officer of Bancorp on January 1, 1984. He was appointed Chairman of the Bank on January 1, 1983 and President and Chief Executive Officer of the Bank on January 1, 1984. Robert A. Hinkle was appointed Executive Vice President on April 1, 1995 in addition to his title of Chief Lending Officer. He had served as Senior Vice President and Chief Lending Officer of the Bank since December 1, 1992. Previously, he served as Executive Vice President and Chief Operating Officer of Century Bank, San Francisco from 1987 to 1992. John K. Wong was appointed Executive Vice President on April 1, 1995. Previously he was a Senior Vice President of the Bank, appointed on January 1, 1989. He was elected as a director of Bancorp in 1983 and as a director of the Bank in 1984. Bonnie L. Hao was appointed Senior Vice President of the Bank on April 1, 1995. Previously, she was Vice President of the Bank from 1992 to 1995, and was Vice President of California National Bank, San Francisco from 1989 to 1992. Kiran C. Mehta was appointed Senior Vice President, Credit Administration of the Bank on January 1, 1989. Grant B. Schley was appointed Senior Vice President of the Bank on January 1, 1994. From 1992 to 1994, he was the Regional Branch Manager. Previously, he served as Vice President of Financial Center Bank, San Francisco from 1985 to 1990. Dennis B. Jang was appointed Chief Financial Officer on March 1, 1996, in addition to his title as Vice President and Corporate Secretary. He was appointed Vice President on January 1, 1994. Previously, he was Assistant Vice President of the Bank from 1990 to 1994. Crystal Z. Hundahl was appointed Vice President of the Bank on January 1, 1994, in addition to her title as Controller. Previously, she was Assistant Vice President of the Bank from 1988 to 1994. Lorraine S. Braud was appointed Vice President of the Bank on February 16, 1995. Previously, she served as Vice President of Bank of San Francisco from 1986 to 1993. All Executive Officers serve at the pleasure of the Board. Crystal Z. Hundahl is the niece of Eddy S.F. Chan. There are no other family relationships between any other officers. Item 11. Executive Compensation Information concerning executive compensation is incorporated by reference from the text under the captions, "Item 1: Election of Directors" and "Executive Compensation" in the Proxy Statement for the May 23, 1996 Annual Meeting of Shareholders. Item 12. Security Ownership of Certain Beneficial Owners and Management Information concerning ownership of equity stock of the Parent by certain beneficial owners and management is incorporated by reference from the text under the captions, "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in the Proxy Statement for the May 23, 1996 Annual Meeting of Shareholders. Item 13. Certain Relationships and Related Transactions Information concerning certain relationships and related transactions with officers and directors is incorporated by reference from the text under the caption, "Item 1: Election of Directors" in the Proxy Statement for the May 23, 1996 Annual Meeting of Shareholders. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Document filed as part of this report: 1. Financial Statements The Consolidated Financial Statements, Notes thereto, and Independent Auditors' Report are incorporated herein by reference from pages 20 through 44 of the 1995 Annual Report. 2. Financial Statement Schedules All schedules for which provision is made in the applicable accounting regulations of the Securities Exchange Commission are not required under the related instructions or are not applicable and, therefore, have been omitted. 3. Exhibits EXHIBIT DESCRIPTION NUMBER 3.1 Articles of Incorporation of Trans Pacific Bancorp, incorporated by reference to Exhibit 3.1 to Bancorp's Registration Statement on Form S-1 (No. 2-86902). 3.2 Amended By-Laws of Trans Pacific Bancorp, incorporated by reference to Exhibit 3.2 to Bancorp's Registration Statement on Form S-1 (No. 2-86902). 3.3 Amendment to Articles of Incorporation, incorporated by reference to Exhibit 3.3 to Bancorp's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. 3.4 Amendment to Articles of Incorporation, incorporated by reference to Exhibit 3.4 to Bancorp's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. 4.1 Specimen Stock Certificate, incorporated by reference to Exhibit 4.1 to Bancorp's registration Statement on Form S-1 (No. 2-86902). 10.2 Employee Stock Option Plan, incorporated by reference to Exhibit 10.2 to Bancorp's Registration Statement on Form S-1 (No. 2- 86902). 10.10 Amendment to Employee Stock Option Plan incorporated by reference to Exhibit 10.10 to Bancorp's Annual Report on Form 10-K for the fiscal year ended December 31, 1987. 10.11 Amendment to Employee Stock Option Plan dated September 21, 1989 incorporated by reference to Exhibit 10.11 to Bancorp's Annual Report on Form 10-K for the fiscal year ended December 31, 1989. 10.12 Trans Pacific Bancorp Employee Stock Ownership Plan and Trust is incorporated by reference to Exhibit 4.1 to Bancorp's Registration Statement on Form S-8 (No. 33-39190). 10.13 Trans Pacific Bancorp Non Qualified Stock Option Plan is incorporated by reference to Exhibit 4.1 to Bancorp's Registration Statement on Form S-8 (No. 33-39191). 22.1 Subsidiaries of the Registrant, incorporated by reference to Exhibit 22.1 to Bancorp's Registration Statement on Form S-1 (No. 2-86902). 23 Consent of KPMG Peat Marwick LLP. (b) No reports on Form 8-K were filed by Bancorp during the fourth quarter of 1995. SIGNATURES Pursuant to the requirements of Section 15 (c) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRANS PACIFIC BANCORP EDDY S.F. CHAN (Eddy S.F. Chan) President Date: March 21, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on the 21st day of March 1996. Signature Title JAMES A. BABCOCK Director and Chairman of the Board (James A. Babcock) EDDY S.F. CHAN Director, President and CEO (Eddy S.F. Chan) (Principal Executive Officer) JOHN T. STEWART Director and Secretary (John T. Stewart) SIMON S. TENG Director and Treasurer (Simon S. Teng) (Principal Financial & Accounting Officer) FRANKIE G. LEE Director and Vice Chairman (Frankie G. Lee) JOHN K. LEE Director (John K. Lee) MASAYUKI NAKAHIRA Director (Masayuki Nakahira) FRANK K.W. WONG Director (Frank K.W. Wong) JOHN K. WONG Director (John K. Wong) 1995 Annual Report About The Company Trans Pacific Bancorp is the holding company of Trans Pacific National Bank, an independent commercial bank with branches in San Francisco and Alameda, California. Trans Pacific National Bank has been providing financial services to local middle-market businesses, professional companies, and import/export companies since 1984. Trans Pacific Bancorp is listed on the NASDAQ Bulletin Board system under the symbol TPAE. TABLE OF CONTENTS FINANCIAL HIGHLIGHTS 3 LETTER TO SHAREHOLDERS 4 FIVE YEAR FINANCIAL SUMMARY 6 RESULTS OF OPERATIONS 7 Net Interest Income 7 Provision for Loan Losses 10 Non-Interest Income 10 Non-Interest Expense 11 Provision for Income Taxes 11 ASSET QUALITY 11 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES 13 ASSET/LIABILITY MANAGEMENT 16 CAPITAL RESOURCES 18 REPORT OF THE INDEPENDENT AUDITORS 21 CONSOLIDATED FINANCIAL STATEMENTS 22 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 28 TRANS PACIFIC BANCORPBOARD OF DIRECTORS 46 TRANS PACIFIC NATIONAL BANKPRINCIPAL OFFICERS 46 FINANCIAL HIGHLIGHTS 1995 1994 Increase For the year Net Income $ 445,382 $ 180,191 +147% Earnings Per Share 0.40 0.16 +150 At year end Loans 38,340,437 32,368,367 +18 Total Assets 64,826,520 56,770,772 +14 Deposits 57,563,988 49,800,237 +16 Shareholders' Equity 6,531,971 5,950,839 +10 Ratios Return on Average Equity 7.14% 3.03% Return on Average Assets 0.73% 0.30% Risk-Based Capital Ratio 16.81% 17.06% LETTER TO SHAREHOLDERS Financial Results We are pleased to report that 1995 was a year of record earnings for Trans Pacific Bancorp. In the best performance in our 11 year history, the Company had net income of $445,382, or $0.40 per share. As discussed in detail under the "Financial Review" beginning on page 7, the improvement in financial results was due to higher net interest income, a reduced provision for loan losses, and reduced non-interest operating expenses. Improved asset quality also continues to contribute positively to our financial results. Over the years, our results have been a direct reflection of the trends in California banking and the California economy, and 1995 was no exception. During the year, we are pleased to note a positive turnaround in results for many of the state's financial institutions, including local independent banks in the San Francisco Bay Area, which had previously been heavily burdened by asset quality problems. We were also pleased to note that California's economy as a whole has improved for local middle-market businesses, professional companies, and import/export companies, all our traditional sources of business. We believe that the local economy will continue to improve in 1996 and this will lead to further job growth, increased personal income and additional capital spending by businesses, which is favorable for us. Special Dividend In order to provide our shareholders with a return, the Board has declared a special dividend of 8 cents per share to shareholders of record March 8, 1996. The dividend will be paid on March 29, 1996. While we have no immediate plans to begin paying regular dividends, we may pay dividends in the future based on our meeting certain profitability and capital goals. Prospects for the Future Our Corporate division will continue to its commitment to serve our core customers, middle-market businesses and professional companies. In 1995, Trans Pacific began to fund loans in conjunction with the Small Business Administration and we seek to increase our participation during 1996. For our International division, we continue to see tremendous opportunity in the expansion of international trade in the Bay Area. We see international trade continuing to be a significant part of California's economy and growing over the next decade, with the Pacific Rim providing the biggest markets for the state's exports. We continue to be active in trade groups, seeking to outreach to emerging import/export entrepreneurs. Around us, banking in California as we know it is going through significant changes as we go forward. The move towards consolidation continues with two significant local transactions: the acquisition of First Interstate Bank by Wells Fargo, and the acquisition of California Bancshares by U.S. Bancorp. In the past, these types of consolidations create great business development opportunities for companies such as Trans Pacific who emphasize customer satisfaction and quality service. Despite the temporary industry upheaval, our plan is to continue to steadily focus on our goal to seek the best for our shareholders, employees and clients by striving for consistent growth in performance, profitability and opportunity. Acknowledgements As a final note, we would like to acknowledge the following individuals: Peter Da Roza played a key part in establishing our International department in 1988. Peter passed away on January 19, 1996, after a lengthy illness. He was truly a pioneer in the area of trade finance and he will be missed not only by his co-workers here, but throughout the Bay Area banking community. Daniel Y. Lee, the Bank's President, left the Company in February 1996 to become the controller of Wind River Systems in Alameda. In his 10 years at the Bank, Dan provided us with great leadership, especially during our most difficult times. We wish him the best of success in the future. Merle S. Konigsberg and Warren K. Miller, two of the Company's founding directors, retired from the Board at the end of 1995, becoming our first two Directors Emeriti. Their hard work, wisdom and dedication to locally-owned, independent banking contributed greatly to the beginning and continued success of the Company. James A. Babcock Chairman Eddy S.F. Chan Chief Executive Officer FIVE YEAR FINANCIAL SUMMARY Summary of Consolidated Operations Years ended December 31, (in thousands except share data) 1995 1994 1993 1992 1991 Interest income $ 4,855 4,259 4,433 5,920 7,550 Interest expense 1,799 1,369 1,617 2,646 4,183 Net interest income 3,056 2,890 2,816 3,274 3,367 Provision for possible loan losses 40 173 889 662 349 Other income 598 664 855 887 866 Other expense 2,962 3,088 3,567 3,579 3,458 Income (loss) before taxes 652 293 (785) (80) 426 Income tax expense (benefit) 207 113 (171) 20 228 Net income (loss) $ 445 180 (614) (100) 198 Net income (loss) per share $ 0.40 0.16 (0.54) (0.09) 0.17 Average common shares outstanding 1,118,195 1,127,305 1,143,195 1,141,247 1,138,795 Year-End Financial Position Years Ended December 31, (in thousands) 1995 1994 1993 1992 1991 Cash and cash equivalents $ 9,916 7,377 6,538 4,313 8,416 Investment securities 14,359 14,508 12,812 11,314 11,743 Loans, net 38,340 32,368 39,566 50,033 54,165 Premises and equipment, net 933 1,037 1,015 1,281 1,484 Other assets 1,279 1,481 5,078 5,430 2,980 Total assets $ 64,827 56,771 65,009 72,371 78,788 Deposits $ 57,564 49,800 57,823 63,916 68,398 Long Term Debt - 26 71 116 161 Other Liabilities 731 994 1,188 1,863 3,720 Total liabilities 58,295 50,820 59,082 65,895 72,279 Stockholders' equity 6,532 5,951 5,927 6,476 6,509 Total liabilities and equity $ 64,827 56,771 65,009 72,371 78,788 MANAGEMENT DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS The Company earned $445 thousand in 1995. This represented an improvement over net income in 1994 of $180 thousand, and the loss of $614 thousand in 1993. The 1995 net income reflects the effects of an improving California economy. Two major results were: More stable real estate values which enabled the sale of other real estate owned; and the strengthening financial condition of the Bank's customers, which led to improved asset quality compared to previous years. On a per share basis, the 1995 net income was $0.40, compared to net income of $0.16 and net loss of ($0.54) in 1994 and 1993, respectively. In addition to the factors discussed above, the improvement in 1995 reflected improved net interest income, a decreased provision for loan losses and lower non-interest expense. The improvement in 1994 over 1993 was mostly due to a decreased provision for loan losses and lower non-interest expense. The Company's return on average total assets (ROA) was 0.73 percent in 1995, from 0.30 percent and (0.89) percent in the previous two years. Return on equity (ROE) in 1995 was 7.14 percent, compared with 3.03 percent in 1994 and (9.90) percent in 1993. Components of Net Income (Loss) (percentage of average earning assets) 1995 1994 1993 Net interest income 5.74% 5.35% 4.93% Provision for loan losses (0.08) (0.32) (1.56) Non-interest income 1.12 1.23 1.50 Non-interest expense (5.55) (5.72) (6.24) Taxes (0.39) (0.21) 0.30 Net income (loss) 0.84 0.33 (1.07) Net income (loss) as a percentage of average total assets 0.73 0.30 (0.89) Net Interest Income Net interest income is the difference between interest income (which includes yield-related net loan fees) and interest expense. The following table details the components of net interest income: Components of Net Interest Income (in thousands) 1995 1994 1993 Interest Income $ 4,855 4,259 4,433 Interest Expense 1,799 1,369 1,617 Net interest income $ 3,056 2,890 2,816 Average earning assets $ 53,212 53,987 57,121 Net interest margin 5.74% 5.35% 4.93% Net interest income in 1995 increased by $166 thousand, or 6 percent from 1994 to $3.1 million. Separately, interest income increased $596 thousand, or 14 percent, and interest expense increased $430 thousand, or 31 percent in 1995. The increase in interest expense was caused by an increase in cost of funds of 116 basis points due to competitive pressures in market rate and time deposits. The increase in interest income was due to the continued shift in the mix of the Bank's earning assets to higher-yielding loans from shorter term, lower-yielding investment securities, due to increased loan demand. The net interest margin, which represents the average net yield on earning assets, rose in 1995; for 1995 the net interest margin was 5.74 percent, a 39 basis point improvement over 1994. In 1994, the net interest margin was 5.35 percent, which was a 42 basis point improvement over 1993, as deposit rates were slower to rise than loan rates, due to competitive pressures. The following table is a summary of the changes in net interest income attributable to changes in either average balances or average rates for both interest-earning assets and interest-bearing liabilities in thousands for the years ended December 31, 1995 and 1994. Because of the numerous simultaneous volume and rate changes during any period, it is not possible to precisely allocate changes between volume and rate. For this table, the changes in interest earned and interest paid due to both rate and volume have been allocated to changes due to volume and rate in proportion to the relationship of absolute dollar amounts in each. Rate and Volume Analysis Years ended December 31, 1995 versus 1994 1994 versus 1993 Volume Rate Total Volume Rate Total Increase (decrease) in interest income due to Interest Earning Assets: Loans $ 56 489 545 (651) 244 (407) Investment securities 73 10 83 271 (102) 169 Federal funds sold (78) 59 (19) 20 61 81 Interest-bearing deposits with banks (12) (1) (13) (8) (9) (17) Total interest-earning assets $ 39 557 596 (368) 194 (174) Increase (decrease) in interest expense due to Interest-Bearing Liabilities: Deposits: Demand, interest-bearing $ 23 223 246 4 (26) (22) Savings (11) 1 (10) 5 (2) 3 Time (70) 296 226 (192) (39) (231) Other short-term borrowings (27) (3) (30) (2) 4 2 Total interest-bearing liabilities $ (85) 517 432 (185) (63) (248) Net interest-earning assets $ 124 40 164 (183) 257 74 The following table lists the average amounts, in thousands, outstanding for major categories of interest-earning assets (excluding non-accrual loans) and interest-bearing liabilities and the average interest rates earned, including loan fee income, and paid for the periods indicated. Average Balances and Rates Years ended December 31, 1995 1994 Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Earning Assets: Loans $ 35,866 3,844 10.72% 35,275 3,299 9.35% Investment securities 12,694 739 5.82% 11,442 656 5.73% Federal funds sold 4,283 249 5.81% 6,722 268 3.99% Interest-bearing deposits with banks 369 23 6.23% 548 36 6.57% Total interest-earning assets $ 53,212 4,855 9.12% 53,987 4,259 7.89% Interest-Bearing Liabilities: Deposits: Demand, interest-bearing $ 23,421 789 3.37% 22,505 544 2.42% Savings 1,179 26 2.21% 1,680 36 2.14% Time 18,481 968 5.24% 20,616 743 3.60% Other short-term borrowings 251 16 6.37% 885 46 5.20% Total interest-bearing liabilities $ 43,332 1,799 4.16% 45,686 1,369 3.00% Net interest income $ 3,056 $ 2,890 Net interest-earning assets yield 5.74% 5.35% 1993 Interest Average Average Income/ Yield/ Balance Expense Rate Earning Assets: Loans $ 43,430 3,706 8.53% Investment securities 6,939 487 7.02% Federal funds sold 6,110 187 3.06% Interest-bearing deposits with banks 642 53 8.26% Total interest-earning assets $ 57,121 4,433 7.76% Interest-Bearing Liabilities: Deposits: Demand, interest-bearing $ 22,354 566 2.53% Savings 1,437 33 2.30% Time 25,421 974 3.83% Other short-term borrowings 916 44 4.80% Total interest-bearing liabilities $ 50,128 1,617 3.23% Net interest income $ 2,816 Net interest-earning assets yield 4.93% Provision for Loan Losses The level of the provision for loan losses during the past three years reflects continuous efforts to improve loan quality by enforcing strict underwriting and administration procedures and aggressively pursuing collection efforts with troubled debtors. The determination of the provision for loan losses and, correspondingly, the level of the allowance for loan losses is based on evaluation of changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, prior loan loss experiences and current economic conditions which may affect the borrowers' ability to pay. The provision for loan losses was $40 thousand in 1995, compared with $173 thousand in 1994 and $889 thousand in 1993. The decrease in the provision for loan losses reflected the effects of improving asset quality, due in part to positive California economic trends. For further discussion related to the provision for loan losses, see the section below entitled "Asset Quality". Non-Interest Income Components of Non-Interest Income (in thousands) 1995 1994 1993 Deposit account fees $ 282 268 275 Other charges and fees 316 312 404 Other real estate - 84 146 Gain on sale of securities - - 30 $ 598 664 855 Non-interest income decreased 10 percent in 1995 to $598 thousand. The decline was due to zero income for other real estate owned, which includes rental income and the net gain on sales of other real estate owned (OREO), as the Bank had no foreclosed properties during 1995. Deposit account and other charges and fees were consistent with 1994 levels. In 1994, non-interest income decreased 22 percent from the previous year, due mainly to reduced commissions on letters of credit earned. Income for other real estate owned, which includes rental income and the net gain on sales of OREO, was lower as those properties were sold during the year. Non-Interest Expense Components of Non-Interest Expense (in thousands) 1995 1994 1993 Salaries and employee benefits $ 1,720 1,627 1,587 Occupancy 296 325 430 Data processing 120 119 111 Amortization of deposit premium 99 99 99 Furniture and equipment 97 95 120 Accounting 85 81 85 Federal deposit insurance 58 142 147 Legal fees and costs 36 38 71 Other real estate owned - 107 459 Other expenses 450 456 458 $ 2,961 3,089 3,567 Non-interest expense decreased to $2.96 million in 1995, a drop of 4 percent as compared to 1994, due primarily to a decrease in federal deposit insurance and in the expenses related to other real estate owned properties. Salaries and employee benefits rose 5.7 percent during the year, which includes incentive payments made under a management incentive plan implemented in 1995. In 1994, non-interest expense decreased 13 percent versus 1993, due primarily to a decrease in the expenses related to other real estate owned properties sold in 1994. Salaries and employee benefits rose 2.5 percent over 1993; occupancy and furniture and equipment expense were lower by 24 percent and 21 percent, respectively, due to reduced depreciation as certain assets became fully depreciated in 1994. Provision for Income Taxes The 1995 income tax expense was $207 thousand compared to $113 thousand income tax expense in 1994 and $171 thousand benefit in 1993. The effective tax rate for 1995 was 32 percent, versus 38 percent in 1994 and (22) percent in 1993. The effective rate decreased in 1995 was due to a reduction in the valuation allowance for deferred tax assets. In 1993, the Company recognized a tax benefit due to the pretax loss which was carried back to recover prior years' taxes paid. Effective January 1, 1993, the Company adopted SFAS 109. There was no impact on the Company's net income from the adoption of SFAS 109. ASSET QUALITY The Company closely monitors the markets in which it conducts its lending operations. The two primary areas of lending for the Company are commercial and real estate loans, which in total comprise 94 percent of loans outstanding as of December 31, 1995. To control its exposure and concentration in real estate loans, the Company has established limits by type of collateral and purpose. To increase diversification of credit risk in commercial loans, the Company monitors commercial loans by business type and location. Asset reviews are performed using grading standards and criteria similar to those employed by bank regulatory agencies. Assets receiving lesser grades are called classified assets and include all potential problem loans. These occur when known information about possible credit problems of borrowers cause management to have doubts as to the ability of such borrowers to comply with loan repayment terms. These loans have varying degrees of uncertainty and may become non-performing assets. While historically only a relatively small amount of classified assets have resulted in losses, such assets receive an elevated level of Management attention to ensure collection. All non- performing assets are included in classified assets. Other classified assets consist of other real estate owned. Classified assets at December 31, 1995, 1994 and 1993 are summarized below: (in thousands) 1995 1994 1993 Classified loans $ 1,443 2,208 4,024 Other classified assets - - 3,107 Total classified assets $ 1,443 2,208 7,131 Reserve for loan losses as a percentage of classified loans 28% 18% 17% Classified assets at December 31, 1995 decreased to $1.4 million from $2.2 million at prior year-end. This decrease reflects the successful collection efforts on many loans previously classified. These efforts were aided by an improving Bay Area real estate market where prices began to stabilize and improved borrowers' financial conditions. During 1994, classified decreased from $7.1 million to $2.2 million as the Company sold all foreclosed real estate during the year and from successful classified loan collections. The performance of any individual loans can be impacted by external factors such as the interest rate environment or factors particular to the borrower. Non-Performing Assets and Restructured Loans As of December 31, 1995 and 1994 there were no other restructured loans, foreign outstandings, loan concentrations or potential problem loans except as discussed below or in the Consolidated Financial Statements and related footnotes. See Note 1 of the Notes to Consolidated Financial Statements for a discussion of the Bank's policy on non-accrual loans. Non-performing assets include non-accrual loans and other real estate owned. Loans are placed on non-accrual status upon reaching 90 days or more delinquent, unless the loan is well secured and in the process of collection. Interest previously accrued on loans placed on non-accrual status is charged against interest income. Loans secured by real estate, with temporarily impaired values and commercial loans to borrowers experiencing financial difficulties, may be placed on non-accrual status even if the borrowers continue to repay the loans as scheduled. Such loans are reinstated to an accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period, and there is a sustained period of repayment performance in accordance with the contractual terms. When the ability to fully collect non-accrual loan principal is in doubt, cash payments received are applied against the principal balance of the loans until such time as full collection of the remaining recorded balance is expected, at which point any additional payments received are recorded as interest income on a cash basis. Loans 90 days or more past due and still accruing, restructured loans, and non-performing assets are as follows for December 31, 1995, 1994, and 1993: December 31, (in thousands) 1995 1994 1993 Loans 90 days or more past due and still accruing interest $ - 66 118 Restructured loans 635 635 635 Non-performing assets: Non-accrual loans 45 352 1,281 Other real estate owned - - 3,107 $ 45 352 4,388 Total $ 680 1,053 5,141 The levels of non-performing assets has decreased significantly over the past three years due to both internal factors such as improved underwriting and monitoring of loans, and external factors such as an improving Bay Area economy and more stable real estate values. Non-performing assets were $45 thousand at December 31, 1995, down 87 percent from $352 thousand at December 31, 1994, due primarily to the resolution of non-accrual loans during the year. At December 31, 1995, other real estate owned was $0 and there were no foreclosure activity during the year. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The Bank has an established process to determine the adequacy of the allowance for loan losses based upon the risk of loss inherent in its portfolio. This process uses two complementary allocation procedures: Specific credit allocations for problem loans; and an unallocated portion provided for the remaining loan portfolio. While management has made specific and general allocations to various portfolio segments, the total allowance for loan losses is general in nature and is available for the portfolio in its entirety. The Bank's determination of the level of the allowance rests upon various judgments and assumptions, including portfolio composition and concentrations, lending policies, delinquency trends and general economic conditions. The Bank has a credit review and evaluation program which continuously reviews loan quality, incorporating internal and external credit review. The results of these reviews are reported to the Board of Directors. Such reviews also assist management in establishing the level of the allowance. The table below provides a breakdown of the allowance for loan losses by loan category. Although management has allocated the allowance to specific loan categories, the adequacy of the allowance must be considered in its entirety. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgement of information available to them at the time of their examination. December 31, (in thousands) 1995 1994 Allowance % of Loans Allowance % of Loans Domestic: Commercial $ 226 1.22% 180 1.20% Real Estate - Construction - - - - Real Estate - Mortgage 82 0.45% 99 0.62% Consumer 9 0.40% - - Foreign - - - - Unallocated 87 - 111 - $ 404 1.04% 390 1.19% Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, (SFAS 114), as amended by Standard of Financial Accounting Standards No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures (SFAS 118). Under SFAS 114 a loan is considered impaired when, based on current information and events, it is "probable" that a creditor will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. The measurement of impairment may be based on (i) the present value of the expected cash flows of the impaired loan discounted at the loan's original effective interest rate, (ii) the observable market price of the impaired loans, or (iii) the fair value of the collateral of a collateral-dependent loan. SFAS 114, as amended by SFAS 118, does not apply to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment. The Company generally identifies loans to be reported as impaired when such loans are in non accrual status or are considered troubled debt restructurings due to the granting of a below-market rate of interest or a partial forgiveness of indebtedness on an existing loan. In measuring impairment for the purpose of establishing specific loan loss reserves, the Company reviews all impaired commercial and construction loans classified "Substandard" and "Doubtful". All "loss" classified loans are fully reserved under the Company's standard loan loss reserve methodology. Commercial and real estate loans that are not classified, groups of non- classified, smaller balance loans such as installment loans and preferred lines of credit, are evaluated collectively for impairment under the Company's standard loan loss reserve methodology and are, therefore, excluded from the specific evaluation using SFAS 114. The following summarizes the Company's impaired loans at December 31, 1995: Non-Accrual Troubled Debt Total Impaired Specific (in thousands) Loans Restructurings Loans Reserves $ 45 - 45 5 The average balances of the Company's impaired loans for the year ended December 31, 1995 was $838 thousand. In general, the Company does not recognize any interest income on loans that are classified as impaired. Changes in the allowance for loan losses for the years 1995 and 1994 were as follows: (in thousands) 1995 1994 Balance, beginning of year $ 390 670 Charge-offs: Domestic: Commercial, financial and agricultural 63 117 Real estate: construction - - Real estate: mortgage 221 504 Installment loans to individuals - 21 Lease financing - - Foreign - - Total charge-offs 284 642 Recoveries: Domestic: Commercial, financial and agricultural 255 157 Real estate: construction - - Real estate: mortgage 3 32 Installment loans to individuals - - Lease financing - - Foreign - - Total Recoveries 258 189 Net charge-offs 26 453 Provision for possible loan losses 40 173 Balance at end of year $ 404 390 Ratio of net charge-offs during the year to average loans outstanding during the year 0.08% 1.24% The Company has experienced reduced levels of chargeoffs over the past three year period due to both internal factors such as improved underwriting and monitoring of loans, and external factors such as an improving Bay Area economy and more stable real estate values. Net chargeoffs in 1995 were $27 thousand or 0.08 percent of average total loans, compared with $453 thousand or 1.24 percent in 1994 and $1 million or 2.23 percent in 1993. During 1993, the increase in net loan chargeoffs reflected the chargeoff of certain problem loans caused by a combination of the weak local economy and falling real estate values in the Bay Area. ASSET/LIABILITY MANAGEMENT The fundamental objectives of the Company's asset/liability management policy are to: (1) maintain liquidity and (2) minimize interest rate risk. Liquidity Liquidity is the ability to meet the present and future needs of customers for funds, primarily the funding of loans and deposit withdrawals. Liquidity is measured and managed at both the parent and banking subsidiary levels. Bancorp is funded by dividend income from the Bank, as well as income from outside sources and through the issuance of equity. Bancorp uses its proceeds primarily to pay the Bank for administrative expenses. In general, the primary source of liquidity for the Bank is the growth of core deposits (particularly demand deposits), and the orderly repayment of the Bank's loan portfolio. Because of the Bank's emphasis on relationship banking, the establishment of both loan and deposit relationships with customers, the Bank has a relatively stable, local deposit base, and brokering deposits is not considered necessary. To supplement short-term liquidity needs, the Bank maintains Fed Funds sold, time deposits with other financial institutions, short-term money market and securities available for sale that totalled approximately $19.1 million, or 29 percent of assets, at December 31, 1995. Additionally, the Bank has established unsecured line of credits with correspondent banks and reverse repurchase facilities with securities dealers. These credit facilities are subject to periodic review. As shown in the Consolidated Statements of Cash Flows, liquidity, or cash and cash equivalents increased to $9.9 million at December 31, 1995 compared to $7.4 million at December 31, 1994. Net cash flows of $843 thousand, $896 thousand and $943 thousand were provided by operating activities in 1995, 1994, and 1993, respectively. Net cash flows of $7.4 million in 1995 were provided by financing activities, primarily due to increases in deposits, while $8.1 million and $6.5 million were used in financing activities in 1994 and 1993, respectively, principally to fund customer withdrawals of time deposits. Net cash flows of $5.7 million were used in investing activities in 1995, primarily funding of loans. In 1994 and 1993, $8.0 million and $7.8 million, respectively, were provided by investing activities, primarily from loan principal repayments and in 1994, the sales of other real estate owned. Interest Rate Risk Bancorp evaluates its interest rate risk exposure by analyzing the interest rate sensitivity of its balance sheet accounts. Interest rate sensitivity measures the interval of time before interest-earning assets and interest- bearing liabilities respond to changes in market rates of interest. The difference between the amount of assets and amount of liabilities which may be re-priced in the same time period is referred to as the "gap". If more assets than liabilities are re-priced at a given time, net interest income tends to improve in a rising rate environment and to decline with lower interest rates. If more liabilities than assets are re-priced under the same conditions, the opposite tends to prevail. The table below shows the interest rate sensitivity of Bancorp based on asset and liability repricing characteristics, excluding non-accruing loans, at December 31, 1995 (in thousands). For this table, assets and liabilities are assumed to reprice or mature according to contractual repricing or maturity dates, except for market rate accounts which may be repriced at any time at the Company's discretion. Re-pricing Immediately 90 days 91-180 181-365 Over Opportunity Adjustable or less days days 365 days Total Rate sensitive assets: Federal funds sold $ 4,725 - - - - 4,725 Interest-bearing deposits - - 196 95 199 490 Securities 191 3,486 1,174 1,972 7,047 13,870 Loans 21,958 4,303 2,935 281 9,223 38,700 Interest earning assets $ 26,874 7,789 4,305 2,348 16,469 57,785 Rate sensitive liabilities: Market rate accounts $ 26,914 - - - - 26,914 Savings 1,024 - - - - 1,024 Time deposits 2,294 8,629 3,577 1,768 2,905 19,173 Other borrowed funds - 71 115 - - 186 Interest paying liabilities $ 30,232 8,700 3,692 1,768 2,905 47,297 Gap $ (3,358) (911) 613 580 13,564 10,488 Cumulative gap $ (3,358) (4,269) (3,656) (3,076) 10,488 The table indicates that overall, Bancorp re-prices more assets than liabilities i.e., is asset-sensitive, and, therefore, generally earns a greater interest spread as interest rates increase and earns a lower interest spread as rates decrease. In the short-term, Bancorp reprices more liabilities than assets, and is liability-sensitive. Depending on interest rate trends and forecasts, Bancorp has the opportunity to modify asset pricing or liability rates offered in a particular time frame in order to reduce interest rate sensitivity. The ability to manage these changes is affected by economic conditions, the competitive environment, and the policies of governmental and regulatory authorities. Additionally, certain assets and liabilities have option-like characteristics that may affect net interest income through the exercise of those options as interest rates change. Hedging strategies using interest rate futures and swaps, while available, are generally not used by Bancorp. CAPITAL RESOURCES The capital position of Bancorp represents the level of capital needed to support the operation and expansion of the Company and the Bank and to protect depositors and the deposit insurance fund from potential losses. Management regularly reviews capital adequacy to ensure that capital is consistent with Bancorp's and the Bank's expected growth. Through December 31, 1995, Bancorp had never paid a cash dividend to stockholders. On February 23, 1996, a special dividend was declared to shareholders of record March 8, 1996. Bancorp has no current plans to pay regular dividends. Stockholder's equity totalled $6.5 million at December 31, 1995, up from $5.95 million at December 31, 1994 and $5.93 million at December 31, 1993. The increase in stockholder's equity was due to Bancorp's net income for 1995, the payoff of debt held by Bancorp's Employee Stock Ownership Plan and a decrease in the level of unrealized losses in the Bank's available-for-sale securities. Bancorp and the Bank are subject to risk-based capital adequacy requirements which call for a minimum 8 percent total risk-based capital ratio, including a Tier 1 capital ratio of 4 percent. There are two categories of capital under the guidelines. Tier 1 capital includes common stockholders' equity and qualifying preferred stock, less certain intangible assets. Tier 2 capital generally includes, subject to limitations, preferred stock not qualifying as Tier 1 capital, mandatory convertible debt, subordinated and unsecured senior debt and the allowance for possible loan losses. The risk-based capital ratio is determined by weighing assets and off-balance sheet exposures according to their relative credit risks. The Federal Reserve has also established a minimum capital requirement ratio. This ratio, Tier 1 capital to quarterly average total assets, operates in conjunction with the risk-based capital guidelines and limits the amount of leverage a bank can undertake. Currently, all banks must maintain at least a 3 percent leverage ratio. In general, however, only the top-ranked banking organizations may operate at the minimum capital levels. Other institutions will be expected to maintain ratios that are at least 100 to 200 basis points above the minimum levels of capital. It is management's intent to maintain capital ratios for Bancorp and the Bank above the regulatory well-capitalized levels, which are 6 percent for the Tier 1 capital ratio, 10 percent for the total risk-based capital ratio, and 5 percent for the Tier 1 leverage ratio. Between December 1992 and September 1994, the Bank was required to maintain a Tier 1 capital ratio of at least 10.00%, and a leverage ratio of at least 6.00%, levels higher than the regulatory minimum, under the terms of the Bank's Formal Agreement with the Office of the Comptroller of the Currency. The Formal Agreement was terminated in September 1994. Bancorp's and the Bank's capital ratios continued to exceed the minimum levels required and were above the regulatory well-capitalized levels throughout 1995. Bancorp's and the Bank's capital ratios for 1995, 1994, and 1993 were: December 31, Capital Ratios 1995 1994 1993 Trans Pacific Bancorp: Tier 1 Capital Ratio 15.81% 15.99% 12.05% Risk-Based Capital Ratio 16.81% 17.06% 13.32% Leverage Ratio 9.85% 9.80% 8.26% Trans Pacific National Bank: Tier 1 Capital Ratio 16.06% 16.08% 11.97% Risk-Based Capital Ratio 17.05% 17.14% 13.23% Leverage Ratio 10.03% 9.90% 8.23% There are no known trends, events, or uncertainties that will have or that are reasonably likely to have a material effect on the Company's capital resources, liquidity, asset quality, or results of operations. REPORT OF THE INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Trans Pacific Bancorp: We have audited the accompanying consolidated balance sheets of Trans Pacific Bancorp and Subsidiary (the Company) as of December 31, 1995 and 1994, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Trans Pacific Bancorp and Subsidiary as of December 31, 1995 and 1994, and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP San Francisco, California January 26, 1996 CONSOLIDATED FINANCIAL STATEMENTS Trans Pacific Bancorp and Subsidiary CONSOLIDATED BALANCE SHEETS December 31, 1995 and 1994 Assets 1995 1994 Cash and due from banks (note 2) $ 5,190,611 3,127,239 Federal funds sold 4,725,000 4,250,000 Interest-bearing deposits with banks 489,713 687,017 Securities held to maturity, at amortized cost, (fair value of $9,518,140 as of December 31, 1994 (note 3) - 9,742,510 Securities available for sale, at fair value (note 3) 13,870,220 4,077,976 Loans, net (notes 4, 10 and 11): Commercial 18,555,335 14,965,760 Real estate 17,982,782 15,905,639 Installment 167,443 279,054 Preference lines 1,997,955 1,594,057 Other 40,573 14,322 Total loans 38,744,088 32,758,832 Allowance for loan losses 403,651 390,465 Loans, net 38,340,437 32,368,367 Premises and equipment, net (note 5) 932,553 1,036,590 Customer acceptances outstanding 50,393 119,150 Deferred tax asset, net (note 6) - 46,000 Intangible assets 437,141 536,121 Other assets 790,452 779,802 Total assets $ 64,826,520 56,770,772 Continued Trans Pacific Bancorp and Subsidiary CONSOLIDATED BALANCE SHEETS December 31, 1995 and 1994 Liabilities and Stockholders' Equity 1995 1994 Liabilities: Non-interest-bearing demand deposits $ 10,453,322 11,355,927 Interest-bearing demand deposits 26,913,507 20,352,897 Savings 1,023,815 1,222,948 Time deposits (note 7) 19,173,344 16,868,465 Total deposits 57,563,988 49,800,237 Accrued interest payable 178,430 107,163 Other short-term borrowings 186,432 513,917 Borrowings for Employee Stock Ownership Plan (note 9) - 26,250 Acceptances outstanding 50,393 119,150 Deferred tax liability, net (note 6) 30,700 - Other liabilities 284,606 253,216 Total liabilities 58,294,549 50,819,933 Commitments and contingencies (notes 12 and 16) Stockholders' equity: Common stock, no par value; 10,000,000 shares authorized, 1,118,195 shares issued and outstanding (note 8) 5,784,323 5,784,323 Retained earnings 768,648 323,266 Deferred compensation - Employee Stock Ownership Plan (note 9) - (26,250) Net unrealized losses on securities available for sale (note 3) (21,000) (130,500) Total stockholders' equity 6,531,971 5,950,839 Total liabilities and stockholders' equity $ 64,826,520 56,770,772 Trans Pacific Bancorp and Subsidiary CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1995, 1994 and 1993 1995 1994 1993 Interest income: Loans $ 3,843,432 3,298,910 3,706,545 Investment securities, including dividends 739,133 655,848 486,651 Deposits with banks 23,240 36,481 52,871 Federal funds sold 249,237 268,166 187,400 Total interest income 4,855,042 4,259,405 4,433,467 Interest expense: Deposits (note 7) 1,783,252 1,323,044 1,573,470 Other borrowed funds (note 9) 15,958 46,149 43,696 Total interest expense 1,799,210 1,369,193 1,617,166 Net interest income 3,055,832 2,890,212 2,816,301 Provision for possible loan losses (note 4) 40,000 173,000 889,000 Net interest income after provision for possible loan losses 3,015,832 2,717,212 1,927,301 Non-interest income: Gain on sale of securities - - 30,324 Service charges on deposit accounts 282,349 267,998 275,430 Other real estate owned - 83,982 145,452 Other charges and fees 315,416 312,013 403,490 Total non-interest income 597,765 663,993 854,696 Non-interest expense: Salaries and employee benefits (note 9) 1,719,503 1,626,665 1,586,516 Occupancy 295,734 325,051 429,981 Furniture and equipment 96,514 94,793 120,221 Other real estate owned 214 106,885 458,509 Other operating 849,250 935,120 971,539 Total non-interest expense 2,961,215 3,088,514 3,566,766 Income (loss) before income taxes 652,382 292,691 (784,769) Income tax expense (benefit) (note 6) 207,000 112,500 (170,800) Net income (loss) $ 445,382 180,191 (613,969) Net income (loss) per share $ 0.40 0.16 (0.54) Average common shares outstanding (note 8) 1,118,195 1,127,305 1,143,195 Trans Pacific Bancorp and Subsidiary CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years ended December 31, 1995, 1994 and 1993 Deferred Compensation- Unrealized Employee Gains (losses) Total Stock on Securities Stock- Common Stock Retained Ownership Available holder Shares Amount Earnings Plan For Sale Equity Balance at Dec. 31, 1992 1,143,195 $5,834,827 $757,044 $(116,250) $ - $6,475,621 Net loss - - (613,969) - - (613,969) Debt reduction of ESOP - - - 45,000 - 45,000 Unrealized gains on securities available for sale, net of tax - - - - 20,250 20,250 Balance at Dec. 31, 1993 1,143,195 5,834,827 143,075 (71,250) 20,250 5,926,902 Net income - - 180,191 - - 180,191 Repurchase of common stock (25,000) (50,504) - - - (50,504) Debt reduction of ESOP - - - 45,000 - 45,000 Change in unrealized losses on securities available for sale, net of tax - - - - (150,750) (150,750) Balance at Dec. 31, 1994 1,118,195 5,784,323 323,266 (26,250) (130,500) 5,950,839 Net income - - 445,382 - - 445,382 Debt reduction of ESOP - - - 26,250 - 26,250 Change in unrealized gains on securities available for sale, net of tax - - - - 109,500 109,500 Balance at Dec. 31, 1995 1,118,195 $5,784,323 $768,648 $ - $ (21,000) $ 6,531,971 Trans Pacific Bancorp CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1995, 1994 and 1993 1995 1994 1993 Cash flows from operating activities: Net income (loss) $ 445,382 180,191 (613,969) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 225,133 250,431 373,121 Provision for loan losses 40,000 173,000 889,000 Provision for real estate owned - 75,000 346,451 Loss (gain) on sale of other real estate owned - (48,135) 28,083 Gain on sale of securities held for sale - - (30,324) Deferred tax expense 37,700 - 141,600 Increase (decrease) in accrued interest payable 71,267 11,183 (7,053) Increase (decrease) in other liabilities 31,390 (45,734) (66,274) (Increase) decrease in other assets (8,150) 300,556 (117,767) Total adjustments 397,340 716,301 1,556,837 Net cash provided by operating activities 842,722 896,492 942,868 Cash flows from investing activities: (Increase) decrease in loans funded, net of principal collected (6,012,070) 6,843,566 9,356,173 Proceeds from principal repayments and matured investment securities 4,265,543 7,725,811 5,491,052 Proceeds from sale of securities held for sale - - 1,533,935 Purchase of securities held to maturity - (8,031,885) (8,461,151) Purchase of securities available for sale (4,169,277) (1,556,485) - Net decrease (increase) in interest-bearing deposits with banks 197,304 (33,848) (5,000) Purchase of premises and equipment (22,116) (173,409) (21,220) Proceeds from sale of other real estate owned - 3,482,593 336,666 Purchase of other real estate owned - (221,328) (437,994) Net cash (used in) provided by investing activities (5,740,616) 8,035,015 7,792,461 continued . . . Trans Pacific Bancorp and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Years ended December 31, 1995, 1994 and 1993 1995 1994 1993 Cash flows from financing activities: Net increase (decrease) in demand deposits and savings $ 5,458,872 (1,650,467) (2,379,313) Net increase (decrease) in time deposits 2,304,879 (6,372,769) (3,713,158) Proceeds from other short-term borrowings 186,432 3,169,448 2,322,122 Repayment of other short-term borrowings (513,917) (3,187,665) (2,739,955) Repurchase of common stock - (50,504) - Net cash provided by (used in) financing activities 7,436,266 (8,091,957) (6,510,304) Net increase in cash and cash equivalents 2,538,372 839,550 2,225,025 Cash and cash equivalents at beginning of year 7,377,239 6,537,689 4,312,664 Cash and cash equivalents at end of year $ 9,915,611 7,377,239 6,537,689 Supplemental Disclosures of Cash Flow Information Non-cash investing and financing activities: Real estate acquired in settlement of loans $ - 181,431 221,705 Reduction of guaranteed ESOP obligation 26,250 45,000 45,000 Change in unrealized gains (losses) on securities available for sale, net of taxes 109,500 150,750 - Transfer of held-to-maturity securities to available-for-sale 6,594,663 - - Cash paid for: Interest $ 1,799,210 1,358,010 1,624,219 Income taxes 147,400 800 25,800 Trans Pacific Bancorp and Subsidiary NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 1. Business and Significant Accounting Policies Trans Pacific Bancorp, a registered banking holding company (Bancorp), provides a full range of banking services to individual and corporate customers in Northern California through its wholly-owned subsidiary bank, Trans Pacific National Bank (the Bank). The Bank is subject to competition from other financial institutions and to regulations of certain agencies and undergoes periodic examinations by those regulatory agencies. Summary of Significant Accounting Policies The consolidated financial statements include the accounts of Bancorp and the Bank (the Company), and are prepared in conformity with generally accepted accounting principles and general practices within the banking industry. The following is a summary of significant policies used in the preparation of the accompanying financial statements. In preparing the financial statements, Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of income and expenses for the periods presented, in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Certain reclassifications have been made to balances in preceding years to conform to the current year presentation. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for a one day period. Marketable Investment Securities Marketable investment securities consist of US Treasury, mortgage-backed, corporate debt securities, and Federal Reserve stock. The Company adopted the provisions of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (Statement 115) at December 31, 1993. Under Statement 115, the Company classifies its debt and marketable equity securities in one of two categories: available-for-sale or held-to-maturity. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold the security until maturity. All other securities not included in held-to-maturity are classified as available-for-sale. The Company engages in no securities trading activities. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. Unrealized gains and losses associated with transfers of securities from held-to-maturity to available-for-sale are recorded as a separate component of stockholders' equity. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale and held-to-maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. A decline in the market value of any available for sale or held to maturity security below cost that is deemed other than temporary, results in a charge to earnings and the establishment of a new cost basis for the security. Loans and Allowance for Loan Losses Loans are stated at the amount of unpaid principal, net of deferred fees, and reduced by an allowance for loan losses. Accrual of interest is discontinued on loans which are more than 90 days delinquent when Management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful unless the loans are well-secured and in the process of collection. When a loan is placed on non-accrual status, all interest previously accrued but not collected is charged against current period income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Non-refundable fees and direct loan origination costs are deferred and amortized to income or expense over the expected loan period using a method that approximates the interest method. The allowance for loan losses is established through periodic provisions for possible loan losses. Loans are charged against the allowance for loan losses when Management believes that the collectibility of the principal is unlikely. The allowance is a reserve to absorb possible losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations include consideration of changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. Management believes that the allowance for loans losses is adequate. While Management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgment of information available to them at the time of their examination. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation, which is computed using the straight-line method over the estimated useful lives of the assets (3 to 20 years). Leasehold improvements are amortized over their estimated useful lives or the terms of the respective leases, whichever is shorter. Fully depreciated assets are removed from the Company's Balance Sheet. Impairment of Long-Lived Assets In 1995, the Financial Accounting Standard Board issued the Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). Under the provisions of SFAS 121, long-lived assets and certain identifiable intangibles to be held and used by an entity are required to be reviewed for impairment whenever events or changes indicate that the carrying amount of an asset may not be recoverable. The Company will implement SFAS 121 in January 1996. Management believes that the adoption of this statement will not have a material impact on the Company's financial condition. Other Real Estate Owned Other real estate owned, consisting of real estate acquired in the settlement of loans is carried at the lower of cost or the fair value less estimated selling costs. Fair value represents the amount that could be reasonably expected in a current sale (other than a forced or liquidation sale) between a willing buyer and a willing seller and is generally based upon an independent property appraisal. When the property is acquired, any excess of the loan balance over fair value of the property is charged to the related allowance for loan losses. Subsequent write-downs due to the declines in independent property appraisals, and routine holding costs are included in other real estate owned expense. Core Deposit Intangibles Core deposit intangibles are amortized over the estimated average life (10 years) of the acquired deposit base using the straight line method. Net Income (Loss) per Share Net income (loss) per share is computed by dividing net income (loss) by the average number of shares outstanding during the period. The impact of common stock equivalents, primarily stock options, is not material. Income Taxes The Company and its subsidiaries file consolidated tax returns. For financial reporting purposes, the income tax effects of transactions are recognized in the year in which they enter into the determination of recorded income, regardless of when they are recognized for income tax purposes. Accordingly, the provisions for income taxes in the consolidated statements of income include charges or credits for deferred income taxes relating to temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Note 2. Restricted Cash Balances Federal Reserve Board regulations require reserve balances on deposits to be maintained by the Bank with the Federal Reserve Bank. The required reserve balances were $279,000 and $306,000 at December 31, 1995 and 1994, respectively. As compensation for check clearing and other services, compensating balances of approximately $4,900,000 and $2,800,000 were maintained with correspondent banks at December 31, 1995 and 1994, respectively. Note 3. Investment Securities The amortized cost, unrealized gains and losses and estimated fair value of major components of available for sale securities and held to maturity securities at December 31, 1995 and 1994 were as follows: Amortized Unrealized Unrealized 1995 Cost Gains Losses Fair Value Available for sale: US Treasury securities $ 6,785,849 22,822 (9,687) 6,798,984 Government Agency securities 2,500,000 2,650 - 2,502,650 Mortgage-backed securities 2,690,646 24,340 (15,788) 2,699,198 Corporate debt securities 1,366,002 - (52,337) 1,313,665 Federal Reserve stock and other securities 555,723 - - 555,723 $13,898,220 49,812 (77,812) 13,870,220 Amortized Unrealized Unrealized 1994 Cost Gains Losses Fair Value Held to maturity: US Treasury securities $ 8,285,393 949 (187,896) 8,098,446 Mortgage-backed securities 1,457,117 8,472 (45,895) 1,419,694 $ 9,742,510 9,421 (233,791) 9,518,140 Available for sale: US Treasury securities 1,505,500 - (32,398) 1,473,102 Mortgage-backed securities $ 992,725 4,853 (56,056) 941,522 Corporate debt securities 1,410,357 - (90,399) 1,319,958 Federal Reserve stock and other securities 343,394 - - 343,394 $ 4,251,976 4,853 (178,853) 4,077,976 The amortized cost and estimated fair value of investment securities at December 31, 1995 and 1994, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 1995 Amortized Cost Fair Value Available for sale: Due in one year or less $ 5,237,875 5,242,447 Due after one year through five years 5,605,299 5,564,175 Mortgage-backed securities 2,690,646 2,699,198 Federal Reserve Stock and other securities 364,400 364,400 $ 13,898,220 13,870,220 1994 Amortized Cost Fair Value Held to maturity: Due in one year or less $ 4,447,696 4,422,490 Due after one year through five years 3,837,697 3,675,956 Mortgage-backed securities 1,457,117 1,419,694 $ 9,742,510 9,518,140 Available for sale: Due in one year or less $ 132,894 132,894 Due after one year through five years 2,915,857 2,793,060 Mortgage-backed securities 992,725 941,522 Federal Reserve Stock and other securities 210,500 210,500 $ 4,251,976 4,077,976 There were no sales of securities during 1995 or 1994. In November 1995, the Financial Accounting Standards Board issued a special report, A Guide to Implementation of Statement No. 115, on Accounting for Certain Investments in Debt and Equity Securities -- Questions and Answers (the Special Report). The Special Report allowed companies to reassess the appropriateness of the classifications of all securities held and account for any resulting reclassification at fair value. Reclassifications from this one-time reassessment will not call into question the intent of an enterprise to hold other debt securities to maturity in the future, provided that it was performed by December 31, 1995. The Company adopted the reclassification provision stated in the Special Report prior to December 31, 1995 and transferred approximately $6.6 million of held-to-maturity securities into available-for-sale. The unrealized pretax gain upon transfer was approximately $15,000 as of December 31, 1995. Investment securities with an amortized cost of approximately $2,835,000 and $1,896,000 at December 31, 1995 and 1994, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Note 4. Loan Concentrations and Allowance for Loan Losses The majority of the Bank's business is done with customers located in Northern California, specifically in the San Francisco Bay Area. The Bank has a significant amount of credit arrangements that are secured by real estate collateral. Generally, the Bank attempts to maintain loan to value ratios no greater than 65 percent on commercial and multi-family real estate loans and no greater than 80 percent on single-family residential real estate loans. At December 31, 1995 and 1994, the Bank had loans outstanding of approximately $17,983,000 and $15,906,000 respectively, that were collateralized by local real estate. Changes in the allowance for loan losses were as follows: 1995 1994 1993 Balance, beginning of year $ 390,465 670,116 795,251 Provision for possible loan losses 40,000 173,000 889,000 Loan charge-offs (284,860) (641,849) (1,026,106) Recoveries of loan charge-offs 258,046 189,198 11,971 Balance, end of year $ 403,651 390,465 670,116 Net loan chargeoffs, as a percentage of average total loans 0.08% 1.24% 2.23% Non-accrual loans were $45,199, $352,330, and $1,281,321, at December 31, 1995, 1994, and 1993, respectively. At December 31, 1995, there were no additional loan commitments to borrowers whose loans were identified as non- accrual. Loans that were restructured were $0, $0, and $635,000, at December 31, 1995, 1994, and 1993, respectively. At December 31, 1995, there were no additional loan commitments to borrowers whose loans were identified as restructured. The following is a summary of interest foregone on non-accrual and restructured loans for the years ended December 31: (in thousands) 1995 1994 1993 Interest income that would have been recognized had the loans performed in accordance with their original terms $ 4,474 18,837 176,978 Less: Interest income recognized on non-accrual and restructured loans - - (73,121) Interest foregone on non-accrual and restructured loans $ 4,474 18,837 103,857 The Company adopted the provisions of Statement of Financial Accounting Standard No. 114, Accounting by Creditors for Impairment of Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures, effective January 1, 1995. SFAS 114 required entities to measure certain impaired loans based on the present value of future cash flows discounted at the loan's effective interest rate, or at the loan's market value or the fair value of collateral if the loan is secured. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. If the measurement of the impaired loans is less than the recorded investment in the loan, impairment is recognized by creating or adjusting an existing allocation of the allowance for loan losses. The adoption of SFAS 114 did not have a material effect on the Company's financial statements, as the Company's policy of measuring loan impairment was consistent with methods prescribed in these standards. At December 31, 1995, the recorded investment in loans for which impairment was recognized in accordance with SFAS 114 totaled $45,199, of which there was a related reserve for loan losses of $4,520. The average balances of the Company's impaired loans for the year ended December 31, 1995, was $838,282. In general, the Company does not recognize any interest income on loans that are classified as impaired. Note 5. Premises and Equipment The following presents the cost of premises and equipment including leasehold improvements and the related accumulated depreciation and amortization at December 31: 1995 1994 Premises and leasehold improvements $ 2,142,446 2,142,446 Furniture, fixtures and equipment 822,368 1,126,971 2,964,814 3,269,417 Less accumulated depreciation and amortization (2,032,261) (2,232,827) Premises and equipment, net $ 932,553 1,036,590 Depreciation and amortization expense related to premises and equipment amounted to $126,153, $151,443, and $287,766, in 1995, 1994 and 1993, respectively. Note 6. Income Taxes Income tax expense (benefit) for the years ended December 31, 1995, 1994, and 1993 consists of: 1995 1994 1993 Current: Federal $ 166,900 94,500 (314,000) State 2,400 18,000 1,600 169,300 112,500 (312,400) Deferred: Federal (33,700) - 119,290 State 71,400 - 22,310 37,700 - 141,600 $ 207,000 112,500 (170,800) A reconciliation of the tax computed at the Federal statutory tax rate to the actual income tax rate on income is as follows: 1995 1994 1993 Income tax expense (benefit) at the statutory tax rate 34.0% 34.0% (34.0)% State income taxes, net 7.5 4.0 3.0 Current year benefit derived from previously capitalized expenses - - (6.6) Other, net 3.9 0.4 0.3 Change in deferred tax asset valuation allowance (13.7) - 15.6 31.7% 38.4% (21.7)% The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1995 and 1994 are presented below: 1995 1994 Deferred tax assets: Book provision for loan losses in excess of tax $ 2,800 39,900 State taxes 800 800 Net operating loss - 87,750 Premises and equipment, principally due to differences between depreciation and amortization charged to income and amount deducted for tax purposes 42,200 26,600 Adjustment for available-for-sale securities market valuation 7,000 46,000 Other, net 8,000 2,800 60,800 203,850 Less: valuation allowance (33,700) (122,950) Total deferred tax assets 27,100 80,900 Deferred tax liabilities: Difference between accrual and cash taxable income 57,800 34,900 Total deferred tax liabilities 57,800 34,900 Net deferred tax (liability) asset $ (30,700) 46,000 Note 7. Deposits Time deposits of $100,000 or more and their remaining maturities at December 31 are approximately as follows: 1995 1994 Three months or less $ 6,992,000 5,866,000 Four through six months 1,971,000 2,161,000 Seven through twelve months 759,000 1,763,000 Over twelve months 967,000 400,000 $ 10,689,000 10,190,000 Interest expense on time deposits of $100,000 or more was approximately $578,000, $437,000, and $557,000 for the years ended December 31, 1995, 1994 and 1993 respectively. Note 8. Common Stock and Stock Options Bancorp has adopted a qualified stock option plan for officers and key employees (the Plan) under which a maximum of 100,000 shares of the Bancorp's common stock may be issued. The Plan calls for the exercise prices of the options to be equal to or greater than the fair market value of the stock at date of the grant. Since 1984, options for a total of 92,500 shares of common stock have been granted with an option price of $5.00 per share, with full vesting generally occurring within five to seven years of the grant date. The expiration period of vested options ranges from the years 1997 through 2000, or within six months of termination. The number of shares of common stock subject to options and exercisable at December 31, 1995 was 45,400. In 1990, Bancorp adopted a non-qualified stock option plan for certain of its directors. Persons eligible to receive grants of options under this plan are directors of Bancorp and the Bank. The amount of shares of stock that may be subject to options granted under the plan is limited to 10% of the total number of issued and outstanding shares of Bancorp stock. In October 1990, stock options to acquire 35,000 shares of common stock were granted to the directors with an option price of $5.25 per share. In December 1995, stock options to acquire 28,750 shares of common stock were granted to the directors with an option price of $4.50 per share. These options are immediately exercisable and expire in ten years from the date of grant, or within six months of resignation. No options had been exercised as of December 31, 1995. The number of shares of common stock subject to these options and exercisable at December 31, 1995 was 56,250. The following is a summary of transactions which occurred during 1993, 1994 and 1995: Options Outstanding Officers & Employees Directors December 31, 1992 35,000 35,000 Options granted 22,500 - Options expired/forfeited - (7,500) December 31, 1993 57,500 27,500 Options granted 35,000 - Options expired/forfeited (30,000) - December 31, 1994 62,500 27,500 Options granted - 28,750 Options expired/forfeited - - December 31,1995 62,500 56,250 Options exercisable at December 31, 1995 45,400 56,250 On October 23, 1995, the Financial Accounting Standards Board issued Statement No. 123, Accounting for Stock-Based Compensation, (SFAS 123). The recognition provisions and disclosure requirements of SFAS 123 are effective January 1, 1996. SFAS 123 allows an entity to either (i) retain the current method of accounting for stock compensation (principally APB Opinion No. 25) for purposes of preparing its basic financial statements, or (ii) adopt a new fair value based method that is established by the provisions of SFAS 123. The Company plans to retain its current method of accounting for stock compensation when it adopts this statement in 1996, and thus, it will not have an impact on the Company's results of operations. Note 9. Employee Stock Ownership Plan In July, 1990, the Bancorp created an Employee Stock Ownership Plan (ESOP) for the benefit of all employees who have worked for the Bank for one or more years. The ESOP borrowed $180,000 at a variable interest rate from a third party financial institution, to be repaid over a 5 year period. The loan was paid off in 1995. The proceeds from the borrowing were used to purchase 48,400 shares of Bancorp common stock for the ESOP which was pledged as collateral for the borrowing. For the years ended December 31, 1995, 1994, and 1993, the Bank provided cash contributions of $26,250, $45,000 and $45,000, respectively, which were included in salaries and employee benefits. Interest expense on ESOP debt was $2,600, $6,300, and $8,200 for 1995, 1994 and 1993, respectively. Note 10. Related Party Transactions In the ordinary course of business, the Bank makes loans to directors, officers, shareholders and their associates on substantially the same terms, including interest rates, origination and commitment fees, and collateral, as comparable transactions with unaffiliated persons, and such loans do not involve more than the normal risk of collectibility. At December 31, 1995, no related party loans were on non-accrual or classified for regulatory reporting purposes. Total loans made to or guaranteed by the Bank's directors and officers and their related companies totaled $2,546,172 and $2,641,733 at December 31, 1995 and 1994, respectively. Activity related to loans to directors, officers and principal shareholders and their associates for the year ended December 31, 1995 and 1994 is as follows: 1995 1994 Balance at December 31, 1994 $ 2,641,733 2,751,070 New loans or disbursements 276,500 424,189 Principal repayments (372,061) (533,526) Balance at December 31, 1995 $ 2,546,172 2,641,733 Note 11. Commitments and Contingencies Bancorp leases certain banking premises under an operating lease that expires April 1, 2001, with a renewal option under similar terms until April 1, 2004. Minimum rental commitments for future years under these noncancelable leases are as follows at December 31, 1995: 1996 $ 120,000 1997 120,000 1998 120,000 1999 120,000 2000 120,000 thereafter 30,000 $ 630,000 The total rental expense was $120,000 for each of the years ended December 31, 1995, 1994, and 1993. Additionally, the Bank is involved in various claims and lawsuits in the normal course of its business. In the opinion of management, after review with independent legal counsel, the ultimate liability resulting from such claims and lawsuits will not have a material adverse effect on the financial position, results of operations, or liquidity of the Bank. Note 12. Financial Instruments with Off-Balance-Sheet Risk The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on- balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management's credit evaluation. Collateral held varies but may include cash, securities, accounts receivable, inventory, property, plant and equipment, residential real estate and income-producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Financial instruments whose contract amounts represent credit risk at December 31: 1995 1994 Commitments to extend credit $ 12,949,000 12,124,000 Standby letters of credit $ 775,000 1,968,000 Note 13. Fair Value of Financial Instruments The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1995. The fair value of financial instruments does not represent actual amounts that may be realized upon any sale or liquidation of the related assets or liabilities. In addition, these values do not give effect to discounts to fair value which may occur when financial instruments are sold in larger quantities. The fair values presented represent the Company's best estimate of fair value using the methodologies discussed below. The respective carrying values of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash and due from banks, interest-bearing deposits in banks, federal funds sold, customers' acceptance liability, accrued interest receivable, other short-term borrowings, acceptances outstanding and accrued interest payable. Carrying values were assumed to approximate fair values for these financial instruments as they are short term in nature and their recorded amounts approximate fair values or are receivable or payable on demand. The Company does not use derivative financial instruments. 1995 Carrying Fair Amount Value Financial Assets Securities available for sale 13,870,220 13,870,220 Loans 38,744,088 38,561,377 Financial Liabilities Deposits 57,563,988 57,607,208 The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Securities: The fair values of securities classified as available-for-sale are based on quoted market prices at the reporting date for those or similar investments. Loans: The fair value of fixed rate loans is determined as the present value of expected future cash flows discounted at the interest rate currently offered by the Company, which approximates rates currently offered by local lending institutions for loans of similar terms to companies with comparable credit risk. Variable rate loans which reprice frequently with changes in market rates, were valued using the outstanding principal balance. Deposits: The fair values of demand deposits, savings deposits, and money market deposits without defined maturities were the amounts payable on demand. For substantially all deposits with defined maturities, the fair values were calculated using discounted cash flow models based on market interest rates for different product types and maturity dates. For variable rate deposits where the Company has the contractual right to change rates, carrying value was assumed to approximate fair value. The discount rates used were based on rates for comparative deposits. Note 14. Condensed Financial Information of Trans Pacific Bancorp (Parent Company Only) Condensed Balance Sheets December 31, 1995 1994 Assets: Cash and due from banks $ 27,884 87,371 Investment in subsidiary 6,511,607 5,892,791 Other assets - 5,000 Total assets $ 6,539,491 5,985,162 Liabilities: Borrowings for Employee Stock Ownership Plan - 26,250 Other liabilities 7,520 8,073 Stockholders' Equity: Common stock 5,784,323 5,784,323 Retained Earnings 768,648 323,266 Deferred Compensation - Employee Stock Ownership Plan - (26,250) Net unrealized losses on available for sale securities (21,000) (130,500) Total liabilities and stockholders' equity $ 6,539,491 5,985,162 Condensed Statements of Operations Years Ended December 31, 1995 1994 1993 Income: Gain on sale of premises $ - - 314,382 Other income 1,363 2,932 56,126 1,363 2,932 370,508 Expenses 65,297 55,045 118,410 Income (loss) before taxes and equity in undistributed income (loss) of subsidiary (63,934) (52,113) 252,098 Income tax expense (benefit) - - - Net income (loss) before equity in undistributed ncome (loss) of subsidiary (63,934) (52,113) 252,098 Equity in undistributed income (loss) of subsidiary 509,316 232,304 (866,067) Net income (loss) $ 445,382 180,191 (613,969) Condensed Statements of Cash Flows Years ended December 31, 1995 1994 1993 Cash flows from operating activities: Net income (loss) $ 445,382 180,191 (613,969) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization - - 18,932 Gain on sale of premises and leasehold - - (314,382) Decrease in other assets 5,000 - - (Decrease) increase in other liabilities (553) (2,533) 10,184 Increase (decrease) in due to subsidiary - - (103,917) Equity in undistributed income (loss) of subsidiary (509,316) (232,304) 866,067 Total adjustments (504,869) (234,837) 476,884 Net cash used in operating activities: (59,487) (54,646) (137,085) Cash flows from investing activities: Investment in subsidiary - - (350,000) Proceeds from sale of premises and leasehold - - 1,146,204 Net cash provided by investing activities - - 796,204 Cash flows from financing activities: Repurchase of common stock - (50,504) - Repayment of note payable - - (489,832) Net cash used in financing activities - (50,504) (489,832) Net (decrease) increase in cash and cash equivalents (59,487) (105,150) 169,287 Cash and cash equivalents at beginning of year 87,371 192,521 23,234 Cash and cash equivalents at end of year $ 27,884 87,371 192,521 Note 15. Capital Adequacy The capital position of Bancorp represents the level of capital needed to support the operation and expansion of the Company and to protect Bank depositors and the Federal deposit insurance fund from potential losses. Bancorp and the Bank are subject to minimum regulatory ratios for risk-based capital and were in compliance with such requirements throughout 1995. Both Bancorp's and the Bank's capital ratios are as follows, at December 31: Regulatory Minimum at 1995 1994 1995 & 1994 Bancorp: Tier 1 capital ratio 15.81% 15.99% 4.00% Total capital ratio 16.81% 17.06% 8.00% Leverage ratio 9.85% 9.80% 3.00% Bank: Tier 1 capital ratio 16.06% 16.08% 4.00% Total capital ratio 17.05% 17.14% 8.00% Leverage ratio 10.03% 9.90% 3.00% Between December 1992 and September 1994, the Bank was required to maintain a Tier 1 capital ratio of at least 10.00%, and a leverage ratio of at least 6.00%, levels higher than the regulatory minimums shown above, under the terms of the Bank's Formal Agreement (see Note 16). Note 16. Regulatory Matters On December 17, 1992, the Bank entered into a Formal Agreement (the Agreement) with the Office of the Comptroller of the Currency (OCC). The Formal Agreement required the Bank to maintain Tier 1 capital of at least 10.00% of risk-weighted assets and Tier 1 capital of at least 6.00% of adjusted total assets. The Agreement also required the following of the Bank: (1) develop a program to improve the effectiveness of Board supervision; (2) develop a program to improve the Bank's loan administration and underwriting; (3) develop and implement an asset review program to ensure the timely identification of problem loans, other real estate owned and other assets; (4) develop and implement a written program to collect or strengthen criticized and classified loan assets; (5) submit a 3 year capital plan for OCC approval; and (6) develop a plan to improve liquidity management. The Agreement also restricted the Bank's ability to pay dividends to Bancorp. On September 8, 1994, the Bank's Formal Agreement with the OCC was terminated, as the Bank had achieved full compliance with the Agreement. On July 22, 1993, Bancorp and the Federal Reserve Bank, Bancorp's primary regulator, signed a Memorandum of Understanding (MOU). This MOU required Bancorp to: (1) report on measures taken to improve the financial condition of Trans Pacific National Bank, (2) report on measures taken to improve the Directors' supervision of Trans Pacific National Bank, and (3) furnish quarterly progress reports that shall include financial statements and information detailing the form and manner of all actions to attain compliance with the MOU. Additionally, Bancorp was required to obtain Federal Reserve approval before: (1) paying cash dividends to shareholders, (2) incurring additional debt, (3) repurchasing outstanding stock, and (4) adding or replacing a Director or senior executive officer. On February 27, 1995, Bancorp's MOU with the Federal Reserve Bank was terminated. Under the National Bank Act, the Bank is subject to prohibitions on the payment of dividends in certain circumstances and to restrictions on the amount that can be paid to Bancorp without the prior approval of the Office of the Comptroller of the Currency (OCC). Without the Comptroller's approval, dividends for a given year cannot exceed the Bank's net profits, as defined by national bank laws, for that year and retained from the preceding two years. Under this formula, the Bank could have declared dividends to Bancorp of $203,000. No dividends were paid by the Bank to Bancorp in 1993, 1994 and 1995, respectively. TRANS PACIFIC BANCORP BOARD OF DIRECTORS JAMES A. BABCOCK President Sandy & Babcock, Inc. EDDY S.F. CHAN Banker, Chairman Trans Pacific National Bank FRANKIE G. LEE Partner, SOH & Associates Structural Engineers JOHN K. LEE President, John K. Lee, C.P.A. A Professional Corporation BRUCE NAKAHIRA President New Century Investments, Inc. JOHN T. STEWART Attorney, Partner Hovis, Larson, Stewart, Lipscomb, Cross SIMON S. TENG Partner John R. McKean Accountants FRANK K.W. WONG Adv & Visual Merchandising Director National Dollar Store, Ltd. JOHN K. WONG Banker, Executive Vice President Trans Pacific National Bank DIRECTORS EMERITI MERLE S. KONIGSBERG President (Retired) Shaff Furniture Company WARREN K. MILLER Transportation Consultant (Retired) TRANS PACIFIC NATIONAL BANK PRINCIPAL OFFICERS EDDY S.F. CHAN Chairman, President Chief Executive Officer Director ROBERT A. HINKLE Executive Vice President Chief Lending Officer INTERNATIONAL TRADE DIVISION JOHN K. WONG Executive Vice President Senior Lending Officer Director BONNIE L. HAO Senior Vice President SAN FRANCISCO BRANCH GRANT BARNEY SCHLEY Senior Vice President Regional Branch Manager EAST BAY BUSINESS BANKING CENTER LORRAINE S. BRAUD Vice President Branch Manager ANNUAL MEETING The annual meeting of shareholders will be held Thursday, May 23, 1996 at 4:30 p.m., local time 46 Second Street San Francisco, California CERTIFIED PUBLIC ACCOUNTANTS KPMG Peat Marwick LLP San Francisco, California COMMON STOCK Stock transactions are facilitated by Van Kasper & Company San Francisco, California Hoefer & Arnett San Francisco, California PRINCIPAL TRANSFER AGENT AND REGISTRAR First Interstate Bank of California San Francisco, California GENERAL COUNSEL Nossaman, Guthner, Knox & Elliott San Francisco, California TRANS PACIFIC NATIONAL BANK SAN FRANCISCO BRANCH COMMERCIAL AND INTERNATIONAL TRADE DIVISIONS 46 Second Street San Francisco, CA 94105-3440 Tel: (415) 543-3377 Fax: (415) 495-5154 Telex: RCA 210903 TPNB EAST BAY BUSINESS BANKING CENTER 1442 Webster Street Alameda, CA 94501-3339 Tel: (510) 769-1000 Fax: (510) 769-1180 ADMINISTRATION HEADQUARTERS 46 Second Street San Francisco, CA 94105-3440 Tel: (415) 543-3377 Fax: (415) 495-5154 Telex: RCA 210903 TPNB SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended: September 30, 1996 Commission file number: 2-86902 TRANS PACIFIC BANCORP (Exact name of registrant as specified in its charter) California 94-2917713 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 46 Second Street, San Francisco, California 94105 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 543-3377 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Class: Outstanding at: October 31, 1996 Common Stock, no par value 1,120,195 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION 3 ITEM 1: UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 3 Consolidated Balance Sheets 3 Consolidated Statements Of Operations 5 Consolidated Statements Of Changes In Stockholders' Equity 6 Consolidated Statement Of Cash Flows 7 Notes to Unaudited Interim Consolidated Financial Statements 9 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 PART II 18 ITEM 1. LEGAL PROCEEDINGS 18 ITEM 2. CHANGES IN SECURITIES 18 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18 ITEM 5. OTHER INFORMATION 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19 SIGNATURES 20 Part I - Financial Information Item 1: Unaudited Interim Consolidated Financial Statements Trans Pacific Bancorp and Subsidiary CONSOLIDATED BALANCE SHEETS (unaudited) Assets September 30, September 30, December 31, 1996 1995 1995 Cash and due from banks $ 4,121,885 4,689,706 5,190,611 Federal funds sold 8,200,000 6,530,000 4,725,000 Interest-bearing deposits with banks 488,000 390,713 489,713 Securities held to maturity (fair value of $6,622,000) - 6,628,458 - Securities available for sale, at fair value 15,202,337 6,188,824 13,870,220 Loans: Commercial 17,977,104 18,593,603 18,555,335 Real estate 22,835,213 17,415,260 17,982,782 Preference lines 2,217,916 1,807,599 1,997,955 Installment and other loans 319,267 173,034 208,016 Total Loans 43,349,500 37,989,496 38,744,088 Allowance for possible loan losses 426,530 422,629 403,651 Loans, net 42,922,970 37,566,867 38,340,437 Premises and equipment, net 883,907 977,538 932,553 Customer acceptance liabilities 361,944 277,604 50,393 Core deposit intangibles 362,910 461,887 437,141 Accrued interest receivable and other assets 937,984 778,876 790,452 $ 73,481,937 64,490,475 64,826,520 See accompanying notes to the unaudited interim consolidated financial statements. continued . . . Trans Pacific Bancorp and Subsidiary CONSOLIDATED BALANCE SHEETS - continued (unaudited) Liabilities and Stockholders' Equity September 30, September 30, December 31, 1996 1995 1995 Liabilities: Non-interest-bearing demand deposits $ 10,965,190 11,360,340 10,453,322 Interest-bearing demand deposits 32,315,018 25,677,836 26,913,507 Savings 852,070 1,106,954 1,023,815 Time deposits 20,569,147 19,200,755 19,173,344 Total deposits 64,701,425 57,345,884 57,563,988 Accrued interest payable 184,475 168,379 178,430 Other borrowed funds 667,789 87,887 186,432 Acceptances outstanding 361,944 277,604 50,393 Other liabilities 658,471 216,928 315,306 Total liabilities 66,574,104 58,096,681 58,294,549 Commitments and contingencies Stockholders' Equity: Common stock, no par value; 10,000,000 shares authorized, 1,120,195, 1,118,195 and 1,118,195 shares outstanding 5,794,323 5,784,323 5,784,323 Retained Earnings 1,181,760 637,971 768,648 Net unrealized losses on securities available for sale (68,250) (28,500) (21,000) Total Stockholders' Equity 6,907,833 6,393,794 6,531,971 $ 73,481,937 64,490,475 64,826,520 See accompanying notes to the unaudited interim consolidated financial statements. Trans Pacific Bancorp and Subsidiary CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) 3 months ended September 30, 9 months ended September 30, 1996 1995 1996 1995 Interest income: Loans $ 1,106,910 963,758 3,179,037 2,793,181 Investment securities 207,222 176,989 588,574 539,532 Deposits with banks 7,272 6,784 26,632 15,863 Federal funds sold 108,967 82,029 225,349 151,069 Total interest income 1,430,371 1,229,560 4,019,592 3,499,645 Interest expense: Deposits 545,528 492,822 1,529,738 1,269,507 Other borrowed funds 10,088 696 18,988 14,127 Total interest expense 555,616 493,518 1,548,726 1,283,634 Net interest income before provision 874,755 736,042 2,470,866 2,216,011 (recovery)for loan losses Provision (recovery) for (40,000) - (40,000) 40,000 loan losses Net interest income after provision (recovery) for loan losses 914,755 736,042 2,510,866 2,176,011 Non-interest income: Service charges on deposit accounts 47,330 78,505 194,838 208,324 Gain on loan sale - - 23,625 - Other charges and fees 107,358 82,773 280,243 220,839 Total non-interest income 154,688 161,278 498,706 429,163 Non-interest expense: Salaries and employee benefits 416,682 377,486 1,192,552 1,203,599 Occupancy expense 62,819 72,337 203,747 218,865 Furniture and equipment expense 19,362 25,348 55,975 75,694 Other operating expenses 215,151 199,507 715,730 653,311 Total non-interest expense 714,014 674,678 2,168,004 2,151,469 Income before income taxes 355,429 222,642 841,568 453,705 Income tax expense 142,000 68,000 339,000 139,000 Net income $ 213,429 154,642 502,568 314,705 Average shares outstanding 1,119,777 1,118,195 1,118,722 1,118,195 Net income per share (note 2) $ 0.19 0.14 0.45 0.28 Dividend declared per share $ - - 0.08 - See accompanying notes to the unaudited interim consolidated financial statements. Trans Pacific Bancorp and Subsidiary CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited) Deferred Unrealized Compensation- Gain (loss) Employee on Total Stock Securities Stock- Common Stock Retained Ownership Available holders' Shares Amount Earnings Plan For Sale Equity Balance at Dec. 31, 1994 1,118,195 $5,784,323 $ 323,266 $(26,250) $(130,500) $5,950,839 Net income - - 314,705 - - 314,705 Debt reduction of ESOP - - - 26,250 - 26,250 Change in unrealized loss on securities available for sale, net of tax - - - - 102,000 102,000 Balance at Sep. 30, 1995 1,118,195 5,784,323 637,971 - (28,500) 6,393,794 Net income - - 130,677 - - 130,677 Change in unrealized loss on securities available for sale, net of tax - - - - 7,500 7,500 Balance at Dec. 31, 1995 1,118,195 5,784,323 768,648 - (21,000) 6,531,971 Net income - - 502,568 - - 502,568 Dividends paid - - (89,456) - - (89,456) Stock options exercised 2,000 10,000 - - - 10,000 Change in unrealized loss on securities available for sale, net of tax - - - - (47,250) (47,250) Balance at Sep. 30, 1996 1,120,195 $5,794,323 $1,181,760 $ - $ (68,250) $6,907,833 See accompanying notes to the unaudited interim consolidated financial statements. Trans Pacific Bancorp and Subsidiary CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) 9 months ended September 30, 1996 1995 Cash flows from operating activities: Net income $ 502,568 314,705 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 152,664 171,725 Provision (recovery) for loan losses (40,000) 40,000 Increase in accrued interest payable 6,045 61,216 Increase (decrease) in other liabilities 358,917 (33,788) (Increase) decrease in accrued interest receivable and other assets (147,532) 10,422 Total adjustments 330,094 249,575 Net cash provided by operating activities 832,662 564,280 Cash flows from investing activities: Increase in loans funded, net of principal collected (4,542,533) (5,238,500) Net decrease in deposits with banks 1,713 296,304 Purchase of securities available for sale (9,621,239) (2,386,236) Proceeds from principal repayments and maturity of securities 8,226,122 3,525,440 Purchase of fixed assets (29,789) (38,439) Net cash used in investing activities (5,965,726) (3,841,431) Cash flows from financing activities: Net increase in demand deposits and savings 5,741,634 5,213,358 Net increase in time deposits 1,395,803 2,332,290 Proceeds from other borrowed funds 860,326 223,400 Repayment of other borrowed funds (378,969) (649,430) Dividends paid (89,456) - Stock options exercised 10,000 - Net cash provided by financing activities 7,539,338 7,119,618 Net increase in cash and cash equivalents 2,406,274 3,842,467 Cash and cash equivalents at beginning of period 9,915,611 7,377,239 Cash and cash equivalents at end of period $ 12,321,885 11,219,706 See accompanying notes to the unaudited interim consolidated financial statements. continued . . . Trans Pacific Bancorp and Subsidiary CONSOLIDATED STATEMENT OF CASH FLOWS - continued (unaudited) 9 months ended September 30, 1996 1995 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,542,681 1,222,418 Income taxes 107,400 137,400 Non-cash investing and financing activities: Reduction of guaranteed ESOP obligation - 26,250 Change in unrealized loss on securities available for sale, net of income taxes (47,250) 102,000 Disclosure of accounting policy: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are sold for one-day periods. See accompanying notes to the unaudited interim consolidated financial statements. Note 1. Basis of Presentation The financial information of Trans Pacific Bancorp (Bancorp) and its wholly-owned subsidiary, Trans Pacific National Bank (the Bank), included herein is unaudited; however, such information reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of financial condition, results of operations and cash flows in conformity with generally accepted accounting principles for the interim periods. These adjustments are all normal and recurring in nature. The results of operations for the nine month and three month periods ended September 30, 1996 are not necessarily indicative of the results to be expected for the full year. This report should be read in conjunction with Bancorp's annual report on Form 10-K for the year ended December 31, 1995. Certain amounts in prior periods have been reclassified to conform to the current period presentation. Note 2. Net Income per Share Net income per share is computed by dividing the net income by the average number of shares outstanding during the periods. The dilutive effect of stock options is not material and has been excluded from the per share presentation. Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations When used in the following discussion, the words "believes", "anticipates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected, including, but not limited to, those set forth in the sections entitled "Asset Quality", "Asset/Liability Management", "Capital Resources", and "Legal Proceedings" below. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. Bancorp undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. I. Overview Trans Pacific Bancorp reported earnings of $213,429, or $0.19 per share, in the third quarter of 1996, compared to earnings of $154,642, or $0.14 per share, in the third quarter of 1995. Net income for the first nine months of 1996 was $502,568 or $0.45 per share, compared to a net income of $314,705, or $0.28 per share, in the first nine months of 1995. Return on average assets, or ROA, was 1.21 percent for the third quarter of 1996, versus 0.98 percent in the same period for 1995. For the first nine months of 1996, ROA was 0.97 percent, compared to 0.69 percent for the first nine months of 1995. Return on average equity, or ROE, was 12.61 percent for the third quarter of 1996, versus 9.80 percent in the same period for 1995. For the first nine months of 1996, ROE was 9.97 percent, compared to 6.80 percent for the first nine months of 1995. The third quarter 1996 results reflect the Bank's increased business development efforts and the improved San Francisco Bay Area economy. Accordingly, 1996 earnings were higher compared to the 1995 results. At September 30, 1996, total assets were $73.5 million, up 13 percent from December 31, 1995, and up 14 percent from September 30, 1995. Total deposits were $64.7 million at September 30, 1996 up 12 and 13 percent from December 31, 1995 and September 30, 1995, respectively, while total loans were $43.3 million, up 12 and 14 percent from December 31, 1995 and September 30, 1995, respectively. II. Results of Operations The following details the components of net income for the nine months ended September 30, 1996 and 1995: (as a percentage of average earning assets) 1996 1995 Net interest income 5.41% 5.73% Provision (recovery)for loan losses 0.09 (0.10) Non-interest income 1.09 1.11 Non-interest expense (4.75) (5.57) Income tax expense (0.74) (0.36) Net income 1.10% 0.81% Net interest income was $2.5 million for the first nine months of 1996, up 12 percent from $2.2 million for the same period ending September 1995. Separately, for the first nine months of 1996, interest income increased $520 thousand, or 15 percent, and interest expense increased $265,000, or 21 percent compared to the first nine months of 1995. The increase in interest income was due to the increase in the volume of earning assets, primarily loans, but was offset slightly by a lower prime rate in 1996. The increase in interest expense was due to both the 17 percent increase in average interest- paying liabilities, and the 14 basis point increase in cost of funds due to higher time deposit rates. As shown below, the average net yield on interest-earning assets, or net interest margin, was 5.41 percent for the first nine months of 1996, lower than the 5.73 percent in the first nine months of 1995. For the third quarter, net interest-earning assets yield was 5.38 percent in 1996, versus 5.40 percent in the same period of 1995, and 5.47 percent in the second quarter of 1996. The following table lists the average amounts, in thousands, outstanding for major categories of interest-earning assets (excluding non-accrual loans) and interest-bearing liabilities and the average interest rates earned (including loan fee income) and paid for the periods indicated Average Balances and Rates Three months ended September 30, 1996 1995 Interest Average Interest Average Average Income/ Yield Average Income/ Yield/ Balance Expense Rates Balance Expense Rate Earning Assets: Loans $ 43,218 1,107 10.24% 36,236 964 10.64% Investment securities 13,546 207 6.12% 12,230 177 5.79% Federal funds sold 7,814 109 5.58% 5,662 82 5.79% Interest-bearing deposits with banks 440 7 6.60% 391 7 6.95% Total interest-earning assets $ 65,018 1,430 8.80% 54,519 1,230 9.02% Interest-Bearing Liabilities: Deposits: Demand, interest-bearing $ 30,682 271 3.53% 25,467 226 3.55% Savings 939 5 2.26% 1,142 6 2.19% Time 20,159 269 5.35% 18,715 261 5.56% Other short-term borrowings 845 10 4.77% 54 1 5.12% Total interest-bearing liabilities $ 52,625 555 4.22% 45,378 494 4.35% Net interest income $ 875 $ 736 Net interest-earning assets yield 5.38% 5.40% Average Balances and Rates Nine months ended September 30, 1996 1995 Interest Average Interest Average Average Income/ Yield Average Income/ Yield/ Balance Expense Rates Balance Expense Rate Earning Assets: Loans $ 41,705 3,179 10.16% 35,294 2,793 10.55% Investment securities 13,240 589 5.93% 12,463 540 5.77% Federal funds sold 5,462 225 5.50% 3,406 151 5.91% Interest-bearing deposits with banks 517 27 6.87% 360 16 5.87% Total interest-earning assets $ 60,924 4,020 8.80% 51,523 3,500 9.06% Interest-Bearing Liabilities: Deposits: Demand, interest-bearing $ 28,203 734 3.47% 22,373 551 3.29% Savings 1,015 17 2.25% 1,225 21 2.22% Time 19,354 779 5.36% 18,171 698 5.12% Other short-term borrowings 532 19 4.76% 289 14 6.51% Total interest-bearing liabilities $ 49,104 1,549 4.21% 42,058 1,284 4.07% Net interest income $ 2,471 $ 2,216 Net interest-earning assets yield 5.41% 5.73% Non-interest income for the first nine months of 1996 was $499 thousand, compared to $429 thousand for the same period in 1995, an increase of 16 percent. Non-interest income was $155 thousand in the third quarter of 1996, compared to $161 thousand in the third quarter of 1995, a decrease of 4 percent. The decrease was caused by lower deposit account service charges, collections fees and letter of credit commissions in 1996. Also included in the non-interest income was the $24 thousand gain on sale of a loan in the first quarter of 1996. Non-interest expense for the first nine months of 1996 was $2.17 million, compared to $2.15 million for the same period of 1995. Personnel expense in 1996 remained at relatively the same level as in 1995. Although full-time equivalent employees were reduced by two and no ESOP contribution was made in 1996, these savings were offset by expenses accrued for payments under a management incentive plan. Occupancy and furniture and equipment expense decreased by 12 percent in 1996 as some equipment became fully depreciated in 1995. For the first nine months of 1996, other operating expenses were $716 thousand, up 10 percent compared to the first nine months of 1995. The increase was primarily due to increased branch operations losses totaling $71 thousand, and increased legal expenses. However, the FDIC insurance premium decreased to $2 thousand in the first nine months of 1996, from $53 thousand in the same period of 1995, which lowered non-operating expense. Tax expense was $339 thousand for the first nine months of 1996 versus tax expense of $139 thousand for the same nine months of 1995. The effective tax rate for 1996 was 40 percent, versus 31 percent in 1995. The lower effective tax rate in 1995 was primarily due to the reduction of the valuation allowance which increased the net deferred tax asset to an amount that was more likely than not to be realized. The increase in the deferred tax asset in 1995 had the corresponding effect of reducing tax expense in that year. The anticipated reduction of the remaining valuation allowance in 1996 will not have a significant effect on the effective tax rate accrual through September 30, 1996. III. Asset Quality Asset quality continued to be maintained at satisfactory levels during the third quarter of 1996. Classified assets totaled $1.7 million at September 30, 1996, compared to $1.4 million at December 31, 1995 and $2.7 million at September 30, 1995. Non-performing assets, comprised of non-accrual loans, totaled $21 thousand at September 30, 1996, compared to $45 thousand at December 31, 1995 and $1.0 million at September 30, 1995. There was no real estate owned as of September 30, 1996. Due to the continued satisfactory levels of asset quality, there was no addition to the provision for loan losses in the first nine months of 1996. However, there was a reduction of $40,000 in provision for loan losses in the third quarter of 1996 due to recovery of a previously charged-off loan. In 1995, the provision for loan losses were $0 and $40,000 in the third quarter of 1995 and the first nine months of 1995, respectively. The determination of the provision for loan losses and, correspondingly, the level of the allowance for loan losses is based on evaluations of changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, prior loan loss experiences and current economic conditions that may affect the borrower's ability to pay. The following table summarizes the provision for loan losses, net credit recoveries and allowance for loan loss activity for the periods indicated: (in thousands) For the three months For the nine months ended September 30, ended September 30, 1996 1995 1996 1995 Balance, beginning of period $ 417 536 404 390 Provision (recovery) for loan losses (40) - (40) 40 Credit losses - (130) (4) (236) Credit loss recoveries 50 17 67 229 Net credit recoveries (losses) 50 (113) 63 (7) Balance, end of period $ 427 423 427 423 Ratio of net credit recoveries (losses) to average loans outstanding 0.46% (1.21)% 0.21% (0.03)% The allowance for possible loan losses increased to $427 thousand, or 0.98 percent of total loans at September 30, 1996 compared to $404 thousand at December 31, 1995, which was 1.04 percent of total loans at 1995 year end, and $423 thousand, which 1.11 percent of total loans at September 30, 1995. The increase in the allowance was the result of recoveries during 1996 of loans previously charged off. The table below provides a breakdown of the allowance for loan losses by loan category as of September 30, 1996 and 1995, and December 31, 1995. Although management has allocated the allowance to specific loan categories, the adequacy of the allowance must be considered in its entirety. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgment of information available to them at the time of their examination. (in thousands) Sept. 30, 1996 Sept. 30, 1995 Dec. 31, 1995 % of % of % of Allowance Loans Allowance Loans Allowance Loans Commercial $ 264 1.47% $ 236 1.27% $ 226 1.22% Real Estate - Construction - - - - - - Real Estate - Mortgage 99 0.43% 100 0.58% 82 0.45% Consumer 9 0.36% - - 9 0.40% Unallocated 55 - 87 - 87 - $ 427 0.98% $ 423 1.11% $ 404 1.04% IV. Asset/Liability Management The fundamental objectives of the asset/liability management policy of Bancorp and the Bank are to: (1) maintain liquidity and (2) minimize interest rate risk. Liquidity: Liquidity is the Bank's and Bancorp's ability to meet the present and future needs of its customers for funds, primarily the funding of loans and deposit withdrawals. Liquidity is measured and managed at both the parent and banking subsidiary levels. Bancorp is funded by dividend income from the Bank and uses its proceeds primarily to pay the Bank for administrative expenses. In general, the growth of core deposits and the orderly repayment of the Bank's loan portfolio are the primary sources of liquidity. Also, because of its emphasis on relationship banking, the Bank has a relatively stable, local deposit base, and customer deposits and withdrawals have been and are expected to continue to be orderly and manageable. To support short-term liquidity needs, the Bank maintains Fed Funds sold, time deposits with other financial institutions, short-term money market instruments and securities available for sale that totaled approximately $23.9 million, or 33 percent of assets at September 30, 1996. Additionally, the Bank has established unsecured lines of credit with its correspondent banks and reverse repurchase facilities with securities dealers. These credit facilities are subject to periodic review. As shown in the unaudited interim Consolidated Statement of Cash Flows, cash and cash equivalents increased to $12.3 million at September 30, 1996, compared to $9.9 million as of December 31, 1995 and $11.2 million as of September 30, 1995. Cash was provided primarily from customers deposits and used primarily to fund loans during the first nine months of 1996. Interest Rate Risk: Bancorp evaluates its interest rate risk exposure by analyzing the interest rate sensitivity of the Bank's balance sheet accounts. Interest rate sensitivity measures the interval of time before interest earning assets and interest bearing liabilities respond to changes in market rates of interest. The "gap" is defined by the Bank as the difference between the amount of assets and amount of liabilities which may be re-priced in the same time period. If more assets than liabilities are re-priced at a given time, net interest income tends to improve in a rising rate environment and to decline with lower rates. If more liabilities than assets are re-priced under the same conditions, the opposite tends to prevail. In general, the Bank re-prices more assets than liabilities and, therefore earns greater interest spread as interest rates, particularly the Bank's prime rate, increase and earns a lesser interest spread as rates decrease. To minimize exposures to declines in net interest margin and economic value due to "gap" mismatches, the Bank's policy is that within certain defined repricing periods, levels of assets and liabilities repricing should be relatively similar. At September 30, 1996, due to the increase in interest-bearing demand deposits, the Bank will re-price more liabilities than assets within the next twelve months, which differs from the Bank's typical repricing patterns, but still acceptable under the Bank's policy. Approximately $45.9 million, or 68 percent of the Bank's total interest rate sensitive assets and $53.0 million, or 98 percent of the Bank's total rate sensitive liabilities mature or reprice within twelve months. V. Capital Resources The capital position of Bancorp represents the level of capital needed to support the operation and expansion of Bancorp and the Bank and to protect depositors and the deposit insurance fund from potential losses. The risk-based capital adequacy requirements established by the Federal Reserve Board calls for a minimum 8 percent total risk-based capital ratio, including core (Tier 1) capital of 4 percent. The ratio is determined by weighing assets and off-balance sheet exposures according to their relative credit risks. A leverage ratio has also been established by the Office of the Comptroller of the Currency (OCC) for its minimum capital requirement ratio for banks. This ratio, Tier 1 capital to adjusted average total assets, operates in conjunction with the risk-based capital guidelines and limits the amount of leverage a bank can undertake. Currently all banks must maintain at least a 3 percent leverage ratio. In general, however, only the top-ranked banking organizations may operate at the minimum leverage levels. Other institutions will be expected to maintain leverage ratios that are at least 100 to 200 basis points above the minimum levels. Bancorp's and the Bank's capital ratios at September 30, 1996 and 1995, and December 31, 1995 are as follows: Sept. 30, Sept. 30, Dec. 31, Regulatory 1996 1995 1995 Minimum Bancorp: Tier 1 capital ratio 13.71% 15.43% 15.81% 4.00% Total capital ratio 14.56% 16.45% 16.81% 8.00% Leverage ratio 9.67% 10.46% 9.85% 3.00% Bank: Tier 1 capital ratio 14.04% 15.22% 16.06% 4.00% Total capital ratio 14.90% 16.24% 17.05% 8.00% Leverage ratio 9.91% 10.28% 10.03% 3.00% Bancorp's and the Bank's capital and leverage ratios were in compliance with the regulatory minimums as of September 30, 1996. Capital ratios were slightly lower at September 30, 1996 as risk-weighted assets, principally loans, grew at a faster rate than capital during the first nine months of 1996 VI. Recent Accounting Pronouncements During 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), Accounting for Stock-Based Compensation. This established a new fair value based accounting method for stock-based compensation plans and encourages (but does not require) employers to adopt the new accounting method in place of the provisions of Accounting Principles Board Opinion ("APB 25"), Accounting for Stock Issued to Employees. In accordance with SFAS No. 123, Bancorp has decided to continue to apply the accounting provisions of APB 25 in determining net income; however it will apply the disclosure requirements of SFAS No. 123 in the 1996 Annual Report. Management does not expect the application of the disclosure requirements of SFAS No. 123 to be material to Bancorp's financial statements. In June 1996, the FASB issued Statement of Financial Accounting Standards No. 125 ("SFAS No. 125"), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement establishes standards under which, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. SFAS No. 125 shall be effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and shall be applied prospectively. Management does not expect the adoption of SFAS No. 125 to be material to Bancorp's financial statements. Part II Item 1. Legal Proceedings The Bank is involved in various claims and lawsuits in the normal course of its business. In the opinion of management, after review with independent legal counsel, the ultimate liability resulting from such claims and lawsuits will not have a material adverse effect on the financial position, results of operations, or liquidity of Bancorp or the Bank. Additionally, the Bank has been notified of a potential unasserted claim relating to a specific corporate deposit account. Independent legal counsel has requested additional information from the underlying corporate entity and the basis for any potential claim. Based on the information available at this time, management is unable to determine what liability, if any, will result from the resolution of this matter or whether any claim will be made. As discussed in Item 5 below, Bancorp has considered this matter in the pricing and escrow structure in the Agreement and Plan of Merger. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information Definitive Agreement Signed: On October 18, 1996, Bancorp entered into a definitive agreement pursuant to which a private investor group led by Chicago banker Denis Daly, Sr. will acquire all of the issued and outstanding shares of Bancorp. Subject to certain terms and conditions, each outstanding share of Bancorp will be converted into the right to receive a cash payment of $8.00 per share at closing and a possible subsequent payment from escrowed funds of up to $0.61 per share following the resolution of certain pending contingencies. The acquisition of Bancorp is subject to approval by regulatory authorities as well as shareholders of Bancorp. The transaction is expected to be completed by March 31, 1997. Stock Option Plan: In 1984, Bancorp adopted the Trans Pacific Bancorp Stock Option Plan (the "Plan"), which provided for the issuance of options to employees of Bancorp and the Bank. The Plan was a qualified plan under the provisions of Section 422 of the Internal Revenue Code. The Plan allowed the grant of options to qualified employees for up to ten years after the date of the adoption of the Plan. The Plan was submitted to and approved by the shareholders of Bancorp in accordance with applicable law. The Plan remains in effect until all options granted under the Plan have either been exercised or have expired under the terms of the Plan. In 1989, the Board of Directors approved proposed amendments to the Plan to, among other things, shorten the period within which options could be granted to qualified employees, from ten to seven years. Under the terms of the Plan, any material amendment to the Plan required submission to the shareholders of Bancorp prior to its effectiveness. No determination was made whether the proposed amendment was a material amendment of the Plan and the proposed Plan amendment was not submitted to the shareholders for approval. In 1993, options were granted to certain eligible employees, for an aggregate of 27,500 shares of Common Stock of Bancorp. In September, 1996, it was determined that the proposed Plan amendment to shorten the period within which options could be granted under the Plan was a material amendment, and as such, required prior submission to the shareholders and thus was ineffective. Accordingly, the Board has rescinded the proposed Plan amendment retroactive to the date of its approval by the Board. Prior filings of the Company will be amended as appropriate. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 2.2 Agreement and Plan of Merger, incorporated by reference from Bancorp's 8-K filing dated October 25, 1996 Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K: After the third quarter of 1996, Bancorp filed a report on Form 8-K on October 25, 1996. The report filed, pursuant to items 5 and 7 of the report, a copy of the Agreement and Plan of Merger and a copy of the press release titled "Private Investor Group Led by Chicago Banker Denis Daly, Sr. Announces Agreement to Acquire Trans Pacific Bancorp". Signatures Pursuant to the requirements of Section 15(c) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRANS PACIFIC BANCORP /s/ Eddy S.F. Chan Eddy S.F. Chan, President /s/ Dennis B. Jang Dennis B. Jang, Chief Financial Officer Date: November 12, 1996
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