FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
Commission File No. 0-27856
CALIFORNIA COMMUNITY BANCSHARES CORPORATION
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(Name of small business issuer in it charter)
Delaware 68-0366324
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(State or other jurisdiction of incorporation) (IRS Employer
Identification No.)
555 Mason Street, Suite 280, Vacaville, CA 95688-4612
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(Address of principal executive offices) (ZIP Code)
Issuer's telephone number: (707) 448-1200
Securities registered under Section 12(g) of the Exchange Act:
$.10 Par Value Common Stock
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ X ]
Total revenue for year ended December 31, 1996, was $15,134,000.
The aggregate market value of the voting stock held by nonaffiliates based on
the average bid and asked prices $17.25 of such stock, was $ 14,007,656 as of
March 24, 1997.
The number of shares outstanding of Common Stock as of March 24, 1997:
1,000,150
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Registrant's Definitive Proxy Statement for the 1997 Annual
Meeting of Stockholders are incorporated by reference in Part III, Items 9,
10, 11, and 12 of this Form 10-KSB.
Transitional Small Business Disclosure Format (Check One) YES [ ] NO [ X ]
CONTAINS 0129 SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX APPEARS ON SEQUENTIALLY NUMBERED PAGE 0048
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TABLE OF CONTENTS
Page
PART I
ITEM 1 - Description of Business 1
ITEM 2 - Description of Property 17
ITEM 3 - Legal Proceedings 18
ITEM 4 - Submission of Matters to a Vote of Security Holders 19
PART II
ITEM 5 - Market for Common Equity and Related Stockholder Matters 19
ITEM 6 - Management's Discussion and Analysis or Plan of Operation 20
ITEM 7 - Financial Statements 44
ITEM 8 - Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 44
PART III
ITEM 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 45
ITEM 10 - Executive Compensation 45
ITEM 11 - Security Ownership of Certain Beneficial Owners and Mgmt 45
ITEM 12 - Certain Relationships and Related Transactions 45
ITEM 13 - Exhibits and Reports on Form 8-K 45
Financial Statements 0052
Signatures 0079
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Certain statements in this Annual Report on Form 10-KSB include
forward-looking information within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and are subject to the "safe harbor" created by those
sections. These forward-looking statements involve certain risks and
uncertainties that could cause actual results to differ materially from those
in the forward-looking statements. Such risks and uncertainties include, but
are not limited to, the following factors: competitive pressure in the banking
industry increases significantly; changes in the interest rate environment
reduce margins; general economic conditions, either nationally or regionally,
are less favorable than expected, resulting in, among other things, a
deterioration in credit quality and an increase in the provision for possible
loan losses; changes in the regulatory environment; changes in business
conditions, particularly in Solano and Contra Costa Counties; volatility of
rate sensitive deposits; operational risks including data processing system
failures or fraud; asset / liability matching risks and liquidity risks; and
changes in the securities markets. See also "Certain Additional Business
Risks", herein and other risk factors discussed elsewhere in this report.
Therefore, the information set forth therein should be carefully
considered when evaluating the business prospects of the corporation and the
bank.
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
BUSINESS OF THE CORPORATION
Continental Pacific Bank (the "Bank") was organized as a California state
banking Corporation on May 27, 1983, and commenced operations on November 14,
1983.
In 1995, the Bank's Board of Directors approved a Bank holding company
formation and corporate reorganization (the "Reorganization") whereby the Bank
would become a wholly-owned subsidiary of California Community Bancshares
Corporation (the "Company"). The Company was incorporated as a Delaware
Corporation on October 5, 1995. The Bank's shareholders approved the
Reorganization on December 20, 1995. The Reorganization was consummated as of
the close of business on February 29, 1996.
On January 18, 1984, the Bank formed Conpac Development Corporation
("Conpac") as a wholly-owned subsidiary to take advantage of the then recently
enacted California Financial Code provision authorizing banks or their
subsidiaries to engage in real property investment and development. The Bank
is presently staffing the activities of Conpac with two regular Bank
employees. As of December 31, 1996, in addition to the Pacific Plaza project
discussed below, Conpac projects and activities have included investment in a
limited partnership real estate development project; improvement of 44
undeveloped residential lots; development of an 8,000 square foot commercial
office building adjacent to the Bank's Benicia branch; and other incidental
activities. As of December 31, 1996, all of Conpac's projects have been sold
at a gross profit, except the current Pacific Plaza project, which is held as
Premises. Recent legislation limits the Bank's and Conpac's ability to engage
in most real estate development and investment activities and, accordingly,
the Bank has filed a divestiture plan with the FDIC, which has not been
objected to, for its real estate developments. See "Real Estate Development
Subsidiary," herein.
DEVELOPMENTS IN THE CORPORATION'S BUSINESS
The principal business of the Company is to act as a holding company for
the Bank. Accordingly, various factors relating to the Bank impact the
business of the Company. Several of these factors are discussed below. The
Bank engages in the general commercial banking business, in Solano and Contra
Costa counties in the State of California. In addition to its head banking
office located at 141 Parker Street, Vacaville, California the Bank has six
full service branch offices at 1011 Helen Power Drive, Vacaville, California;
1300 Oliver Road, Fairfield, California; 1001 First Street, Benicia,
California; 303 Sacramento Street, Vallejo, California; 3355 Sonoma Boulevard,
Suite 20, Vallejo, California and the Bank's newest branch at 2151 Salvio
Street, Suite H, Concord, California. In 1996 the 1100 Texas Street, branch
was converted to an express branch for deposit services. The Company's
business is not seasonal.
The Bank conducts a commercial banking business including accepting
demand, savings and time deposits, including certificates of deposit, money
market deposit accounts, NOW and Super NOW accounts. The Bank offers
commercial, real estate, personal, home improvement, automobile and other
installment term loans. It also offers installment note collection, issues
cashier's checks and money orders, sells travelers' checks and provides safe
deposit boxes and other customary banking services.
The vast majority of loans are direct loans made to individuals,
professionals, and small- to medium-sized businesses. On December 31, 1996,
the total loans outstanding were as follows: commercial loans: $8,926,000;
real estate construction loans: $6,408,000; real estate mortgage loans:
$82,246,000; consumer loans: $16,045,000; and total loans: $113,625,000.
Deposits are attracted primarily from individuals, professionals, and
small- to medium-sized businesses. The Bank also attracts some deposits from
municipalities and other governmental agencies or entities. The Bank is
generally required to pledge securities to secure such deposits (except the
first $100,000 of such deposits, which is insured by the FDIC).
Except as described above, material portions of the deposit have not been
obtained from a single person or a few persons (including federal, state and
local governments and agencies thereunder) the loss of anyone or more of which
would have a materially adverse effect on the business of the Company;
however, at December 31, 1996, approximately three percent of total deposits
were obtained from a title company. Such deposits have the potential to
increase or decrease rapidly. Approximately 78% of the loans are real estate
loans. The value of real estate collateral could be affected by adverse
changes in the real estate markets in which the Company operates and this
could significantly adversely impact the value of such collateral or the
Company's earnings.
As of December 31, 1996, the brokerage mortgage loan department consisted
of three loan originators who are paid on a commission basis and one salaried
full-time processor. The department's purpose is to originate and process
single family residential loan applications in Solano County and adjacent
areas. The loans are underwritten and funded by one of the twenty wholesale
loan sources the Bank has established. For the year ended December 31, 1996,
the Company earned fees of $184,000 on $12,900,000 in loan volume closed.
There were no loans held for sale at December 31, 1996.
The Company does not offer trust services or international banking
services and does not plan to do so in the near future, but has arranged with
its correspondent banks for such services to be offered to its customers. In
December 1993, the Bank began offering financial investment services (mutual
fund and annuity sales) through a broker relationship with Financial Network
Investment Corporation ("FNIC"). For the year ending December 31, 1996, the
Company earned fees of $53,000 on $1,600,000 in sales.
In 1995, the Bank began offering a new service called Business Manager.
With Business Manager the Bank purchases a business' accounts receivables and
sets up a credit line custom tailored to the business' needs. The program
includes the administration of the billing and collection function. For the
year ending December 31, 1996, the Company earned fees of $72,000 for this
service.
In 1994, the Small Business Administration established a Low Doc loan
program. This program is intended to reduce the paperwork requirements and
improve approval turnaround time on certain SBA qualifying commercial loan
requests of $100,000 or less. For the year ended September 30, 1996, the Bank
was among the Top 10 "Low Doc" lenders in Northern California
Other than as disclosed above, with respect to the Business Manager
Accounts Receivable program and the SBA loan Program, the Company has not
engaged in any material research activities relating to the development of new
services or the improvement of existing banking services during the last two
fiscal years. During that time, however, the Company's directors, officers
and employees have continually engaged in marketing activities, including the
evaluation and development of new services, in order to maintain and improve
the Company's competitive position in its primary service area. The cost of
these activities cannot be calculated with any degree of certainty.
The Company holds no patents, trademarks, licenses (other than licenses
required to be obtained from the appropriate Bank regulatory agencies),
franchises or concessions which are of material importance to its business.
The Company is exploring the merits and costs of offering home banking, a
bill paying service through the customer's computer, and telephone banking in
1997. It is estimated these services could require an investment of $75,000
to $100,000. The Company currently has no other plans to introduce a new
product or line of business which would require the investment of a
significant amount of the Company's total assets.
As of December 31, 1996, the Company employed a total of 90 employees
representing 75 full-time-equivalent employees.
ACQUISITION OF TRACY BRANCH
On May 14, 1996, the Bank, entered into a Purchase and Assumption
Agreement ("Agreement") with Tracy Federal Bank, a Federal Savings Bank
(Tracy).
On August 14, 1996, the Federal Deposit Insurance Corporation ("FDIC")
approved the Purchase and Assumption merger application. On August 28, 1996,
the State Banking Department ("SBD") approved the proposal of the Bank to
purchase the business of the Concord branch office of Tracy pursuant to the
Agreement, dated as of May 14, 1996.
On October 8, 1996, the Bank entered into an amendment to the Agreement
with Tracy. On Saturday, October 12, 1996 at 12:01 a.m. according to the
terms of the Agreement, the acquisition by the Bank of the Concord, California
branch office of Tracy was consummated.
The assets purchased totalled $210,000 and consisted of Cash on Hand,
Negative Balance Accounts, Savings Secured Loans and Corresponding Accrued
Interest and Leasehold Improvements and Equipment. The liabilities assumed
totalled approximately $15,500,000 and consisted of the branch deposits and
accrued interest. The acquisition was accounted for under the purchase method
of accounting. The consideration, which was 4% of adjusted deposits, amounted
to $610,000. Of this amount $550,000 is considered goodwill and will be
amortized over 15 years.
There is not a material relationship between Tracy and the Bank or any of
its affiliates, any director or officer of the Bank or any associate of any
such director or officer.
The source(s) of funds for the consideration given to Tracy from the Bank
was Cash on Hand.
The Leasehold Improvements and Equipment acquired from Tracy were used
for Banking purposes and will continue to be used for Banking purposes by the
Bank.
REAL ESTATE DEVELOPMENT SUBSIDIARY
The Bank's wholly-owned subsidiary, Conpac, engages in the real estate
development business as authorized under California law. In July 1988, Conpac
purchased and leased unimproved real property in the vicinity of Mason and
Davis streets in downtown Vacaville. This project is known as Pacific Plaza.
In mid-1990 Conpac began to build a two-story building of approximately 32,000
square feet (27,133 rentable square feet) and 140 parking spaces. This
building is located on the lot east of Davis Street which Conpac currently
owns and is referred to as Pacific Plaza East. In 1990, Conpac also exercised
its option to purchase the lot immediately west of Davis Street for $225,000.
This lot and the adjacent lots previously purchased by Conpac are the proposed
site of Pacific Plaza West.
Pacific Plaza East was 100% occupied in 1995 and 1996, including the
4,660 square feet occupied by the Bank's Corporate office. As of December 31,
1996, the average leases were $1.45 per square foot on a triple net basis.
Pacific Plaza East has ample parking, with 140 spaces, adjacent to the
building. Only 84 parking spaces are required by the City. Prior to 1995, it
was the intent of the Company to sell the additional 56 spaces to the City of
Vacaville. In 1995, the Bank decided the building's long term value would be
improved by retaining these extra spaces. Therefore, the carrying amount of
these spaces was added to the project and transferred to premises. As of
December 31, 1996, Conpac had a carrying amount of $3,730,000 for Pacific
Plaza East (net of $426,000 accumulated depreciation) and approximately
$753,000 for Pacific Plaza West. At December 31, 1996, with Pacific Plaza
East 100% leased, the estimated return on investment was approximately 11.6%,
before depreciation.
Beginning in December 1992, state banks and their subsidiaries were
prohibited from engaging, as principal, in activities not permissible to
national banks and their subsidiaries. Any Bank engaged in such activities
must divest itself of these investments by December 1996 and was required to
file a divestiture plan with the FDIC by February 5, 1993, detailing its
plans. Generally, national banks may not engage in real estate development,
although they can own property used or to be used, in part, as a banking
facility. During 1993, the Bank moved its corporate offices to Pacific Plaza
East. The Bank occupies 4,660 square feet in Pacific Plaza East (17% of the
leasable office space). Since ownership of banking premises is permissible
for a national Bank subsidiary, a divestiture plan was not required for
Pacific Plaza East. Conpac currently plans to retain Pacific Plaza East.
On August 1, 1994, at the request of the FDIC, the Bank filed a new
divestiture plan. The new plan indicated the Bank intended to build a
two-story 12,000 square foot commercial office building, upon 50% preleasing, on
the 38,725 square foot vacant parcel referred to as Pacific Plaza West. The
Bank also indicated its intent to occupy between 15% and 19% of the space in
Pacific Plaza West. The plan requested FDIC approval to transfer Pacific
Plaza West to premises, for regulatory reporting purposes, upon completion and
occupancy of Pacific Plaza West by the Bank. The plan also reaffirmed the
Bank's intent to retain Pacific Plaza East classifying the property as
premises for regulatory reporting purposes. On August 12, 1994, the Bank
received notification from the FDIC that they raised no objections to the
Bank's plan. However, the FDIC requested to be notified of the circumstances
if the project was not completed by year end 1995. The Bank is continuing its
effort to lease 50% of the 12,000 square feet available but has changed the
design from one two-story 12,000 square foot commercial office building to two
6,000 square foot single story office buildings which could be sold or leased
separately. As of the date hereof, it is the Bank's intent to construct one
building for use by its head banking office. The lease on the building
currently occupied by the head banking office expires in May 1998. The other
building would not be built until it was either leased or sold. At December
31, 1996, the Bank had not begun construction of Pacific Plaza West. At
December 31, 1996, Pacific Plaza West is carried on the books as premises.
On December 31, 1996, Conpac had total investments of $4,483,000. Except
for Pacific Plaza, Conpac has no other projects or investments. During 1996,
1995, and 1994, respectively, Conpac contributed $242,000, $213,000, and
$223,000 respectively, to revenue net of related expenses.
ENVIRONMENTAL MATTERS
Compliance with federal, state and local regulations regarding the
discharge of materials into the environment may have a substantial effect on
the capital expenditure, earnings and competitive position of the Company in
the event of lender liability or environmental lawsuits. Under federal law,
liability for environmental damage and the cost of the cleanup may be imposed
upon any person or entity who is an "owner" or "operator" of contaminated
property. State law provisions, which were modeled after federal law, are
similar. Congress established an exemption under Federal law for lenders from
"owner" and/or "operator" liability, which provides that "owner" and/or
"operator" do not include "a person, who, without participating in the
management of a vessel or facility, holds indicia of ownership primarily to
protect his security interests in the vessel or facility." The wording of
this exemption is subject to conflicting interpretations between the Federal
Courts and has therefore generated uncertainty within the financial and
lending communities, particularly with regard to the extent to which a secured
creditor may undertake activities to oversee the affairs of the borrower
without "participating in the management" of a facility. Congress is
currently addressing lender liability under environmental laws, and it is
expected that the lender exemption will be clarified. There is no assurance,
however, that such clarification will be made, and, if made, that it will be
favorable to lenders. Thus, the scope of lender liability under federal and
state law remains an open question.
It is the policy of the Company to prohibit officers and employees from
becoming directly involved in the operation or management of borrowers'
businesses. To further minimize the risk of liability, the Company requires
that each borrower proposing to finance nonresidential property complete an
environmental questionnaire and, in those instances where it is warranted,
requires appropriate independent environmental assessment studies.
In the event the Bank or Conpac was held liable as owners or operators of
a toxic property, they could be responsible for the entire cost of
environmental damage and cleanup. Such an outcome could have a serious effect
on the Company's consolidated financial condition depending upon the amount of
liability assessed and the amount of the cleanup required. At March 24, 1997,
the Company has no knowledge that any real estate securing loans in its
portfolio are contaminated by hazardous substances.
THE EFFECT OF GOVERNMENT POLICY ON BANKING
The earnings and growth of the Company are affected not only by local
market area factors and general economic conditions, but also by government
monetary and fiscal policies. For example, the Board of Governors of the
Federal Reserve System ("FRB") influences the supply of money through its open
market operations in U.S. Government securities and adjustments to the
discount rates applicable to borrowings by depository institutions and others.
Such actions influence the growth of loans, investments and deposits and also
affect interest rates charged on loans and paid on deposits. The nature and
impact of future changes in such policies on the business and earnings of the
Company cannot be predicted.
As a consequence of the extensive regulation of commercial banking
activities in the United States, the business of the Company is particularly
susceptible to being affected by the enactment of federal and state
legislation which may have the effect of increasing or decreasing the cost of
doing business, modifying permissible activities or enhancing the competitive
position of other financial institutions. Any change in applicable laws or
regulations may have a material adverse effect on the business and prospects
of the Company. In response to various business failures in the savings and
loan industry and, more recently, in the banking industry, in December 1991,
Congress enacted, and the President signed into law, the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). FDICIA
substantially revised the Bank regulatory framework and deposit insurance
funding provisions of the Federal Deposit Insurance Act and made revisions to
several other federal banking statutes.
Implementation of the various provisions of FDICIA is subject to the
adoption of regulations by the various regulatory agencies and to certain
phase-in periods. The effect of FDICIA on the Company and the Bank cannot be
determined until after all the implementing regulations are adopted by the
agencies.
SUPERVISION AND REGULATION
THE COMPANY
The Company, as a Bank holding company, is subject to regulation under
the Bank Holding Company Act of 1956, as amended (the "BHC Act") and is
registered with and subject to the supervision of the Board of Governors of
the Federal Reserve System ("Federal Reserve"). It is the policy of the
Federal Reserve that each Bank holding company serve as a source of financial
and managerial strength to its subsidiary banks. The Federal Reserve has the
authority to examine the Company and the Bank.
The BHC Act requires the Company to obtain the prior approval of the
Federal Reserve before acquisition of all or substantially all of the assets
of any Bank or ownership or control of the voting shares of any Bank if, after
giving effect to such acquisition, the Company would own or control, directly
or indirectly, more than 5% of the voting shares of such Bank. However,
amendments to the BHC Act effected by the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Riegle-Neal"), which is discussed further
below, expand the circumstances under which a Bank holding company may acquire
control of or all or substantially all of the assets of a Bank located outside
the State of California.
The Company may not engage in any business other than managing or
controlling banks or furnishing services to its subsidiaries, with the
exception of certain activities which, in the opinion of the Federal Reserve,
are so closely related to banking or to managing or controlling banks as to be
incidental to banking. The Company is also generally prohibited from
acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company unless that company is engaged in such activities
and unless the Federal Reserve approves the acquisition.
The Company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, sale or lease
of property or provision of services. For example, with certain exceptions,
the Bank may not condition an extension of credit on a customer obtaining
other services provided by it, the Company or any other subsidiary, or on a
promise by the customer not to obtain other services from a competitor. In
addition, federal law imposes certain restrictions on transactions between the
Bank and its affiliates. As affiliates, the Bank and the Company are subject,
with certain exceptions, to the provisions of federal law imposing limitations
on and requiring collateral for loans by the Bank to any affiliate.
THE BANK
As a California state-licensed Bank, the Bank is subject to regulation,
supervision and periodic examination by the California State Banking
Department ("SBD") and the Federal Deposit Insurance Corporation ("FDIC").
The Bank is not a member of the Federal Reserve System, but is nevertheless
subject to certain regulations of the Federal Reserve. The Bank's deposits
are insured by the FDIC to the maximum amount permitted by law, which is
currently $100,000 per depositor in most cases.
The regulations of these state and federal Bank regulatory agencies
govern most aspects of the Bank's business and operations, including but not
limited to, the scope of its business, its investments, its reserves against
deposits, the nature and amount of any collateral for loans, the timing of
availability of deposited funds, the issuance of securities, the payment of
dividends, Bank expansion and Bank activities, including real estate
development and insurance activities, and the maximum rates of interest
allowed on certain deposits. The Bank is also subject to the requirements and
restrictions of various consumer laws and regulations.
The following description of statutory and regulatory provisions and
proposals is not intended to be a complete description of these provisions and
is qualified in its entirety by reference to the particular statutory or
regulatory provisions discussed.
CHANGE IN CONTROL
The BHC Act and the Change in Bank Control Act of 1978, as amended (the
"Change in Control Act"), together with regulations of the Federal Reserve,
require that, depending on the particular circumstances, either Federal
Reserve approval must be obtained or notice must be furnished to the Federal
Reserve and not disapproved prior to any person or company acquiring "control"
of a Bank holding company, such as the Company, subject to exemptions for
certain transactions. Control is conclusively presumed to exist if an
individual or company acquires 25% or more of any class of voting securities
of the Bank holding company. Control is rebuttably presumed to exist if a
person acquires 10% or more but less than 25% of any class of voting
securities and either the company has securities registered under Section 12
of the Exchange Act, or no other person will own a greater percentage of that
class of voting securities immediately after the transaction. The Financial
Code also contains approval requirements for the acquisition of 10% or more of
the securities of a person or entity which controls a California licensed
Bank. Finally, the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as
amended, together with regulations of the Federal Trade Commission, may
require certain filings to be made with the Federal Trade Commission and the
United States Department of Justice, and certain waiting periods to expire,
prior to consummation of an acquisition of a company's voting securities.
CAPITAL ADEQUACY REQUIREMENTS
The Company is subject to the Federal Reserve's capital guidelines for
Bank holding companies and the Bank is subject to the FDIC's regulations
governing capital adequacy for nonmember banks. As noted below, the federal
banking agencies have adopted regulations which could impose additional
capital requirements on banks based on market risk and have added a component
to the uniform Bank rating system which addresses sensitivity to market risk,
including interest rate risk. In addition, the Bank is subject to specific
capital requirements imposed by the FDIC and the SBD.
THE FEDERAL RESERVE AND FDIC
The Federal Reserve has established risk-based and leverage capital
guidelines for Bank holding companies which are similar to the FDIC's capital
adequacy regulations for nonmember banks. The Federal Reserve guidelines
apply on a consolidated basis to Bank holding companies with consolidated
assets of $150 million or more.
The Federal Reserve capital guidelines for Bank holding companies and
the FDIC's regulations for nonmember banks set total capital requirements and
define capital in terms of "core capital elements," or Tier 1 capital(F1) and
"supplemental capital elements," or Tier 2 capital(F2). At least fifty
percent (50%) of the qualifying total capital base must consist of Tier 1
capital. The maximum amount of Tier 2 capital that may be recognized for
risk-based capital purposes is limited to one-hundred percent (100%) of Tier 1
capital, net of goodwill.
- -------------------
F1 Tier 1 capital is generally defined as the sum of the core
capital elements less goodwill and certain intangibles. The
following items are defined as core capital elements: (i)
common stockholders' equity; (ii) qualifying noncumulative
perpetual preferred stock and related surplus; and (iii)
minority interests in the equity accounts of consolidated
subsidiaries.
F2 Supplementary capital elements include: (i) allowance for
loan and lease losses (which cannot exceed 1.25% of an
institution's risk-weighted assets); (ii) perpetual preferred
stock, long term preferred stock, and related surplus not
qualifying as core capital; (iii) hybrid capital instruments,
including mandatory convertible debt securities; and (iv)
term subordinated debt and intermediate-term preferred stock
and related surplus.
- -------------------
Both Bank holding companies and nonmember banks are required to maintain
a minimum ratio of qualifying total capital to risk-weighted assets of eight
percent (8%), at least one-half of which must be in the form of Tier 1
capital. Risk-based capital ratios are calculated with reference to
risk-weighted assets, including both on and off-balance sheet exposures, which
are multiplied by certain risk weights assigned by the Federal Reserve and the
FDIC to those assets.
The Federal Reserve and the FDIC have established a minimum leverage
ratio of three percent (3%) Tier 1 capital to total assets for Bank holding
companies and nonmember banks that have received the highest composite
regulatory rating and are not anticipating or experiencing any significant
growth. All other institutions are required to maintain a leverage ratio of
at least 100 to 200 basis points above the 3% minimum for a minimum of four
percent (4%) or five percent (5%).
The following tables present the capital ratios for the Company and the
Bank and respective regulatory capital adequacy requirements.
<TABLE>
<CAPTION>
Company: For Capital
Actual Adequacy Purposes
--------------------- --------------------
Minimum Minimum
Amount Ratio Amount Ratio
<S> <C> <C> <C> <C>
As of December 31, 1996:
Total capital
(to risk weighted assets) $17,895,000 13.55% $10,564,000 8.0%
Tier I capital
(to risk weighted assets) $13,104,000 9.92% $ 5,282,000 4.0%
Tier I capital
(to average assets) $13,104,000 7.04% $ 7,444,000 4.0%
</TABLE>
<TABLE>
<CAPTION>
Bank:
To Be
Categorized as Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ------------------- -------------------
Minimum Minimum Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total capital
(to risk weighted assets) $17,416,000 13.22% $10,540,000 8.0% $13,174,000 10.0%
Tier I capital
(to risk weighted assets) $12,647,000 9.60% $ 5,270,000 4.0% $7,905,000 6.0%
Tier I capital
(to average assets) $12,647,000 6.81% $ 7,407,000 4.0% $9,286,000 5.0%
As of December 31, 1995:
Total capital
(to risk weighted assets) $17,510,000 13.71% $10,214,000 8.0% $12,768,000 10.0%
Tier I capital
(to risk weighted assets) $12,327,000 9.65% $5,107,000 4.0% $7,661,000 6.0%
Tier I capital
(to average assets) $12,327,000 7.75% $6,362,000 4.0% $7,953,000 5.0%
</TABLE>
If at any time the Bank fails to meet its minimum regulatory capital
requirements it is required, within 60 days thereafter, to submit a capital
restoration plan to the FDIC for review and approval.
Management of the Company and the Bank believe that the Company and the
Bank will continue to meet its minimum capital requirements in the foreseeable
future.
The risk-based capital ratio discussed above focuses principally on broad
categories of credit risk, and may not take into account many other factors
that can affect a Bank's financial condition. These factors include overall
interest rate risk exposure; liquidity, funding and market risks; the quality
and level of earnings; concentrations of credit risk; certain risks arising
from nontraditional activities; the quality of loans and investments; the
effectiveness of loan and investment policies; and management's overall
ability to monitor and control financial and operating risks, including the
risk presented by concentrations of credit and nontraditional activities. The
FDIC has addressed many of these areas in related rule-making proposals and
under FDICIA (as defined below), some of which are discussed herein. In
addition to evaluating capital ratios, an overall assessment of capital
adequacy must take account of each of these other factors including, in
particular, the level and severity of problem and adversely classified assets.
For this reason, the final supervisory judgment on a Bank's capital adequacy
may differ significantly from the conclusions that might be drawn solely from
the absolute level of the Bank's risk-based capital ratio. In light of the
foregoing, the FDIC has stated that banks generally are expected to operate
above the minimum risk-based capital ratio. Banks contemplating significant
expansion plans, as well as those institutions with high or inordinate levels
of risk, should hold capital commensurate with the level and nature of the
risks to which they are exposed.
Recently adopted regulations by the federal banking agencies have revised
the risk-based capital standards to take adequate account of concentrations of
credit and the risks of non-traditional activities. Concentrations of credit
refers to situations where a lender has a relatively large proportion of loans
involving one borrower, industry, location, collateral or loan type.
Non-traditional activities are considered those that have not customarily been
part of the banking business but that start to be conducted as a result of
developments in, for example, technology or financial markets. The
regulations require institutions with high or inordinate levels of risk to
operate with higher minimum capital standards. The federal banking agencies
also are authorized to review an institution's management of concentrations of
credit risk for adequacy and consistency with safety and soundness standards
regarding internal controls, credit underwriting or other operational and
managerial areas. In addition, the agencies have promulgated guidelines for
institutions to develop and implement programs for interest rate risk
management, monitoring and oversight.
Further, the banking agencies recently have adopted modifications to the
risk-based capital regulations to include standards for interest rate risk
exposures. Interest rate risk is the exposure of a Bank's current and future
earnings and equity capital arising from movements in interest rates. While
interest rate risk is inherent in a Bank's role as financial intermediary, it
introduces volatility to Bank earnings and to the economic value of the Bank.
The banking agencies have addressed this problem by implementing changes to
the capital standards to include a Bank's exposure to declines in the economic
value of its capital due to changes in interest rates as a factor that the
banking agencies will consider in evaluating an institution's capital
adequacy. Bank examiners will consider a Bank's historical financial
performance and its earnings exposure to interest rate movements as well as
qualitative factors such as the adequacy of a Bank's internal interest rate
risk management.
Finally, institutions which are engaged in securities trading activities
and have significant exposure to market risk will be required as of January 1,
1998 to maintain additional capital to support that exposure, although
voluntary compliance with the new regulations is permissible after January 1,
1997. The additional capital requirements will apply to institutions with
trading assets and liabilities equal to 10% or more of total assets or trading
activity of $1 billion or more. Institutions subject to the rule will be
required to test internal models of market risk and the market risk capital
charge will be increased for institutions whose models are inaccurate. The
federal banking agencies may apply the market risk regulations on a case by
case basis to institutions not meeting the eligibility criteria if necessary
for safety and soundness reasons.
In connection with the recent regulatory attention to market risk and
interest rate risk, the federal banking agencies will evaluate an institution
in its periodic examination on the degree to which changes in interest rates,
foreign exchange rates, commodity prices or equity prices can affect a
financial institution's earnings or capital. In addition, the agencies will
focus in the examination on an institution's ability to monitor and manage its
market risk, and will provide management with a clearer and more focused
indication of supervisory concerns in this area.
In certain circumstances, the FDIC or the Federal Reserve may determine
that the capital ratios for an FDIC-insured Bank or a Bank holding company
must be maintained at levels which are higher than the minimum levels required
by the guidelines or the regulations. A Bank or Bank holding company which
does not achieve and maintain the required capital levels may be issued a
capital directive by the FDIC or the Federal Reserve to ensure the maintenance
of required capital levels.
PAYMENT OF DIVIDENDS
The shareholders of the Company are entitled to receive dividends when
and as declared by its Board of Directors, out of funds legally available,
subject to the dividends preference, if any, on preferred shares that may be
outstanding and also subject to the restrictions of the California
Corporations Code. At December 31, 1996, the Company had no outstanding
shares of preferred stock.
The principal sources of cash revenue to the Company have been dividends
received from the Bank. The Bank's ability to make dividend payments to the
Company is subject to state and federal regulatory restrictions.
Dividends payable by the Bank to the Company are restricted under
California law to the lesser of the Bank's retained earnings, or the Bank's
net income for the latest three fiscal years, less dividends previously
declared during that period, or, with the approval of the SBD, to the greater
of the retained earnings of the Bank, the net income of the Bank for its last
fiscal year or the net income of the Bank for its current fiscal year.
The FDIC has broad authority to prohibit a Bank from engaging in banking
practices which it considers to be unsafe or unsound. It is possible,
depending upon the financial condition of the Bank in question and other
factors, that the FDIC may assert that the payment of dividends or other
payments by the Bank is considered an unsafe or unsound banking practice and
therefore, implement corrective action to address such a practice.
In addition to the regulations concerning minimum uniform capital
adequacy requirements discussed above, the FDIC has established guidelines
regarding the maintenance of an adequate allowance for loan and lease losses.
Therefore, the future payment of cash dividends by the Bank to the Company
will generally depend, in addition to regulatory constraints, upon the Bank's
earnings during any fiscal period, the assessment of the respective Boards of
Directors of the capital requirements of such institutions and other factors,
including the maintenance of an adequate allowance for loan and lease losses.
IMPACT OF FEDERAL AND CALIFORNIA TAX LAWS
The following are the more significant federal and California income tax
provisions affecting commercial banks.
CORPORATE TAX RATES
The federal corporate tax rate is 34% for up to $10 million of taxable
income, and 35% for taxable income over $10 million. The 1% differential is
phased out between $15 million and approximately $18.3 million so that
corporations with over approximately $18.3 million of taxable income are taxed
at a flat rate of 35%.
CORPORATE ALTERNATIVE MINIMUM TAX
Generally, a Corporation will be subject to an alternative minimum tax
("AMT") to the extent the tentative minimum tax exceeds the Corporation's
regular tax liability. The tentative minimum tax is equal to (a) 20% of the
excess of a Corporation's "alternative minimum taxable income" ("AMTI") over
an exemption amount, less (b) the alternative minimum foreign tax credit.
AMTI is defined as taxable income computed with special adjustments and
increased by the amount of tax preference items for a tax year. An important
adjustment is made for "adjusted current earnings," which generally measures
the difference between corporate earnings and profits (as adjusted) and
taxable income. Finally, a Corporation's net operating loss (computed for AMT
purposes), if any, can be utilized only up to 90% of AMTI, with the result
that a Corporation with current year taxable income will pay some tax.
BAD DEBT DEDUCTION
A Bank with average adjusted bases of all assets exceeding $500 million
(a "large Bank") must compute its bad debt deduction using the specific
charge-off method. Under that method, a deduction is taken at the time the
debt becomes partially or wholly worthless. A Bank not meeting the definition
of a large Bank may use either the specific charge-off method or the
"experience" reserve method, under which the addition to bad debt reserve is
based on the Bank's actual loss experience for the current year and five
preceding years. The U.S. Treasury has promulgated regulations which permit a
Bank to elect to establish a conclusive presumption that a debt is worthless,
based on applying a single set of standards for both regulatory and tax
accounting purposes.
INTEREST INCURRED FOR TAX-EXEMPT OBLIGATIONS
Generally, taxpayers are not allowed to deduct interest on indebtedness
incurred to purchase or carry tax-exempt obligations. This rules applies to a
Bank, to the extent of its interest expense that is allocable to tax-exempt
obligations acquired after August 7, 1986. A special exception applies,
however, to a "qualified tax-exempt obligation," which includes any tax-exempt
obligation that (a) is not a private activity bond and (b) is issued after
August 7, 1986 by an issuer that reasonably anticipates it will issue not more
than $10 million of tax-exempt obligations (other than certain private
activity bonds) during the calendar year. Interest expense on qualified
tax-exempt obligations is deductible, although it is subject to a 20%
disallowance under special rules applicable to financial institutions.
NET OPERATING LOSSES
Generally, a Bank is permitted to carry a net operating loss ("NOL") back
to the prior three tax years and forward to the succeeding fifteen tax years.
If the NOL of a commercial Bank is attributable to a bad debt deduction taken
under the specific charge-off method after December 31, 1986, and before
January 1, 1994, however, such portion of the NOL may be carried back ten
years and carried forward five years. A commercial Bank's bad debt loss is
treated as a separate NOL to be taken into account after the remaining portion
of the NOL for the year.
AMORTIZATION OF INTANGIBLE ASSETS INCLUDING BANK DEPOSIT BASE
Certain intangible property acquired by a taxpayer must be amortized over
a 15 year period. For this purpose, acquired assets required to be amortized
include goodwill and the deposit base or any similar asset acquired by a
financial institution (such as checking and savings accounts, escrow accounts
and similar items). The 15 year amortization rule generally applies to
property acquired after August 10, 1993.
MARK-TO-MARKET RULES
The Revenue Reconciliation Act of 1993 introduced certain "mark-to-market"
tax accounting rules for "dealers in securities. " Under
these rules, certain "securities" held at the close of a taxable year must be
marked to fair market value, and the unrealized gain or loss inherent in the
security must be recognized in that year for federal income tax purposes.
Under the definition of a "dealer," a Bank or financial institution that
regularly purchases or sells loans may be subject to the new rules. The rules
generally are effective for tax years ending on or after December 31, 1993.
Certain securities are excepted from the mark-to-market rules provided
the taxpayer timely complies with specified identification rules. The
principal exceptions affecting banks are for (1) any security held for
investment and (2) any note, bond, or other evidence of indebtedness acquired
or originated in the ordinary course of business and which is not held for
sale. If a taxpayer timely and properly identifies loans and securities as
being excepted from the mark-to-market rules, these loans and securities will
not be subject to these rules. Generally, a financial institution may make
the identification of an excepted debt obligation in accordance with normal
accounting practices, but no later than 30 days after acquisition.
CALIFORNIA TAX LAWS
A commercial Bank is subject to the California franchise tax at a special
Bank tax rate based on the general corporate (non financial) rate plus 2%.
The rate for calendar income year 1996 is 11.3%. For calendar income year
1997, the Bank tax rate is 10.84% (which reflects a decrease in the general
corporate tax rate to 8.84%). The applicable tax rate is higher than that
applied to general corporations because it includes an amount "in lieu" of
many other state and local taxes and license fees payable by such corporations
but generally not payable by banks and financial corporations.
California has adopted substantially the federal AMT, subject to certain
modifications. Generally, a Bank is subject to California AMT in an amount
equal to the sum of (a) 7% of AMTI (computed for California purposes) over an
exemption amount and (b) the excess of the Bank tax rate over the general
Corporation tax rate applied against net income for the taxable year, unless
the Bank's regular tax liability is greater. The 7% rate is lowered to 6.65%
for any income year beginning after 1996.
California permits a Bank to compute its deduction for bad debt losses
under either the specific charge-off method or according to the amount of a
reasonable addition to a bad debt reserve.
California has incorporated the federal NOL provisions, subject to
significant modifications for most corporations. First, NOLs arising in
income years beginning before 1987 are disregarded. Second, no carry back is
permitted, and for most corporations NOLs may be carried forward only five
years. Third, in most cases, only 50% of the NOL for any income year may be
carried forward. Fourth, NOL carryover deductions are suspended for income
years beginning in calendar years 1991 and 1992, although the carryover period
is extended by one year for losses sustained in income years beginning in 1991
and by two years for losses sustained in income years beginning before 1991.
Finally, the special federal NOL rules regarding bad debt losses of commercial
banks do not apply for California purposes.
Finally, in 1994, California enacted legislation conforming to the
federal tax treatment of amortization of intangibles and goodwill, with
certain modifications. No deduction is allowed under this provision for any
income year beginning prior to 1994.
The various laws discussed herein contain other changes that could have a
significant impact on the banking industry. The effect of these changes is
uncertain and varied, and it is unclear to what extent any of these changes
may influence the Bank's operations or the banking industry generally.
In addition, there are several tax bills currently pending before
Congress which could have a significant impact on the banking industry. As of
March 24, 1997, it is uncertain whether these bills will be enacted and what
impact these bills will have on the Bank.
IMPACT OF MONETARY POLICIES
The earnings and growth of the Bank and the Company are subject to the
influence of domestic and foreign economic conditions, including inflation,
recession and unemployment. The earnings of the Bank and, therefore, the
Company, are affected not only by general economic conditions but also by the
monetary and fiscal policies of the United States and federal agencies,
particularly the Federal Reserve. The Federal Reserve can and does implement
national monetary policy, such as seeking to curb inflation and combat
recession, by its open market operations in United States Government
securities and by its control of the discount rates applicable to borrowings
by banks from the Federal Reserve System. The actions of the Federal Reserve
in these areas influence the growth of Bank loans, investments and deposits
and affect the interest rates charged on loans and paid on deposits. As
demonstrated recently by the Federal Reserve's actions regarding interest
rates, its policies have had a significant effect on the operating results of
commercial banks and are expected to continue to do so in the future. The
nature and timing of any future changes in monetary policies are not
predictable.
RECENT AND PROPOSED LEGISLATION
Federal and state laws applicable to financial institutions have
undergone significant changes in recent years. The most significant recent
federal legislative enactments are the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Riegle-Neal") and the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA").
RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994
In September 1994, President Clinton signed Riegle-Neal, which amends
the BHC Act and the Federal Deposit Insurance Act ("FDIA") to provide for
interstate banking, branching and mergers. Subject to the provisions of
certain state laws and other requirements, as September 29, 1995, Riegle-Neal
allows a Bank holding company that is adequately capitalized and adequately
managed to acquire a Bank located in a state other than the holding company's
home state regardless of whether or not the acquisition is expressly
authorized by state law. Similarly, beginning on June 1, 1997, the federal
banking agencies may approve interstate merger transactions, subject to
applicable restrictions and state laws. Further, a state may elect to allow
out of state banks to open de novo branches in that state. Riegle-Neal
includes several other provisions which may have an impact on the Company's
and the Bank's business. The provisions include, among other things, a
mandate for review of regulations to equalize competitive opportunities
between U.S. and foreign banks, evaluation on a Bank-wide, state-wide and, if
applicable, metropolitan area basis of the Community Reinvestment Act
compliance of banks with interstate branches, and, in the event the FDIC is
appointed as conservator or receiver of a financial institution, the revival
of otherwise expired causes of action for fraud and intentional misconduct
resulting in unjust enrichment or substantial loss to an institution.
California has adopted the Caldera, Weggeland, and Killea California
Interstate Banking and Branching Act of 1995 ("IBBA"), which became effective
on October 2, 1995. The IBBA addresses the supervision of state chartered
banks which operate across state lines, and covers such areas as branching,
applications for new facilities and mergers, consolidations and conversions,
among other things. The IBBA allows a California state Bank to have agency
relationships with affiliated and unaffiliated insured depository institutions
and allows a Bank subsidiary of a Bank holding company to act as an agent to
receive deposits, renew time deposits, service loans and receive payments for
a depository institution affiliate. In addition, pursuant to the IBBA,
California "opted in early" to the Riegle-Neal provisions regarding interstate
branching, allowing a state Bank chartered in a state other than California to
acquire by merger or purchase, at any time after effectiveness of the IBBA, a
California Bank or industrial loan company which is at least five (5) years
old and thereby establish one or more California branch offices. However, the
IBBA prohibits a state Bank chartered in a state other than California from
entering California by purchasing a California branch office of a California
Bank or industrial loan company without purchasing the entire entity or
establishing a de novo California branch office.
The changes effected by Riegle-Neal and the IBBA may increase the
competitive environment in which the Company and the Bank operate in the event
that out of state financial institutions directly or indirectly enter the
Bank's market area. It is expected that Riegle-Neal will accelerate the
consolidation of the banking industry as a number of the largest Bank holding
companies attempt to expand into different parts of the country that were
previously restricted. However, at this time, it is not possible to predict
what specific impact, if any, Riegle-Neal and the IBBA will have on the
Company and the Bank, the competitive environment in which the Bank operates,
or the impact on the Company or the Bank of any regulations adopted or
proposed under Riegle-Neal and the IBBA.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 ("FDICIA")
GENERAL
FDICIA primarily addresses the safety and soundness of the deposit
insurance funds, supervision of and accounting by insured depository
institutions and prompt corrective action by the federal Bank regulatory
agencies with respect to troubled institutions. FDICIA gives the FDIC, in
its capacity as federal insurer of deposits, broad authority to promulgate
regulations to assure the viability of the deposit insurance funds, including
regulations concerning safety and soundness standards. FDICIA also places
restrictions on the activities of state-chartered institutions and on
institutions failing to meet minimum capital standards and provides enhanced
enforcement authority for the Federal banking agencies. FDICIA also
strengthened Federal Reserve Act regulations regarding insider transactions.
PROMPT CORRECTIVE ACTION
FDICIA amended the FDIA to establish a format for closer monitoring of
insured depository institutions and to enable prompt corrective action by
regulators when an institution begins to experience difficulty. The general
thrust of these provisions is to impose greater scrutiny and more restrictions
on institutions as they descend the capitalization ladder.
FDICIA establishes five capital categories for insured depository
institutions: (a) Well Capitalized(F3); (b) Adequately Capitalized(F4); (c)
Undercapitalized(F5); (d) Significantly Undercapitalized(F6) and (e)
Critically Undercapitalized(F7). All insured institutions (e.g., the Bank)
are barred from making capital distributions or paying management fees to a
controlling person (e.g., the Company) if to do so would cause the institution
to fall into any of the three undercapitalized categories.
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F3 Well Capitalized means a financial institution with a total
risk-based ratio of 10% or more, a Tier 1 risk-based ratio of
6% or more and a leverage ratio of 5% or more, so long as the
institution is not subject to any written agreement or order
issued by the FDIC.
F4 Adequately Capitalized means a total risk-based ratio of 8% or
more, a Tier 1 risk-based ratio of 4% or more and a leverage ratio
of 4% or more (3% or more if the institution has received the highest
composite rating in its most recent report of examination) and does
not meet the definition of a Well Capitalized institution.
F5 Undercapitalized means a total risk-based capital ratio of less than
8%, a Tier 1 risk-based capital ratio of less than 4% or a leverage
ratio of less than 4%.
F6 Significantly Undercapitalized means a financial institution with a
total risk-based ratio of less than 6%, a Tier 1 risk-based ratio of
less than 3% or a leverage ratio of less than 3%.
F7 Critically Undercapitalized means a financial institution with a
ratio of tangible equity to total assets that is equal to or less than 2%.
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An institution which is undercapitalized, significantly undercapitalized
or critically undercapitalized becomes subject to the following mandatory
supervisory actions immediately upon notification of its capital category: (1)
restrictions on payment of capital distributions, such as dividends; (2)
restrictions on payment of management fees to any person having control of the
institution; (3) close monitoring by the FDIC of the condition of the
institution, compliance with capital restoration plans, restrictions, and
requirements imposed under Section 38 of the FDIA, and periodic review of the
institution's efforts to restore its capital and comply with restrictions; (4)
requirement that the institution submit within the time allowed by the FDIC a
capital restoration plan, which must include (a) the steps the institution
will take to become adequately capitalized, (b) the levels of capital to be
attained during each year in which the plan will be in effect, (c) how the
institution will comply with restrictions or requirements imposed on its
activities, (d) the types and levels of activities in which the institution
will engage, and (e) such other information as the FDIC may require; (5)
requirement that any company which controls an undercapitalized institution
must guarantee, in an amount equal to the lesser of 5% of the institution's
total assets or the amount needed to bring the institution into full capital
compliance, that the institution will comply with the capital restoration plan
until the institution has been adequately capitalized, on the average, for
four consecutive quarters; (6) restrictions on growth of the institution's
total assets so that its average total assets during any calendar quarter do
not exceed its average total assets during the preceding calendar quarter
unless (a) the FDIC has accepted the institution's capital restoration plan,
(b) any increase in total assets is consistent with the capital restoration
plan, and (c) the institution's ratio of tangible equity to assets increases
during the calendar quarter at a rate sufficient to enable the institution to
become adequately capitalized within a reasonable time; and (7) limitations on
the institution's ability to make any acquisition, open any new branch offices
or engage in any new line of business unless the FDIC has accepted the
institution's capital plan and has granted prior approval.
In addition to the above, the FDIC may take any of the actions described
below for institutions which fail to submit and implement a capital
restoration plan.
Significantly undercapitalized and undercapitalized institutions that
fail to submit and implement adequate capital restoration plans are subject to
the mandatory provisions set forth above and, in addition, will be required to
do or comply with one or more of the following: (1) sell enough additional
capital, including voting shares, to bring the institution to an adequately
capitalized level or if one or more grounds exist for appointing a conservator
or receiver for the institution, be acquired by or combined with another
insured depository institution; (2) restrict transactions with affiliates; (3)
restrict interest rates paid on deposits to the prevailing rates in the region
where the institution is located, as determined by the FDIC; (4) restrict
asset growth or reduce total assets more stringently than described above; (5)
terminate, reduce or alter any activity (including any activity conducted by a
subsidiary of the institution) determined by the FDIC to pose an excessive
risk to the institution; (6) hold a new election for the institution's board
of directors; (7) dismiss directors or senior officers and/or employ new
officers, subject to agency approval; (8) cease accepting deposits from
correspondent depository institutions, including renewals and rollovers of
prior deposits; (9) divest or liquidate any subsidiary that is in danger of
becoming insolvent and poses a significant risk to the institution or that is
likely to cause significant dissipation of the institution's assets or
earnings; or (10) take any other action that the FDIC determines to be
appropriate.
In addition, significantly undercapitalized institutions are prohibited
from paying any bonus or raise to a senior executive officer without prior
FDIC approval. No such approval will be granted to an institution which is
required but has failed to submit an acceptable capital restoration plan.
Further, the FDIC may impose one or more of the restrictions applicable to
critically undercapitalized institutions set forth below.
In addition to all of the above restrictions, a critically
undercapitalized institution must be placed in conservatorship or receivership
within 90 days of becoming critically undercapitalized, unless the FDIC
determines that other action would better achieve the purposes of the FDIA. A
determination of alternate action by the FDIC is effective for only 90 days,
after which period the FDIC must reexamine whether to appoint a conservator or
receiver for the Bank. Critically undercapitalized institutions which are not
placed in conservatorship or receivership may be subject to additional
stringent operating restrictions.
OTHER PROVISIONS OF FDICIA
FDICIA required the federal banking agencies to adopt regulations or
guidelines with respect to safety and soundness standards. The agencies have
adopted uniform guidelines which are used, primarily in connection with
examinations, to identify and address problems at insured depository
institutions before capital becomes impaired. The federal Bank regulatory
agencies recently adopted asset quality and earnings standards which were
added to the safety and soundness guidelines. The asset quality standards
require a depository institution to establish and maintain a system
appropriate to the institution's size and operations to identify and prevent
deterioration in problem assets. With respect to earnings, the institution
should adopt and maintain a system to evaluate and monitor earnings and ensure
that earnings are sufficient to maintain adequate capital and reserves.
FDICIA restricts the acceptance of brokered deposits by insured
depository institutions that are not well capitalized. It also places
restrictions on the interest rate payable on brokered deposits and the
solicitation of such deposits by such institutions. An undercapitalized
institution will not be allowed to solicit brokered deposits by offering rates
of interest that are significantly higher than the prevailing rates of
interest on insured deposits in the particular institution's normal market
areas or in the market area in which such deposits would otherwise be
accepted. In addition to these restrictions on acceptance of brokered
deposits, FDICIA provides that no pass-through deposit insurance will be
provided to employee benefit plan deposits accepted by an institution which is
ineligible to accept brokered deposits under applicable law and regulations.
FDICIA also adds grounds to the previously existing list of reasons for
appointing a conservator or receiver for an insured depository institution.
Pursuant to FDICIA, the FDIC has established a risk-based assessment
system for depository institutions. This risk-based system is used to
calculate a depository institution's semiannual deposit insurance assessment
based on the probability that the deposit insurance fund will incur a loss
with respect to the institution. To arrive at a risk-based assessment for
each depository institution, the FDIC has constructed a matrix of nine risk
categories based on capital ratios and relevant supervisory information. Each
institution is assigned to one of three capital categories: "well
capitalized," "adequately capitalized" or "undercapitalized." Each institution
also is assigned to one of three supervisory groups based on levels of risk.
Risk assessment premiums are based on an institution's assignment within the
matrix and for 1996 ranged from $0.0 to $0.27 per $100 of deposits. For 1996,
the FDIC lowered assessment rates for all risk categories by four cents
($.04), with the lowest-rated institutions' assessment being reduced from
$0.31 per $100 of deposits.
FDICIA also places restrictions on insured state Bank activities and
equity investments, interbank liabilities and extensions of credit to insiders
and transactions with affiliates.
Because the foregoing and other proposed regulations are subject to
change before they are adopted in final form, their ultimate impact on the
Company and the Bank cannot yet be determined.
OTHER RECENT LEGISLATION
The Deposit Insurance Funds Act of 1996 requires the FDIC to impose a
one-time special assessment against deposits insured by the Savings
Association Insurance Fund ("SAIF") in order to recapitalize the SAIF to
its required reserve ratio. The special assessment was imposed at a rate of
65.7 cents ($0.657) per $100 of SAIF-assessable deposits on October 8, 1996.
The Bank held no SAIF-assessable deposits as of that date.
On September 23, 1994, President Clinton signed into law the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Regulatory
Improvement Act"). The Regulatory Improvement Act provides regulatory relief
for both large and small banks by, among other things, reducing the burden of
regulatory examinations, streamlining Bank holding company procedures and
establishing a formal regulatory appeals process. The Regulatory Improvement
Act also addresses a variety of other topics, including, but not limited to,
mortgage loan settlement procedures, call reports, insider lending, money
laundering, currency transaction reports, management interlocks, foreign
accounts, mortgage servicing and credit card receivables. Although the
Regulatory Improvement Act should reduce the regulatory burden currently
imposed on banks, it is not possible to ascertain the precise effect its
various provisions will have on the Company or the Bank.
CONSUMER PROTECTION LAWS AND REGULATIONS
The Bank regulatory agencies are focusing greater attention on compliance
with consumer protection laws and their implementing regulations. Examination
and enforcement have become more intense in nature, and insured institutions
have been advised to monitor carefully compliance with various consumer
protection laws and their implementing regulations. The Bank is subject to
many federal consumer protection statutes and regulations, including the
Community Reinvestment Act, the Equal Credit Opportunity Act, the Truth in
Lending Act, the Fair Housing Act, the Home Mortgage Disclosure Act and the
Real Estate Settlement Procedures Act. Penalties under these statutes may
include fines, reimbursements and other penalties. Due to heightened
regulatory concern related to compliance with these and other statutes
generally, the Bank may incur additional compliance costs.
OTHER
Other legislation which has been or may be proposed to the United States
Congress and the California Legislature and regulations which may be proposed
by the Federal Reserve, the FDIC and the SBD may affect the business of the
Company or the Bank. It cannot be predicted whether any pending or proposed
legislation or regulations will be adopted or the effect such legislation or
regulations may have upon the business of the Company or the Bank.
ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, which must
be adopted by the Company for transactions occurring after December 31, 1996.
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This
standard is based on consistent application of a financial-components approach
that focuses on control. Under this approach, 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.
The Company has determined that the adoption of this standard will not have a
material effect on the Company's financial position or results of operations.
COMPETITION
The Bank's primary market area presently consists of portions of the
Vacaville, Fairfield, Benicia and Vallejo areas of Solano County and the
Concord area of Contra Costa County. The banking business in California
generally, and specifically in the Bank's primary market area, is highly
competitive with respect to both loans and deposits. A relatively small
number of major banks dominate the business, most of which have many offices
operating over wide geographic areas. Many major commercial banks offer
certain services (such as international, trust and securities brokerage
services) which the Bank does not offer directly. By virtue of their greater
total capitalization, such banks have much higher lending limits than the Bank
and substantial advertising and promotional budgets.
However, regional and smaller independent financial institutions also
represent a competitive force. To illustrate the Bank's relative market
share, total deposits in banks in Solano County, California at June 30, 1996
(more recent data is not available) approximated $1,506,000,000. The Bank's
deposits at June 30, 1996 represented approximately 9.76% of such figure. As
of June 30, 1996, the Bank was the fourth largest Bank, behind Bank of
America, Wells Fargo Bank and Westamerica Bank, serving all the major cities
in Solano County. In October 1996 the Bank purchased a branch in Concord
California from Tracy Federal Savings Bank. The total deposits in banks in
Contra Costa County, where Concord is located, at June 30, 1996, were
approximately $5,507,000,000.
To compete with major financial institutions in its service area, the
Bank relies upon specialized services, responsive handling of customer needs,
local promotional activities, and personal contacts by its officers, directors
and staff. For customers whose loan demands exceed the Bank's lending limits,
the Bank seeks to arrange for such loans on a participation basis with its
correspondent banks or other independent commercial banks. The Bank also
assists customers requiring services not offered by the Bank to obtain such
services from its correspondent banks.
In the past, an independent Bank's principal competitors for deposits and
loans have been other banks (particularly major banks), savings and loan
associations and credit unions. To a lesser extent, competition was also
provided by thrift and loans, mortgage brokerage companies and insurance
companies. Other institutions, such as brokerage houses, credit card
companies, and even retail establishments have offered new investment
vehicles, such as money-market funds, which also compete with banks for
deposit business. The direction of federal legislation in recent years seems
to favor competition between different types of financial institutions and to
foster new entrants into the financial services market, and it is anticipated
that this trend will continue.
The enactment of the Riegle-Neal Act as well as the California Interstate
Banking and Branching Act of 1995 will likely increase competition within
California. Regulatory reform, as well as other changes in federal and
California law will also affect competition. While the impact of these
changes, and of other proposed changes, cannot be predicted with certainty, it
is clear that the business of banking in California will remain highly
competitive.
CONCLUSION
It is impossible to predict with any degree of accuracy the competitive
impact these laws will have on commercial banking overall and the business of
the Bank in particular or whether any of the proposed legislation and
regulations will be adopted. If experience is any indication, there appears
to be a continued lessening of the historical distinction between the services
offered by financial institutions and other businesses offering financial
services. As a result of these trends, it is anticipated that banks will
experience increased competition for deposits and loans and, possibly, further
increases in their cost of doing business.
******************************************************************************
ITEM 2 - DESCRIPTION OF PROPERTY
The Vacaville main office is located in a modern, one-story building of
7,700 square feet at 141 Parker Street, Vacaville, California. This office has
liberal off-street parking accommodations. The Branch's annual rental payment
for 1996 was $72,191. Its rent for 1997 will be the same as the prior year
plus an adjustment to be made to reflect changes in the cost of living as
measured by the Consumer Price Index for the San Francisco-Oakland
metropolitan area (the "CPI"), limited however, to no more than a 6% increase
in any year. The lease term expires in May 1998, with two successive five-year
renewal options. The Bank also has a right of first refusal to purchase the
premises.
The second Vacaville branch is located in the factory stores area of
Vacaville, California. This 3,600 square foot stand alone office has ample
parking on the site. The Bank signed a 20-year ground lease in May 1994 with
rent increases scheduled every five years. The annual rent is $31,250 plus
common area maintenance (cam) expenses. In 1996, rent and cam expenses totaled
$38,380.
The Fairfield branch office is located in freestanding building at 1100
Texas Street, Fairfield, California, and comprises 5,760 square feet. This
office has parking for approximately 42 cars. The lease term expired in 1993,
with a single five-year renewal option. The Bank exercised it's option to
renew the lease for five years and in January 1996 negotiated an extension of
the lease to December 2002 in exchange for a reduction in rent of
approximately $2,000 a month. The annual rental payments during 1996 totaled
$59,000. In November 1996 the Bank began interior reconstruction of the office
in an effort to provide larger office space for the Bank's Central/Data
Operations departments. At December 31, 1996, these departments were in the
rear of the Vacaville main office. In January 1997, with the reconstruction
completed, the departments were moved to the Fairfield Texas Street Office.
As a result the space occupied by the Branch was greatly reduced and the
Branch became an express branch for deposit services only.
A second Fairfield office, located at 1300 Oliver Road, Fairfield,
California has been in operation since 1993. The office occupies approximately
3,819 rental square feet in a 60,000 square foot commercial office building.
The office has ample parking. The lease began in August 1993 and has a term of
15 years. Rental and cam expenses in 1996 totalled $88,197. Rent is adjusted
annually in August to reflect changes in the CPI.
The Bank has occupied its facility at 1001 First Street, Benicia,
California, since June 1987. This two-story, 2,600 square foot building was
constructed to the Bank's specifications at a cost of approximately $435,000.
There is off-street parking for approximately 10 cars. The Bank purchased the
property in early 1986 from an unaffiliated party for approximately $125,000.
On May 28, 1988, the Bank sold this property to an unaffiliated party for
$625,000. After deducting $25,000 for real estate commissions, the sale and
lease back of the property resulted in a $40,000 profit which will be deferred
over the life of the lease. The lease, which was effective on May 1, 1988, has
a fifteen year term and has two successive five-year renewal options. The
annual rental in 1996 was $70,980.
The Bank maintains two offices in the city of Vallejo, California. The
first office opened in June 1987 and is located at 303 Sacramento Street.
The premises are leased for a monthly base rental of $5,900, adjusted to reflect
changes in the CPI (minimum of 4% to a maximum of 6%) on an annual basis.
Those terms are effective from January 1, 1988 to December 31, 1997. From
January 1, 1998 to December 31, 2007, there will be a new base rental of
$5,500 adjusted to reflect changes in the CPI on an annual basis. The
accumulated change in the CPI will be adjusted back for the period beginning
January 1, 1988 and ending January 1, 1998. The annual rental in 1996 was
$99,166.
The second Vallejo office, which opened in March 1992, is located in the
Park Place shopping center at 4300 Sonoma Boulevard, Suite 300. The rent for
the building, which is a modern 3,900 square foot, one-story stand alone
building, is $70,056 per year plus common area maintenance. The lease term
expires in January 1997 with three five-year renewal options. In December
1996, the Bank exercised the first five-year option and negotiated the base
rent downward to $63,180 per year plus cam expenses. This new rent is
effective beginning with the February 1, 1997 payment. Each subsequent year
the rent will increase by $2,340 per year. Total rental and cam payments
during 1996 totaled $88,706.
The Bank opened it's first office in Contra Costa County on October 12,
1996 in the City of Concord, California at 2151 Salvio Street, Suite H. The
office occupies approximately 2,866 square feet in an approximately 120,000
square foot commercial office building. The lease has a term of 3 years and
has a single five-year renewal option. The annual rent is $42,990 plus cam
expenses until October 1, 1997, at which time the rent increases to $44,710
per year through the remaining term of the lease. The prorated rental payments
in 1996 totaled $10,700.
Conpac owns two parcels of land, one of approximately 84,500 square feet
which is located eat of Davis Street in Vacaville, California, and one of
approximately 38,500 square feet located west of Davis Street in Vacaville,
California. Both lots are part of the Pacific Plaza project. The eastern lot,
known as Pacific Plaza East, was purchased in July 1988 at a cost of $612,500.
The western lot, Pacific Plaza West, consisted of three parcels and was
purchased in stages. Two of the parcels were purchased for approximately
$225,000 in July 1988. The third lot was leased at $1,100 per month from July
1988 to June 1990, at which time it was purchased by Conpac for $225,000. See,
"Description of Business - Real Estate Development Subsidiary", herein.
In September 1993, the Bank moved its corporate offices to Pacific Plaza
East, where it occupies 4,660 square feet. Rent of $106,000 was paid to Conpac
in 1996, which amount is eliminated upon consolidation with the Company. The
Company does not occupy any space other than that shared with the Corporate
offices on the Bank.
******************************************************************************
ITEM 3 - LEGAL PROCEEDINGS
None of the Company, the Bank or Conpac is a party to or the subject of,
or is any of their property the subject of, any material pending legal
proceedings, other than ordinary routine litigation incidental to the business
of the Company.
******************************************************************************
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
******************************************************************************
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to the Reorganization on February 29, 1996, the Bank's Common Stock
was traded over-the-counter and privately and the Bank was it's own transfer
agent, handling all stock related functions. As of the date of Reorganization,
each outstanding share of common stock was converted into one share of common
stock of the Company . As a result of the Reorganization, the Bank's stock
ceased trading on February 29, 1996. On March 14, 1996, the Company's stock
was added to the Nasdaq National Market under the symbol "CCBC". This listing
allows easy electronic access to trading prices and volume through brokers and
the Internet alike. On April 1, 1996, United States Trust Company of
California became the Company's transfer agent.
The following table indicates the historical range of high and low sales
prices for the Company's common stock, excluding brokers' commissions, for the
periods shown based upon information provided by Hoefer & Arnett, Inc., Van
Kasper & Company, A.G. Edwards and Nasdaq.
<TABLE>
<CAPTION>
Bid Price of Approximate Cash
Common Stock Trading Dividends
Quarter Ended: Low High Volume Declared / Paid
------------------- ---------- ------------------
<S> <C> <C> <C> <C>
December 31, 1996 $15.750 $16.500 32,266 0.150
September 30, 1996 $13.750 $15.750 45,616 0.150
June 30, 1996 $13.250 $14.500 48,311 0.150
March 31, 1996 $14.000 $16.000 31,381 0.125
December 31, 1995 $14.500 $15.375 23,522 0.125
September 30, 1995 $14.500 $15.500 37,000 0.125
June 30, 1995 $12.250 $14.750 57,600 0.125
March 31, 1995 $13.500 $16.500 40,700 0.125
</TABLE>
The last known trade in the Company's Common Stock occurred on March 21,
1997 for 600 shares at $17.25 per share. As of March 24, 1997, the
approximate number of holders of record of the Company's Common Stock was 649.
Management believes the Company's Common Stock is held by approximately 946
beneficial owners.
AUTOMATIC DIVIDEND REINVESTMENT AND COMMON STOCK PURCHASE PLAN
In July 1996, the Company adopted its Automatic Dividend Reinvestment and
Common Stock Purchase Plan (the "Dividend Reinvestment Plan"). The Dividend
Reinvestment Plan allows eligible shareholders of the Company (those holding
of record 100 or more shares of the Company's Common Stock) to automatically
acquire additional shares of the Company's Common Stock through the
reinvestment of cash dividends or through the purchase of additional shares of
Common Stock with supplemental cash investments without the payment of any
brokerage commission or service charge. The Dividend Reinvestment Plan
includes certain dollar limitations on additional cash payments and is
administered by U.S. Trust Company, N.A. pursuant to an agency agreement with
the Company. Shares acquired through the Dividend Reinvestment Plan are
purchased in the open market or in negotiated transactions. The Company will
not issue new shares of Common Stock to participants under the Dividend
Reinvestment Plan.
For information related to stockholder and dividend matters, including
limitations on dividends, see Item 1, Description of Business-Regulation and
Supervision of Bank Holding Company and-Restrictions on Dividends and Other
Distributions.
******************************************************************************
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain matters discussed or incorporated by reference in this Annual
Report on Form 10-KSB are forward-looking statements that are subject to risks
and uncertainties that could cause actual results to differ materially from
those projected in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, those described in ITEM 6. -
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. Therefore, the
information set forth therein should be carefully considered when evaluating
the business prospects of the Company and the Bank.
FINANCIAL REVIEW
California Community Bancshares Corporation and subsidiary (the
"Company") became the holding company for Continental Pacific Bank (the
"Bank"), a California state-chartered non-member Bank, as of February 29,
1996. The following discussion of the Company's financial condition and
results of operations is designed to provide a better understanding of the
changes and trends related to the Company's financial condition, liquidity and
capital resources. The discussion should be read in conjunction with all
other information herein, including the Consolidated Financial Statements of
the Company and the Notes thereto. The Company has not commenced any business
operations independent of the Bank, therefore the following discussion
pertains primarily to the Bank. Average balances are generally comprised of
daily balances.
OVERVIEW
The Company's net income in 1996 was $1,559,000, a 11% increase over the
$1,405,000 reported in 1995. Fully diluted earnings per share were $1.31 in
1996 as compared to $1.22 in 1995 and $1.09 in 1994. Assets ended the year at
$191.8 million, an increase of $31.8 million over the $160.0 million at
December 31, 1995. Assets averaged $169.0 million during 1996 versus $158.1
million in 1995, for a $10.9 million (6.9%) increase. The 11% increase in
earnings and the 6.9% increase in average assets resulted in a Return on
Average Assets (ROA) of .92% for 1996. This was 3.4% higher than 1995's ROA
of .89%. Return on Average Equity in 1996 was 12.25% compared to 12.31% in
1995. The factors influencing income, as discussed more fully below, were an
improving interest margin, a slight decrease in noninterest income and a
slight increase in noninterest expense.
On May 14, 1996, the Bank entered into a Purchase and Assumption
Agreement ( the "Agreement") with Tracy Federal Bank, F.S.B., a Federal
Savings Bank ("Tracy") to acquire the Concord, California branch office of
Tracy. This acquisition, which was consummated on October 12, 1996 is
consistent with the Company's strategic plan to expand the Company's deposit
and lending activities into contiguous markets. The assets purchased consisted
of cash on hand, negative balance transaction accounts, savings secured loans
and corresponding accrued interest, leasehold improvements and personal
property. These assets totalled $210,000. The liabilities assumed consisted of
branch deposits and accrued interest of approximately $15,500,000. The
consideration, which was 4% of adjusted deposits, amounted to $610,000. Of
this amount $550,000 is considered goodwill and will be amortized over 15
years. At December 31, 1996, unamortized goodwill totalled $540,000 after
amortizing $10,000 in 1996. Due to the low overall cost structure of this
branch the immediate negative impact on earnings should be minimal. As this
branch generates loans, the purchase should increase overall income. See
"Description of Business - Acquisition of Tracy Branch"
Capital, a key measure of a Company's safety and soundness, increased in
1996 as Tier 1 capital increased from $12,327,000 at December 31, 1995 to
$13,104,000 at December 31, 1996.
The detailed changes in the nature and sources of income and expense for
the years shown are highlighted in the following table of consolidated
statements of operations.
<TABLE>
<CAPTION>
--------------------------------------------------------
Year Ended December 31
--------------------------------------------------------
1996 VS. 1995 1995 VS.1994 1994 VS.1993
Amount Percent Amount Percent Amount Percent
Incr. / (Decr) Incr. / (Decr) Incr. / (Decr)
--------------------------------------------------------
(Dollars in thousands)
--------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income $ 792 6% $1,357 12% $371 4%
Interest Expense ( 16) ( 0) 1,385 0 354 9
Net Interest Income 808 12 ( 28) 0 17 0
Provision for Loan Losses 87 27 68 27 ( 13) ( 5)
Net Interest Income
After Provision for Loan Losses 721 11 ( 96) ( 1) 30 0
Noninterest Income Excluding
Securities Transactions 252 15 44 3 144 10
Noninterest Expense 151 2 152 2 ( 48) ( 1)
Earnings Before Income Taxes and
Securities Transactions 822 52 ( 204) ( 11) 222 14
Securities Transactions ( 398) (83) 472 5,244 (196) (96)
Provisions for Income Taxes 270 42 84 15 ( 13) ( 2)
----- --- ------ ----- ---- ---
Net Income 154 11 184 15 39 3
===== === ====== ===== ==== ===
</TABLE>
NET INTEREST INCOME
Average interest earning assets increased $10.1 million to $151.4 million
in 1996, from $141.3 million in 1995, while the yield earned on these assets,
declined from 8.71% to 8.65%, respectively. In 1996 average equity increased
by $1.3 million while average noninterest bearing deposits increase $4.0
million and average interest bearing liabilities increased by $5.4 million. A
significant portion of the increase in average deposits resulted from the
Concord Branch purchase mentioned above. The remaining increase was derived
from internal deposit growth and borrowed funds. The distribution of this
funding growth within the various earning assets categories resulted in an
overall decline in yield earned on average earning assets. Average loans, the
highest yielding category contributed only $1.7 million of this growth, while
significantly lower yielding average investments increased by $8.4 million.
The cumulative effect of these changes improved interest income by $792,000
from $12,310,000 in 1995 to $13,102,000 in 1996.
Average interest-bearing liabilities increased $5.4 million in the same
period from $125.7 million in 1995 to $131.1 million in 1996. The Board of
Governors of the Federal Reserve System (the "Federal Reserve") raised short
term interest on February 1, 1995. Rates remained unchanged until July 7,
1995, when the Federal Reserve reduced the Federal Funds rate by .25%. This
rate was further reduced by .25% on December 20, 1995. In 1996, the Federal
Reserve again lowered rates by .25% on February 1, 1996. The timing and the
degree of the rate increase in 1995 and the decreases in rates in 1995 and
1996 resulted in lower average interest rates in 1996 versus 1995. While the
average yield earned on interest earning assets decreased by 6 basis points
(.06%), the average rate paid on interest bearing liabilities decreased by 19
basis points (.19%) from 4.36% in 1995 to 4.17% in 1996. The net result of
lower average rates paid and the increased volume was a $16,000 decrease in
interest expense. The Company's interest bearing liabilities reprice faster
than its assets, due to the significant amount of assets tied to lagging
indexes. Consequently, the lower average rates paid which offset the
increase in interest expense as a result of higher volume was only very
slightly offset by lower yields on earning assets. The result was net interest
income in 1996 of $7,637,000, $808,000 higher than the $6,829,000 reported in
1995. Net interest income in 1995 was, in turn, $28,000 lower than the
$6,857,000 reported in 1994.
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST
RATES AND DIFFERENTIALS
The following table presents, for the periods indicated, condensed
average balance sheet information for the Company, together with average
interest rates earned and paid on the various sources and uses of its funds,
the amount of interest income or interest expense, the net interest margin,
and net interest spread. The table is arranged to group the elements of
interest-earning assets and interest-bearing liabilities, these items being
the major sources of income and expense. Nonaccruing loans are included in
the table for computational purposes, but the nonaccrued interest thereon is
excluded. Tax exempt income is not shown on a tax equivalent basis.
<TABLE>
<CAPTION>
Year Ending December 31,
1996 1995 1994
---------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance<F1> Paid Rate Balance<F1> Paid Rate Balance<F1> Paid Rate
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
INTEREST EARNING ASSETS
Federal Funds Sold $ 3,469 $ 183 5.28% $ 2,040 $ 116 5.69% $ 1,379 $ 54 3.92%
Investment Securities:
Taxable <F2> 30,457 1,869 6.14 17,773 1,126 6.34 14,438 691 4.79
Exempt From Federal
Taxes<F3> 6,477 346 5.34 12,121 698 5.76 12,234 708 5.79
Loans, Net <F4>, <F5> 111,052 10,704 9.64 109,372 10,370 9.48 106,408 9,500 8.93
-------- ------- -------- ------- -------- -------
Total Interest Earning Assets $151,455 $13,102 8.65 $141,306 $12,310 8.71 $134,459 $10,953 8.15
Cash and Due From Banks 8,692 7,522 8,502
Premises and Equipment, NET 2,185 2,242 2,457
Invest. in Development Ventures 4,545 4,661 4,745
Accrued Interest Receivable
and Other Assets 2,101 2,368 2,644
-------- -------- --------
TOTAL AVERAGE ASSETS $168,978 $158,099 $152,807
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
Interest-Bearing NOW accounts $ 18,470 $ 257 1.39% $ 18,111 $ 229 1.26% $ 18,871 $ 228 1.21%
Savings Deposits and MMDA 55,679 2,105 3.78 56,193 2,333 4.15 46,983 1,596 3.40
Time Deposits 30,499 1,546 5.07 30,292 1,628 5.37 34,937 1,266 3.62
Time Deposits over $100,000 19,647 1,049 5.34 15,853 873 5.51 15,371 621 4.04
Federal Funds Purchased 80 4 5.00 439 28 6.38 98 5 5.10
Security Repurchase Agreements 1,000 50 5.00 816 44 5.39 1,435 52 3.62
Other Borrower Money 1,885 146 7.75
Subordinated Debentures 3,910 308 7.88 4,025 346 8.60 4,025 328 8.15
-------- ------- -------- ------- -------- -------
Total Average Interest -
Bearing Liabilities $131,170 $ 5,465 4.17% $125,729 $ 5,481 4.36% $121,720 $ 4,096 3.37%
------- ---- ------- ---- ------- ----
Noninterest-Bearing DDA's 24,817 20,794 20,194
Accrued Interest Payable
and Other Liabilities 261 162 357
-------- -------- --------
Total Average Liabilities $156,248 $146,685 $142,271
Total Equity 12,730 11,414 10,536
-------- -------- --------
Total Average Liabilities
and Shareholders' Equity $168,978 $158,099 $152,807
======== ======== ========
Net Interest Spread <F6> 4.48% 4.35% 4.78%
==== ==== ====
Net Interest Income $ 7,637 $ 6,829 $ 6,857
======= ======= =======
Net Interest Margin <F7> 5.04% 4.83% 5.10%
======= ======= =======
- -------------------------------------------------
<FN>
<F1> Average balances are computed principally on the basis of daily balances.
<F2> The taxable securities yield is computed by dividing interest income
(annualized on an actual day basis) by average historical cost.
<F3> The tax equivalent yield on exempt from federal taxes investment
securities (tax exemptinvestments) was 7.78%, 8.39% and 8.51% in 1996,
1995 and 1994. The tax equivalent yield is calculatedby dividing the
adjusted yield by one minus the Federal Tax rate. The adjusted yield is
determined bysubtracting the Tefra penalty from the unadjusted tax exempt
investment yield. The unadjusted taxexempt investment yield is computed
by dividing tax exempt interest income by their average historicalcost.
The Tefra penalty is computed by dividing total interest expense
(annualized) by average assets andmultiplying the result by 20% (Tefra
disallowance) and 34% (Federal Tax rate).
<F4> Allowance for loan losses and deferred loans are netted from loans
receivable which includes nonaccrual loan balances.
<F5> Interest income on loans includes fees on loans of $441,000, $486,000
and $620,000 in 1996, 1995 and 1994.
<F6> Net interest spread represents the average yield earned on interest-
earning assets less the average rate paid on interest-bearing
liabilities.
<F7> Net interest margin is computed by dividing net interest income by total
average interest earning assets.
</FN>
</TABLE>
RATE AND VOLUME VARIANCES
The following tables set forth, for the periods indicated, a summary of
the changes in interest income and interest expense resulting from changes in
average asset and liability balances (volume) and changes in average yield /
interest rate (rate). The change in interest due to both rate and volume has
been allocated to change due to rate and volume in proportion to the
relationship of absolute dollar amounts in each. Nonaccrual loans are
included in total loans outstanding, while nonaccrued interest thereon is
excluded from the computation of rates earned. Tax exempt income is not shown
on a tax equivalent basis.
The following tables below illustrate the effect that declining interest
rates and volume increases had on net interest income.
<TABLE>
<CAPTION>
1996 Compared to 1995
-------------------------------
Net
Volume Rate Change
-------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Increase (Decrease) in Interest Income:
Federal Funds Sold $ 75 ($ 8) $ 67
Taxable Investment Securities 778 ( 35) 743
Exempt from Federal Taxes
Investment Securities ( 302) ( 50) ( 352)
Loans, Net <F1> 162 172 334
---- ---- ----
Total Interest Income $713 $ 79 $792
==== ==== ====
Increase (Decrease) in Interest Expense:
Interest-bearing Now Accounts $ 5 $ 23 $ 28
Savings Deposits and MMDA ( 19) ( 209) ( 228)
Time Deposits 10 ( 92) ( 82)
Time Deposits over $100,000 203 ( 27) 176
---- ---- ----
Total Interest Expense on Deposits 199 ( 305) ( 106)
Federal Funds Purchased ( 18) ( 6) ( 24)
Security Repurchase Agreements 9 ( 3) 6
Other Borrowings 146 0 146
Subordinated Debentures ( 9) ( 29) ( 38)
---- ---- ----
Total Interest Expense 327 ( 343) ( 16)
---- ---- ----
Net Interest Income $386 $422 $808
==== ==== ====
- --------------------------------------
<FN>
<F1> Loan fees have been included in the interest income computation. Loan
fees for 1996 and 1995 were $441,000 and $486,000, respectively.
</FN>
</TABLE>
<TABLE>
<CAPTION>
1995 Compared to 1994
-------------------------------
Net
Volume Rate Change
-------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Increase (Decrease) in Interest Income:
Taxable Investment Securities $211 $ 224 $ 435
Nontaxable Investment Securities- ( 6) ( 4) ( 10)
Federal Funds Sold 38 24 62
Loans, Net <F1> 285 585 870
---- ------ ------
Total Interest Income $528 $ 829 $1,357
==== ====== ======
Increase (Decrease) in Interest Expense:
Interest-bearing Transaction Accounts ($ 8) $ 9 $ 1
Savings Deposits 384 353 737
Time Deposits ( 226) 840 614
---- ------ ------
Total Deposits 150 1,202 1,352
Federal Funds Purchased 22 1 23
Security Repurchase Agreements ( 33) 25 ( 8)
Subordinated Debentures 0 18 18
---- ------ ------
Total Interest Expense 139 1,246 1,385
---- ------ ------
Increase (Decr.) in Interest Margin $389 ($ 417) ($ 28)
==== ====== ======
- --------------------------------------
<FN>
<F1> Loan fees have been included in the interest income computation. Loan
fees for 1995 and 1994 were $486,000 and $620,000, respectively.
</FN>
</TABLE>
INTEREST INCOME ON EARNING ASSETS
Assets and liabilities grew modestly in 1996. As mentioned above,
average interest earning assets grew by $10.1 million in 1996 or 7.2%,
compared to a $6.8 million increase in 1995. Average interest-bearing
liabilities increased by $5.4 or 4.3% million in 1996 versus growth of $4.0
million in 1995.
Although average net loans increased by $1.7 million in 1996, the ratio
of average net loans to average interest earning assets declined from 77.4% in
1995 to 73.3% in 1996. The other $8.4 million growth in interest earning
assets consisted primarily of taxable investment securities, which increased
by $12.7 million in 1996. Average Federal Funds accounted for $1.4 million of
this increase. Average nontaxable investments decreased by $5.7 million.
These changes were a function of additional funds invested as well as a change
in the portfolio mix from long term fixed investment to short term fixed
securities as well as variable rate securities.
As mentioned earlier, in 1995 and 1996 the Federal Reserve lowered the
key short term rate known as Federal Funds. Other interest rates follow this
rate with varying degrees of magnitude (multiplier) and timing (lag). For
example, the Prime rate usually changes immediately and by the same degree
(multiple of 1.0) as the Federal Funds rate, while the Cost of Funds Index
(COFI) may change by a smaller amount, and this change may occur over a period
of six to twelve months. This delay in rate change is known as lag.
The Federal Funds rate and the Prime rate began 1995 at 5.50% and 8.50%,
respectively. In 1995, the Federal Reserve raised the Federal Funds rate by
.50% to 6.0% on February 1, 1995. Prime immediately increased to 9.0% and
remained at that level until early July, when the Federal Reserve began to
lower rates. This was the first rate reduction by the Federal Reserve since
July 1992 and it was only a .25% reduction. The next and final rate reduction
of 1995 occurred on December 20, 1995. At this time, the Federal Funds rate
was reduced by another .25% to 5.5%. Prime rate also fell by .25% to 8.5% at
this time. The result of the rate changes in 1995 and the subsequent minor
rate reduction in February, 1996 was lower average rates in 1996. For
example, Prime rate averaged 8.83% in 1995 and 8.27% in 1996. The degree and
timing of these changes for each interest rate index utilized by the Company
and the Bank and the amount and timing of volume changes for each type of
interest earning asset and interest-bearing liability determined the change in
interest income and expense in 1996.
At December 31, 1996, approximately 23.0% of the loans were tied to non-
lagging, high multiplier indexes such as Prime rate ($15.7 million) and 1 year
treasury indexes ($10.4 million), while 28.2% ($32.0 million) were tied to the
lagging certificate of deposit (CD) index and 27.7% ($31.5 million) were tied
to the longer lagging COFI index. The remaining 21.1% ($24.0 million) of the
loans had fixed rates and therefore were not subject to rate changes.
In 1996, Prime rate averaged .56% lower than it did in 1995, while the CD
index averaged .34% lower, the COFI index averaged .20% lower and the one year
treasury index averaged .44% lower. In 1996, although the average for each
index was lower in 1996 verses 1995, due to the repricing timing on COFI and
CD indexed loans, which adjust every six months based on the index available
two months before the adjustment date, the actual yield on loans tied to
these indexes increased. In 1996 loans tied to these indexes averaged
approximately $63.5 million or 79% of the average $80.7 million in real estate
mortgage loans. In 1996 the yield on this loan category increased by .34%
Another reason the yield on the loan portfolio is higher than expected, given
the lower rates in 1996, is the fact that in 1995 the Bank's nonaccrual loans
averaged $1.57 million, lowering the overall loan yield, while in 1996 this
figure dropped to $.58 million, still lowering the yield but not to the same
degree as occurred in 1995. In 1996, if unrecognized interest on nonaccrual
loans had been accrued, such income would have been approximately $7,000
verses $203,000 in 1995. Loan fees, which are included in loan interest income
and effect the loan yield, totalled $441,000 in 1996, compared to $486,000 in
1995.
The aggregate effect of these influences was a 16 basis point increase in
net loan yield from 9.48% in 1995 to 9.64% in 1996. The result of the $1.7
million increase in average loan volume and the 16 basis point increase in
yield resulted in the $334,000 increase in interest and fee income from loans.
As mentioned earlier, total average investments increased by $8.4 million
in 1996 while the yield on these investments decreased by 14 basis points from
6.08% in 1995 to 5.94% in 1996. Consequently, in 1996 the increase in
interest income from investments of $458,000 was a function of increased
volume offset slightly by the decreased yield. The increased volume accounted
for $551,000, while decreased yield reduced income by $93,000. The $334,000
increase in interest and fee income from loans and the $458,000 increase in
interest from investments resulted in the $792,000 increase in total interest
income from 1995 to 1996.
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Interest expense also declined in 1996 as lower rates paid offset the
increased average volume. As mentioned above, average interest-bearing
liabilities increased $5.4 million in 1996 over the average balance in 1995.
In 1996, average time deposits over $100,000 showed the most growth, increasing
by $3.8 million from $15.9 in 1995 to $19.7 in 1996. The rate paid
of these deposits declined from 5.51% in 1995 to 5.34% in 1996. The increased
volume increased interest expense by $203,000 while the lower rate paid
reduced expense by $27,000 for a net increase of $176,000. Other borrowed
money also experienced growth in 1996. For the first time the Bank borrowed
money from the Federal Home Loan Bank to match fund fixed rate loans. In 1996
these funds averaged $1.9 million and resulted in $146,000 in additional
interest expense. Interest expense in 1996 on savings and money market demand
accounts declined by $228, 000 from the previous year. In 1996 the average
balance in this category decreased by $.5 million and the average rate paid
decreased by 37 basis points (.37%) from 4.15% in 1995 to 3.78% in 1996.
Within this category is a money management account which is tied to the 91 Day
T-Bill rate. In 1996 this account averaged $38.0 million and accounted for
$233,000 of the $228,000 net decrease in interest expense within this group.
This decline was a result of the 50 basis point drop in the average 91 Day
Bill index from 1995 to 1996. All other average volume changes from 1995 to
1996 were less that $.5 million. The only other significant change in 1996
influencing interest expense was a 30 basis point decrease in the average rate
paid on time deposit less than $100,000. This lower rate off-set by a slight
increase in volume accounted for a $82,000 reduction in interest expense.
Within the remaining interest bearing liabilities categories, interest expense
decreased by $28,000 from the prior year mainly due to slightly lower rates.
The net effect of the above mentioned volume changes and average rates
paid was a $16,000 reduction in interest expense, from $5,481,000 in 1995 to
$5,465,000 in 1996. The combined effect of this $16,000 reduction in interest
expense and the $5.4 million increased in volume was a 19 basis points (.19%)
decline in the average rate paid on average interest bearing liabilities from
4.36% in 1995 to 4.17% in 1996.
In summary, from 1995 to 1996, interest income increased by $79,000 as a
result of increases in interest rates while interest expense decreased by
$343,000, resulting in a $422,000 increase in net interest income due to
changes in interest rates. Interest income attributed to an increase in volume
improved by $713,000, while interest expense attributed to increased volume
rose by $327,000, for a increase in net interest income attributed to volume
of $386,000. This increase and the $422,000 increase in net interest income
due to interest rate changes resulted in a $808,000 increase in net interest
income. Net interest income was $7,637,000 in 1996 versus $6,829,000 in 1995
and $6,857,000 in 1994.
NONINTEREST INCOME AND EXPENSE
Noninterest income was $2,032,000 (1.20% of average assets) in 1996
compared to $2,178,000 in 1995, a $146,000 (6.7%) decrease. Service charges
on deposit accounts increased by $24,000 in 1996 over 1995 and $26,000 in 1995
over 1994. Other fees and charges increased by $167,000 in 1996 after
increasing by $22,000 in 1995. In 1996 the Company recognized $157,000 in fee
income from the sale of $1.8 million in SBA guaranteed loans. This accounted
for 94% of the increase in other fees and charges. In 1995 the Bank did not
recognize any fee income from the sale of SBA guaranteed loans.
Income from real estate development ventures increased by $61,000 to
$542,000 in 1996 from $481,000 in 1995 and $485,000 in 1994. The sole real
estate development venture in 1995 and 1996 was Pacific Plaza East, a 100%
occupied 32,000 square foot commercial office building in Vacaville,
California. The increase in 1996 is attributed to rent increases in a
majority of the suites. A substantial reduction in gains from the sale of
securities offset all of the increases discussed above and accounts for the
$146,000 decline in noninterest income. In 1996 gains on sale of securities
totalled $83,000 a decline of $398,000 from the $481,000 earned in 1995.
The table below depicts the changes in noninterest income from period to
period.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1996 1995 Incr. / 1995 1994 Incr. /
(Decr.) (Decr.)
---------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest Income:
Service Charges on Deposit $ 843 $ 819 $ 24 $ 819 $ 793 $ 26
Other Fees and Charges 564 397 167 397 375 22
------ ------ ---- ------ ------ ----
Subtotal 1,407 1,216 191 1,216 1,168 48
Income From Real Estate
Development Ventures 542 481 61 481 485 ( 4)
------ ------ ---- ------ ------ ----
Subtotal 1,949 1,697 252 1,697 1,653 44
Gain on the
Sale of Securities 83 481 ( 398) 481 9 472
------ ------ ---- ------ ------ ----
Total $2,032 $2,178 ($146) $2,178 $1,662 $516
====== ====== ==== ====== ====== ====
- ----------------------------------
</TABLE>
In 1996, noninterest expense totalled $6,781,000, an increase of $151,000
over 1995's total of $6,630,000, which was $152,000 more than the $6,478,000
reported in 1994. One measure of efficiency is the ratio of noninterest
expense to average assets. This ratio has improved the last three years, from
4.24% in 1994 to 4.19% in 1995 and finally to 4.01% in 1996.
In 1996, salaries and benefits increased by $205,000 from $3,137,000 in
1995 to $3,342,000 in 1996. In 1995 salaries and benefits decreased by
$11,000 from 1994's figure. Salary expense in the new branch along with
increased bonuses accounted for about half of the increase. Normal salary
increases and a nominal increase in the number of employees accounted for the
remaining difference.
Occupancy expense decreased by $8,000 (1%) in 1996 from 1995's total,
which was $41,000 higher than the 1994 figure. In January 1996, the Bank
renegotiated an annual reduction in rent of $25,000 for its Fairfield Branch
in exchange for an extended term of 41/2 years.
Other noninterest expense declined by 4.2% or $78,000 in 1996 from the
figure reported in 1995, after increasing by $116,000 (6.7%) in 1995 over the
1994 figure. In 1996, marketing expenses and outside services such as
investment banker fees associated with the branch purchase increased by
$45,000 and $59,000 respectively. All other expenses as a group increased by
$56,000.These increases we more than offset by a significant decrease in FDIC
Insurance from $187,000 in 1995 to $2,000 in 1996. In January 1996, the FDIC
premium was reduced for the Bank to a $2,000 minimum annual fee. Also in 1996,
net gains or losses from the sale of other real estate owned (OREO) and OREO
operating expenses declined by $53,000. In total, other noninterest expenses
declined in 1996 to $1,773,000 from $1,851,000 in 1995.
The major components of noninterest expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
Net Income Net Income
1996 1995 Incr. / 1995 1994 Incr. /
(Decr.) (Decr.)
--------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest Expense:
Salary and Benefits $3,342 $3,137 $205 $3,137 $3,148 ($ 11)
Occupancy, Furniture,
Fixtures and Equipment 1,366 1,374 ( 8) 1,374 1,333 41
Other Noninterest Exp. 1,773 1,851 ( 78) 1,851 1,735 116
Expenses from
Real Estate Development 300 268 32 268 262 6
------ ------ ---- ------ ------ ----
Total
Noninterest Expenses $6,781 $6,630 $151 $6,630 $6,478 $152
====== ====== ==== ====== ====== ====
- -------------------------------------------
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses was $411,000 in 1996 compared to $324,000
in 1995 and $256,000 in 1994. The Bank experienced net charge-offs of $468,000
in 1996, or .42% of average loans, compared to $274,000, or .25% of average
loans, in 1995 and $238,000, or .22% of average loans, in 1994.
The $411,000 provision, when deducted from the net interest income figure
of $7,637,000, resulted in net interest income after provision for loan losses
of $7,226,000 for 1996. This amount, which is $721,000 higher than the
$6,505,000 reported in 1995, represents a return on average assets of 4.27% in
1996. In 1995 and 1994, this ratio was 4.11% and 4.32%, respectively.
INCOME BEFORE PROVISION FOR INCOME TAXES
The result of a 4.27% ratio of adjusted net interest income to average
assets, a 1.20% noninterest income ratio and a 4.01% noninterest expense
ratio, resulted in a ratio of Income before Provision for Income Taxes to
average assets of 1.46%. This is an improvement of .16% from 1.30% in 1995
which in turn was a .13% improvement over the 1.17% reported in 1994.
The $721,000 increase in net interest income after provision for loan
losses, the $146,000 decrease in noninterest income and the $151,000 increase
in noninterest expenses improved income before provision for income taxes by
$424,000 to $2,477,000 in 1996 from $2,053,000 in 1995. This 1995 figure was
$268,000 higher than the $1,785,000 reported in 1994.
NET INCOME
The Company recorded $918,000 in provision for income taxes in 1996
versus $648,000 in 1995 and $564,000 in 1994. The tax provisions reduced
income to $1,559,000, $1,405,000 and $1,221,000 for 1996, 1995 and 1994,
respectively.
The before tax ROA was 1.46% in 1996. After deducting the provision for
income taxes, .54% of average assets, ROA in 1996 was .92%.
Management is not aware of any trends, events or uncertainties that have
had or that are reasonably expected to have a material impact on liquidity,
capital resources, or revenues or income from continuing operations. The
company is also not aware of any current recommendations by any regulatory
authority which, if they were implemented, would have such an effect.
LOAN PORTFOLIO
The Association of Bay Area Governments (ABAG) projects Solano County to
have the largest percentage increase in population growth between 1995 and
2015 of all the Bay Area counties. They further estimate that Solano's
population will be 531,700 by the year 2015, which is an increase of 40%. Job
growth in Solano County is projected to increase by 68% during this same time
period.
Contra Costa County is also slated for substantial growth over the next
15 years. Contra Costa's population is projected to grow from 882,700 in 1995
to 1,169,400 by 2015, representing a 32% increase. A 50% increase in jobs and
a 3% increase in the mean household income, bringing it to $95,800, is
projected by the year 2015.
The economic climate of Solano and Contra Costa counties remains strong
due to its prime locale between San Francisco and Sacramento, a plentiful
supply of natural resources, an extensive transportation network, and the
enviable quality of life which exist due to the availability of affordable
homes, clean and safe communities, a comfortable climate all within easy reach
of many recreational and cultural activities.
The following table shows the composition of the loan portfolio by major
category of loan as of the dates indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------
Loan Categories: (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Real Estate Mortgage:
Commercial $ 64,634 $ 61,942 $ 60,206 $ 56,401 $ 52,977
Residential 17,612 15,456 19,272 18,063 18,064
-------- -------- -------- -------- --------
Total Real Estate Mortgage 82,246 77,398 79,478 74,464 71,041
Commercial 8,926 9,908 9,348 10,269 11,363
Real Estate Construction 6,408 9,553 9,433 9,723 9,878
Consumer 16,045 14,265 12,937 13,252 12,640
-------- -------- -------- -------- --------
Total Loans 113,625 111,124 111,196 107,708 104,922
Less
Allowance for Loan Losses 1,101 1,158 1,108 1,090 933
Deferred Loan Fees 599 732 940 892 967
-------- -------- -------- -------- --------
Net Loans $111,925 $109,234 $109,148 $105,726 $103,022
======== ======== ======== ======== ========
- ---------------------------------------
</TABLE>
The loan portfolio consists of: (1) commercial loans; (2) real estate
construction loans; (3) consumer loans (loans to individuals for household,
family and other personal expenditures, including revolving equity loans); and
(4) real estate mortgage loans. These categories accounted for approximately
8%, 6%, 14% and 72%, respectively, of the total loan portfolio at December 31,
1996. Loans are generally made to persons or businesses with whom it has an
existing relationship or anticipates developing such a relationship.
Because loans are the highest yielding assets, maximizing the
loan-to-deposit ratio increases interest income, however, in order to prudently
manage its liquidity, the loan policy calls for it to maintain a loan-to-deposit
ratio between 70% and 85%. The loan-to-deposit ratio was 67% and 78% at December
31, 1996 and December 31, 1995, respectively. The ratio declined significantly
at year end 1996 due to the addition of approximately $15.5 million in
deposits purchased from Tracy Federal Savings Bank without corresponding loan
balances.
With certain exceptions, the Bank is permitted under applicable law to
make loans which are unsecured to single borrowers in aggregate amounts of up
to 15% of the sum of the Bank's total capital, including subordinated debt,
and allowance for possible loan losses for unsecured loans (as defined for
regulatory purposes), and up to 25% of such sum in the aggregate for unsecured
and secured loans (as defined for regulatory purposes). As of December 31,
1996, these lending limits were approximately $2,652,000 for unsecured loans
and $4,420,000 for unsecured and secured loans. The Bank sells participations
in its loans where necessary to stay within its lending limits. However, the
unsecured limit is used as a guideline for the maximum amount it will lend to
any one borrower on a secured basis.
REAL ESTATE MORTGAGE LOANS
Real estate mortgage loans consist primarily of loans secured by
commercial real property and by first liens on single-family residential
properties.
As of December 31, 1996, outstanding commercial mortgage loans totalled
$64,634,000, or 57% of total loans. This represents an increase in
outstanding balances of $2,692,000 since year end 1995. Of these loans $55.0
million were adjustable rate loans while $9.6 million had fixed rates. These
loans are secured by first or second deeds of trust on both owner occupied and
nonowner occupied commercial properties, and generally have 5 to 15 year
maturities with 15 to 25 year amortizations. The Bank generally conducts
market rent surveys and requires all borrowers to meet minimum debt service
ratios. The Bank also makes loans in conjunction with Small Business
Administration ("SBA") sponsored programs. With the SBA 504 program, the Bank
takes a first deed of trust on the property generally at a loan to value ratio
of 50%. The SBA then makes an additional loan in second position of up to 40%
of value. With the SBA 7A program, the Bank makes commercial loans for the
purchase of inventory, equipment, or real estate or to fund working capital,
and the SBA provides a guaranty up to 90% of the loan amount.
As of December 31, 1996, residential mortgage loans totalled $17,612,000,
or 15% of total loans. This loan category increased $2,156,000 over the
$15,456,000 outstanding at December 31, 1995. These loans were secured by
first or second deeds of trust predominately by property in Solano County. Of
these loans, $2.3 million or 13% were fixed rate mortgage loans having
original terms ranging from one to 30 years, with the majority having
remaining terms of less than 5 years. The other $15.3 million or 87% were
held as adjustable rate mortgages which are adjusted either semiannually or
annually based on either the COFI Index or the CD Index (the secondary market
monthly average interest rate or yield for large negotiable certificates of
deposit ($100,000 or more with maturity of one month)). The above loans
consist of 1-4 family residential loans, multi-family loans, second mortgage
loans, and loans on improved single family lots. The majority of the
residential mortgage loans have been underwritten for the portfolio, and such
loans do not necessarily meet standard underwriting criteria for sale in the
secondary market. The Bank uses certain of the credit underwriting criteria
applicable to loans for sale in the secondary market, but chooses not to use
certain other underwriting criteria which in the opinion of management do not
materially affect credit quality. The loan to appraised value ratio is
generally 80% or less when originated. The Bank does not generally make
residential real estate loans on a negative amortization basis.
COMMERCIAL LOANS
Commercial loans consist primarily of financing for businesses and
professionals in Solano County. At December 31, 1996, these loans totalled
$8,926,000, or 8% of total loans. This figure is $982,000 less than the figure
reported December 31, 1995. The commercial loans are diversified as to
industries and type of businesses with no material industry concentration.
Commercial borrowers generally have deposit relationships with the Bank.
Commercial loans are made for the purposes of providing working capital,
financing the purchase of equipment or inventory and for other business
purposes. Such loans include loans with maturities ranging from thirty days
to twelve months and "term loans" which are loans with maturities normally
ranging from one to seven years. Short-term business loans are generally used
to finance current transactions and typically provide for periodic interest
payments, with principal being payable monthly, quarterly or at maturity.
Term loans normally provide for floating interest rates, with monthly payments
of both principal and interest. In 1996, the Bank began offering an additional
service to its commercial customers called Business Manager. Under this
program account receivables are purchased from its customer for a discount
fee. At December 31, 1996, Business Manager loans totalled $555,000.
In commercial lending, the amount of losses as a percentage of
outstanding loans can vary widely from period to period and is particularly
sensitive to the fluctuations caused by changing economic conditions. Charged
off commercial loans totalled $104,000 and $217,000 in 1995 and 1996,
respectively.
REAL ESTATE CONSTRUCTION LOANS
Real estate construction loans are made to finance the construction of
commercial and single-family residential property and, typically, have short
maturities. Construction lending involves certain risks not inherent in other
forms of real estate financing. The Bank does not require construction loan
borrowers to obtain commitments for permanent takeout financing from other
lenders. As a result, the Bank may be required to grant permanent financing
or extend its construction loans beyond anticipated maturity periods in times
of rising interest rates or reduced availability of permanent financing from
other lenders. At December 31, 1996 there were eight such permanent financing
loans totaling approximately $2,100,000.
Currently there are 51 construction loans with an average balance of
approximately $126,000. As of December 31, 1996, these loans totalled
$6,408,000, or 6% of the loan portfolio. This is $3,145,000 lower than the
figure reported as of December 31, 1995.
Construction loans are funded on a line-item, percentage of completion
basis. As the builder completes various line items (foundation, framing,
electrical, etc.) of the project, or portions of those line items, the work is
reviewed by an officer of the Bank. Upon approval from the officer, the Bank
funds the draw request according to the percentage completion of the line
items that have been approved. Actual funding checks must be signed by an
officer of the Bank. Charged off real estate construction loans totalled
$72,000 and $181,000 in 1995 and 1996, respectively.
CONSUMER LOANS
Consumer loans are made for the purpose of financing the purchase of
various types of consumer goods, home improvement loans, and other personal
loans. Consumer installment loans generally provide for the monthly payment
of principal and interest. Most of the consumer installment loans are secured
by the personal property being purchased or a second deed of trust on the
borrower's residence. As of December 31, 1996, consumer loans totalled
$16,045,000, or 14% of the portfolio, an increase of $1,780,000 over the
figure reported December 31, 1995.
LOAN COMMITMENTS
In the normal course of business, there are various commitments
outstanding to extend credit that are not reflected in the financial
statements. As of December 31, 1996, outstanding undisbursed loan commitments
totalled approximately $14.4 million. In the opinion of management, annual
review of the commercial credit lines and ongoing monitoring of outstanding
balances reduces the risk of loss associated with these commitments. The
undisbursed loan commitments include $3.0 million, or 34% of the outstanding, of
commercial loans, $1.8 million, or 27% of the outstanding, of real estate
construction loans, and $9.6 million, or 60% of outstanding, of consumer
loans. Undisbursed commercial loan commitments represent primarily business
lines of credit. Undisbursed construction commitments represent undisbursed
funding on construction projects in process. The consumer loan commitments
represent approved, secured (equity) lines of credit, and unsecured personal
lines of credit.
Standby letters of credit outstanding aggregating $649,000 and $407,000
at December 31, 1996 and 1995, respectively.
ASSET QUALITY
The risk of nonpayment of loans is inherent in commercial banking. To
some extent, the degree of perceived risk is taken into account in
establishing the loan structure, the interest rate and security for specific
loans and various types of loans. The Bank also attempts to minimize its
credit risk exposure by use of thorough loan application, approval and review
procedures.
The primary risk elements considered by management with respect to each
installment and conventional real estate loan are the lack of timely payment
and the value of the collateral. Management has a reporting system that
monitors past due loans and has adopted policies to pursue its creditor's
rights in order to preserve the Bank's position. As the majority of the loan
portfolio is held in real estate related loans and in light of the continuing
economic downturn, particular attention is given to factors affecting the real
estate markets. The primary risk elements considered by management with
respect to real estate construction loans are fluctuations in real estate
values in the Company's market areas, fluctuations in interest rates, the
availability of conventional financing, the demand for housing in the
Company's market areas, and general economic conditions. The primary risk
elements with respect to commercial loans are the financial condition of the
borrower, general economic conditions in the Company's market area, the
sufficiency of collateral, the timeliness of payment, and, with respect to
adjustable rate loans, interest rate fluctuations.
Because the Bank lends primarily within its market area, the real
property collateral for its loans is similarly concentrated, rather than
diversified over a broader geographic area. The Company could, therefore, be
adversely affected by a decline in real estate values in Solano County, even
if real estate values elsewhere in Northern California or California generally
remained stable or increased. Management has a policy of requesting and
reviewing annual financial statements from its commercial loan customers and
periodically reviews the existence of collateral and its value.
The Bank places an asset on nonaccrual status when one of the following
events occur: any installment of principal or interest is 90 days or more
past due (unless in management's opinion the loan is well secured and in the
process of collection), management determines the ultimate collection of
principal or interest on a loan to be unlikely, it takes possession of the
collateral (in the case of real estate collateral, referred to as "OREO"), or
the terms of a loan have been renegotiated to less than market rates due to a
serious weakening of the borrower's financial condition.
With respect to the policy of placing loans 90 days or more past due on
nonaccrual status, unless the loan is well secured and in the process of
collection, a loan is considered to be in the process of collection if, based
on a probable specific event, it is expected that the loan will be repaid or
brought current. Generally, this collection period would not exceed 30 days.
When a loan is placed on nonaccrual status, the general policy is to reverse
and charge against current income previously accrued but unpaid interest.
Interest income on such loans is subsequently recognized only to the extent
that cash is received and future collection of principal is deemed by
management to be probable. Where the collectibility of the principal or
interest on a loan is considered to be doubtful by management, it is placed
on nonaccrual status prior to becoming 90 days delinquent. For loans where
the collateral has been repossessed, the property is classified as OREO or, if
the collateral is personal property, the loan is classified as other assets on
the Company's financial statements.
The following table sets forth the amount of the nonperforming assets as
of the dates indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonperforming Assets:
Nonaccrual Loans $ 70 $1,049 $1,258 $179 $ 490
Accruing Loans Past
Due 90 Days or More 67 78 496 127 285
---- ------ ------ ---- ------
Total Nonperforming Loans 137 1,127 1,754 306 775
In-Substance Foreclosures 0 0 0 0 219
Other Real Estate Owned 150 182 374 389 304
---- ------ ------ ---- ------
Total Nonperforming Assets $287 $1,309 $2,128 $695 $1,298
---- ------ ------ ---- ------
Performing Restructured Loans $974 $ 470 $ 0 $946 $ 943
Allowance for Loan Losses
to Nonperforming Loans 804% 103% 63% 356% 120%
Allowance for Loan Losses
to Nonperforming Assets 384% 88% 52% 157% 72%
Allowance for Loan Losses
to Nonperforming Assets
and Performing
Restructured Loans 87% 65% 52% 66% 42%
Nonperforming Loans
to Total Assets .07% .70% 1.12% .21% .56%
Nonperforming Assets
to Total Assets .15% .82% 1.36% .47% .94%
Nonperforming Assets and
Performing Restructured
Loans to Total Assets .66% 1.11% 1.36% 1.10% 1.63%
- -----------------------------
</TABLE>
At December 31, 1996 and 1995, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 was
approximately $2,648,000 and $1,602,000. The total allowance for loan losses
related to these loans was $278,000 and $309,000 at December 31, 1996 and
1995. For the years ended December 31, 1996 and 1995, the average recorded
investment in loans for which impairment has been recognized was approximately
$1,218,000 and $1,641,000. During the portion of the year that the loans were
impaired, the Company recognized interest income of approximately $28,000 and
$12,000 for cash payments received in 1996 and 1995.
Interest income on nonaccrual loans which would have been recognized if
all such loans had been current in accordance with their terms totalled
$7,000, $203,000 and $19,000 in 1996, 1995 and 1994, respectively.
Nonperforming assets declined to $287,000 or .15% of total assets, at December
31, 1996, from $1,309,000 or .82% of total assets, at December 31, 1995.
Included in the impaired loans above were seven nonaccrual loans to four
borrowers totalling $1,049,000 at December 31, 1995. In 1996 the Bank received
payments totalling $837,000 from these borrowers, generated from the sale of
the underlying collateral. The difference of $212,000 was charged off. At
December 31, 1996 there were three nonaccrual loans to two borrowers totalling
$70,000. The Company expects the loss, if any, on these loans to be minimal.
At December 31, 1995, OREO consisted of two foreclosed real estate
properties with a carrying value of $182,000. This consisted of a commercial
property in Vallejo, California and five (5) unimproved residential lots in
Vallejo, California. The residential lots had carrying value of $32,000 at
December 31, 1995. These lots were sold in 1996 for $18,000 causing the
Company to realize a $14,000 loss. At December 31, 1996, OREO consisted of the
commercial property in Vallejo with a carrying value of $150,000.
At December 31, 1995, there was one performing restructured loan for
$470,000. This loan is secured by a shopping center and was appraised "as is"
for $434,000 in September 1996. The center is currently 69% occupied. The
loan was restructured in December 1995 to receive principle based upon the
original amortization schedule while the interest rate was reduced to
approximately 3%. At the time of restructuring, approximately $10,500 in past
due interest was forgiven. The new terms were extended to the borrower for
two terms of six months each, at which time management will reevaluated the
project's cash flow and the borrower's situation. The most recent six month
restructuring occurring in December 1996, increased the interest rate to
7.72%. At December 31, 1996 the outstanding balance was $412,000 as a result
of a $46,000 write down and a $12,000 principal reduction received from the
borrower. Currently, the borrower is in compliance with the terms of the
restructure and was actively marketing this shopping center to increase
occupancy and cash flow.
In December, 1996 another commercial real estate loan was added to the
performing restructured loan category. At December 31, 1996 the outstanding
balance on this loan was $562,000 bringing the total of performing restructured
loans to $974,000. This additional restructured loan is secured
by a 7,500 square foot commercial office building. The borrowers recently lost
a tenant who had occupied approximately 36 percent of the building increasing
the vacancy to approximately 63 percent. This loan has been restructured on a
month to month basis to receive principal based on the original amortization
schedule while the interest rate was reduced to approximately 6.79%. The
borrower has informed management there are a number of prospective tenants
considering leasing space in the building. The borrow has indicated based on
their financial strength and a 62% occupancy level they will be able to
service the original terms of the loan. Currently, the borrower is in
compliance with the terms of the restructure and was actively marketing this
office building to increase occupancy and cash flow.
Although any potential increase in the volume of nonperforming assets
will depend, upon other events, upon the economic environment, in addition to
the assets described above, the Bank has identified loans, totalling
$2,027,000, where known information about the possible credit problems of the
borrowers cause management to have serious doubts as to the ability of such
borrowers to comply with the present loan repayment terms and which may become
nonperforming in the future. This total consists of ten loans to five
borrowers. Four loans totalling $178,000 to two borrowers are secured by
Second Deed of Trust on single family residences. Notices of default were
filed on these properties in December 1996 and February 1997. Due to loan to
value and marketability of these properties minimal loss is expected. One loan
for $93,000 is secured by a First Deed of Trust on a single family residence.
Notice of Default was filed January 1997. The Bank believes the loss exposure
is minimal. The Bank has an unsecured loan for $15,000 and a real estate
secured loan for $78,000 to one borrower. Based on the borrower's financial
condition the unsecured loan may result in a loss and the secured loan may
result in a minimal loss. The other four loans to two borrowers are secured by
commercial real estate properties. The outstanding balance at December 31,
1996 for these two borrowers was $1,663,000 one for $444,000 and one for
$1,219,000.
The two loans totalling $444,000 are secured by the two remaining suites
in an eight unit medical condominium office building in Vacaville, California.
The borrower has leased one of the units and the Bank has financed the tenant
improvement costs. Cash flow from this lease will only debt service these
loans with interest at approximately 2%. Therefore in February 1997 these
loans were restructured for six months at approximately 2% to allow the
borrower time to lease or sell the final unit. Once leased or sold the
borrower is expected to be able to fully debt service the loan under the
original terms.
The two loans totalling $1,219,000 are secured by a commercial
office/warehouse building in Suisun, California. This building is
approximately 29,000 square feet. Management became aware the building was
approximately 44% vacant in a meeting with the borrower in January 1997. At
that time the loans were restructured, on a month to month basis, at
approximately 2.0% to allow the borrower to secure new tenants. The reduction
in interest is being deferred and remains an obligation of the borrower. The
borrower is currently negotiating with a prospective tenant to lease 6,500
square feet. When the above mentioned lease is signed the building will be
approximately 79 percent occupied. The Bank believes the borrower will be able
to fully debt service the loan under the original terms at the time the
building becomes approximately 90% occupied.
Changes in general or local economic conditions or specific industry
segments, rising interest rates, declines in real estate values and acts of
nature could have an adverse effect on the ability of borrowers to repay
outstanding loans and the value of real estate and other collateral securing
such loans.
Other than the loans discussed above, management is not aware of any
loans that represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity
or capital resources; or represent material credits about which management is
aware of information which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.
LOAN CONCENTRATIONS
As of December 31, 1996, the only concentration of loans to any
individual, business, or industry exceeding 10% of total loans was Real Estate
loans secured by commercial office properties, which represented 24.7% of
total loans.
SUMMARY OF THE ALLOWANCE FOR LOAN LOSSES
The Bank maintains an allowance for loan losses. Additions to the
allowance are made by charges to operating expense in the form of a provision
for possible loan losses. Where a loss is considered probable, loans are
charged against the allowance while any recoveries are credited to the
allowance. The allowance for loan losses is maintained at a level determined
by management to be adequate, based on the performance of loans in the
portfolio, with particular attention to credit risks associated with any loans
past due thirty days or more, evaluation of collateral for such loans,
historical loan loss experience, examination reports prepared by regulatory
agencies, the prospects or net worth of the borrowers or guarantors,
anticipated growth in the portfolio, prevailing economic conditions and such
other factors which, in the Bank's judgment, deserve consideration in the
estimation of possible loan losses.
The following table provides certain information with respect to the
allowance for loan losses as well as charge-offs, recoveries and certain
related ratios:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan Losses:
Balance at Beginning of Period $ 1,158 $ 1,108 $ 1,090 $ 933 $ 781
Charge Offs:
Commercial 217 104 44 142 214
Real Estate Construction 181 72 146 0 0
Real Estate Mortgage 83 31 0 41 26
Consumer Loans 15 75 49 4 7
----------------------------------------------------
Total Charge Offs 496 282 239 187 247
Recoveries:
Commercial 1 2 1 75 0
Real Estate Construction 25 0 0 0 0
Real Estate Mortgage 1 0 0 0 0
Consumer Loans 1 6 0 0 2
----------------------------------------------------
Total Recoveries 28 8 1 75 2
Net Charge Offs 468 274 238 112 245
Provision for Loan Losses 411 324 256 269 397
----------------------------------------------------
Balance at End of Period $ 1,101 $ 1,158 $ 1,108 $ 1,090 $ 933
====================================================
Loans:
Average Loans Outstanding
During Period (Net) $111,052 $109,372 $106,408 $105,868 $ 97,244
Total Loans at End of Period $113,625 $111,124 $111,196 $107,708 $104,922
Ratios:
Net Loans Charged Off to
Average Loans .42% .25% .22% .11% .25%
Net Loans Charged Off to
Total Loans at End of Period .41% .25% .21% .10% .23%
Net Loans Charged Off to
Allowance for Loan Losses 42.5% 23.7% 21.5% 10.3% 26.3%
Net Loans Charged Off to
Provision for Loan Losses 113.8% 84.6% 93.0% 41.6% 61.7%
Allowance for Loan Losses to
Average Loans .99% 1.06% 1.04% 1.03% .96%
Allowance for Loan Losses to
Total Loans at End of Period .97% 1.04% 1.00% 1.01% .89%
Allowance for Loan Losses to
Nonperforming Loans 804% 103% 63% 356% 120%
Allowance for Loan Losses to
Nonperforming Assets 384% 88% 52% 157% 72%
Allowance for Loan Losses to
Nonperforming Assets and
Performing Restructured Loans 87% 65% 52% 66% 42%
- ------------------------------------
</TABLE>
The provision for loan losses represents management's determination of
the amount necessary to be added to the allowance for loan losses to bring it
to a level which is considered adequate in relation to the risk of future
losses inherent in the loan portfolio. While it is the policy to charge off
in the current period those loans where a loss is considered probable, there
also exists the risk of future losses which cannot be precisely quantified or
attributed to particular loans or classes of loans. Because this risk is
continually changing in response to factors beyond the control of the Company,
such as the state of the economy, management's judgment as to the adequacy of
the allowance for loan losses is necessarily an approximate one. Management
believes that the allowance for loan losses of $1,101,000 at December 31,
1996, which constituted .97% of total loans, was adequate as an allowance
against foreseeable loan losses at that time.
The following table shows the allocation of the allowance for loan losses
and the percent of loans in each category to total loans as of the periods
indicated.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-----------------------------------------------------------------
Allowance for % of Loans Allowance for % of Loans
Loan Losses in each Loan Losses in each
Category Category
to Total Loans to Total Loans
-----------------------------------------------------------------
Loan Categories: (Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate Mortgage:
Residential $ 192 15% $ 11 14%
Commercial 469 57 200 56
-----------------------------------------------------------------
Total Real Estate Mortgage 661 72 211 70
Commercial 214 8 216 9
Real Estate Construction 91 6 434 8
Consumer (Inc. ELOC) 52 14 67 13
Unallocated 83 --- 230 ---
-----------------------------------------------------------------
Total $ 1,101 100% $ 1,158 100%
=================================================================
- -------------------------------------
</TABLE>
The adequacy of the allowance for loan losses is based upon the potential
for loss related to specific loans and formula allocations based upon the
potential for loss in various categories. Specific allocations are increased
or decreased through management's reevaluation of the status of particular
problem loans. Provisions for losses which have not been made on a specific
basis are based on a formula. Management applies a percentage factor based on
loss ratios of the Bank's peers, history of loss, underlying collateral, type
of loan and general economic conditions, to the loan categories.
INVESTMENT SECURITIES
In order to provide investment income and collateral to secure borrowings
to meet liquidity and loan requirements, from time to time the Bank purchases
United States Treasury securities and obligations of federal agencies as well
as obligations of states and their political subdivisions and other
securities. Purchases of such securities, as well as sales of Federal funds
(short-term loans to other banks) and placement of funds in certificates of
deposit with other financial institutions, are also made as alternative
investments pending utilization of funds for loans or other purposes.
Under the investment policy, investment securities may be placed in two
categories: "available for sale" and "held to maturity." Securities
available for sale provide flexibility to the asset/liability management
strategy and may be sold in response to changes in interest rates and to meet
liquidity needs.
The Company accounts for securities investment in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. In November 1995, as
permitted by additional implementation guidance regarding the previously
issued SFAS No. 115, the entire held to maturity portfolio was transferred to
available for sale.
At December 31, 1996 the total reduction in the carrying value of
investment securities available for sale was $475,000, along with a reduction
to stockholders' equity of $276,000 and a $199,000 increase in deferred tax
assets. At December 31, 1996, the amortized cost of available for sale
securities totalled $53,044,000, consisting of $9,145,000 variable rate (COFI)
U. S. Government Agency Bonds, $17,963,000 fixed rate short term (less than 5
years) U.S. Treasury and U.S. Government Agency Securities, $19,273,000 in
variable rate (Prime rate and 1 year CMT) U. S. Government Agency Bonds,
$4,667,000 in fixed rate municipal bonds, $1,506,000 fixed rate long term
(greater than 5 years) U.S. Government Agency Bonds and $490,000 in Federal
Home Loan Bank (FHLB) stock. As detailed above, holding in both fixed rate
short term U.S. agency bonds and variable rate U.S. agency bonds tied to prime
and the 1-year CMT index were significantly increased. It also reduced
holdings in U.S. Government Agency bonds tied to the lagging COFI index and
long term fixed rate municipal bonds.
At December 31, 1995, the total reduction in the carrying value of
investment securities available for sale was $111,000, along with a reduction
to stockholders' equity of $65,000 and a $46,000 increase in deferred tax
assets. At December 31, 1995, amortized cost of available for sale securities
totalled $29,891,000 consisting of $10,361,000 variable rate (COFI) U.S.
Government Agency Bonds and $3,999,000 short term fixed rate U.S. Government
Agency Bonds, $8,452,000 in variable rate (Prime rate and 1 year CMT) U.S.
Government Agency Bonds, $6,961,000 in fixed rate Municipal Bonds and $118,000
in Federal Home Loan Bank (FHLB) stock.
At December 31, 1996 and 1995, the Company did not have any investment
securities designated as held to maturity or considered to be held for trading
under the provisions of SFAS No. 115.
In 1996, $6,719,000 available for sale securities were sold for liquidity
purposes, to reduce interest rate risk or in response to changes in interest
rates. The Bank also had pay downs on its U.S. Agency bonds (mortgage backed
securities) of $2,790,000. The above-mentioned transactions resulted in a
pretax profit of $83,000. In addition, $1,626,000 in municipal and U. S.
Agency bonds either matured or were called.
During 1996, the Bank entered into an interest-rate swap agreement with
the Federal Home Loan Bank (FHLB). Interest-rate swap agreements involve not
only the risk of dealing with counter parties and their ability to meet the
terms of the contracts but also the interest-rate risk associated with
unmatched positions. Notional principal amounts are often used to express the
volume of these transactions, but the amounts potentially subject to credit
risk are much smaller. The notional principal amount of the interest-rate
swap outstanding was $10,000,000 at December 31, 1996 and has an original term
of five years. Under the agreement, the Bank receives a floating-rate
interest payment based on the three-month treasury bill in exchange for
payment of a floating-rate interest payment based on the 11th District Cost of
Funds Index (COFI) plus .65%. The effect of this agreement was to shorten the
lag time in interest rate fluctuations from the COFI index to the treasury
bill to enable the Bank to better match the timing of the repricing of certain
liabilities. The net interest expense recognized in 1996 was approximately
$19,000.
At December 31,1996, the Company did not have any investment securities
issued by a single issuer, which the aggregate book value of such securities
exceeded ten percent of stockholders' equity other than those issued by the
U.S. Government and U. S. Government agencies and corporations.
The following table shows the carrying amounts and approximate market
values of investment securities available for sale at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------------
Amortized Carrying Amortized Carrying
Cost Amount Cost Amount
(approx. (approx.
Fair Value) Fair Value)
-----------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury Securities and
Securities of other U.S.
Government Agencies
and Corporations $47,887 $47,395 $22,812 $22,591
Obligations of States of the
U.S. and Political Subdivisions 4,667 4,684 6,961 7,071
Other Securities 490 490 118 118
-----------------------------------------------------
Total $53,044 $52,569 $29,891 $29,780
=====================================================
- -------------------------------------------
</TABLE>
At December 31, 1996 and 1995, investment securities having carrying
amounts of approximately $10,171,000 and $5,170,000, respectively, were
pledged to secure public deposits and short-term borrowings and for other
purposes required or permitted by law.
The following table sets forth the maturity distribution and weighted
average yield of available for sale securities (other than FHLB stock with a
carrying value of approximately $490,000), categorized by type of security,
including securities issued by U.S. Government agencies, states and political
subdivisions as of December 31, 1996:
<TABLE>
<CAPTION>
Available for Sale
- ---------------------------------------------------------------------------------------
Market Weighted
December 31, 1996 Value Average Yield<F1>
- ---------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
U.S. Treasury Securities and
Securities of Government Agencies and Corporations
Due within one year $ 6,016 6.00%
Due after one year but within five years 12,273 6.40
Due after five years but within ten years 1,336 7.41
Due after ten years 27,770 6.64
------- ----
$47,395 6.52%
======= ====
Obligations of States of the
U.S. and Political Subdivisions(F1)
Due within one year $ 60 6.60%
Due after one year but within five years 867 5.35
Due after five years but within ten years 2,569 5.05
Due after ten years 1,188 5.47
------- ----
$ 4,684 5.24%
------- ----
$52,079 6.41%
======= ====
- ------------------------------
<FN>
<F1> The yields shown above for Obligations of States of the U.S. and
Political Subdivisions are not shown on a tax equivalent basis.
</FN>
</TABLE>
DEPOSITS
Deposits are the primary source of funds. The Bank presently prices its
deposit rates to be slightly higher than those offered by the major banks in
its market area but competitive with those rates offered by other independent
financial institutions with offices in the Company's service areas, based upon
a weekly survey of such rates.
The deposit distribution, in terms of maturity and applicable interest
rates, is a primary determinant of the Company's cost of funds and the
relative stability of its supply of funds. Deposits are, for the most part,
no longer subject to interest rate limitations, and interest rates on such
deposits tend to reflect current market rates of interest available to
depositors on alternative investments at the time of deposit. At December 31,
1996, the aggregate amount of time, savings and interest-bearing demand
deposits was 84% of total deposits. As of December 31, 1996, the Company did
not have any foreign deposits, nor, except as noted below, did it have any
material concentrations of deposits in any one industry or business. However,
the Bank's escrow deposits from a local title company, which are demand
deposits, are volatile and occasionally exceeded 5% of total deposits. Such
escrow deposits averaged $2,876,000 and $2,280,000 in 1996 and 1995,
respectively, and accounted for about 12% and 11% of average demand deposits
and 2% of average total deposits during 1996 and 1995. The loss of these
escrow deposits would likely require the Bank to replace some or all of such
funds with more costly interest-bearing deposits which would likely increase
the Company's cost of funds and decrease earnings. At year end 1996, the Bank
has had an ongoing deposit relationship with the title company for almost
seven years. The Bank does not experience substantial seasonal fluctuations
in deposit levels.
The average rate paid on total deposits for 1996, 1995 and 1994, was
3.32%, 3.58% and 2.72%, respectively.
The following table, sets forth by time remaining to maturity, domestic
time deposits in amounts of $100,000 or more at December 31, 1996:
<TABLE>
<CAPTION>
(Dollars
Remaining Maturity: in thousands)
--------------------------- --------------
<S> <C>
Three Months or Less $ 12,313
Over Three Months through Six Months 3,023
Over Six Months through Twelve Months 4,466
Over One Year 1,079
--------
Total $ 20,881
========
- -------------------------
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
Management regularly reviews general economic and financial conditions,
both external and internal, and determines its position with respect to
liquidity and interest rate sensitivity.
Liquidity is defined as the ability to provide funds on an ongoing basis
to meet fluctuations in deposit levels as well as the credit needs of its
customers without affecting net income. Both assets and liabilities
contribute to the liquidity ratio. Assets such as unpledged investment
securities, cash and due from banks, time deposits in other banks, Federal
Funds sold, loan sales, and loan repayments contribute to liquidity. Cash
flows generated are mainly used to fund loans, while investment securities are
both a use and a source of funds.
Of equal significance are the diverse sources comprising the funding
base. These include demand deposits, interest-bearing transaction accounts,
savings and time deposits, Federal Funds purchased and security repurchase
agreements, and borrowings from the Federal Home Loan Bank (FHLB).
Additionally, equity and debt provide sources of funds. Capital markets can
be utilized by management as a potential funding source.
Liquidity is measured by various ratios, the most common being the
liquidity ratio of cash, time deposits in other banks, Federal Funds sold, and
investment securities as compared to total assets. At December 31, 1994 this
ratio was 24%. In 1995 and 1996, as loan growth was nominal and securities
increased, this ratio increased to 26% and 36%, respectively. Another
relevant measure of liquidity is the ratio of total loans to total deposits.
This ratio also changed in 1995 and 1996, due to the slow loan growth,
dropping from 79% at year end 1994 to 78% and 67% at December 31, 1995 and
1996, respectively. This large drop in the loan to deposit ratio in 1996 was
also a function of the Concord branch purchase which added about $15.0 million
in deposits and only $.14 million in loans at year end 1996. As of December
31, 1996, the Company through the Bank could borrow up to $8,500,000 from its
correspondent banks under informal arrangements should its liquidity needs so
mandate. The Bank has made arrangements with the Federal Reserve to borrow
funds at the discount window. In addition, the Bank is a member of FHLB where
it can borrow approximately $4,500,000. Outstanding borrowings from the FHLB
were $2,650,000 at December 31, 1996.
In the area of interest rate sensitivity management focuses on reducing
the impact movements in interest rates would have on interest income and the
economic value of the Company. The Company believes that keeping overall risks
at a low level achieves optimal performance. The objective is to control risks
and produce consistent, high quality earnings independent of fluctuating
interest rates. The Board of Directors and the Board Asset / Liability
Committee ("ALCO") oversees the establishment of appropriate internal controls
which are designed to ensure that implementation of the Asset / Liability
strategies remain consistent with Asset / Liability Management Policy
objectives. The ALCO consists of all Senior Management and is charged with
implementing these strategies.
A major tool used by this Committee and the Board ALCO is the ALX Asset /
Liability computer model. This model, which is run quarterly, measures a
number of risks, including liquidity risk, capital adequacy risk, interest
rate risk and market risk. The model analyzes the mix and repricing
characteristics of interest rate sensitive assets and liabilities using
multipliers (the degree interest rates change when federal funds change) and
lags (the time it takes rates to change after federal funds rate change). The
model simulates the effects of net interest income and market risk when
federal funds change. The ALCO committee then uses this information, in
conjunction with, current and projected economic conditions and the outlook
for interest rates to set loan strategies, investment strategies and funding
strategies, which include loan and deposit pricing, volume and mix of each
asset and liability category and proposed changes to the maturity distribution
of assets and liabilities. The Asset / Liability policy states that the Bank
will monitor and limit interest rate risk as follows:
For a 1% change in the federal funds rate, net interest income (NII)
should not change by more than 5% and for a 2% change in the federal funds
rate, NII should not change by more that 10%. The policy further states that
the Bank will monitor and limit market risk (in a market where interest rates
have risen 3%) to 25% of equity capital while maintaining "well capitalized"
leverage and risk based capital ratios.
At December 31, 1996, the "ALX" model showed the Bank was moderately
liability sensitive with a NII exposure of $85,000 or 1.1% for a 1% increase
in the federal funds rate and a $481,000 or 6.3% exposure in NII for 2%
increase. Both of these figures are within policy.
At December 31, 1996 market risk, as measured by the model, for a 3%
increase in market rates, was 17.6 % of equity capital, well within policy,
and the market risk adjusted leverage and risk based capital ratios were 5.6%
and 11.5%, respectively, also well within policy.
When the Bank is liability sensitive, as it was at December 31, 1996,
management will discontinue or limit the use of longer lagging indexes such as
the 11th District Cost of Funds (COFI) for loan pricing and switch to more
market sensitive indexes. In the security portfolio, the Bank will switch from
fixed rate investments, as well as investment tied to lagging indexes, to
short term securities and/or to securities tied to more market sensitive
indexes. The Bank will also use interest rate swaps, when appropriate, to
reposition the Bank's interest rate risk.
The following table shows the interest sensitive assets and liabilities
gap, which is the measure of interest sensitive assets over interest bearing
liabilities, for each individual repricing period on a cumulative basis:
INTEREST RATE SENSITIVITY GAP
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------
After
Three After
Next Day Months One
Assets and Liabilities Through But Through After
Which Mature or Reprice: Three Within Five Five
Immediately<F1> Months One Year Years Years Total
----------------------------------------------------------------
Dollars in Thousands
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal Funds Sold $ 6,115 $ -- $ -- $ -- $ -- $ 6,115
Investment Securities -- 28,477 6,081 12,766 5,245 52,569
Total Loans 21,648 40,358 35,878 8,219 7,522 113,625
Total Interest
Earning Assets 27,763 68,835 41,959 20,985 12,767 172,309
======= ======== ======== ======== ======== ========
Cumulative Interest
Earning Assets 27,763 96,598 138,557 159,542 172,309 172,309
Interest Bearing
Transaction Accounts 21,467 -- -- -- -- 21,467
Savings Accounts 61,298 -- -- -- -- 61,298
Time Deposits 0 26,813 28,899 4,974 10 60,696
Repurchase Agreements -- 992 0 -- -- 992
Other Borrowed Funds 2,650 2,650
Subordinated Debentures -- -- 3,690 -- -- 3,690
Total Interest
Bearing Liabilities 82,765 27,805 32,589 4,974 2,660 150,793
======= ======== ======== ======== ======== ========
Cumulative Interest
Bearing Liabilities 82,765 110,570 143,159 148,133 150,793 150,793
Interest Rate
Sensitivity Gap (55,002) 41,030 9,370 16,011 10,107 21,516
Cumulative Interest
Rate Sensitivity Gap (55,002) (13,972) (4,602) 11,409 21,516 21,516
Interest Rate
Sensitivity Gap Ratio <F2> 34% 248% 129% 422% 100% 114%
Cumulative Interest Rate
Sensitivity Gap Ratio <F3> 34% 87% 97% 108% 114% 114%
- -----------------------------------------
<FN>
<F1> Includes $9,931,000 in regular savings accounts which are subject to
interest rate changes.
<F2> The interest rate sensitivity Gap Ratio for each time period presented is
calculated by dividing the respective total interest earning assets by
total interest bearing liabilities.
<F3> The cumulative interest rate sensitivity Gap ratio, for each time period
presented, is calculated by dividing the respective cumulative interest
earning assets by cumulative interest bearing liabilities.
</FN>
</TABLE>
Both the traditional GAP analysis and the asset liability simulation
model showed, in the twelve-month period ending December 31, 1996, the Company
and the Bank were moderately liability sensitive. In 1996 average interest
rates were lower than they were in 1995. The liability sensitive posture had a
positive impact on net interest margins as predicted by the asset liability
simulation model. Interest rate sensitivity measured by the gap method does
not consider the impact of different multipliers and lags. Neither method of
measuring interest rate sensitivity takes into account actions that management
could take to modify the effect to net interest income if interest rates were
to rise or fall, or the behavior of consumers in response to changes in
interest rates.
At year end 1996, the Company had $138,557,000 in assets and $143,159,000
in liabilities repricing within one year, resulting in a cumulative gap ratio
of 97%. Stated differently, 3% of interest-rate sensitive liabilities are
unmatched through one year. The Company could experience a decrease in its
net interest margin if the general level of interest rates were to rise. At
year end 1996, the Company had $21,516,000 more in interest rate sensitive
assets than it did in interest rate sensitive liabilities. The principal
funding source of these assets is $26,882,000 in noninterest bearing deposits
which are by definition not sensitive to interest rate changes since they do
not earn interest.
MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY OF LOANS
The following table shows the maturity of commercial loan and real estate
construction loans outstanding as of December 31, 1996. Also provided are the
amounts due after one year classified according to the sensitivity to changes
in interest rates. Nonperforming loans are included in this table based on
nominal maturities, even though the Company may be unable to collect such
loans or compel repricing of such loans at the maturity date. Included in the
totals are unearned income on such loans, such as deferred loan fees.
<TABLE>
<CAPTION>
Maturing
-----------------------------------------------
After One
Within through After
One Year Five Years Five Years Total
-----------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial, $ 3,172 $ 4,181 $ 1,573 $ 8,926
Real Estate - Construction 4,904 1,375 129 6,408
------- ------- ------- -------
$ 8,076 $ 5,556 $ 1,702 $15,334
======= ======= ======= =======
Loans maturing after one year with:
Fixed interest rates $ 1,829 $ 264
Variable interest rates 3,727 1,438
------- -------
$ 5,556 $ 1,702
======= =======
- ---------------------------------------------------------
</TABLE>
CAPITAL RESOURCES
Capital planning by the Company and the Bank considers current capital
needs as well as anticipated future growth and dividend payouts. A
determination of whether a Bank is "well capitalized," "adequately
capitalized" or "under capitalized" is used by Bank regulators to determine
which aspects of federal regulations are applicable to the Bank. For example,
FDIC premium rates are now based upon capital levels as well as the Bank's
safety and soundness rating.
The Company raised capital of $321,000 and $114,000 in 1996 and 1995,
respectively, through an issuance of common stock pursuant to the exercise of
employee stock options and the conversion of debentures.
The Company and the Bank are subject to minimum capital guidelines issued
by the Federal Reserve and the FDIC, respectively, which require a minimum
leverage ratio of Tier 1 capital to quarterly average total assets less
goodwill of 3% to 5% (the "leverage ratio"). The Company and the Bank are
also required to meet a minimum risk based capital ratio of qualifying total
capital to risk weighted assets of 8%, of which at least 4% must be in the
form of core (Tier 1) capital-common stock less goodwill. The unrealized loss
in Available for Sale Securities is excluded when calculating capital ratios.
For the Company and the Bank, supplementary (Tier 2) capital consists only of
the allowance for loan losses and the debentures (Company) and subordinated
notes (Bank). As of December 31, 1996, the Company's and the Bank's leverage
ratio were 7.04% and 6.81%. Despite the higher capital, the nearly 20% growth
in assets and the addition of $540,000 in goodwill, remaining from the
purchase of the Concord Branch in 1996, reduced the leverage ratio from 7.75%
at December 31, 1995. The Company's and the Bank's total risk-based capital
ratio also declined from 13.71% at December 31, 1995 to 13.55% for the Company
and 13.22% for the Bank at December 31, 1996.
The Company and the Bank must also maintain a 4% ratio of Tier 1 capital
to risk weighted assets. As of December 31, 1996, this ratio was 9.92% and
9.60%, respectively, compared to 9.65% in the prior year, both well above the
minimum. In October 1992, the FDIC adopted the final rules for implementing
the risk-related premium system, where a Bank's safety and soundness rating by
a Bank supervisory body and the Bank's capitalization determines which of nine
risk classifications is appropriate for an institution. Although the Bank
meets all the minimum requirements of each capital ratio, these standards are
now the minimum ratios to be considered "adequately capitalized."
The following tables present the capital ratios for the Company and the
Bank and respective regulatory capital adequacy requirements, at December
31, 1996:
<TABLE>
<CAPTION>
Company: For Capital
Actual Adequacy Purposes
--------------------- --------------------
Minimum Minimum
Amount Ratio Amount Ratio
<S> <C> <C> <C> <C>
As of December 31, 1996:
Total capital
(to risk weighted assets) $17,895,000 13.55% $10,564,000 8.0%
Tier I capital
(to risk weighted assets) $13,104,000 9.92% $ 5,282,000 4.0%
Tier I capital
(to average assets) $13,104,000 7.04% $ 7,444,000 4.0%
- ------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Bank:
To Be
Categorized as Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ------------------- -------------------
Minimum Minimum Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total capital
(to risk weighted assets) $17,416,000 13.22% $10,540,000 8.0% $13,174,000 10.0%
Tier I capital
(to risk weighted assets) $12,647,000 9.60% $ 5,270,000 4.0% $7,905,000 6.0%
Tier I capital
(to average assets) $12,647,000 6.81% $ 7,407,000 4.0% $9,286,000 5.0%
- ---------------------------------------
</TABLE>
SELECTED FINANCIAL RATIOS
The following table sets forth certain financial ratios for the periods
indicated (averages are computed using daily figures):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1995
--------------------------
<S> <C> <C>
Net earnings to:
Average interest earning assets 1.03 % .99 %
Average total assets .92 .89
Average stockholders' equity 12.25 12.31
Cash dividend payment to:
Net earnings 36.00 34.20
Average stockholders' equity 4.40 4.20
Tier 1 capital to:
Quarterly average total assets (less goodwill) 7.04 7.80
Average earning assets to:
Average total assets 89.60 89.40
Average total deposits 101.60 100.00
Percent of total deposits:
Net loans 65.70 78.80
Noninterest-bearing deposits 15.80 15.40
Interest-bearing deposits 84.20 84.60
Total interest expense to:
Total gross interest income 41.70 44.50
Total risk-based capital to:
Risk-based assets 13.55 13.71
Tier 1 capital to:
Risk based assets 9.92 9.65
Average stockholders' equity to:
Average total assets 7.53 7.22
- ------------------------------------------------
</TABLE>
SHORT-TERM BORROWINGS
The Company had no short term borrowings at December 31, 1996.
IMPACT OF INFLATION
Impact of inflation on a financial institution differs significantly from
that exerted on an industrial concern, primarily because a financial
institution's assets and liabilities consist largely of monetary items. The
relatively low proportion of the Company's net fixed assets (less than 4% at
December 31, 1996) reduces both the potential of inflated earnings resulting
from understated depreciation and the potential understatement of absolute
asset values.
******************************************************************************
ITEM 7 - FINANCIAL STATEMENTS
The Financial Statements Required by this Item are set forth following
Item 13 hereof, and are incorporated herein by reference.
******************************************************************************
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
******************************************************************************
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information concerning directors and executive officers required by
this item is incorporated by reference from the section of the Company's
Definitive Proxy Statement for the 1997 Annual Meeting of Stockholders of the
Company (the "Proxy Statement") to be filed with the Securities and Exchange
Commission (the "Commission") entitled "Election of Directors" (not including
the share information included in the beneficial ownership table nor the
footnotes thereto or the subsection entitled "Committees of the Board of
Directors").
******************************************************************************
ITEM 10 - EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the section of the Proxy Statement entitled "Executive Compensation."
******************************************************************************
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
sections of the Proxy Statement, entitled "Principal Stockholders" and
"Election of Directors," as to share information in the table of beneficial
ownership and footnotes thereto.
******************************************************************************
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the section of the Proxy Statement, entitled "Certain Relationships and
Related Transactions."
******************************************************************************
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits
See Index to Exhibits at page 45 of this Annual Report on
Form 10-KSB, which is incorporated herein by reference.
B) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last
quarter of 1996.
C) The following is a list of all exhibits filed as part of the
Annual Report on Form 10-KSB.
Sequentially
Numbered
Exhibit Exhibit Page
No.
2.1 Plan of Reorganization and Merger Agreement,
dated February 22, 1996 is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
3.1 Certificate of Incorporation of Registrant, dated
October 5, 1995 is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
3.2 By-laws of Registrant is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
4.1 Indenture, dated as of April 16, 1993, between Continental
Pacific Bank and U.S. Trust Company of California,
N.A. is incorporated by reference from the Company's
1995 Annual Report on Form 10-KSB filed on March 29, 1996. *
4.2 First Supplemental Indenture, dated as of October 20, 1995,
Amending Indenture dated as of April 16, 1993, between
Continental Pacific Bank and U.S. Trust Company
of California, N.A. is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
4.3 Second Supplemental Indenture, dated as of February 29, 1996,
Amending Indenture dated as of April 16, 1993, between
Continental Pacific Bank, California Community Bancshares
Corporation and U.S. Trust Company of California, N.A. is
incorporated by reference from the Company's 1995 Annual
Report on Form 10-KSB filed on March 29, 1996. *
10.1 Deferred Compensation Arrangement, as amended is
incorporated by reference from the Company's 1995 Annual
Report on Form 10-KSB filed on March 29, 1996. *
10.2 Amended and Restated Employment Agreement between
Walter O. Sunderman and Continental Pacific Bank, dated
August 1, 1993 is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.3 Amended and Restated Employment Agreement between
Andrew S. Popovich and Continental Pacific Bank, dated
August 1, 1993 is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.4 Amended and Restated Agreement Employment Agreement
between Ronald A. Alfstad and Continental Pacific Bank,
dated August 1, 1994 is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.5 Employment Agreement between Larry Q. Fletcher and
Continental Pacific Bank, dated August 1, 1993 is
incorporated by reference from the Company's 1995
Annual Report on Form 10-KSB filed on March 29, 1996. *
10.6 Continental Pacific Bank Supplemental Retirement Plan,
effective August 1, 1993 is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.7 1990 Amended Stock Option Plan is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.8 1993 Stock Option Plan is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.9 Lease Agreement, dated July 15, 1993, between
Conpac Development Corporation and Continental Pacific
Bank for the Administrative Offices is incorporated by
reference from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.10 Lease Agreement and Addendum, dated May 31, 1983,
between Ibrahim Dib and Continental Pacific Bank for the
Vacaville Branch is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.11 Lease Agreement and Amendment, dated August 11, 1983,
between Leon Schiller, Joseph Friend, Ida Friend, Beulah
Schiller and Bruch J. Friend and Continental Pacific Bank
for the Fairfield Branch is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.12 Modification of Lease Agreement, dated December 31, 1987,
between Dante A. Madnani, Ernest N. Kettenhofen and Maxine
M. Campbell and Continental Pacific Bank for the Vallejo
Branch is incorporated by reference from the Company's 1995
Annual Report on Form 10-KSB filed on March 29, 1996. *
10.13 Lease Agreement, dated May 3, 1988, between Albert Morgan
Family Trust and Continental Pacific Bank for the Benicia
Branch is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.14 Ground Lease Agreement and Amendment, dated April 4, 1993,
between Jepson Parkway Associates L.P. and Continental
Pacific Bank for the Power Plaza Branch is incorporated
by reference from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.15 Lease Agreement and First Amendment to Lease, dated January
15, 1993, between BTV Crown Equities, Inc. and Continental
Pacific Bank for the Oliver Road Branch is incorporated by
reference from the Company's 1995 Annual Report on
Form 10-KSB filed on March 29, 1996. *
10.16 Lease Agreement, dated July 8, 1991, between Vallejo C & R
Associates and Continental Pacific Bank for the Park Place
Branch is incorporated by reference
from the Company's 1995 Annual Report on Form
10-KSB filed on March 29, 1996. *
10.17 Purchase and Assumption Agreement between Tracy
Federal Bank, F.S.B., and Continental Pacific Bank,
dated as of May 14, 1996 is incorporated by reference
from the Company's Current Report on Form
8-K filed on May 24, 1996. *
10.18 Terms and Conditions of Authorization for Automatic
Dividend Reinvestment and Common Stock Purchase
Plan for Shareholders of California Community
Bancshares Corporation is incorporated by reference
from the Company's Current Report on Form
8-K filed on July 15, 1996. *
10.19 Form of Automatic Dividend Reinvestment and
Common Stock Purchase Plan Agency Agreement
is incorporated by reference from the Company's
Current Report on Form 8-K filed on July 15, 1996. *
10.20 Amendment to Purchase and Assumption Agreement
between Tracy Federal Bank, F.S.B., and Continental
Pacific Bank, dated as of October 8, 1996
is incorporated by reference from the Company's
Current Report on Form 8-K filed on May 24, 1996. *
10.21 Lease Agreement, dated August 22, 1996, between
Salvio Pacheco Square Investors / IRM
Corporation and Continental Pacific Bank for the
Concord Branch ---0082---
21.1 The Company's only subsidiary is Continental Pacific Bank,
a California banking Corporation
21.2 The Bank's only subsidiary is Conpac Development Corporation,
a real estate development business as authorized under
California law.
- --------------
* Asterisk denotes documents which have been incorporated by reference.
*************************************************************************
CALIFORNIA COMMUNITY BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Financial Statements as of December 31, 1996
and 1995 and for each of the Three Years in the Period Ended
December 31, 1996 and Independent Auditors' Report
*************************************************************************
[LOGO]
Deloitte & Touche LLP
Suite 2000
400 Capitol Mall
Sacramento, CA 95814-4424
Telephone: (916) 498-7100
Facisimile: (916) 444-7963
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
California Community Bancshares Corporation
Vacaville, California
We have audited the accompanying consolidated balance sheets
of California Community Bancshares Corporation and
subsidiary (Company) as of December 31, 1996 and 1995, and
the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial
position of the Company at December 31, 1996 and 1995, and
the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP
- --------------------------
February 21, 1996
Sacramento, California
DELOITTE TOUCHE TOHMATSU INTERNATIONAL
************************************************************
CALIFORNIA COMMUNITY BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 10,825,000 $ 9,346,000
Federal funds sold 6,115,000 1,915,000
------------ ------------
Total cash and cash equivalents 16,940,000 11,261,000
Available for sale securities,
at fair value 52,569,000 29,780,000
Loans receivable 113,625,000 111,124,000
Less: Allowance for loan losses 1,101,000 1,158,000
Deferred loan fees 599,000 732,000
------------ ------------
Net loans receivable 111,925,000 109,234,000
Premises and equipment,
net of accumulated depreciation 2,284,000 2,137,000
Investment in
real estate development 4,483,000 4,607,000
Other real estate owned 150,000 182,000
Goodwill 540,000
Accrued interest receivable
and other assets 2,938,000 2,882,000
------------ ------------
TOTAL ASSETS $191,829,000 $160,083,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 26,882,000 $ 21,900,000
Interest-bearing 143,461,000 120,334,000
------------ ------------
Total deposits 170,343,000 142,234,000
Repurchase agreements 992,000 665,000
Accrued interest payable
and other liabilities 785,000 897,000
Other borrowed funds 2,650,000
Convertible
subordinated debentures 3,690,000 4,025,000
------------ ------------
Total liabilities 178,460,000 147,821,000
SHAREHOLDERS' EQUITY:
Preferred stock, no par value,
Series A, authorized 1,000,000
shares; none outstanding
Common stock, $.10 par value;
authorized 2,000,000 shares;
outstanding, 994,519 and
966,153 in 1996 and 1995 11,135,000 10,814,000
Retained earnings 2,510,000 1,513,000
Unrealized loss on available
for sale securities
(net of tax effect) (276,000) (65,000)
------------ ------------
Total shareholders' equity 13,369,000 12,262,000
------------ ------------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $191,829,000 $160,083,000
============ ============
</TABLE>
See notes to consolidated financial statements
*************************************************************************
CALIFORNIA COMMUNITY BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ----------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
INTEREST INCOME:
Loans and loan fees $10,704,000 $10,370,000 $ 9,500,000
Securities:
Taxable 1,869,000 1,126,000 691,000
Exempt from federal taxes 346,000 698,000 708,000
Federal funds and
repurchase agreements sold 183,000 116,000 54,000
----------- ----------- -----------
Total interest income 13,102,000 12,310,000 10,953,000
INTEREST EXPENSE:
Deposits 4,957,000 5,063,000 3,711,000
Federal funds and
repurchase agreements purchased 54,000 72,000 57,000
Convertible subordinated debentures 308,000 346,000 328,000
Other borrowed funds 146,000
----------- ----------- -----------
Total interest expense 5,465,000 5,481,000 4,096,000
----------- ----------- -----------
NET INTEREST INCOME 7,637,000 6,829,000 6,857,000
PROVISION FOR LOAN LOSSES 411,000 324,000 256,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,226,000 6,505,000 6,601,000
----------- ----------- -----------
NONINTEREST INCOME:
Service charges on deposit accounts 843,000 819,000 793,000
Net gain on sale of
available for sale securities 83,000 481,000 9,000
Other fees and charges 564,000 397,000 375,000
Income from real estate development 542,000 481,000 485,000
----------- ----------- -----------
Total noninterest income 2,032,000 2,178,000 1,662,000
----------- ----------- -----------
NONINTEREST EXPENSES:
Salaries and employee benefits 3,342,000 3,137,000 3,148,000
Occupancy 1,366,000 1,374,000 1,333,000
Business development 176,000 137,000 101,000
Data processing 118,000 106,000 110,000
Expenses from
real estate development 300,000 268,000 262,000
Other 1,479,000 1,608,000 1,524,000
----------- ----------- -----------
Total noninterest expenses 6,781,000 6,630,000 6,478,000
----------- ----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 2,477,000 2,053,000 1,785,000
PROVISION FOR INCOME TAXES 918,000 648,000 564,000
----------- ----------- -----------
NET INCOME $ 1,559,000 $ 1,405,000 $ 1,221,000
=========== =========== ===========
INCOME PER COMMON
AND EQUIVALENT SHARE:
Primary $1.53 $1.41 $1.24
=========== =========== ===========
Fully diluted $1.31 $1.22 $1.09
=========== =========== ===========
Weighted average shares used
to compute income
per common and equivalent shares:
Primary 1,020,814 999,704 983,107
Fully diluted 1,323,068 1,315,390 1,298,793
</TABLE>
See notes to consolidated financial statements.
*************************************************************************
CALIFORNIA COMMUNITY BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Common Stock Loss on
------------------------ Securities
Number Available
of Shares Retained for Sale Shareholders'
Outstanding Amount Earnings (Net of Taxes) Equity
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 950,964 $10,659,000 $( 156,000) $ (85,000) $10,418,000
Stock options exercised 4,503 41,000 41,000
Cash dividend on common stock (477,000) (477,000)
Net change in unrealized
gain (loss) on available
for sale securities (477,000) (477,000)
Net income 1,221,000 1,221,000
------- ----------- ---------- ---------- -----------
Balance at December 31, 1994 955,467 10,700,000 588,000 (562,000) 10,726,000
Stock options exercised 10,686 114,000 114,000
Cash dividend on common stock (480,000) (480,000)
Net change in unrealized
gain (loss) on available
for sale securities 497,000 497,000
Net income 1,405,000 1,405,000
------- ----------- ---------- ---------- -----------
Balance at December 31, 1995 966,153 10,814,000 1,513,000 (65,000) 12,262,000
Stock options exercised 2,094 14,000 14,000
Common stock issued on
conversion of debentures 26,272 307,000 307,000
Cash dividend on common stock (562,000) (562,000)
Net change in unrealized
gain (loss) on available
for sale securities (211,000) (211,000)
Net income 1,559,000 1,559,000
------- ----------- ---------- ---------- -----------
Balance at December 31, 1996 994,519 $11,135,000 $2,510,000 $(276,000) $13,369,000
======= =========== ========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
*************************************************************************
CALIFORNIA COMMUNITY BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ----------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,559,000 $1,405,000 $1,221,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 523,000 516,000 548,000
Provision for loan losses 411,000 324,000 256,000
Proceeds from sales of loans 1,438,000
Originations of loans held for sale (1,181,000)
Provision for deferred income taxes 132,000 (268,000) 193,000
Net gain on sale of
available for sale securities (83,000) (481,000) (9,000)
Loss (gain) on sale of
other real estate owned 17,000 (8,000) (1,000)
Loss on sale of premises
and equipment (8,000)
Effect of changes in:
Interest receivable
and other assets (541,000) (294,000) (413,000)
Interest payable
and other liabilities (112,000) 390,000 93,000
----------- ----------- ----------
Net cash provided by
operating activities 1,906,000 1,584,000 2,137,000
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of
available for sale securities (34,275,000) (23,721,000) (8,887,000)
Proceeds from sales of
available for sale securities 6,635,000 18,468,000 2,401,000
Proceeds from maturities, calls or
repayments of available
for sale securities 4,416,000 6,558,000 2,483,000
Purchases of held to
maturity securities (1,493,000) (502,000)
Proceeds from maturities or calls
of held to maturity securities 1,735,000 365,000
Net change in loans receivable (3,192,000) (710,000) (3,815,000)
Proceeds from sales of
other real estate owned 105,000 500,000 153,000
Purchases of premises and equipment (592,000) (194,000) (607,000)
Proceeds from sales of
premises and equipment 14,000 17,000 12,000
Change in investment in
real estate development 124,000 111,000 48,000
----------- ----------- ----------
Net cash provided by (used in)
investing activities (26,765,000) 1,271,000 (8,349,000)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits:
Noninterest bearing 4,982,000 475,000 (2,502,000)
Interest bearing 23,127,000 1,032,000 12,108,000
Net change in repurchase agreements 327,000 (82,000) (1,822,000)
Net change in other borrowed funds 2,650,000
Cash dividends paid (562,000) (480,000) (477,000)
Cash proceeds from
stock options exercised 14,000 114,000 41,000
----------- ----------- ----------
Net cash provided by
financing activities 30,538,000 1,059,000 7,348,000
----------- ----------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 5,679,000 3,914,000 1,136,000
CASH AND CASH EQUIVALENTS:
Beginning of year 11,261,000 7,347,000 6,211,000
----------- ----------- ----------
End of year $16,940,000 $11,261,000 $7,347,000
=========== =========== ==========
</TABLE>
See notes to consolidated financial statements.(Continued)
*************************************************************************
CALIFORNIA COMMUNITY BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Concluded)
- ----------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
ADDITIONAL INFORMATION:
Common stock issued on conversion of debentures
net of debenture offering costs of $28,000 in 1996 $ 307,000
============
Transfer of securities from held to maturity to
available for sale $12,087,000
===========
Transfer of foreclosed loans from loans receivable
to other real estate owned $ 100,000 $ 341,000 $ 157,000
============ =========== ==========
Cash Payments:
Income tax payments $ 738,000 $ 896,000 $ 557,000
============ =========== ==========
Interest payments $ 5,443,000 $5,465,000 $4,046,000
============ =========== ==========
</TABLE>
See notes to consolidated financial statements.
*************************************************************************
CALIFORNIA COMMUNITY BANCSHARES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- ----------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - California Community Bancshares
Corporation was incorporated in Delaware on October 5, 1995
for the purpose of becoming a bank holding Company
registered under the Bank Holding Company Act of 1956. On
February 29, 1996, pursuant to a plan of reorganization and
agreement of merger, resulting in the Bank becoming the
wholly-owned subsidiary of the Company, the Company issued
967,902 shares of its common stock for all of the
outstanding common stock of the Bank. The Company's
wholly-owned subsidiary, Continental Pacific Bank (Bank)
commenced banking operations on November 14, 1983. The
merger has been accounted for as a reorganization
of entities under common control (similar to a
pooling-of-interests). Additionally, during 1996, the
Company purchased from a bank approximately $15,500,000 in
deposits and certain leasehold improvements and equipment
and assumed the building lease of a branch located in
Concord, California, for approximately $820,000. The
leasehold improvements and equipment were recorded at fair
value and the excess of the amounts paid over the fair value
was recorded as goodwill. The Company operates eight
branches in Solano and Contra Costa Counties in Northern
California. The Company's primary source of revenue is
through providing loans to customers, who are predominately
small and middle market businesses and middle income
individuals.
General - The accounting and reporting policies of the
Company conform to generally accepted accounting principles
and to prevailing practices within the banking industry.
The Company follows the accrual method of accounting.
Use of Estimates in the Preparation of Financial
Statements - The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The more significant accounting and reporting policies
are discussed below.
Consolidation - The consolidated financial statements
include California Community Bancshares Corporation and its
wholly-owned subsidiary, Continental Pacific Bank and its
wholly-owned subsidiary, Conpac Development Corporation.
All material intercompany accounts and transactions have
been eliminated in consolidation.
Cash and Cash Equivalents - For purposes of the
statements of cash flows, cash and cash equivalents have
been defined as cash, demand deposits with correspondent
banks, cash items in transit and federal funds sold.
Generally, federal funds are sold for one-day periods. Cash
equivalents have remaining terms to maturity of three
months or less from the date of acquisition.
Securities Investments - The Company accounts for
securities investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities. The
Company's policy with regard to investments is as follows:
Available for Sale Securities are carried at fair value.
Unrealized gains and losses resulting from changes in fair
value are recorded, net of tax, as a separate component of
shareholders' equity. Gains or losses on disposition are
recorded in other operating income based on the net proceeds
received and the carrying amount of the securities sold,
using the specific identification method.
The Company does not have any investment securities
considered to be held to maturity or held for trading under
the provisions of SFAS 115.
Financial Instruments - All derivative financial
instruments held or issued by the Company are held or issued
for purposes other than trading. Interest rate exchange
agreements (swaps) are used by the Company as part of their
asset/liability management activities to reduce its exposure
to certain lags and fluctuations in interest rates and are
accounted for using the accrual method. Net interest income
or expense resulting from the differential between
exchanging floating interest payments based on different
indices is recorded on a current basis.
Loans Receivable - Loans are reported at the principal
amount outstanding adjusted for any specific charge-offs.
Interest on loans is calculated by using the simple interest
method on the daily balance of the principal amount
outstanding.
Loan fees and certain related direct costs to originate
loans are deferred and amortized to income by a method that
approximates a level yield over the contractual life of the
underlying loans.
The accrual of interest on impaired loans is
discontinued when reasonable doubt exists as to the full and
timely collection of interest and principal, or when a loan
becomes contractually past due by 90 days or more with
respect to interest or principal (unless the loan is well
secured and in the process of collection) and such loans are
designated as nonaccrual loans. When a loan is placed on
nonaccrual status, all accrued but unpaid interest revenue
is reversed by a charge to earnings. Income on such loans
is then recognized only to the extent that cash is received
and where the future collection of principal is determined
by management to be probable. Interest accruals are resumed
on such loans when, in the judgment of management, the loans
are estimated to be fully collectible as to both principal
and interest.
Allowance for Loan Losses - The Company accounts for
impaired loans in accordance with SFAS No. 114, Accounting
by Creditors for Impairment of a Loan and SFAS No. 118,
Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosure. Under these standards, a loan
is considered impaired if, based on current information and
events, it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when
due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally
based on the fair value of the collateral, for all
collateral dependent loans, or the present value of expected
future cash flows discounted at the historical effective
interest rate.
The allowance for loan losses is established through a
provision for loan losses charged to operations. Loans are
charged against the allowance for loan losses when
management believes that the collectibility of the principal
is unlikely. The allowance is an amount that management
believes will be adequate to absorb losses inherent in
existing loans and commitments to extend credit based on
evaluations of the collectibility and prior loss experience
of loans and commitments to extend credit. In evaluating
the probability of collection, management is required to
make estimates and assumptions that affect the reported
amounts of loans, allowance for loan losses and the
provision for loan losses charged to operations. Actual
results could differ significantly from those estimates.
The evaluations take into consideration such factors as
changes in the nature and volume of the portfolio, overall
portfolio quality, loan concentrations, specific problem
loans, commitments, and current and anticipated economic
conditions that may affect the borrowers' ability to pay.
Premises and Equipment - Premises and equipment are
carried at cost less accumulated depreciation and
amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the
respective assets, generally 5 to 10 years for furniture and
fixtures and 3 to 7 years for equipment. Leasehold
improvements are amortized on the straight-line method over
the shorter of the estimated useful lives of the
improvements or the terms of the respective leases.
Expenditures for major renewals and betterments of premises
and equipment are capitalized and those for maintenance and
repairs are charged to operations as incurred.
Investments in Real Estate Development - The investment
in real estate development represents the investment in the
Pacific Plaza project by the Bank's wholly-owned
consolidated subsidiary, Conpac Development Corporation.
The investment in the land and building is carried at cost,
net of accumulated depreciation which is computed on the
straight-line basis over 31.5 years. (see Note 6).
Other Real Estate Owned - Real estate properties
acquired through, or in lieu of, foreclosure are expected to
be sold and are recorded at the date of foreclosure at the
lower of the recorded investment in the property or its fair
value less estimated selling costs (fair value) establishing
a new cost basis through a charge to allowance for loan
losses, if necessary. After foreclosure, valuations are
periodically performed by management with any subsequent
write-downs recorded as a valuation allowance and charged
against operating expenses. Operating expenses of such
properties, net of related income, are included in other
expenses and gains and losses on their disposition are
included in other income and other expenses.
Goodwill - Goodwill consists of the unamortized excess
of the purchase price over the fair value of the assets
acquired in the purchase of a branch located in Concord
California. Goodwill is being amortized on a straight-line
basis over 15 years.
Income Taxes - The Company accounts for income taxes
in accordance with SFAS No. 109, Accounting for Income Taxes.
SFAS No. 109 applies an asset and liability method in
accounting for deferred income taxes. Deferred tax assets
and liabilities are calculated by applying applicable tax
laws to the differences between the financial statement
basis and the tax basis of assets and liabilities. The
effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the
enactment date.
Stock-Based Compensation - The Company accounts for
stock-based awards to employees using the intrinsic value
method in accordance with Accounting Principles Board (APB)
No. 25, Accounting for Stock Issued to Employees.
Net Income per Common and Equivalent Share - Primary
earnings per common and equivalent share is calculated by
dividing net income by the weighted average number of common
and common equivalent (stock options) shares outstanding.
Fully diluted earnings per common and common equivalent
share is determined by adjusting net income for the after
tax effect of the interest paid on the convertible
debentures and dividing this amount by the weighted average
common and common equivalent shares outstanding as adjusted
for the conversion of the convertible debentures.
Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities - In June 1996,
the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 125,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, which must be adopted by
the Company for transactions occurring after December 31,
1996. This Statement provides accounting and reporting
standards for transfers and servicing of financial assets
and extinguishments of liabilities. This standard is based
on consistent application of a financial-components approach
that focuses on control. Under this approach, 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. The Company has determined
that the adoption of this standard will not have a material
effect on the Company's financial position or results of
operations.
Reclassifications - Certain amounts in 1995 and 1994
have been reclassified to conform with the 1996 financial
statement presentation.
2. RESTRICTED CASH BALANCES
Aggregate reserves of $750,000 and $150,000 in the form
of deposits with the Federal Reserve Bank were maintained to
satisfy Federal Reserve requirements at December 31, 1996
and 1995.
3. SECURITIES
At December 31, the amortized cost of securities and
their approximate fair value were as follows:
<TABLE>
<CAPTION>
Carrying
Gross Gross Amount
Amortized Unrealized Unrealized (Approximate
Cost Gains Losses Fair Value)
<S> <C> <C> <C> <C>
Available for Sale Securities:
December 31, 1996:
Securities of U.S. government
agencies and corporations $47,887,000 $ 27,000 $ 519,000 $47,395,000
FHLB stock 490,000 490,000
Obligations of states and
political Subdivisions 4,667,000 65,000 48,000 4,684,000
----------- -------- --------- -----------
$53,044,000 $ 92,000 $ 567,000 $52,569,000
=========== ======== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Carrying
Gross Gross Amount
Amortized Unrealized Unrealized (Approximate
Cost Gains Losses FairValue)
<S> <C> <C> <C> <C>
December 31, 1995:
Securities of U.S. government
agencies and corporations $22,812,000 $ 23,000 $ 244,000 $22,591,000
FHLB stock 118,000 118,000
Obligations of states and
political subdivisions 6,961,000 166,000 56,000 7,071,000
----------- -------- --------- -----------
$29,891,000 $189,000 $ 300,000 $29,780,000
=========== ======== ========= ===========
</TABLE>
Gross realized gains on sales of available for sale
securities were approximately $88,000 in 1996 and $499,000
in 1995. Gross realized losses on sales of available for
sale securities were approximately $5,000 in 1996 and
$18,000 in 1995.
In November 1995, the FASB issued additional
implementation guidance regarding the previously issued SFAS
No. 115. In accordance with this guidance and prior to
December 31, 1995, companies were allowed a one-time
reassessment of their classification of securities and were
required to account for any resulting transfers at fair
value. Transfers from the held to maturity category that
result from this one-time reassessment will not call into
question the intent to hold other securities to maturity in
the future. The Company transferred approximately
$12,087,000 of securities from held to maturity to available
for sale to allow the Company greater flexibility in
managing its interest rate risk and liquidity. Available
for sale securities were adjusted to fair value and
stockholders' equity was increased by $274,000 net of income
taxes of $198,000.
Scheduled maturities of available for sale securities
(other than FHLB stock with a carrying value of
approximately $490,000) at December 31, 1996, are shown
below. Expected maturities may differ from contractual
maturities because borrowers may have the right to prepay
with or without penalty.
<TABLE>
<CAPTION>
Available for sale securities
-----------------------------
Approximate
Fair Value
Amortized (Carrying
Cost Amount)
<S> <C> <C>
Due in one year or less $ 6,064,000 $ 6,076,000
Due after one year through five years 13,192,000 13,140,000
Due after five years through 10 years 3,940,000 3,905,000
Due after 10 years 29,358,000 28,958,000
----------- ------------
$52,554,000 $ 52,079,000
=========== ============
</TABLE>
At December 31, 1996 and 1995, securities having
carrying amounts of approximately $10,171,000 and
$5,170,000 were pledged to secure public deposits
and short-term borrowings and for other purposes
required by law or contract.
Derivative financial instruments - Entering into
interest-rate swap agreements involves not only the risk of
dealing with counterparties and their ability to meet the
terms of the contracts but also the interest-rate risk
associated with unmatched positions. Notional principal
amounts are often used to express the volume of these
transactions, but the amounts potentially subject to credit
risk are much smaller.
During 1996, the Company entered into an interest rate
swap agreement with the Federal Home Loan Bank (FHLB). The
notional principal amount of the interest-rate swap
outstanding was $10,000,000 at December 31, 1996 and has an
original term of five years. Under the agreement the
Company receives a floating-rate interest payment based on
the three-month treasury bill in exchange for payment of a
floating-rate interest payment based on the 11th District
Cost of Funds Index (COFI) plus .65%. The effect of this
agreement was to shorten the lag time in interest rate
fluctuations from the COFI index to the treasury bill to
enable the Company to better match the timing of the
repricing of certain liabilities. The net interest expense
recognized in 1996 was approximately $19,000.
4. LOANS RECEIVABLE, IMPAIRED LOANS AND ALLOWANCE FOR
LOAN LOSSES
The Company's loan customers are located primarily in
Solano County and neighboring communities. At December 31,
1996, 72% of the Company's loan portfolio was for real
estate, of which 79% was for commercial projects and 21% was
for residential properties. Real estate construction loans
comprise 6% of the loan portfolio with consumer and other,
and commercial loans accounting for the remaining 14% and
8%, respectively. The real estate portfolio consists of
approximately 86% variable rate loans and approximately 14%
fixed rate loans. Substantially all loans are
collateralized. Generally, real estate loans are secured by
real property. Commercial and other loans are secured by
bank deposits or business or personal assets. The Company's
policy for requiring collateral reflects the Company's
analysis of the borrower, the borrower's industry and the
economic environment in which the loan would be granted.
The loans are expected to be repaid from cash flows or
proceeds from the sale of selected assets of the borrower.
The major classifications of loans at December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Commercial $ 8,926,000 $ 9,908,000
Real estate construction 6,408,000 9,553,000
Real estate 82,246,000 77,398,000
Consumer and other 16,045,000 14,265,000
------------ ------------
113,625,000 111,124,000
Less:
Allowance for loan losses 1,101,000 1,158,000
Deferred loan fees 599,000 732,000
------------ ------------
Net loans receivable $111,925,000 $109,234,000
============ ============
</TABLE>
Changes in the allowance for loan losses for the years
ended December 31 are summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $1,158,000 $1,108,000 $1,090,000
Provision for loan losses 411,000 324,000 256,000
Loans charged off (496,000) (282,000) (239,000)
Recoveries 28,000 8,000 1,000
---------- ---------- ----------
Balance at end of year $1,101,000 $1,158,000 $1,108,000
========== ========== ==========
</TABLE>
At December 31, 1996 and 1995, the recorded investment
in loans for which impairment has been recognized in
accordance with SFAS No. 114 was approximately $2,648,000
and $1,602,000. The total allowance for loan losses related
to these loans was $278,000 and $309,000 at December 31,
1996 and 1995. For the years ended December 31, 1996 and
1995, the average recorded investment in loans for which
impairment has been recognized was approximately $1,218,000
and $1,641,000. During the portion of the year that the
loans were impaired, the Company recognized interest income
of approximately $28,000 and $12,000 for cash payments
received in 1996 and 1995.
Included in the impaired loans are nonperforming loans
at December 31 as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Nonaccrual loans $ 70,000 $1,049,000
Loans 90 days past due but still accruing interest 67,000 78,000
--------- ----------
Total nonaccrual and 90 days past due loans $ 137,000 $1,127,000
========= ==========
</TABLE>
If interest on nonaccrual loans had been accrued, such
income would have been approximately $7,000, $203,000, and
$19,000, in 1996, 1995 and 1994. At December 31, 1996,
there were no commitments to lend additional funds to
borrowers whose loans were classified as nonaccrual or whose
loans have been modified.
5. PREMISES AND EQUIPMENT
The major classifications of premises and equipment
at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Bank premises $ 132,000 $ 132,000
Furniture, fixtures and equipment 2,222,000 1,895,000
Leasehold improvements 2,752,000 2,530,000
---------- ----------
5,106,000 4,557,000
Less accumulated depreciation and amortization 2,822,000 2,420,000
---------- ----------
$2,284,000 $2,137,000
========== ==========
</TABLE>
6. INVESTMENT IN REAL ESTATE DEVELOPMENT
In 1984, the Bank formed a wholly-owned subsidiary,
Conpac Development Corporation (Conpac), to engage in real
estate development activities.
Conpac's current project consists of one commercial
property development, Pacific Plaza, located in Vacaville,
California. The Pacific Plaza East portion of the project,
consisting of a 32,000 square-foot office building, was
completed and commenced operations in 1992. The Pacific
Plaza West portion is being considered for development. At
December 31, 1996, the Company occupied approximately 17% of
the Pacific Plaza East project for use as its corporate
offices. All significant intercompany transactions,
including rental income for the Company's corporate offices,
are eliminated in consolidation and excluded from the
schedule of future minimum rentals.
A summary of certain financial information for Conpac,
after consolidation, is as follows:
<TABLE>
<CAPTION>
1996 1995 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Investment in
Pacific Plaza:
Land $1,366,000 $1,366,000 Rental income - net $542,000 $481,000 $485,000
Building and -------- -------- --------
improvements 3,459,000 3,459,000 Operating expenses 185,000 168,000 164,000
Less accumulated
depreciation (426,000) (311,000) Depreciation
Total investment ---------- ---------- expense 115,000 100,000 98,000
in Pacific Plaza 4,399,000 4,514,000 -------- -------- --------
Other 84,000 93,000 Total expenses 300,000 268,000 262,000
Total investment in ---------- ---------- -------- -------- --------
real estate Income from real
development $4,483,000 $4,607,000 estate development $242,000 $213,000 $223,000
========== ========== ======== ======== ========
</TABLE>
The future minimum rental income under long-term
noncancelable leases for the Pacific Plaza East project are
as follows:
1997 $ 302,000
1998 49,000
------------
Total $ 351,000
============
No interest costs were capitalized in 1996 or 1995 in
connection with the Bank's development activities.
Certain provisions of the Federal Deposit Insurance
Corporation Improvement Act restrict the Bank's ability to
continue to engage in real estate development activities
(see Note 18).
7. OTHER REAL ESTATE OWNED
Other real estate owned at December 31, consisted of the
following:
<TABLE>
<CAPTION>
1996
1995
<S> <C> <C>
Real estate acquired through foreclosure and held for sale $ 219,000 $ 343,000
Less - allowance for other real estate owned losses (69,000) (161,000)
------------ ------------
Other real estate owned - net $ 150,000 $ 182,000
============ ============
</TABLE>
A summary of the activity in the allowance for other
real estate owned losses is as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Balance at beginning of year $ 161,000 $ 148,000
Provision charged to expense 13,000
Charge-offs (92,000)
--------- ---------
Balance at end of year $ 69,000 $ 161,000
========= =========
</TABLE>
8. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Major classes of accrued interest receivable and other
assets at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Accrued interest receivable $1,589,000 $1,200,000
Prepaid expenses 260,000 403,000
Deferred debt issuance costs 290,000 365,000
Deferred tax assets 555,000 535,000
Other 244,000 379,000
---------- ----------
Balance at end of year $2,938,000 $2,882,000
========== ==========
</TABLE>
Other expenses in the consolidated statements of income
include amortization of the deferred debt issuance costs of
$47,000 in 1996 and $46,000 in 1995 related to the
convertible subordinated debentures. Deferred debt issuance
costs are being amortized on a straight-line basis over the
term of the debentures.
9. DEPOSITS
The aggregate amount of time certificates of deposit in
denominations of $100,000 or more was $20,881,000 and
$18,422,000 at December 31, 1996 and 1995. Interest expense
incurred on certificates of deposit of $100,000 or more
was approximately $1,049,000, $873,000, and $621,000, for the
years ended December 31, 1996, 1995 and 1994.
10. OTHER BORROWED FUNDS
Other borrowed funds at December 31, 1996 represent
amounts borrowed from the FHLB. Borrowings require monthly
interest payments with the principal payable at maturity.
Amounts consist of the following:
<TABLE>
<S> <C>
Borrowing from the FHLB, matures March 31, 2000, interest at 6.44% $ 750,000
Borrowing from the FHLB, matures April 30, 2002, interest at 6.92% 1,900,000
----------
Total $2,650,000
==========
</TABLE>
11. CONVERTIBLE SUBORDINATED DEBENTURES
During 1993, the Bank sold $4,025,000 of convertible
subordinated variable rate debentures due April 30, 2003,
with an initial and minimum interest rate of 8%. During
1996, as part of the plan of reorganization and merger of
the Company and the Bank, the convertible subordinated
debentures were assumed by the Company under the same terms
and provisions as previously entered into by the Bank.
Interest is payable, as to the six months beginning on any
interest rate payment date, on each April 1 and October 1
based on a variable rate of 1.5% over the average yield on
the 10-year U.S. Treasury bond (rounded down to the nearest
1/8%) for the month ending two months prior to the month of
the interest payment, subject to a ceiling of 10%. The
debentures are convertible, at any time prior to maturity,
into shares of the $.10 par value common stock of the
Company at a conversion prices of $12.75 per share (subject
to adjustment). During 1996, $307,000 (net of $28,000 in
debt issuance costs) of the debt was converted to 26,272
shares of common stock at $12.75 per share. The debentures
are currently redeemable at the Company's option, in whole
or from time to time in part, at rates of 108% and 104% of
principal value for the 12-month periods beginning April 1,
1996 and 1997 and at a rate of 100% of principal value
thereafter. The payment of principal and interest on the
debentures is subordinated in right of payment in full to
senior indebtedness of the Company which includes
obligations of the Company to its depositors and general
creditors.
12. INCOME TAXES
The provision for income taxes for the years ended
December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Currently payable:
Federal $ 529,000 $ 667,000 $ 158,000
State 257,000 249,000 213,000
--------- --------- ---------
Total 786,000 916,000 371,000
--------- --------- ---------
Deferred:
Federal 98,000 (259,000) 223,000
State 34,000 (9,000) (30,000)
--------- --------- ---------
Total 132,000 (268,000) 193,000
--------- --------- ---------
Provision for income taxes $ 918,000 $ 648,000 $ 564,000
========= ========= =========
</TABLE>
A reconciliation of the federal statutory tax rate to
the effective tax rate on income is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Federal statutory tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 7.7 7.4 7.6
Effect of tax exempt income (4.2) (10.5) (11.9)
Other (1.4) (0.3) 0.9
----- ----- -----
37.1% 31.6% 31.6%
===== ===== =====
</TABLE>
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the
amounts used for income tax reporting purposes. The
significant components of the Bank's net deferred tax asset
(included in other assets) at December 31, were as follows:
<TABLE>
<CAPTION>
1996 1995
1994
<S> <C> <C> <C>
Unrealized loss on available for sale securities $199,000 $ 47,000 $407,000
Provision for loan losses 349,000 429,000 409,000
Alternative minimum tax credit 79,000
State taxes 59,000 41,000 36,000
Depreciation 70,000 34,000 13,000
Deferred compensation 42,000 24,000 9,000
Mark to market adjustment (179,000) (78,000) (335,000)
Other 15,000 38,000 9,000
-------- --------- ---------
$555,000 $ 535,000 $627,000
======== ========= =========
</TABLE>
13. STOCK BASED COMPENSATION
During 1996, as part of the plan of reorganization and
merger of the Company and the Bank, the two stock option
plans of the Bank were assumed by the Company under the same
terms and provisions as previously adopted by the Bank.
Under the plans, options are exercisable at prices equal to
the fair market value at the date of the grant. The Company
has reserved 200,000 shares of common stock for the 1993
stock option plan. No additional grants may be made under
the 1990 plan, however, options for 55,271 shares remain
outstanding. Options become exercisable in approximately
one-third increments during each year subsequent to the date
of grant. Options held by executives and directors must be
fully exercised by the end of the tenth year, while all
remaining options must be exercised by the end of the fifth
year. A summary of stock options follows:
<TABLE>
<CAPTION>
Weighted
Average
Options Exercise Price
<S> <C> <C>
Outstanding, January 1, 1994 126,608 $ 9.55
Granted 19,000 11.49
Exercised (4,503) 9.16
Expired or cancelled (738) 8.89
-------
Outstanding, December 31, 1994 140,367 10.17
Granted 3,500 14.50
Exercised (10,686) 10.65
Expired or canceled (333) 10.45
-------
Outstanding, December 31, 1995 132,848 10.49
Granted 4,000 14.81
Exercised (2,094) 6.53
Expired or canceled (500) 16.00
-------
Outstanding December 31, 1996 134,254 10.67
=======
</TABLE>
Information about stock options outstanding at December 31,
1996 is summarized as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Average Exercise Exercise
Range of Remaining Price of Price of
Exercises Options Contractual Options Options Options
Prices Outstanding Life (Years) Outstanding Exercisable Exercisable
<S> <C> <C> <C> <C> <C>
$8.88-$9.50 29,270 3.25 $ 8.99 29,270 $ 8.99
$10.45-$11.50 95,984 5.67 $10.82 95,984 $10.82
$13.75-$16.00 9,000 7.00 $14.47 4,500 $14.58
</TABLE>
As discussed in Note 1, the Company continues to account
for its stock-based awards using the intrinsic value method
in accordance with APB No. 25, Accounting for Stock Issued
to Employees and its related interpretations. Accordingly,
no compensation expense has been recognized in the financial
statements for employee stock arrangements. The fair values
of the grants and disclosures of pro-forma net income and
earnings per share had the Company adopted the fair value
method for grants made in 1995 and 1996 are not presented as
the differences are not material.
Dividends subsequent to year-end - On January 21, 1997,
the Board of Directors declared a $.15 per share cash
dividend payable February 18, 1997 to shareholders of
record on February 4, 1997.
14. PROFIT SHARING PLAN
The Company has a profit sharing plan (Plan) for the
employees of the Company under which annual contributions
are at the discretion of the Board of Directors.
Substantially all of the Company's employees are
participants in the Plan. The total contribution made to
the Plan by the Company in 1996, 1995 and 1994 was
approximately $132,000, $117,000, and $113,000.
15. SALARY CONTINUATION PLAN
The Company has a Salary Continuation Plan covering
certain of its senior officers. Under this plan, the
officers or their beneficiaries will receive monthly
payments after retirement or if earlier, death. The Company
has accrued $41,000, $32,000 and $20,000 as compensation
expense in 1996, 1995 and 1994, respectively, under this
plan. To protect the Company in the event of death prior to
retirement, the Company has secured life insurance on the
lives of the covered officers.
16. COMMITMENTS AND CONTINGENCIES
Branch facilities and certain equipment are rented under
long-term operating leases which provide for future minimum
rental payments as follows:
<TABLE>
<CAPTION>
Year Ended December 31 Amount
<S> <C>
1997 $ 557,000
1998 517,000
1999 490,000
2000 467,000
2001 476,000
Thereafter 2,279,000
------------
$ 4,786,000
============
</TABLE>
Renewal privileges exist on certain leases. Total rent
expense amounted to $536,000, $534,000, and $481,000, for
the years ended December 31, 1996, 1995, and 1994.
The Company is involved in a number of legal actions
arising from normal business activities. Management, upon
the advice of legal counsel, believes that the ultimate
resolution of these actions will not have a material adverse
effect on the financial statements.
The Company was contingently liable under letters of credit
issued on behalf of its customers in the amount of $649,000
and $407,000 at December 31, 1996 and 1995. Commercial and
consumer lines of credit, and real estate loans of
approximately $14,370,000 and $15,044,000 were undisbursed
at December 31, 1996 and 1995. These instruments involve,
to varying degrees, elements of credit and market risk in
excess of the amounts recognized in the balance sheet. The
contractual or notional amounts of these transactions
express the extent of the Company's involvement in these
instruments and do not necessarily represent the actual
amount subject to credit loss. However, at December 31,
1996 and 1995, no losses were anticipated as a result of
these commitments.
Loan commitments are typically contingent upon the
borrower meeting certain financial and other covenants.
Such commitments typically have fixed expiration dates and
require payment of a fee. As many of these commitments are
expected to expire without being drawn upon, the total
commitments do not necessarily represent future cash
requirements. The Company evaluates each potential borrower
and the necessary collateral on an individual basis.
Collateral varies, but may include real property, bank
deposits, debt securities, equity securities, or business
assets.
Standby letters of credit are conditional commitments
written by the Company to guarantee the performance of a
customer to a third party. These guarantees are issued
primarily relating to inventory purchases by the Company's
commercial and technology division customers, and such
guarantees are typically short-term. Credit risk is similar
to that involved in extending loan commitments to customers,
and the Company accordingly uses evaluation and collateral
requirements similar to those for loan commitments.
17. RELATED PARTY TRANSACTIONS
The Bank has made loans to directors and executive
officers and companies with which they are affiliated.
These loans were made on substantially the same terms,
including interest rates and collateral, as those prevailing
at the time for comparable transactions with unrelated
parties. A summary of the activity at December 31 is as
follows (renewals are not reflected as either new loans or
repayments):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Balance at beginning of year $ 3,376,000 $ 2,967,000
Borrowings 433,000 739,000
Principal repayments (399,000) (330,000)
----------- ------------
Balance at end of year $ 3,410,000 $ 3,376,000
=========== ============
</TABLE>
18. REGULATORY MATTERS
The Company and the Bank are subject to various
regulatory capital requirements administered by federal
banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and, possibly,
additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the
Company's consolidated financial statements. Under capital
adequacy guidelines, the Company and the Bank must meet
specific capital guidelines that involve quantitative
measures of the Company's and the Bank's assets, liabilities
and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's and the
Bank's capital amounts and the Bank's prompt correction
action classification are also subject to qualitative
judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to
ensure capital adequacy require the Company and the Bank to
maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined) and of
Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1996, that the
Company and the Bank meet all capital adequacy requirements
to which they are subject.
The most recent notifications from the Federal Deposit
Insurance Corporation for the Bank as of December 31, 1996
and 1995, categorized the Bank as well capitalized under the
regulatory framework for prompt correction action. To be
categorized as well capitalized the Bank must maintain
minimum Total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the table. There are no
conditions or events since that notification that management
believes have changed the Bank's category.
The Company and the Bank's actual capital amounts
and ratios are also presented, respectively, in
the following tables.
<TABLE>
<CAPTION>
Company: For Capital
Actual Adequacy Purposes
--------------------- --------------------
Minimum Minimum
Amount Ratio Amount Ratio
<S> <C> <C> <C> <C>
As of December 31, 1996:
Total capital
(to risk weighted assets) $17,895,000 13.55% $10,564,000 8.0%
Tier I capital
(to risk weighted assets) $13,104,000 9.92% $ 5,282,000 4.0%
Tier I capital
(to average assets) $13,104,000 7.04% $ 7,444,000 4.0%
</TABLE>
<TABLE>
<CAPTION>
Bank:
To Be
Categorized as Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ------------------- --------------------
Minimum Minimum Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total capital
(to risk weighted assets) $17,416,000 13.22% $10,540,000 8.0% $13,174,000 10.0%
Tier I capital
(to risk weighted assets) $12,647,000 9.60% $ 5,270,000 4.0% $7,905,000 6.0%
Tier I capital
(to average assets) $12,647,000 6.81% $ 7,407,000 4.0% $9,286,000 5.0%
As of December 31, 1995:
Total capital
(to risk weighted assets) $17,510,000 13.71% $10,214,000 8.0% $12,768,000 10.0%
Tier I capital
(to risk weighted assets) $12,327,000 9.65% $5,107,000 4.0% $7,661,000 6.0%
Tier I capital
(to average assets) $12,327,000 7.75% $6,362,000 4.0% $7,953,000 5.0%
</TABLE>
Under federal and California state banking laws,
dividends paid by the Bank to the Company in any calendar
year may not exceed certain limitations without the prior
written approval of the appropriate bank regulatory agency.
At December 31, 1996, the amount available for such
dividends without prior written approval was approximately
$2,510,000. Similar restrictions apply to the amounts and
terms of loans, advances and other transfers of funds from
the Bank to the Company.
A provision of the Federal Deposit Insurance Corporation
Improvement Act (FDICIA) has impacted the Bank's ability to
continue to engage in certain real estate development
activities. Beginning in December 1992, state banks and
their subsidiaries may not engage, as principal, in
activities not permissible to national banks and their
subsidiaries. Any bank engaged in such activities must
divest itself of these investments by December 1996, and was
required to file a divestiture plan with the FDIC by
February 5, 1993. Generally national banks may not engage
in real estate development, although they can own property
used or to be used, in part, as a banking facility. During
1993, the Bank moved its corporate offices to Pacific Plaza
East which is owned by Conpac. The Bank occupies
approximately 17% of the leasable office space. Since
ownership of banking premises is permissible for a national bank
subsidiary, a divestiture plan is not required for
Pacific Plaza East. The Bank, through Conpac, currently
plans to retain its ownership of Pacific Plaza East.
The Bank's divestiture plan, which was not objected to
by the FDIC, states that the Bank and Conpac plan to develop
and retain ownership of Pacific Plaza West.
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial
Instruments requires certain disclosures regarding the
estimated fair value of financial instruments for which it
is practicable to estimate. Although management uses its
best judgment in assessing fair value, there are inherent
weaknesses in any estimating technique that may be reflected
in the fair values disclosed. The fair value estimates are
made at a discrete point in time based on relevant market
data, information about the financial instruments, and other
factors. Estimates of fair value of instruments without
quoted market prices are subjective in nature and involve
various assumptions and estimates that are matters of
judgment. Changes in the assumptions used could
significantly affect these estimates. Fair value has not
been adjusted to reflect changes in market conditions
subsequent to December 31, 1996, therefore, estimates
presented herein are not necessarily indicative of amounts
which could be realized in a current transaction.
The following estimates and assumptions were used as of
December 31, 1996 and 1995 to estimate the fair value of
each class of financial instruments for which it is
practicable to estimate that value.
(a) Cash and Cash Equivalents - The carrying amount
represents a reasonable estimate of fair value.
(b) Securities - Available for sale securities are
carried at market based on quoted market prices, if
available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar
securities.
(c) Loans Receivable - Commercial loans, residential
mortgages, and construction loans, are segmented by fixed
and adjustable rate interest terms, by maturity, and by
performing and nonperforming categories.
The fair value of performing loans is estimated by
discounting contractual cash flows using the current
interest rates at which similar loans would be made to
borrowers with similar credit ratings and for the same
remaining maturities. Assumptions regarding credit risk,
cash flow, and discount rates are judgmentally determined
using available market information.
The fair value of nonperforming loans and loans
delinquent more than 30 days is estimated by discounting
estimated future cash flows using current interest rates
with an additional risk adjustment reflecting the individual
characteristics of the loans.
(d) Deposit Liabilities - Noninterest bearing and
interest bearing demand deposits and savings accounts are
payable on demand and are assumed to be at fair value. Time
deposits are based on the discounted value of contractual
cash flows. The discount rate is based on rates currently
offered for deposits of similar size and remaining
maturities.
(e) Other Borrowed Funds - The fair value of other
borrowed funds is estimated by discounting the contractual
cash flows using the current interest rate at which similar
borrowings for the same remaining maturities could be made.
(f) Convertible Subordinated Debentures - The
carrying amount represents a reasonable estimate of fair
value.
(g) Commitments to Fund Loans/Standby Letters of
Credit - The fair values of commitments are estimated using
the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. The
differences between the carrying value of commitments to
fund loans or stand by letters of credit and their fair
value is not significant and therefore not included in the
following table.
(h) Interest rate swaps - The fair value of the
interest rate swap is estimated by discounting the
contractual cash flows using the interest rates in effect at
year end over the remaining maturity.
The estimated fair values of the Company's financial
instruments as of December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 16,940,000 $ 16,940,000 $ 11,261,000 $ 11,261,000
Available for sale securities 52,569,000 52,569,000 29,780,000 29,780,000
Loans receivable 113,625,000 112,499,000 111,124,000 110,291,000
FINANCIAL LIABILITIES:
Deposits 170,343,000 170,271,000 142,234,000 142,129,000
Other borrowed funds 2,650,000 2,606,000
Convertible subordinated debentures 3,690,000 3,690,000 4,025,000 4,025,000
OFF BALANCE SHEET ITEMS:
Interest rate swap in a net payable
position with a notional amount
of $10,000,000 (68,000)
</TABLE>
19. CONDENSED FINANCIAL INFORMATION OF CALIFORNIA
COMMUNITY BANCSHARES CORPORATION
The condensed financial statements of California
Community Bancshares Corporation are presented below:
CALIFORNIA COMMUNITY BANCSHARES CORPORATION
<TABLE>
<CAPTION>
BALANCE SHEET
DECEMBER 31, 1996
<S> <C>
Assets:
Cash and cash equivalents $ 94,000
Investments in subsidiaries 12,913,000
Note receivable from Bank 3,669,000
Other assets 478,000
-----------
Total $17,154,000
===========
Liabilities and shareholders' equity:
Other liabilities $ 95,000
Convertible subordinated debentures 3,690,000
Shareholders' equity:
Common stock, no par value: authorized,
2,000,000 shares; outstanding, 994,519
as of December 31, 1996 11,135,000
Retained earnings 2,510,000
Unrealized loss on available for sale securities
(net of tax effect) (276,000)
-----------
Total $17,154,000
===========
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF INCOME
PERIOD FROM FEBRUARY 29, 1996 (DATE OF MERGER WITH BANK)
TO DECEMBER 31, 1996
<S> <C>
INCOME:
Dividends from subsidiary $ 710,000
Interest income on note receivable from Bank 251,000
-----------
Total income 961,000
EXPENSE:
Convertible subordinated debenture interest expense 254,000
Other 120,000
-----------
Total expense 374,000
Income before equity in undistributed income
of subsidiaries 587,000
Equity in undistributed income of subsidiaries 972,000
-----------
Net income $ 1,559,000
===========
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
PERIOD FROM FEBRUARY 29, 1996 (DATE OF MERGER WITH BANK)
TO DECEMBER 31, 1996
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,559,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of subsidiaries (972,000)
Effect of changes in:
Other assets (478,000)
Other liabilities 95,000
----------
Net cash provided by operating activities 204,000
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (442,000)
Increase in note receivable from Bank (3,669,000)
Assumption of convertible subordinated debentures 4,025,000
Other (24,000)
----------
Net cash used in financing activities (110,000)
----------
INCREASE IN CASH AND CASH EQUIVALENTS 94,000
CASH AND CASH EQUIVALENTS:
Beginning of year ----
----------
End of year $ 94,000
==========
ADDITIONAL INFORMATION:
Common stock issued on conversion of debentures net
of debenture offering costs of $28,000 in 1996 $ 307,000
==========
</TABLE>
******************************************************************************
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
CALIFORNIA COMMUNITY BANCSHARES CORPORATION
- --------------------------------------------
Registrant
By:/s/ Walter O. Sunderman
- ----------------------------------------
Walter O. Sunderman
President and Chief Executive Officer
(Principal Executive Officer)
By:/s/ Andrew S. Popovich
- ----------------------------------------
Andrew S. Popovich
Executive Vice President and Chief Administrative Officer
(Principal Financial and Accounting Officer)
Dated: March 18, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
NAME AND SIGNATURE: TITLE DATE
- ------------------------- -------- --------------
/s/ Dorce Daniel Director March 18, 1997
- -------------------------
DORCE DANIEL
/s/ William J. Hennig Director March 18, 1997
- -------------------------
WILLIAM J. HENNIG
/s/ Bernard E. Moore Director March 18, 1997
- -------------------------
BERNARD E. MOORE
/s/ Melvin M. Norman Director March 18, 1997
- -------------------------
MELVIN M. NORMAN
/s/ Stephen R. Schwimer Director March 18, 1997
- -------------------------
STEPHEN R. SCHWIMER
/s/ Donald E. Sheahan Director March 18, 1997
- -------------------------
DONALD E. SHEAHAN
/s/ Gary E. Stein Director March 18, 1997
- -------------------------
GARY E. STEIN
/s/ Walter O. Sunderman Director March 18, 1997
- -------------------------
WALTER O. SUNDERMAN
/s/ John C. Usnick Director March 18, 1997
- -------------------------
JOHN C. USNICK
*************************************************************************
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- -----------------------------------
Exhibits
to
FORM 10 - KSB
ANNUAL REPORT
UNDER
SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
- -----------------------------------
CALIFORNIA COMMUNITY BANCSHARES CORPORATION
*************************************************************************
EXHIBIT 10.21
TENANT: CONTINENTAL PACIFIC BANK LOAN NO.
-------------------------------- ---------------------
TENANT ESTOPPEL CERTIFICATE
---------------------------
November 14, 1996
- -----------------
L.J. Melody & Co., its successors and assigns
5847 San Felipe
Houston, TX 77057
Re: Suite H (the "PREMISES") in the property located at 2151 Salvio Street,
Concord, CA (the "PROPERTY")
Gentleman:
The undersigned, as tenant ("TENANT") under that certain lease of the
Premises with Salvio Pacheco Square Investors or its predecessor in title
("LANDLORD"), dated AUGUST 22, 1996 (the "LEASE"), understands that you are
about to make a loan to Landlord and receive as part of the security for such
loan a Mortgage or Deed of Trust encumbering Landlord's interest in the
Property and the rents and profits of the Lease (the "MORTGAGE") and that you
(and persons or entities to whom the Mortgage may subsequently be assigned)
are relying upon the representations and warranties contained herein in making
such loan. Accordingly, Tenant does hereby represent and warrant to you and
your successors and assigns as follows:
1. The copy of the Lease attached hereto as EXHIBIT A is a true, correct and
complete copy of the Lease including all amendments, supplements and
modifications thereto. The Lease is in full force and effect.
2. As of the date hereof, Tenant is occupying and paying rent on a current
basis for all of the Premises. The minimum monthly or base rent currently
being paid by Tenant is $3,582.50 per month. No rentals are accrued and unpaid
under the Lease. If applicable, percentage rent due under the Lease has been
paid through N/A, and the amount of percentage rent for the last period paid
was $N/A. Taxes, insurance, common area maintenance, and any other applicable
charges due under the Lease have been paid through AUGUST 22, 1996. No
prepayments of rental due under the Lease have been made. Further, no security
or deposits as security has been made under the Lease, except for the sum of
$3,582.50, in cash, which has been deposited by Tenant with landlord pursuant
to the terms of the Lease.
3. Tenant has accepted possession of the Premises, and all of Landlord's
obligations with respect thereto have been completed, including, but not
limited to, completion of construction thereof (and all other improvements
required under the Lease) in accordance with the Lease, and the payment by
Landlord of any contribution towards work to be performed by Tenant under the
Lease.
4. Tenant acknowledges that the initial term of the Lease commenced on
OCTOBER 11, 1996 and is scheduled to expire on OCTOBER 10, 1999. Tenant has no
option to renew or extend the lease term, except as set forth in the Lease.
Tenant has no option or right to purchase the Property or any part thereof.
5. No default or event that with the passage of time or notice would
constitute a default (a "DEFAULT") on the part of Tenant exists under the
Lease in the performance of the terms covenants and conditions of the Lease
required to be performed on the part of Tenant. No Default on the part of
Landlord exists under the Lease in the performance of the terms, covenants and
conditions of the Lease required to be performed on the part of Landlord.
6. Tenant has not assigned, sublet, transferred, hypothecated or otherwise
disposed of its interest in the Lease and/or the Premises, or any part
thereof.
7. There have been no promises or representations made to Tenant by Landlord
concerning the Lease or the Premises not contained in the Lease.
8. Neither the Lease nor any obligations of Tenant thereunder have been
guaranteed by any person or entity, except as follows (if none, so state):
- --------------------------------------------------------------------------.
9. Tenant has no defense as to its obligations under the Lease and asserts no
set off, claim or counterclaim against Landlord.
10. Tenant agrees to notify you by certified mail, return receipt requested,
with postage prepaid, of any Default on the part of Landlord under the lease,
and Tenant further agrees, that, notwithstanding any provisions of the Lease,
no cancellation or termination of the Lease and no abatement or reduction of
the rent payable thereunder shall be effective unless you have received notice
of the same and have failed within thirty (30) days after the time when you
shall have become entitled under the Mortgage to remedy the same, to commence
to cure such Default and thereafter diligently prosecute such cure to
completion, provided that such period may be extended, if you need to obtain
possession of the Property to cure such default, to allow you to obtain
possession of the Property provided you commence judicial or non-judicial
proceedings to obtain possession within such period and thereafter diligently
prosecute such efforts and cure to completion. It is understood that you shall
have the right, but not the obligation, to cure any Default on the part of
Landlord.
11. Tenant has received notice that the Lease and the rent and all other sums
due thereunder have been assigned or are to be assigned to you as security for
the aforesaid loan secured by the Mortgage. In the event that you (or any
person or entity to who the Mortgage may subsequently be assigned) notify
Tenant of a default under the Mortgage and demand that Tenant pay its rent and
all other sums due under the Lease to you (or such future lender), Tenant
shall honor such demand without inquiry and pay its rent and all other sums
due under the Lease directly to you (or such future lender) or as otherwise
required pursuant to such notice and shall not thereby incur any obligation or
liability to Landlord. Landlord has executed this Tenant Estoppel Certificate
to evidence its agreement with the foregoing.
12. (a) Tenant agrees and acknowledges that the Lease is subordinate to the
lien of your Mortgage, but that, at your election, the Lease may be made prior
to the lien of your Mortgage. In the event you succeed to the interests of
Landlord under the Lease, then, at your election (i) the undersigned shall be
bound to you under all of the terms, covenants and conditions of the Lease for
the remaining balance of the term of the Lease, with the same force and effect
as if you were the lessor under such Lease, and Tenant does hereby agree to
attorn to you as its lessor without requiring the execution of any further
instruments immediately upon you succeeding to the interest of Landlord under
the Lease; provided, however, that the undersigned agrees to execute and
deliver to you any instrument reasonably requested by you to evidence such
attornment; and (ii) subject to the observance and performances by Tenant of
all the terms, covenants and conditions of the Lease on the part of Tenant to
be observed and performed and subparagraph (b) below, you shall recognize the
leasehold estate of Tenant under all the terms and conditions of the Lease for
the remaining balance of the term with the same force and effect as if you
were the lessor under the Lease.
(b) Furthermore, Tenant agrees that if you shall succeed to the interest
of Landlord under the Lease, you, your successors and assigns shall not be:
liable for any prior act or omission of Landlord; subject to any claims,
offsets, credits or defenses which Tenant might have against any prior
landlord (including Landlord); or bound by any assignment (except as permitted
by the Lease), surrender, release, waiver, amendment or modification of the
Lease made without your prior written consent; or obligated to make any
payment to Tenant or liable for refund of all or any part of any security
deposit or other prepaid charge to Tenant held by Landlord for any purpose
unless you shall have come into exclusive possession of such deposit or
charge. In addition, if you shall succeed to the interest of Landlord under
the Lease, you shall have no obligation, nor incur any liability, beyond your
then equity interest, if any, in the Premises.
13. The agreements contained herein shall be binding upon and inure to the
benefit of the respective heirs, administrators, executors, legal
representatives, successors and assigns of you, Landlord and Tenant.
14. The undersigned is authorized to execute this Tenant Estoppel Certificate
on behalf of Tenant.
15. This Tenant Estoppel Certificate may be executed in any number of
separate counterparts, each of which shall be deemed an original, but all of
which, collectively and separately, shall constitute one and the same
instrument.
Very truly yours,
TENANT:
CONTINENTAL PACIFIC BANK
By: /s/ ANDREW S. POPOVICH
----------------------
Name: Andrew S. Popovich
Title: Executive Vice President
LANDLORD:
SALVIO PACHECO SQUARE INVESTORS
By: /s/ Lawrence Van Duyn
----------------------
Name: Lawrence Van Duyn
Title: President
******************************************************************************
EXHIBIT A
TO
TENANT ESTOPPEL CERTIFICATE
- ---------------------------
LEASE
- -----
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TABLE OF CONTENTS
1. SALIENT LEASE TERMS 1
2. PARTIES 2
3. DESCRIPTION 2
4. USES PROHIBITED 3
5. TERM 3
6. PRE-TERM POSSESSION 4
7. POSSESSION 4
8. MINIMUM RENTAL AND FINANCIAL ADJUSTMENT 4
9. PERCENTAGE RENTAL 6
10. PROMOTIONAL PROGRAM 7
11. OPERATING COVENANT 8
12. ACCORD AND SATISFACTION 8
13. LEASE DEPOSIT 8
14. TAXES ASSESSMENT 9
15. MAINTENANCE OF PREMISES 11
16. COMMON AREAS 11
17. ALTERATIONS 13
18. WASTE 14
19. COMPLIANCE WITH GOVERNMENTAL 14
20. LIABILITY AND PLATE GLASS INSURANCE 14
21. INDEMNIFICATION, WAIVER OF CLAIMS AND SUBROGATION 15
22. FIRE INSURANCE 16
23. LESSEE PROPERTY DAMAGE INSURANCE 16
24. INSURANCE POLICY REQUIREMENTS 16
25. ADVERTISEMENTS AND SIGNS 17
26. UTILITIES 17
27. ENTRY BY LESSOR 18
28. DESTRUCTION 18
29. CONDEMNATION 19
30. ASSIGNMENT AND SUBLETTING 20
31. COVENANT NOT TO COMPETE 23
32. ABANDONMENT 23
33. DEFAULT 23
34. REMEDIES UPON DEFAULT 24
35. FORFEITURE OF PROPERTY 26
36. SURRENDER OF LEASE 26
37. SUBORDINATION 26
38. EMPLOYEE PARKING 27
39. NOTICES 27
40. TRANSFER OF SECURITY 27
41. WAIVER 27
42. HOLDING OVER 27
43. LIMITATION ON LESSOR'S LIABILITY 27
44. LATE CHARGES 28
45. SUCCESSORS AND ASSIGNS 28
46. TIME 28
47. MARGINAL CAPTIONS 28
48. EFFECT OF LANDLORD'S CONVEYANCE 28
49. DEFAULT OF LESSOR 28
50. OFFSET STATEMENTS 28
51. ATTORNEY'S FEES 29
52. WAIVER OF CALIFORNIA CODE SECTIONS 29
53. LESSEE'S COVENANTS 29
54. NO PARTNERSHIP 31
55. BANKRUPTCY 31
56. MISCELLANEOUS 32
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This lease is dated for reference purposes only the 22nd day of August, 1996.
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SALIENT LEASE TERMS
General Location: Salvio St. bounded by Grant and Mt. Diablo Streets,
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Concord, California
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(Section 3.1)
1.2 Lessor: SALVIO PACHECO SQUARE INVESTORS
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c/o IRM Corporation
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P.O. Box 3000, Concord, CA 94522-3000
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Lessee: CONTINENTAL PACIFIC BANK
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2151 Salvio St., Corp.: 555 Mason St.,
Suite H Suite 280
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Concord, CA 94520 Vacaville, CA 95688
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(If more than one, then the obligations hereunder
shall be joint and several).(Sections 2, 39.1 & 39.3)
1.3 Approximately 2,866 square feet.(Section 3.2)
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1.4 Uses: Solely for Bank branch office
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(Section 4.1)
1.5 Term: (a) Thirty-six (36) months
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(b) Days After Delivery For Term Commencement: 10/11/96
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(Section 8.1)
1.6 Term: (a) Minimum rent: $3,582.50
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(b) Adjustment: $1.30/s.f.
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(Section 8.1)
(c) Adjustment dates: October 1, 1997
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(Section 8.2(a)
(d) Percentage rent: None
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(Section 9.1)
(e) Advance rent: $3,582.50
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(Section 13.1)
(f) Base Interest Cost: N/A
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(Section 8.4)
1.7 Security Deposit: $3,582.50 (See Addendum)
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(Section 13.1)
1.8 Promotional Program Expense: N/A
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(Section 10.1)
1.9 Initial Pro-rata Share 2.39 %
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1.10 Contents of this lease:
Pages 1 through 32
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Sections 1.1 through 56.5
Addenda (if any) Addendum A
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Exhibits: A - Legal description of shopping center
B - Site plant (subject to alteration) with
demised premises outlined
C - Construction exhibit - if any
D - Acknowledgment of Commencement
E - Rules and Regulations
F - Sign Criteria
G - Guaranty
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WITNESSETH
PARTIES
2. This lease is made between the Lessor and the Lessee described in Section
1.2 hereof.
DESCRIPTION
3.1 Lessor hereby leases to Lessee, and Lessee hires from Lessor, a portion
of those certain premises with appurtenances, situated as describe in Section
1.1 hereof and more particularly describe in Exhibit "A," attached hereto and
made a part hereof.
3.2 The portion leased herein is delineated on the plat attached hereto
marked Exhibit "B," which is made a part hereof by reference, consisting of
the approximate number of square feet as specified in Section 1.3 hereof. The
Exhibit "B" property is hereinafter referred to as the "Shopping Center" or
the "Shopping Complex." The portion leased to Lessee is hereinafter referred
to as the "demised premises," the "leased premises" or "the premises." The
exterior walls and exterior portions of the leased premises, the area beneath
said premises, and the area above said premises are not demised hereunder, and
the use thereof together with the right to install, maintain, use repair, and
replace pipes, ducts, conduits, wires, and structural elements leading through
the leased premises serving other parts of the Shopping Complex are hereby
reserved unto Lessor. Such reservation in no way affects maintenance
obligations imposed herein.
3.3 [SECTION DELETED]
3.4 (a) The parties agree that this Lease is subject to the effect of any
covenants, conditions, restriction, easements, mortgages or deeds of trust,
ground leases, rights of way, and any other matters or documents of record;
(b) The effect of any zoning laws of the city, county and state where
the complex is situated; and
(c) General and special taxes not delinquent.
Lessee agrees that:
(1) As to its leasehold estate it, and all persons in possession or
holding under it, will conform to and will not violate the terms of any
covenants, conditions or restrictions which may encumber the property now or
in the future (hereinafter the "restriction") or said matters of record; and
(2) This Lease is subordinate to the restrictions and any amendments or
modifications thereto; provided, however, that if the restrictions are not on
record as of the date hereof, then this lease shall automatically become
subordinate to the restrictions upon recordation thereof; and Lessee further
agrees to execute and return to Lessor within ten (10) days after written
demand therefor by Lessor, an agreement in recordable form subordinating this
Lease to said restrictions.
USES PROHIBITED
4.1 As an express and material consideration to the Lessor for entering into
this lease, the premises shall be used solely for the purposes specified in
Section 1.4 hereof and for no other purpose. Lessee shall not use, or permit
said premises, or any part thereof to be used, for any purpose or purposes
other than the purpose or purposes stated hereinabove.
4.2 Should any of the above uses of the premises, or any acts done in
conjunction therewith, increase the rate of insurance above that for the least
hazardous retail use in the Shopping Center in which said premises may be
located, said increased premium costs shall be borne exclusively by the
Lessee. The Lessee shall not engage in any activities or permit to be kept,
used or sold in or about the premises, any article which may be prohibited by
the standard form of fire insurance policies. Lessee shall, at its sole cost
and expense, comply with any and all requirements, pertaining to said
premises, of any insurance organization or company, necessary for the
maintenance of reasonable fire and public liability insurance covering said
building and appurtenances.
4.3 [SECTION DELETED]
TERM
5.1 The term of this lease shall commence the number of days specified in
Section 1.5(b) hereof after delivery of the premises to Lessee or when Lessee
opens for business, whichever is the first to occur, and, unless sooner
terminated as hereinafter provided, shall continue for the number of months
specified in Section 1.5(a) hereof, plus any partial month at the commencement
of the term. Lessor agrees to deliver possession of the premises to Lessee,
and Lessee agrees to accept the same from Lessor upon notice from Lessor to
Lessee that the portion of Lessor's work relating to the premises which is
scheduled for completion prior to the commencement of Lessee's work has been
substantially completed as specified in Exhibit "C" attached hereto and
incorporated herein by reference. If despite Lessor's best efforts, said
premises so improved shall not be delivered by the date specified in Section
1.5 (c) hereof, any remaining work shall be completed by the Lessor with
reasonable dispatch, but not later than ninety (90) days thereafter, provided
that said date shall be extended for a period equal to the time construction
has been delayed due to causes beyond the reasonable control of the Lessor,
including, without limitation, strikes, lockouts, or other labor disturbances,
governmental orders, regulations, or embargoes, shortages of materials,
inclement weather, fire, flood or other casualty. Lessor's liability hereunder
shall be restricted to abatement of rent for the period of any such delay. The
term shall also include the portion of a calendar month, if any, immediately
following commencement.
5.2 If the term of this lease has not commenced within eighteen (18) months
from the date of execution hereof, either party may cancel this lease at any
time thereafter, by written notice to the other prior to the commencement
date.
5.3 [SECTION DELETED]
5.4 After delivery of the premises to Lessee, Lessor shall executed a written
acknowledgment of the date of commencement in the form attached hereto as
Exhibit "D" and by this reference it shall be incorporated herein.
PRE-TERM POSSESSION
6.1 [SECTION DELETED]
6.2 [SECTION DELETED]
POSSESSION
7. If Lessor, for any reason whatsoever, cannot deliver possession of the said
premises to Lessee at the commencement of the said term, as hereinbefore
specified, this lease shall not be void or voidable, nor shall Lessor be
liable to Lessee for any loss or damage resulting therefrom; but in that event
there shall be an abatement of rent for the period between the commencement of
the said term and the time when Lessor can deliver possession.
MINIMUM RENTAL AND FINANCING ADJUSTMENT
8.1 The minimum rental during the term of said lease, all of which shall be
payable to Lessor at the address specified for notices herein (see Section1.2
hereof), or such other place as the Lessor shall designate in writing, shall
be as specified in Section 1.6(a) hereof as adjusted, if applicable, in
accordance with the terms of Section1.6(b) hereof.
8.2 (a) The minimum rental provided for herein shall be subject to increase
after each number of months following commencement hereof as specified in
Section 1.6(c) ("the adjustment date") as follows: The following paragraphs
thru 8.3 apply to option period only.
The base for computing the increase is the Consumer Price Index, all urban
consumers, all items, San Francisco/Oakland Bay Area, published by the United
States Department of Labor, Bureau of Labor Statistics, in which 1967 equals
one hundred (100) ("Index"), which is published for the last month prior to
the commencement of the term hereof (beginning index). If the Index published
nearest the adjustment date ("Extension Index"), has increased over the
beginning index, the minimum rental until the next rent adjustment date shall
be established by multiplying the minimum rent as specified in the first
Section of this article, by a fraction, of the numerator of which is the
extension index and the denominator of which is the beginning index. In no
event, however, shall the minimum rental established at the adjustment date be
less than the minimum rental established at the previous adjustment date or as
established in the first paragraph of this article, whichever last occurred.
On adjustment of the minimum rent as provided herein, the parties shall
immediately execute an amendment to the lease on request of either party
stating the new minimum rent.
(b) If the Index is changed so that the base year differs from that used
as of the month immediately preceding the month in which the term commences,
the Index shall be converted in accordance with the conversion factor
published by the United States Department of Labor, Bureau of Labor
Statistics. If the Index is discontinued or revised during the term, such
other government index or computation with which it is replaced shall be used
in order to obtain substantially the same result as would be obtained if the
Index has not been discontinued or revised.
8.3 All rentals shall be paid without deduction or offset, each month in
advance, on the first day of each calendar month during said term. If the
lease term commences on other than on the first day of a calendar month, the
rent for the first partial month shall be prorated accordingly.
8.4 (a-d) [SECTIONS DELETED]
8.5 [SECTION DELETED]
PERCENTAGE RENTAL
9.1 - 9.5 [SECTIONS DELETED]
PROMOTIONAL PROGRAM
10.1 - 10.2 [SECTIONS DELETED]
OPERATING COVENANT
11. [SECTION DELETED]
ACCORD AND SATISFACTION
12. No payment by Lessor or receipt by Lessor of a lesser amount of monthly
rent or any other sum due hereunder, shall be deemed to be other than on
account of the earliest due rent or payment, nor shall any endorsement or
statement on any check or any letter accompanying any such check or payment be
deemed an accord and satisfaction, and Lessor may accept such check or payment
without prejudice to Lessor's right to recover the balance of such rent or
payment or pursue any other remedy available in this lease, at law or in
equity. Lessor may accept any partial payment from Lessee without invalidation
of any contractual notice required to be given herein (to the extent such
contractual notice is required) and without invalidation of any notice given
or required to be given pursuant to applicable law.
LEASE DEPOSIT
13.1 Simultaneous with the execution of this lease, Lessee has deposited with
Lessor the sum specified in Section 1.6(e) hereof, which sum shall be
applicable to the first rent accruing under the terms of this lease.
13.2 Simultaneous with the execution of this Lease, lessee has deposited with
Lessor the sum specified in Section 1.7. This sum is designated as a "security
deposit" and shall remain the sole and separate property of the Lessor until
actual repaid to Lessee (or at Lessor's option the last assignee, if any, of
Lessee's interest hereunder), said sum not being earned by Lessee until all
conditions precedent for its payment to Lessee have been fulfilled. As this
sum both in equity and at law is Lessor's separate property, Lessor shall not
be required to (1) keep said deposit separate from his general accounts, or
(2) pay interest, or other increment for its use. If Lessee fails to pay rent
or other charges when due hereunder, or otherwise defaults with respect to any
provision of this lease, including and not limited to Lessee's obligation to
restore or clean the premises following vacation thereof, Lessee, at Lessor's
election, shall be deemed not to have earned the right to repayment of the
"security deposit" or those portions thereof, used or applied by Lessor for
the payment of any rent or other charges in default, or for the payment of any
other sum to which Lessor may become obligated by reason of Lessee's default,
or to compensate Lessor for any loss or damage which lessor may suffer
thereby. This security deposit is not to be characterized as rent until and
unless so applied in respect of a default.
13.3 If Lessor elects to use or apply all or any portion of the "security
deposit" as provided in Section 13.1, Lessee shall within ten (10) days after
written demand therefor pay Lessor cash, in an amount equal to that portion
of the "security deposit" used or applied by lessor, and Lessee's failure to
so do shall be a material breach of this lease. The ten (10) day notice
specified in the preceding sentence shall insofar as not prohibited by law,
constitute full satisfaction of notice of default provisions required by law
or ordinance.
13.4 If, on termination of this lease, the Lessee is not in default of any of
its obligations hereunder, the remaining security deposit held by the Lessor
shall be returned forthwith to the Lessee.
TAXES AND ASSESSMENTS
14.1 Lessee shall be liable for all taxes levied against personal property,
trade fixtures and other property, trade fixtures and other property placed by
Lessee in or on or about the demised premises including without prejudice to
the generality of the foregoing, shelves, counters, vaults, vault doors, wall
safes, partitions, fixtures, machinery, plant equipment and other articles and
if any such taxes on Lessee's personal property, trade fixtures or property
placed in the demised premises by Lessee are levied against Lessor or Lessor's
property and if Lessor pays the same (which Lessor shall have the right to do
regardless of the validity of such levy), or if the assessed value of Lessor's
property is increased by the inclusion of the value placed in such property or
trade fixtures of Lessee or placed in the demised premises by lessee and if
lessor pays the taxes based on such increased assessment (which Lessor shall
have the right to do, regardless of the validity thereof), Lessee, upon demand
shall, as the case may be, pay to the Lessor the taxes so levied against
Lessor or the proportion of such taxes resulting from such increase in the
assessments.
14.2 Lessee shall pay, as additional rent, all taxes and assessments levied
or assessed against the land and buildings of which the demised premises form
a part, including the common areas, as well as the improvements and the
buildings and improvements on said land, prorated on the basis that the number
of square feet occupied by Lessee in the said building or Shopping Center
bears to the gross leaseable area in the entire building or Shopping Center
which is included in the tax bill.
14.3 If any general or special assessment is levied and assessed against the
premises, Lessor may elect to either pay the assessment in full or allow the
assessment to go to bond. If Lessor pays the assessment in full, Lessee shall
pay to Lessor each time a payment of real property taxes is made, a sum equal
to that which would have been payable (as both principal and interest), had
Lessor allowed the assessment to go to bond.
14.4 The term "taxes" and "assessments" as used herein shall include all real
property taxes on the building, the land on which the building is situated,
and the various estates in the building the land, as well as all personal
property taxes levied on the property used in the operation of the building,
land, or personal property, whether or not now customary or within the
contemplation of the parties to this lease. "Taxes" also shall include the
cost to Lessor of contesting the amount, validity, or applicability of any
taxes mentioned in this section. Further included in the definition of taxes
herein shall be general and special assessments, license fees, commercial
rental tax, levy, penalty or tax (other that inheritance or estate taxes)
imposed by any authority having the direct or indirect power to tax, as
against any legal or equitable interest of the Lessor in the leased premises
or in the real property of which the leased premises are a part, as against
the Lessor's right to rent or other income therefrom, or as against the
Lessor's business of leasing the leased premises, any tax, fee, or charge with
respect to the possession, leasing, transfer of interest, operation,
management, maintenance, alteration, repair, use, or occupancy by Lessee, of
the premises or any portion thereof or the complex, or any tax imposed in
substitution, partially or totally, for any tax previously included within
the definition of taxes herein, or any additional tax, the nature of which may
or may not have been previously included within the definition of taxes. The
term "real property taxes" or "taxes" shall not include any tax which may be
levied upon or against the general income or profits of the Lessor or its
successors or assigns.
14.5 If Lessee shall in good faith desire to contest the validity or amount
of any tax, assessments, levy or other governmental charge herein agreed to be
paid by Lessee, Lessee shall be permitted to do so, upon giving twenty (20)
days' written notice thereof prior to the commencement of any such contest and
indemnifying the Lessor against any governmental charge, penalty, costs,
liability or damage arising out of any such contest. At all events, the Lessee
must make prompt payment prior to delinquency of any such tax or charge,
irrespective of the contest, and seek a rebate thereof in event such contest
is successful.
14.6 Any and all rebates on account of any such taxes, rates, levies,
charges or assessments required to be paid and paid by Lessee under the
provisions of this lease shall belong to Lessee, and Lessor will, upon request
of Lessee, execute any receipts, assignments or other acquaintances that may
be necessary in the premises in order to secure the recovery of any such
rebates, and will pay over to Lessee, its proportionate share of any such
rebates that may be received by Lessor.
14.7 It is the intention that the rental received by the Lessor be net of any
taxes of any sort to be paid by the Lessor, subject to the exclusion stated in
Section 14.4. In the event it shall not be lawful for the Lessee to reimburse
lessor for any of the taxes covered by this Article, the minimum rent payable
to Lessor under the terms of this Lease shall be increased by the amount of
the portion allocable to Lessee so as to net to Lessor the amount which would
have been receivable by Lessor if such tax had not been imposed.
MAINTENANCE OF PREMISES
15. Lessee shall, at its sole cost, keep and maintain each and every portion
of the premises and appurtenances (excepting structural aspects of the
exterior walls and structural aspects of roof which Lessor agrees to repair),
including glazing, repair and replacement of the heating, ventilation and air
conditioning system installed to serve the premises, any store front and the
interior of the premises, in clean, good and sanitary order, condition and
repair, hereby waiving all right to make repairs or replacements at the
expense of Lessor. Lessee shall also keep the walkways in front of the
premises free from any debris, papers or dirt. As of commencement of the term
hereof, Lessee accepts the premises as being in good and sanitary order,
condition and repair, and agrees on the last day of said term, or sooner
termination of this lease, to surrender unto Lessor said premises and
appurtenances in good condition and repair, reasonable use and wear thereof
and damage by fire excepted, and to remove all of the Lessee's signs from said
premises, and to repair any damage caused by such removal. In the case of
equipment installed by the Lesso4 for the Lessee, or installed by the Lessee
and being the property of the Lessor, such as heating, ventilating and air
conditioning equipment, Lessee shall maintain a service contract for the
regular maintenance with a service company acceptable to the Lessor, at
Lessee's expense. [LAST LINE DELETED]
COMMON AREAS
16.1 Common areas herein referred to means all areas and facilities outside
the demised premises and within the exterior boundaries of the Shopping Center
of which the demised premises form a part, that are provided and designated by
the Lessor from time to time for the general use and convenience of the Lessee
and of other lessees of the Lessor having the common use of such areas, and
their respective authorized representatives and invitees. Common areas
include, without limitation, upper levels, walkways, restrooms, elevators,
pedestrian entrances, landscaping, sidewalks, landscaped areas, courtyards,
hallways, parking areas and facilities, all as shown on Exhibit "B" attached
hereto. Exhibit "B" is tentative and Lessor reserves the right to make
alterations thereto from time to time as described in the following sections.
16.2 Lessor shall, in Lessor's sole discretion, maintain the common areas,
establish and enforce reasonable rules and regulations concerning such areas,
close any of the common areas to whatever extent required in the opinion of
Lessor's counsel to prevent a dedication of any of the common areas or the
accrual of any rights of any person or of the public to the common areas,
close temporarily any of the common areas for maintenance purposes, and make
changes to the common areas including, without limitation, changes in the
location of driveways, entrances, exits, vehicular parking spaces, parking
area, the designation of areas for the exclusive use of others, the direction
of the flow of traffic or construction of additional buildings thereupon,
without any restriction whatsoever. The initial Rules and Regulations
concerning the Shopping Complex are attached hereto as Exhibit "E." Lessor
reserves the right to make additional reasonable rules affecting the Shopping
Complex throughout the term hereof.
16.3 Lessee shall pay to Lessor, as additional rent, its proportionate share
of common area costs within ten (10) days of receiving a bill therefor from
the Lessor, which shall be no more frequently than monthly. Except as
otherwise provided herein, Lessee's proportionate share of common area costs
shall be that fraction of the total common area costs that the total number of
square feet in the premises bears to the gross leasable area in the buildings
having the use of the common areas. Lessor may bill the Lessee estimated
charges for common area costs provided that such costs are adjusted annually
to reflect the actual costs incurred in the previous year. Upon completion of
the actual costs, the party owing the sum of money needed to adjust the
Lessee's contribution to actual figures shall remit to the other the balancing
sum within ten (10) days of receiving a statement therefor from the Lessor, if
the Lessee's estimated payments have been insufficient, or within sixty (60)
days following the close of the calendar year, if Lessee has paid in excess of
its share.
16.4 "Common area costs," means all sums expended by the Lessor for the
supervision, maintenance, repair, replacement and operation (including
security services) of the common areas, and insurance, plus an allowance of
fifteen percent (15%) of such costs to the Lessor for administrative fee.
Costs for maintenance and operation of the common area shall include without
limitation, costs of resurfacing, repainting and restriping, painting
(including exterior building painting), sweeping and other janitorial and
security services, maintenance of restrooms, elevators, walkways, pedestrian
entrances, repairs and replacements (including repairs and replacement of
structural aspects of the Shopping Complex), policing, purchase, construction
and maintenance of refuse receptacles, planting and landscaping, directories,
signs and other markers, lighting and other utilities, the cost of Christmas
decorations [REMAINDER OF SENTENCE DELETED]. Without in any way limiting the
generality of the foregoing, in which the parties intend to express their
agreement that all common area costs shall be borne by the tenants in pro rata
amounts, specific reference is made to the inclusion in such costs of any
capital improvements made by the Lessor to the Shopping Complex for the
purpose of reducing other operating expenses or utility costs, or that are
required by governmental law, ordinance, regulation or mandate, not applicable
to the complex at the time of the original construction. The portion to be
included each year in common area costs shall be that fraction allocable to
the year in question calculated by amortizing over the reasonable useful life
of such improvement, as determined by the Lessor, with interest on the
unamortized balance at ten percent (10%) per annum or such higher rate as may
have been paid by Lessor for funds borrowed for the purpose of constructing
such improvements, but in no event to exceed the highest rate permissible by
law.
Notwithstanding the above, (1) the following costs shall be excluded from the
above definition of common area costs, to wit: costs directly related to (a)
the maintenance and repair of the elevators and (b) the maintenance and repair
of hallways and bathrooms located on the second and third floor of the
shopping complex; (2) Lessee's responsibility for the following costs shall be
based upon use, as estimated by Lessor, to wit: (a) scavenger, (b) domestic
water; and (3) Lessee's responsibility for costs relating to the repair and
maintenance of the heating, ventilating and air conditioning system serving
that portion of the complex being used for retail purposes shall be determined
by multiplying the repair and maintenance costs by a fraction the numerator of
which is the gross square feet of the leased premises, and the denominator of
which is the gross leasable square footage of that portion of the premises
being used for retail purposes.
ALTERATIONS
17.1 Lessee shall not make, or suffer to be made, any alterations to the
demised premises, or any part thereof, without the written consent of the
Lessor first had and obtained. Any additions to, or alterations of, the leased
premises, except trade fixtures, shall become at once a part of the realty and
belong to Lessor. Except as otherwise provided in this lease, Lessee shall
have the right to remove its trade fixtures placed upon the leased premises
provided that Lessee restores the leased premises as indicated below.
17.2 Any alterations, additions or installations performed by the Lessee
(hereinafter collectively "alterations") shall be subject to strict conformity
with the following requirements:
(a) All alterations shall be at the sole cost and expense of the Lessee;
(b) Prior to commencement of work of alteration, Lessee shall submit
detailed plans and specifications, including working drawings (hereinafter
referred to as "Plans"), of the proposed alterations, which shall be subject
to the consent of the Lessor in accordance with the terms of paragraph 17.1
above;
(c) Following approval of the plans by the Lessor, Lessee shall give
Lessor at least ten (10) days prior written notice of commencement of work in
the leased premises so that Lessor may post notices of nonresponsibility in or
upon the leased premises as provided by law;
(d) No alterations shall be commenced without the Lessee having
previously obtained all appropriate permits and approvals required by and of
governmental agencies;
(e) All alterations shall be performed in a skillful and workmanlike
manner, consistent with the best practices and standards of the construction
industry, and pursued with diligence in accordance with the plans previously
approved by the Lessor and in full accord with all applicable laws and
ordinances. All material, equipment, and articles incorporated in the
alterations is to be new, and of recent manufacture, and of the most suitable
grade for the purpose intended;
(f) Lessee must obtain the prior written approval from Lessor for
Lessee's contract prior to commencement of the work. Lessee's contractor shall
maintain all of the insurance reasonable required by Lessor, including
comprehensive general liability, workers' compensation, as well as builder's
risk insurance and course of construction insurance;
(g) As a condition of approval of the alterations, Lessor may require a
Certificate of Deposit drawn on Continental Pacific Bank, payable to Lessor,
in a sum equal to the cost of the alterations guarantying the completion of
the alterations free and clear of all liens and other charges in accordance
with the plans. Such a bond shall name the Lessor as beneficiary;
(h) The alterations must be performed in a manner such that it will not
interfere with the quiet enjoyment of the other lessees in the Shopping
Complex.
17.3 The Lessee shall keep the demised premises and the Shopping Complex in
which the demised premises are situated, free from any liens arising out of
any work performed, materials furnished or obligations incurred by the Lessee.
In the event a mechanic's or other lien is filed against the leased premises
or the Shopping Complex of which the leased premises forms a part as a result
of a claim arising through the Lessee, the Lessor may demand that the Lessee
furnish to the Lessor a surety bond satisfactory to the Lessor in an amount
equal to at least one hundred fifty percent (150%) of the amount of the
contested lien claim or demand, indemnifying Lessor against liability for the
same and holding the leased premises free from the effect of such line or
claim. Such bond must be posted within ten (10) days following notice from
lessor. In addition, Lessor may require Lessee to pay Lessor's attorney's fees
and costs in participating in such action if Lessor shall decide it is to its
best interest to do so. The Lessor may pay the claim prior to the enforcement
thereof, in which event the Lessee shall reimburse the Lessor in full,
including attorney's fees, for any such expense, as additional rent, with the
next due rental.
17.4 Lessee shall ascertain from Lessor at least thirty (30) days prior to
the termination of this lease, whether Lessor desires the leased premises, or
any part thereof, restored to its condition prior to the making of permitted
alterations, installations and improvements, and if Lessor shall so desire,
then Lessee shall forthwith restore said lease premises or the designated part
of it as the case may be to its original condition, entirely at its own
expense, excepting normal wear and tear.
WASTE
18. Lessee shall not commit, or suffer to be committed, any waste upon the
leased premises, or any nuisance, or other act or thing which may disturb the
quiet enjoyment of any other tenant or occupant of the complex in which the
leased premises are located.
COMPLIANCE WITH GOVERNMENTAL REGULATIONS
19. Lessee, shall, at its sole cost and expense, comply with all of the
requirements of all municipal, state and federal authorities now in force, or
which may hereafter be in force, pertaining to the premises, and shall
faithfully observe in the use of the premises all municipal ordinances and
state and federal statutes now in force or which may hereafter be in force.
The judgment of any Court of competent jurisdiction, or the admission of
Lessee in any action of proceeding against Lessee, whether Lessor be a party
thereto or not, that any such ordinance or statute pertaining to the premises
has been violated, shall be conclusive of that fact as between Lessor and
Lessee.
LIABILITY AND PLATE GLASS INSURANCE
20. Lessee agrees to provide and keep in force for the benefit of the Lessor
and Lessee, at Lessee's own cost and expense at all times during the term
hereof, a liability insurance policy or endorsement on a blanket liability
insurance policy insuring Lessor and Lessee against any and all damages and
liability on account of or arising out of injuries to or the death of any
person in or about the demised premises in a minimum amount of ONE MILLION
DOLLARS ($1,000,000.00), for bodily and personal injuries and for damage to
property [NEXT SENTENCE DELETED]. Said policies or endorsements shall be
effected with insurance companies approved by Lessor, authorized to write
liability insurance in the State in which the shopping center is located, and
shall include coverage related to occupancy of premises, as well as
contractual liability, liquor liability, and products liability. Said policies
shall designate specifically that Lessor is an additional named insured
thereunder; such policies or certified copies thereof shall be delivered in
Lessor. Said policies shall require that notice be afforded to Lessor of any
cancellation, lapse, failure to renew or any material change in coverage at
least thirty (30) days prior to the effective date of any such events. In no
event shall any deductible for any of the policies described above exceed
$500.00.
INDEMNIFICATION, WAIVER OF CLAIMS AND SUBROGATION
21.1 This Article 21 is written and agreed to in respect of the intent of the
parties to assign the risk of loss whether resulting from negligence of the
parties or otherwise, to the party who is obligated hereunder to cover the
risk of such loss with insurance. Thus, the indemnity and waiver of claims
provisions of this Lease have as their object, so long as such object is not
in violation of public policy, the assignment of risk for a particular
casualty to the party carrying the insurance for such risk, without respect to
the causation thereof.
21.2 Lessor and Lessee release each other, and their respective authorized
representatives, from any claims for damage to any person or to the premises
and the building and other improvements in which the premises are located, and
to the fixtures, personal property, Lessee's improvements and alterations of
either Lessor or Lessee, in or on the premises and the building and other
improvements in which the premises are located, including loss of income, that
are caused by or result from risks insured against under any property
insurance policies carried by the parties and in force at the time of any such
damage.
21.3 Each party shall cause each insurance policy obtained by it to provide
that the insurance company waives all rights of recovery by way of subrogation
against either party in connection with any damage covered by any policy.
Neither party shall be liable to the other for any damage caused by fire or
any other risks insured against under any property insurance policy required
by this lease. If any such insurance policy cannot be obtained with a Waiver
of Subrogation clause or rider without payment of an additional premium charge
above that charged by the insurance companies issuing such policies without
Waiver of Subrogation, the Lessee shall pay such additional premium to the
insurance carrier requiring such additional premium.
21.4 Lessee, as a material part of the consideration to be rendered to
Lessor, shall indemnify and hold harmless the Lessor from any loss by reason
of injury to person or property, from whatever cause, all or in any way
connected with the condition or use of the leased premises, or the
improvements or personal property therein or thereon, including without
limitation any liability or injury to the person or property of the Lessee,
its agents, officers, employees or invitees. Lessee agrees to indemnify Lessor
and hold it harmless from any and all liability, loss, cost or obligation on
account of, or arising out of, any such injury or loss however occurring,
including breach of the provisions of this lease and the negligence of the
parties hereto.
21.5 In the event any action, suit or proceeding is brought against Lessor by
reason of any such occurrence, Lessee, upon Lessor's request will be at
Lessee's expense resist and defend such action, suit or proceeding, or cause
the same to be resisted and defended by counsel designated by the insurer
whose policy covers the occurrence or by counsel designated by Lessee and
approved by Lessor. The obligations of Lessee under this Section arising by
reason of any of occurrence taking place during the lease term shall survive
any termination of this lease.
21.6 Lessee, as a material part of the consideration to be rendered to
Lessor, hereby waives all claims against Lessor for damages to goods, wares,
merchandise and loss of business in, upon or about the leased premises and for
injury to Lessee, its agents, employees, invitees or third persons in or about
the leased premises from any cause arising at any time, including breach of
the provisions of this lease and the negligence of the parties hereto.
FIRE INSURANCE
21.1 Lessee, upon demand, shall pay to Lessor, as additional rent, its
proportionate share of the premium for fire, extended coverage and other
property insurance obtained by the Lessor on the premises and on the Shopping
Center or building of which the premises form a part, including the common
areas. Lessee's proportionate share shall be that fraction, the numerator of
which is the number of square feet in the Lessee's premises, and the
denominator of which is the total number of leaseable square feet in the
building of buildings covered by such policies of insurance.
22.2 Additionally, the Lessee shall, upon demand, pay to the Lessor any
increase in such insurance premium resulting to the overall cost on the
building or buildings covered by such policies because of any special
conditions relating to the Lessee's operations which require a higher premium.
Lessors insurance carrier or Lessor's insurance agent shall make the judgment
as to the sum of money so involved, which judgment shall be conclusive.
22.3 No such insurance above-described may have a deductible in excess of
$5,000.00.
- ----------
22.4 No use shall be made or permitted to be made on the leased premises, nor
acts done, which will increase the existing rate of insurance upon the
building in which the premises are located or upon any other building in the
complex or cause the cancellation of any insurance policy covering the
building, or any part thereof, nor shall Lessee sell, or permit to be kept,
used or sold, in or about the leased premises, of any insurance organization
or company, necessary for the maintenance of reasonable property damage and
public liability insurance, covering the leased premises, building and
appurtenances.
LESSEE PROPERTY DAMAGE INSURANCE
23. Lessee agrees at all times during the term of this lease, and at Lessee's
sole expense, to keep all trade fixtures, equipment and merchandise of Lessee,
or any subtenant of Lessee that may be in the premises from time to time,
insured against loss or damage by fire or the hazards commonly referred to
under the extended coverage endorsement, for an amount of ninety percent (90%
of full replacement value. The proceeds from any such insurance must be used
by the Lessee to restore or replace any such trade fixtures, equipment and
merchandise in the premises. No such insurance above described may have a
deductible in excess of $5,000.00.
---------
INSURANCE POLICY REQUIREMENTS
24.1 All insurance policies required to be carried by the Lessee hereunder
shall conform to the following requirements:
(a) The insuror in each case shall carry a designation in "Best's
Insurance Reports" as issued from time to time throughout the term as follows:
Policy holder's rating of A; financial rating of not less that X;
(b) The insuror shall be qualified to do business in the state in which
the premises are located;
(c) Each policy shall name the Lessor as an insured and, at Lessor's
request, shall carry a lender's loss payee endorsement in favor of Lessor's
lender;
(d) An executed copy of each insurance policy, or a certificate thereof,
shall be delivered to the Lessor at commencement of the term and shall remain
in effect throughout the term, including copies of any renewals or
certificates thereof, at lease thirty (30) days prior to the expiration of
such policies;
(e) These policies shall require that the Lessor be notified in writing
by the insuror at least thirty (30) days prior to any cancellation or
expiration of such policy, or any reduction in the amounts of insurance
carried;
(f) Each policy shall be primary, not contributing with, and not in
excess of coverage which the Lessor may carry;
(g) All liability insurance required to be carried by the Lessee
hereunder shall state that the Lessor is entitled to recovery for the
negligence of the Lessee even though Lessor is a named insured.
ADVERTISEMENTS AND SIGNS
25. Lessee shall not conduct or permit to be conducted any sale by auction on
said premises. Lessee shall not place or permit to be placed on the premises
any interior or exterior sign, advertisement, decoration, marquee or awning
that is visible from the exterior of the premises without the prior written
consent of Lessor which Lessor reserves the right to withhold in its sole
judgment. Lessee, upon request of Lessor, shall immediately remove any such
sign, advertisement, decoration, marquee or awning which, in the opinion of
Lessor, is objectionable or offensive, and if Lessee fails so to do, Lessor
may enter upon said premises and remove the same. Lessor has reserved the
exclusive right to the exterior sidewalls, rear wall and roof of said
premises, and Lessee shall not place or permit to be placed upon the said
sidewalls, rear wall or roof, any sign advertisement or notice without the
written consent of Lessor. At the termination of this lease, or any extension,
Lessee shall remove all his signs provided that any damage caused by removal
shall be repaired at lessee's expense All signs shall be maintained by lessee
at his own expense. Except for approved signs, Lessee shall not use any
advertising or promotional medium which may be heard or experienced outside of
the premises (such as searchlights, barkers or loudspeakers). Lessee shall not
distribute handbills or circulars to patrons of the Shopping Center or to cars
in the parking lots, nor engage in any similar form of direct advertising in
the Shopping Center. The initial sign criteria for the Shopping Complex (which
Lessor may change from time to time, in Lessor's sole discretion) are attached
hereto as Exhibit "F", and are incorporated herein by reference.
UTILITIES
26. Lessee, from the time it first enters the premises for the purpose of
setting fixtures, or from the commencement of this lease, whichever date shall
first occur, and throughout the term of this lease shall pay for all charges
(including, without limitation, connection fees) for water, gas, heat, sewer,
power, telephone services and any other utility supplied to or consumed in or
on the leased premises. Lessee shall not allow refuse, garbage, or trash to
accumulate outside of the demised premises. Lessor shall not be responsible or
liable for any interruption in utility services, nor shall such interruption
affect the continuation or validity of this lease. Lessor's allocation of any
utility charges emanating from a common meter shall be performed in good
faith, and shall be conclusive upon the Lessee. All payments to Lessor in
respect thereof shall be due within ten (10) days of billing.
ENTRY BY LESSOR
27. Lessee shall permit Lessor and Lessor's agents to enter into and upon
said premises at all reasonable times for the purpose of inspecting the same
or for the purpose of maintaining the building in which said premises are
situated, or for the purpose of making repairs, alterations or additions to
any other portion of said building, including the erection and maintenance of
such scaffolding, canopies, fences and props as may be required, or for the
purpose of posting notices of non-responsibility for alterations, additions or
repairs, or for the purpose of placing upon the property in which the said
premises are located any usual or ordinary "for sale" signs, without any
rebate of rent and without any liability to Lessee for any loss of occupation
or quiet enjoyment of the premises thereby occasioned and shall permit Lessor
and his agents, at any time within ninety (90) days prior to the expiration of
this lease, to place upon said premises any usual or ordinary "to let" or "to
lease" signs and exhibit the premises to prospective tenants at reasonable
hours. Lessee will give Lessor notice in writing five (5) days prior to
employing any laborer or contractor to perform work resulting in an alteration
of the leased premises so that Lessor may post a notice of non-responsibility.
This section in no way affects the maintenance obligations of the parties
hereto.
DESTRUCTION
28.1 In the event the premises suffers (a) an uninsured casualty or a (b)
casualty which cannot be repaired within one hundred twenty (120) days from
the date of destruction under the laws and regulations of state, federal,
county, municipal authorities or other authorities with jurisdiction, the
Lessor may terminate this lease as at the date of the damage upon written
notice to the Lessee following the casualty.
28.2 In the event of a casualty which may be repaired within one hundred
twenty (120) days from the date of the damage, or, in the alternative, in the
event the Lessor does not elect to terminate this lease under the terms of
Section 28.1 above, then this lease shall continue in full force and effect
and the Lessor shall forthwith undertake to make such repairs to reconstitute
the leased premises to as near the condition as existed prior to the casualty
as practicable. Such partial destruction shall in no way annul or void this
lease except that Lessee shall be entitled to a proportionate reduction of
rent following the casualty and until the time the leased premises are
restored (except if such casualty was caused by the negligence of the Lessee,
in which case there shall be no abatement of rent). Such reduction shall be in
the amount of that fraction of the minimum rent in which the numerator is the
portion of the premises unoccupied during any such reconstruction and the
denominator or which is the amount of square footage in the leased premises.
Lessor's repair obligations shall in no way include any construction
obligations originally hereunder imposed on the Lessee or subsequently
undertaken by Lessee, but shall include solely that property constructed by
Lessor prior to commencement of the term hereof.
28.3 Lessee hereby waives all statutory or common law rights of termination
in respect to any partial destruction or casualty which Lessor is obligated to
repair to may elect to repair under the terms of this Article. Further, in
event of a casualty occurring during the last two (2) years of the original
term hereof or of any extension, Lessor need not undertake any repairs and may
cancel this lease unless the Lessee has the right under the terms of this
lease to extend the term for an additional period and does so within thirty
(30) days of the date of the casualty.
28.4 In the event that the building in which the demised premises is situated
by destroyed to the extent of not less than thirty three and one-third percent
(33-1/3%) of the replacement cost thereof, Lessor may elect to terminate this
lease, whether the demised premises by injured or not, in the same manner as
in Section 28.1 above. At all events, a total destruction of the complex of
which the leased premises form a part, or the leased premises itself, shall
terminate this lease.
CONDEMNATION
29.1 (a) "Condemnation" means (i) the exercise of any governmental power,
whether by legal proceedings or otherwise, by a condemnor and/or (ii) a
voluntary sale or transfer by Lessor to any condemnor, either under threat of
condemnation or while legal proceedings for condemnation are pending.
(b) "Date of taking" means the date the condemnor has the right to
possession of the property being condemned.
(c) "Award" means all compensation, sums or anything of value awarded,
paid, or received on a total or partial condemnation.
(d) "Condemnor" means any public or quasi-public authority, or private
corporation or individual, having the power of condemnation
29.2 If the premises are totally taken by condemnation, this lease shall
terminate on the date of taking.
29.3 (a) If any portion of the leased premises is taken by condemnation, this
lease shall remain in effect, except that Lessee can elect to terminate this
lease if fifty percent (50%) or more of the total number of square feet in the
leased premises is taken.
(b) If the common areas of the complex of which the leased premises form
a part is taken by condemnation, this lease shall remain in full force and
effect, except that if thirty percent (30%) or more of the common area is
taken by condemnation, either party shall have the election to terminate this
lease pursuant to this section.
(c) If fifty percent (50%) or more of the building in which the leased
premises are located is taken, the Lessor shall have the election to terminate
this lease in the manner prescribed herein.
29.4 (a) If either party elects to terminate this lease under the provisions
of Section 29.3, it must terminate by giving notice to the other party within
thirty (30) days after the nature and extent of the taking have been finally
determined. The party terminating this lease also shall notify the other party
of the date of termination, which date shall not be earlier than sixty (60)
days or later than ninety (90) days after the terminating party has notified
the other party of its election to terminate; except that this lease shall
terminate on the date of taking if the date of taking falls on a date before
the date of termination designated in the notice from the terminating party.
If this lease is not terminated within the thirty (30) day period, it shall
continue in full force and effect except that minimum rent shall be reduced by
subtracting therefrom an amount calculated by multiplying the minimum rent by
a fraction the numerator of which is the number of square feet taken from the
leased premises and the denominator of which is the number of square feet in
the leased premises prior to the taking.
(b) If there is a partial taking of the leased premises and this lease
remains in full force and effect pursuant to his Article, Lessor, at its cost,
shall accomplish all necessary restoration so that the leased premises is
returned as near as practical to its condition immediately prior to the date
of the taking, but in no event shall Lessor be obligated to expend more for
such restoration than the extent of funds actually paid to Lessor by the
condemnor.
29.5 Any award arising from the condemnation or the settlement thereof shall
belong to and be paid to the Lessor except that the Lessee shall receive from
the award the following, if specified in the award by the condemning
authority, so long as it does not reduce the Lessor's award in respect of the
real property: Lessee's trade fixtures, personal property, goodwill, loss of
business and relocation expenses. At all events the Lessor shall be solely
entitled to all award in respect of the real property including the bonus
value of the leasehold. The Lessee shall not be entitled to any award until
the Lessor has received the above sum in full.
ASSIGNMENT AND SUBLETTING
30.1 Lessee shall not assign this lease, or any interest therein, and shall
not sublet the said premises or any part thereof, or any right or privilege
appurtenant thereto, or suffer any other person (the agents and servants of
Lessee excepted) to occupy or use the said premises, or any portion thereof,
without the written consent of Lessor first had and obtained, and a consent to
one assignment, subletting, occupation or use by any other person, shall not
be deemed to be a consent to any subsequent assignment, subletting occupation
or use by another person. Any such assignment or subletting without such
consent shall be void at the option of the Lessor, and shall, at the option of
Lessor, terminate this lease. This lease shall not, nor shall any interest
therein, be assignable, as to the interest of Lessee, by operation of law,
without the written consent of Lessor. This Lease is assumable by the FDIC
without consent.
30.2 The consent of the Lessor required under Section 30.1 above, may not be
unreasonably withheld, provided, should Lessor withhold its consent for any of
the following reasons, which list is not exclusive, such withholding shall be
deemed to be reasonable:
(a) A conflict with other uses in the Shopping Center of which the
premises form a part;
(b) Incompatibility of the proposed use with others within the Shopping
Center of which the premises form a part;
(c) Financial inadequacy of the proposed sublessee or assignee;
(d) A proposed use or user which would cause a diminution in the
reputation of the Shopping Center or the other businesses located therein;
(e) Wherein the percentage rent clause herein is not suitable for the
proposed new assignee or sublessee in that their volume could reasonably be
expected to be less than that of the Lessee hereunder;
(f) A proposed user whose impact on the common facilities or the other
tenants in the Shopping Center would be disadvantageous.
In any event, should the Lessor decline to give its consent, and does so
without stating a reasonable cause, this lease shall terminate thirty (30)
days following written notice from Lessor to Lessee of its election to
withhold consent without justifiable reason therefor. At that time, all
obligations of both parties hereunder thereafter accruing shall terminate. The
purpose of this paragraph is to permit Lessor, at its option, to terminate
this lease, and relieve Lessee of continuing liability, in event of a proposed
assignment or subletting.
30.3 Notwithstanding the foregoing, the following conditions shall apply to
any proposed assignment or sublease hereunder:
(a) Each and every covenant, condition, or obligation imposed upon
Lessee by this lease and each and every right, remedy, or benefit afforded
Lessor by this lease shall not be impaired or diminished as a result of such
assignment or sublease;
(b) Any sums of money, or other economic consideration received by
Lessee as a result of such subletting, including bonuses, key money, or the
like (except rental or other payments received which are attributable to the
amortization for the cost of leasehold improvements performed at the expense
of the Lessee herein) which exceed, in the aggregate, the total sums which
Lessee is obligated to pay lessor under this lease, or the prorated portion
thereof if the premises subleased is less than the entire premises, shall be
payable to Lessor as additional rental under this lease without affecting or
reducing any other obligation of the Lessee hereunder.
(c) If Lessee is a corporation which is not deemed a public corporation,
or is an unincorporated association or partnership, the transfer, assignment
or hypothecation of any stock or interest in such corporation, associate or
partnership in the aggregate in excess of twenty-five percent (25%) shall be
deemed an assignment within this Article 30;
(d) Lessee shall reimburse Lessor as additional rents for Lessor's
reasonable costs and attorney's fees incurred in conjunction with the
processing and documentation of any such requested assignment, subletting,
transfer, change of ownership or hypothecation of this lease or Lessee's
interest in and to the premises;
(e) Lessor may condition the approval of any assignment or subletting as
specified herein upon an increase in the minimum guaranteed rental payable by
Lessee or Lessee's successor in interest;
(f) No subletting or assignment, even with the consent of Lessor, shall
relieve Lessee of its obligation to pay the rent and to perform all other
obligations to be performed by Lessee hereunder. The acceptance of rent by
Lessor from any person shall not be deemed to be a waiver by Lessor of any
provision of this lease or to be a consent to any assignment or subletting.
30.4 Notwithstanding anything to the contrary contained herein, at Lessor's
election:
(a) In the event that at any time or from time to tome during the term
of this lease, Lessee desires to assign or sublet all or part of the demised
premises, Lessee shall notify the Lessor in writing (hereinafter referred to
as "Transfer Notice") of the terms of the proposed assignment or subletting,
the proposed transferee and the area so proposed to be assigned or sublet and
shall give the Lessor the right to accept an assignment or to sublet from
Lessee such space (hereinafter referred to as "Transferred Space") on the same
terms as those contained in this lease, including the rent which Lessee is
then paying for such space, calculated on the basis of the total minimum rent
hereunder divided by the total square footage in the entire premises
multiplied by the number of square feet to be assigned or sublet. Such option
shall be exercisable by Lessor in writing for a period of thirty (30) days
after receipt of the Transfer Notice.
(b) If Lessor fails to exercise such option, and Lessee fails to
complete negotiations for a valid and bona fide assignment to or sublease with
a third party within sixty (60) days thereafter in accordance with the terms
of the Transfer Notice, Lessee shall again comply with all the conditions of
this Article 30, as if the notice and option hereinabove referred to had not
been given and received.
(c) In the event Lessor does not exercise its option and Lessee
completes negotiations for an assignment or sublease with a third party within
the sixty (60) day period, Lessee shall deliver an executed copy of such
assignment or sublease to Lessor to obtain its consent as required in this
Article 30. If the Lessor consents to a sublease, then such sublease shall be
subject to and made upon the following terms:
1. Any such sublease shall be subject to the terms of this lease
and the term thereof may not extend beyond the expiration of the term of this
lease;
2. The use be made of the Transferred Space shall be a legal use in
keeping with the character of the complex and the terms of this lease;
3. Such assignment or sublease shall not violate any negative
covenant as to use contained in any deed of trust affecting the complex; and
4. No sublessee shall have a right to further sublet.
(d) Lessee shall have the right without the consent of Lessor but upon
prior written notice to Lessor, to assign this lease to a company incorporated
or to be incorporated by Lessee provided that lessee owns or beneficially
controls all the issued and outstanding shares in the capital stock of the
company. Such assignment shall not, however, relieve Lessee from its
obligations for the payment of rent and for the full and faithful observance
and performance of the covenants, terms and conditions contained herein.
(e) No permitted assignment or sublessee shall be valid and no assignee
or sublease shall take possession of the premises assigned or sublet unless,
within ten (10) days after the execution thereof, Lessee shall deliver to
Lessor a duly executed duplicate original of such assignment or sublease in
form satisfactory to Lessor which provides (1) the assignee or sublessee
assumes Lessee's obligations for the payment of rent and for the full and
faithful observance and performance of the covenants, terms and conditions
contained herein, and (2) that such assignee or sublessee will, at Lessor's
election, attorn directly to Lessor in the event Lessee's lease is terminated
for any reason, and (3) such assignment or sublease contains such other
assurances as Lessor reasonably deems necessary.
COVENANT NOT TO COMPETE
31. [DELETED]
ABANDONMENT
32. Lessee shall not vacate or abandon the premises at any time during the
term; and if Lessee shall abandon, vacate or surrender the premises, or be
dispossesed by process of law, or otherwise, any personal property belonging
to Lessee and left on the premises shall be deemed to be abandoned, at the
option of Lessor, except such property as may be mortgaged to Lessor.
DEFAULT
33.1 The occurrence of any of the following shall constitute a material
default and breach of this lease by Lessee:
(a) Any failure by Lessee to pay the rental or to make any other payment
required to be made by Lessee hereunder when due.
(b) The abandonment or vacation of the premises by Lessee in violation
of Article 32 hereof.
(c) A failure by Lessee to observe and perform any other provision of
this lease to be observed or performed by Lessee, where such failure continues
for ten (10) days after written notice thereof by Lessor to Lessee; provided,
however, that if the nature of such default is such that the same cannot
reasonable be cured within such ten (10) day period, Lessee shall not be
deemed to be in default if Lessee shall within such period commence such cure
and thereafter diligently prosecute the same to completion.
(d) Either (1) the appointment of a receiver (except a receiver
appointed at the instance or request of Lessor) to take possession of all or
substantially all of the assets of Lessee, or (2) a general assignment by
lessee for the benefit of creditors, or (3) any action taken or suffered by
Lessee under any insolvency or bankruptcy act shall constitute a breach of
this lease by Lessee. In such event, Lessor may, at his option, declare this
lease terminated and forfeited by Lessee, and Lessor shall be entitled to
immediate possession of such premises. Upon such notice of termination, this
lease shall terminate immediately and automatically by its own limitation.
(e) Any two (2) failures by Lessee to observe and perform any provision
of this lease during any twelve (12) month period of the term, as such may be
extended, shall constitute, at the option of the Lessor, a separate
non-curable default.
(f) [SECTION DELETED]
(g) [SECTION DELETED]
33.2 Under the terms of this Lease numerous charges are and may be due from
Lessee to Lessor including, without limitation, common area charges, real
estate taxes, insurance reimbursement and other items of a similar nature
including advances made by Lessor in respect of Lessee's default at Lessor's
option. In event that at any time during the term there is a dispute between
the parties as to the amount due for any of such charges claimed by Lessor to
be due, the amount demanded by the Lessor shall be paid by the Lessee until
the resolution of the dispute between the parties or by litigation. Failure by
Lessee to pay the disputed sums until resolution shall constitue a material
default and a breach of this lease by Lessee.
REMEDIES UPON DEFAULT
34.1 Lessor and Lessee agree as follows upon Lessor's remedies for any
default by Lessee as set forth in Section 33.1 above:
(a) In the event of any such default by Lessee, then in addition to any
other remedies available to Lessor at law or in equity, Lessor shall have the
immediate option to terminate this lease and all rights of Lessee hereunder by
giving written notice of such intention to terminate. In the event that Lessor
shall elect to so terminate this lease, then Lessor may recover from Lessee:
(i) the worth at the time of award of any unpaid rent which had
been earned at the time of such termination; plus
(ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss Lessee proves could have been
reasonable avoided; plus
(iii) the worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Lessee proves could have been reasonably
avoided; plus
(iv) any other amount necessary to compensate Lessor for all the
detriment proximately caused by Lessee's failure to perform his obligations
under this lease or which in the ordinary course of things would be likely to
result therefrom; and
(v) at Lessor's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by the law
applicable in the State in which the Shopping Center is located.
(b) The term "rent", as used herein, shall be deemed to be and to mean
set minimum rental and all other sums required to be paid by Lessee pursuant
to the terms of this lease.
(c) As used in subparagraphs (a)(i) and (ii) above, the "worth at the
time of award" is computed by allowing interest at the rate of ten percent
(10%) per annum. As used in subparagraph (a) (iii) above, the "worth at the
time of award" is computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco at the time of award plus one
percent (1%).
(d) In the event of any such default by Lessee, (i) Lessor shall also
have the right, with or without terminating this lease, to re-enter the
premises and remove all persons and property from the premises; such property
may be removed and stored in a public warehouse or elsewhere at the cost of
and for the account of Lessee, and/or at Lessor's option (ii) all of Lessee's
fixtures, furniture, equipment, improvements, additions, alterations and other
personal property, shall remain upon the premises and in that event, and
continuing during the length of such default, Lessor shall have the sole right
to take exclusive possession of such property and to use it, rent or charge
free, until all defaults are cured or, at Lessor's option, at any time during
the term of this lease, to require Lessee to forthwith remove such property.
The rights stated herein are in addition to the Landlord's rights described in
Section 35.2.
(e) In the event of the vacation or abandonment of the premises by
lessee or in the event that Lessor shall elect to re-enter as provided in
subparagraph
(d) above, or shall take possession of the premises pursuant to legal
proceeding as pursuant to any notice provided by law, then if Lessor does not
elect to terminate this lease as provided in subparagraph (a) above, Lessor
may from time to time, without terminating this lease, either recover all
rental as it becomes due or relet the premises or any part thereof for such
term or terms and at such rental or rentals and upon such other terms and
conditions as Lessor in its sole discretion, may deem advisable with the right
to make alterations and repairs to the premises.
(f) In the event that Lessor shall elect to so relet, then rentals
received by Lessor from such reletting shall be applied: first, to the payment
of any indebtedness other than rent due hereunder from Lessee to Lessor;
second, to the payment of any cost of such reletting; third, to the payment of
the cost of any alterations and repairs to the premises; fourth, to the
payment of rent due and unpaid hereunder; and the residue, if any, shall be
held by Lessor and applied in payment of future rent as the same may become
due and payable hereunder. Should that portion of such rentals received from
such reletting during any month, which is applied by the payment of rent
hereunder, be less than the rent payable during that month by Lessee
hereunder, then Lessee shall pay such deficiency to Lessor immediately upon
demand therefor by Lessor. Such deficiency shall be calculated and paid
monthly. Lessee shall also pay to Lessor as soon as ascertained, any costs and
expenses incurred by Lessor in such reletting or in making such alterations
and repairs not covered by the rentals received from such reletting.
(g) No re-entry or taking possession of the premises or any other action
under this paragraph shall be construed as an election to terminate this lease
unless a written notice of such intention be given to Lessee or unless the
termination thereof be decreed by a Court of competent jurisdiction.
Notwithstanding any reletting without termination by Lessor because of any
default by Lessee, Lessor may at any time after such reletting elect to
terminate this lease for any such default.
FORFEITURE OF PROPERTY
35.1 Lessee agrees that as of the date of termination of this lease or
repossession of the premises by Lessor, by way of default or otherwise, it
shall remove all personal property to which it has the right to ownership
pursuant to the terms of this lease. Any and all such property of Lessee not
removed by such date shall, at the option of Lessor, irrevocably become the
sole property of Lessor. Lessee waives all rights to notice and all common law
and statutory claims and causes of action which it may have against Lessor
subsequent to such date as regards the storage, destruction, damage, loss of
use and ownership of the personal property affected by the terms of this
Article. Lessee acknowledges Lessor's need to relet the premises upon
termination of this lease or repossession of the premises and understands that
the forfeitures and waivers provided herein are necessary to aid said
reletting.
35.2 Lessee hereby grants to Lessor a lien upon and security interest in all
fixtures, chattels and personal property of every kind now or hereafter to be
placed or installed in or on the premises and agrees that in the event of any
default on the part of the Lessee the Lessor shall have all the rights and
remedies afforded the secured party by the chapter on "Default" of Division 9
of the Uniform Commercial Code of California on the date of this lease and
may, in connection therewith, also (a) enter on the premises to assemble and
take possession of the collateral, (b) require Lessee to assemble the
collateral and make its possession available to the Lessor at the premises
(c) enter the premises, render the collateral, if equipment, unusable and
dispose of it in a manner provided by the Uniform Commercial code of
California on borrower's premises. Lessee designates Lessor his
attorney-in-fact for purposes of executing such documents as may be necessary
to perfect the lien and security interest granted hereunder.
SURRENDER OF LEASE
36. The voluntary or other surrender of this lease by Lessee, or a mutual
cancellation thereof, shall not work as a merger, and shall, at the option of
Lessor, terminate all or any existing subleases or subtenancies, or may, at
the option of Lessor, operate as an assignment to him of any or all such
subleases or subtenancies.
SUBORDINATION
37. This lease shall, at the option of the mortgagee, or beneficiary be
subordinate to any mortgage or Deed of Trust which shall at any time be placed
upon the demised premises or any part thereof or the building of which the
demised premises are a portion, and Lessee agrees to execute and deliver any
instrument without cost, which may be deemed necessary to further effect the
subordination of this lease to any such mortgage or Deed of Trust, provided,
however, that the mortgagee agrees that in the event of transfer of title to
the demised premises by Lessor to a mortgagee, trustee or beneficiary under
said Deed of Trust or to any purchaser therefrom or successor thereto, this
lease shall not terminate if Lessee is not in default. Lessee shall attorn to
said new owner as if a party hereto regardless of any rule of law to the
contrary or absence of privity of contract.
EMPLOYEE PARKING
38. Automobiles of Lessee, its employees and agents shall not park within the
parking area except in areas, if any, delineated by Lessor as "employee
parking" - the adjacent City public parking garage.
NOTICES
39.1 All notices to be given to either party hereunder may be given in
writing, personally or by depositing the same in the United States mail,
postage prepaid, certified mail, return receipt requested, at the addresses
for the parties as specified in Section 1.2 hereof.
39.2 Either party may change the address to which notices are required to be
given by written notice to the other party. All notices shall be deemed
effective upon receipt if personally delivered, or upon execution of the
return receipt if by United States mail.
39.3 Should Lessee consist of more than one person or entity, they shall be
jointly and severally liable on this lease. Each person and/or entity whose
signature is affixed to the end of this lease as Lessee, designates each other
such person and/or entity their agent for service of process, or notice, in
the event of all litigation or dispute arising from Lessee's breach of any
obligation imposed by this lease, or otherwise, due from lessee to Lessor.
TRANSFER OF SECURITY
40. If any security be given by Lessee to secure the faithful performance of
all or any of the covenants of this lease on the part of Lessee, Lessor may
transfer and/or deliver the security, as such, to the purchaser of the
reversion, in the event that the reversion be sold, and thereupon Lessor shall
be discharged from any further liability in reference thereto.
WAIVER
41. The waiver by Lessor of any breach of any lease provision shall not be
deemed to be a waiver of such lease provision or any subsequent breach of the
same or any other term, covenant or condition therein contained. The
subsequent acceptance of rent hereunder by Lessor shall not be deemed to be a
waiver of any preceding breach by Lessee of any provision of this lease, other
than the failure of Lessee to pay the particular rental so accepted regardless
of Lessor's knowledge of such preceding breach at the time of acceptance of
such rent.
HOLDING OVER
42. Any holding over after the expiration of the term hereof, with the
consent of the Lessor, shall be construed to be a tenancy from month to month
upon the same terms and conditions as existed during the last month of the
term hereof, so far as applicable, except that the minimum rental shall be
twice the minimum rental in effect immediately prior to the expiration or
sooner termination of the lease.
LIMITATION ON LESSOR'S LIABILITY
43. In the event of default, breach, or violation by Lessor (which term
includes Lessor's partners, co-venturers, co-tenants, officers, directors,
employees, agents, or representatives) of any Lessor's obligations under this
lease, Lessor's liability to Lessee shall be limited to its ownership interest
in the premises (or its interest in the Shopping Complex, if applicable) or
the proceeds of a public sale of such interest pursuant to foreclosure of a
judgment against the Lessor. Lessor may, at its option, and among its other
alternatives, relieve itself of all liability under this lease by conveying
the premises to the Lessee. Notwithstanding any such conveyance, Lessee's
leasehold and ownership interest shall not merge.
LATE CHARGES
44. Lessee acknowledges that late payment by Lessee to Lessor of rent or any
other payment due hereunder will cause Lessor to incur costs not contemplated
by this lease, the exact amount of such costs being extremely difficult and
impractical to fix. Such costs include, without limitation, processing and
accounting charges, and late charges that may be imposed on Lessor by the
terms of any encumbrance and note secured by any encumbrance covering the
premises. Therefore, if any installment of rent, or any other payment due
hereunder, due from Lessee is not received by Lessor when due, Lessee shall
pay to Lessor an additional sum of ten percent (10%) of such rent or other
charge as a late charge. The parties agree that this late charge represents a
fair and reasonable estimate of the cost that Lessor will incur by reason of
late payment by Lessee. Acceptance of any late charge shall not constitute a
waiver of Lessee default with respect to the overdue amount, or prevent Lessor
from exercising any other rights or remedies available to Lessor. Rent is due
the first of each month with late charge imposed on the 10th if rent is not
paid.
SUCCESSORS AND ASSIGNS
45. The covenants and conditions herein contained shall, subject to the
provisions as to assignment, apply to and bind the heirs, successors,
executors, administrators and assigns of all of the parties hereto; and all of
the parties hereto shall be jointly and severally liable hereunder.
TIME
46. Time is of the essence of this lease with respect to each and every
article, section and subsection hereof.
MARGINAL CAPTIONS
47. The captions in the margins of this lease are for convenience only and
are not a part of this lease and do not in any way, limit or amplify the terms
and provisions of this lease
EFFECT OF LANDLORD'S CONVEYANCE
48. If during the term of this lease, Lessor shall sell his interest in the
Shopping Center, or the premises, then from and after the effective date of
sale, Lessor shall be released and discharged from any and all obligations
and responsibilities under this lease except those already accrued.
DEFAULT OF LESSOR
49. If Lessor is in default of this lease, and as a consequence Lessee
recovers a money judgment against Lessor, the judgment shall be satisfied only
out of the proceeds of sale received on execution of the judgment and levy
against the right, title, and interest of the landlord in the Shopping Center,
and out of the rent or other income from such real property receivable by the
Lessor or out of the consideration received by Lessor from the sale or other
disposition of all or any part of Lessor's right, title and interest in the
Shopping Center. Neither the Lessor nor any of the partners comprising the
partnership designated as Lessor (if applicable) shall be personally liable
for any deficiency.
OFFSET STATEMENTS
50. Within ten (10) days of request therefor by Lessor, Lessee shall provide
a written statement acknowledging the commencement and termination dates of
this lease, that it is in full force and effect, has not been modified (or if
it has, stating such modifications), and providing any other pertinent
information as Lessor or its agent might reasonably request. Failure to comply
with this paragraph shall be a material breach of this lease by Lessee giving
Lessor all rights and remedies of Article 34. hereof, as well as a right to
damages caused by the loss of a loan or sale which may result from such
failure by Lessee.
ATTORNEY'S FEES
51. If either party becomes a party to any litigation concerning this lease,
the premises, or the building or other improvements of which the premises form
a part, by reason of any act or omission of the other party or its authorized
representatives, and not by any act or omission of the party that becomes a
party to that litigation or any act or omission of its authorized
representatives, the party that causes the other party to become involved in
the litigation shall be liable to that party for reasonable attorney's fees,
court costs, investigation expenses, discovery costs and costs of appeal
incurred by it in the litigation.
If either party commences an action against the other party arising out of or
in connection with this lease, the prevailing party shall be entitled to have
and recover from the losing party reasonable attorney's fees, costs of suit,
investigation costs and discovery costs, including costs of appeal.
WAIVER OF CALIFORNIA CODE SECTIONS
52. Lessee waives the provisions of Civil Code Sections 1932(2) and 1933(4)
with respect to the destruction of the premises, Civil Code Sections 1941 and
1942 with respect to Lessor's repair duties and Lessee's right to repair, and
Code of Civil Procedures Section 1265.130, allowing either party to petition
the Superior Court to terminate this lease in the event of a partial taking of
the by condemnation as herein defined.
LESSEE'S COVENANTS
53. As additional consideration, which additional consideration induces
Lessor to execute this lease, Lessee covenants as follows:
(a) Illumination of Display Windows. The Lessee shall keep the display
window of the leased premises suitably illuminated on each and every day from
8:00 a.m. to midnight unless prohibited by law. Lessor reserves the right to
change such hours of illumination form time to time.
(b) [SECTION DELETED]
(c) Floor Load. Lessee shall not place a load upon any floor of the
leased premises which exceeds one hundred (100) pounds per square foot. Lessor
reserves the right to prescribe the weight, movement and position of all safes
and heavy installations which the Lessee wishes to place in the leased
premises so as to properly distribute the weight thereof.
(d) Garbage, Debris, and Refuse. The Lessee shall not place or leave or
permit to be placed or left in or upon any part of the common areas any
garbage, debris or refuse. Lessee shall deposit all refuse and debris in an
area to be designated by Lessor for such purpose. The Lessee shall pay the
cost of any garbage and refuse removal on the basis of the volume of such
refuse as reasonable determined by Lessor.
(e) Storage - Delivery of Merchandise. All delivery and dispatch of
merchandise, supplies, fixtures, equipment and furniture shall be made and
shall be conveyed to or from the leased premises by means and during hours
established by the Lessor under the Rules and Regulations. The Lessor shall
have no responsibility regarding such delivery or dispatch of merchandise,
supplies, fixtures, equipment and furniture. The Lessee shall not at any time
park its trucks or other delivery vehicles in common areas except in such
parts thereof as may be specifically allocated for such purpose.
(f) Modifications Required by Lender. It is understood by Lessee that
during the term of this lease, Lessor may place new or additional financing
upon the Shopping Complex and in that event this lease must be approved by the
financing institution making such loans. Accordingly, if any such financial
institution requires, as a condition to the making of its loan, any
non-substantive modification of this lease, Lessee agrees to enter into an
agreement so modifying this lease. In the event Lessee refuses on the grounds
that the modification is substantive, that issue only shall be arbitrated as
follows. If the parties are unable to agree on the terms of the amendment,
then each party, at its own cost and expense, and by giving notice to the
other party in writing, shall appoint an arbitrator with at least five (5)
years experience with industrial real property leases as an appraiser or Real
Estate Broker in the County in which the premises are located (hereinafter
"qualified arbitrator"), to arbitrate and set the terms of the amendment. If a
party does not appoint a qualified arbitrator within ten (10) days after the
other party has given notice of the name of its arbitrator, the singe
arbitrator appointed shall be the sole arbitrator and shall set the terms of
the amendment. If the two (2) arbitrators are appointed by the parties as
stated in this section, they shall meet promptly to select a third qualified
arbitrator within ten (10) days after the appointment of the last of the two
arbitrators. If they are unable to timely agree on the third arbitrator,
either of the parties to this lease, by giving five (5) days notice to the
other party, may apply to the then president of the County Real Estate Bard
for the county in which the property is located, or to the presiding judge of
the highest trial court in the county in which the property is located, for
the selection of a third arbitrator. Each of the parties shall bear one-half
of the cost of appointing the third arbitrator and of paying the third
arbitrator's fee. The third arbitrator, however selected, shall be a person
who has not previously acted in any capacity for either party. Within thirty
(30) days after the selection of the third arbitrator, each of the arbitrators
shall notify each of the parties hereto, in writing, of its opinion as to the
terms of the amendment. If it is determined by such arbitration that Lessee is
required to enter into such amendment and if Lessee refuses to execute such
amendment within ten (10) days after such determination, then Lessor shall
have the right, in addition to any other remedies it may have at law or in
equity, by giving written notice to Lessee, to terminate this lease; and upon
giving such notice this lease shall terminate and both Lessor and Lessee shall
pay any sums owing to the other at the time of such termination.
(g) Lessor's Right to Cure Default. All covenants and agreements to be
performed by the Lessee under any of the terms of this lease shall be at its
sole cost and expense and without any abatement of rent. If the Lessee shall
fail to pay any sum of money other than rent, required to be paid by it
hereunder or shall fail to perform any other act on its part to be performed
hereunder and such failure shall have become an event of default as provided
herein, the Lessor may, but shall not be obligated to do so, and without
waiving or releasing the Lessee from any such obligation, make such payment or
perform any such other act on the Lessee's part to be made or performed as
provided herein. All sums so paid by the Lessor and all necessary incidental
costs shall be deemed additional rent hereunder and shall be payable to the
Lessor immediately.
NO PARTNERSHIP
54. It is understood and agreed that nothing contained in this lease nor in
any act of the parties hereto shall be deemed to create any relationship
between the parties hereto other than the relationship of Lessor and Lessee.
BANKRUPTCY
55. If at any time during the term of this lease there shall be filed by or
against Lessee in any court pursuant to any statute either of the United
States or of any State a petition in bankruptcy or insolvency or for
reorganization or the appointment of a receiver or trustee of all or a portion
of Lessee's property, or if a receive or trustee takes possession of any of
the assets of Lessee, or if the leasehold interest herein pass to a receiver
or trustee, or if Lessee makes an assignment for the benefit of creditors or
petitions for, or enters into, an arrangement (and of which are referred to
herein as "a bankruptcy event'), then the following provisions shall apply:
(a) At all events any receiver or trustee in bankruptcy shall either
expressly assume or reject this lease within forty-five (45) days following
the entry of an "Order for Relief."
(b) In the event of an assumption of the lease by a debtor or by a
trustee, such debtor or trustee shall within fifteen (15) days after such
assumption (1) cure any default or provide adequate assurances that defaults
will be promptly cured; and (2) compensate Lessor for actual pecuniary loss or
provide adequate assurances that compensation will be made for actual
pecuniary loss; and (3) provide adequate assurance of future performance.
(c) Where a default exists in the lease, the trustee or debtor assuming
the lease may not require Lessor to provide services or supplies incidental to
the lease before its assumption by such trustee or debtor, unless Lessor is
compensated under the terms of the lease for such services and supplies
provided before the assumption of such lease.
(d) The debtor or trustee may only assign this lease if: (1) it is
assumed; and (2) adequate assurance of future performance by the assignee is
provided, whether or not there has been a default under the lease. Any
consideration paid by any assignee in excess of the rental reserved in the
lease shall be the sole property of, and paid to, Lessor.
(e) The Lessor shall be entitled to the fair market value for the
premises and the services provided by lessor (but in no event less than the
rental reserved in the lease) subsequent to the commencement of a bankruptcy
event.
(f) Lessor specifically reserves any and all remedies available to
Lessor in Article 34 hereof or and law or in equity in respect of a bankruptcy
event by Lessee to the extent such remedies are permitted by law.
MISCELLANEOUS PROVISIONS
56.1 Whenever the singular number is used in this lease and when required by
the context, the same shall include the plural, the plural shall include the
singular, and the masculine gender shall include the feminine and neuter
genders, and the word "person" shall include corporation, firm or association.
If there be more than one lessee, the obligations imposed under this lease
upon Lessee shall be joint and several.
56.2 This instrument contains all of the agreements, conditions and
representations made between the parties to this lease and may not be modified
orally in any other manner than by an agreement in writing signed by all of
the parties to this lease.
56.3 Except as otherwise expressly stated, each payment required to be made
by lessee shall be in addition to and not in substitution for other payments
to be made by Lessee.
56.4 The validity of any provision of this lease, as determined by a Court of
competent jurisdiction, shall in no way affect the validity of any other
provision hereof.
56.5 The preparation and submission of a draft of this lease by either party
to the other shall not constitute an offer nor shall either party be bound to
any terms of this lease or the entirety of the lease itself until both parties
have fully executed a final document and an original signature document has
been received by both parties. Until such time as describe in the previous
sentence, either party is free to terminate negotiations with no obligation to
the other.
IN WITNESS WHEREOF, Lessor and Lessee have executed this lease
this 12th day of September 1996.
--------------------------------
LESSOR
SALVIO PACHECO SQUARE INVESTORS
By: IRM Corporation, General Partner
--------------------------------
By: /s/ LAWRENCE VAN DUYN
--------------------------------
Lawrence Van Duyn,
President
LESSEE
By: CONTINENTAL PACIFIC BANK
--------------------------------
By: /s/ ANDREW S. POPOVICH
--------------------------------
Andrew S. Popovich,
EVP/CFO
9/10/96
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SALVIO PACHECO SQUARE
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EXHIBIT A
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LEGAL DESCRIPTION
- ---------------------
The land is situated in the City of Concord, County of Contra Costa, State of
California, and is described as follows:
Parcel A, as shown on that certain map of Subdivision M.S. C. 14-82, filed
September 15, 1982 in Book 102 of Parcel Maps, at page 45, Contra Costa County
records.
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SALVIO PACHECO SQUARE
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EXHIBIT B
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SITE PLAN
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[THIS PAGE IS A MAP OF SALVIO PACHECO SQUARE]
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SALVIO PACHECO SQUARE
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EXHIBIT C
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CONSTRUCTION
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[THIS PAGE IS A MAP OF THE PREMISES TO BE LEASED]
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SALVIO PACHECO SQUARE
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EXHIBIT D
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ACKNOWLEDGMENT OF COMMENCEMENT
- ------------------------------
This Acknowledgment is made as of ___________, with reference to that certain
Lease Agreement (hereinafter referred to as the "lease") dated __________, by
and between _____________, as "Lessor" therein, and ____________, as
"Lessee".
The undersigned hereby confirms the following:
1. That the Lessee accepted possession of the Demised Premises (as described
in said lease) on _________, and acknowledges that the premises are as
represented by Lessor and in good order, condition and repair; and that the
improvements, if any, required to be constructed for Lessee by Lessor under
this lease have been so constructed and are satisfactorily completed in all
material respects.
2. That all conditions of said lease to be performed by Lessor prerequisite
to the full effectiveness of said lease have been satisfied and that Lessor
has fulfilled all of its duties of an inducement nature.
3. That in accordance with the provisions of Article 4 of said lease the
commencement date of the term is ______, and that, unless sooner terminated,
the original term thereof expires on ______.
4. That said lease is in full force and effect and that the same represents
the entire agreement between Lessor and Lessee concerning said lease.
5. That there are no existing defenses which Lessee has against the
enforcement of said lease by Lessor, and no offsets or credits against
rentals.
6. That the minimum rental obligation of said lease is presently in effect
and that all rental, charges and other obligations on the part of Lessee under
said lease commenced to accrue on ________________.
7. That the undersigned Lessee has not made any prior assignment,
hypothecation or pledge of said lease or of the rents thereunder.
LESSEE:
BY: _____________________
BY: _____________________
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SALVIO PACHECO SQUARE
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EXHIBIT E
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RULES AND REGULATIONS
- ---------------------
1. The sidewalks, halls, passages, exits, entrances, elevators and stairways
of the Building shall not be obstructed by any of the Lessees or used by them
for any purpose other than for ingress to and egress from their respective
premises. The halls, passages, exits, entrances, elevators and stairways are
not for the general public, and Lessor shall in all cases retain the right to
control and prevent access thereto of all persons whose presence in the
judgment of Lessor would be prejudicial to the safety, character, reputation
and interests of the Building and its Lessees, provided that nothing herein
contained shall be construed to prevent such access to persons with whom any
Lessee normally deals in the ordinary course of its business, unless such
persons are engaged in illegal activities. No Lessee and no employee or
invitee of any Lessee shall go upon the roof of the Building.
2. No sign, placard, picture, name, advertisement or notice visible from the
exterior of any Lessee's premises shall be inscribed, painted, affixed or
otherwise displayed by any Lessee on any part of the Building without the
prior written consent of Lessor. Lessor will adopt and furnish to Lessee
general guidelines relating to signs inside the Building on the office floors.
Lessee agrees to conform to such guidelines, but may request approval of
Lessor for modifications, which approval will not be unreasonably withheld.
All approved signs or lettering on doors shall be printed, painted, affixed or
inscribed at the expense of the Lessee by a person approved by Lessor which
approval will not be unreasonably withheld. Material visible from outside the
Building will not be permitted.
3. The premises shall not used for the storage of merchandise held for sale
to the general public or for lodging. No cooking shall be done or permitted by
any Lessee on the premises, except that use by the Lessee of Underwriters'
Laboratory approved equipment for brewing coffee, tea, hot chocolate and
similar beverages and the use of microwave ovens shall be permitted, provided
that such use is in accordance with all applicable federal, state and city
laws, codes, ordinances, rules and regulations.
4. [SECTION DELETED]
5. [SECTION DELETED]
6. The elevator shall be available for movement of freight or equipment to
the upper floors by all Lessees in the Building, subject to such reasonable
scheduling as Lessor in its discretion shall deem appropriate. Scheduling by
Lessor is necessary so that appropriate protection can be installed to prevent
damage to the elevator interior. The Lessee should acknowledge that elevator
scheduling for vertical freight movement may be scheduled for "off-peak" hours
since the elevator's primary purpose is for passenger transportation. The
persons employed to move such freight or equipment in or out of the Building
must be acceptable to Lessor. Lessor shall have the right to prescribe the
weight, size and position of all equipment, materials, furniture or other
property brought into the Building. Heavy objects shall, if considered
necessary by Lessor, stand on wood strips of such thickness as to necessary to
properly distribute the weight. Lessor will not be responsible for loss of or
damage to any such property from any cause, and all damage done to the
Building by moving or maintaining such property shall be repaired at the
expense of Lessee.
7. No Lessee shall use or keep in the premises or the Building any kerosene,
gasoline or inflammable or combustible fluid or material other than limited
quantities thereof reasonably necessary for the operation or maintenance of
office equipment, or, without Lessor's prior written approval, use any method
of heating or air conditioning other than that supplied by Lessor. No Lessee
shall use or keep or permit to be used or kept any foul or noxious gas or
substance in the premises, or permit or suffer the premises to be occupied or
used in a manner offensive or objectionable to Lessor or other occupants of
the Building by reason of noise, odors or vibrations, or interfere in any way
with other Lessees or those having business therein.
8. Lessor shall have the right, exercisable without notice and liability to
any Lessee, to change the name and street address of the Building.
9. Lessor reserves the right to exclude from the Building between the hours
of 6 p.m. and 7 a.m. and at all hours on Sundays, legal holidays and after 1
p.m. on Saturdays all persons who do not present a pass to the Building signed
by Lessor. Lessor will furnish passes to persons for whom any Lessee requests
the same in writing. Each Lessee shall be responsible for all persons for whom
it requests passes and shall be liable to Lessor for all acts of such persons.
Lessor shall in no case be liable for damages for any error with regard to the
admission to or exclusion from the Building of any person. In the case of
invasion, mob, riot, public excitement or other circumstance rendering such
action advisable in Lessor's opinion, Lessor reserves the right to prevent
access to the Building during the continuance of the same by such action as
Lessor may deem appropriate, including closing doors.
10. The directory of the Building will be provided for the display of the
name and location of Lessee and a reasonable number of the principal officers
and employees of Lessees, and Lessor reserves the right to exclude any other
names therefrom. Any additional name which Lessee shall desire to place upon
said bulletin board must first be approved by Lessor, and, if so approved, a
charge will be made therefor.
11. No curtains, draperies, blinds, shutters, shades, screens, or other
coverings, hangings or decorations shall be attached to, hung or placed in, or
used in connection with any window of the Building without the prior written
consent of Lessor. In any event, with the prior written consent of Lessor,
such items shall be installed on the office side of Lessor's standard window
covering and shall in no way be visible from the exterior of the building.
12. No Lessee shall obtain for use in the premises, ice, drinking water, food
beverage, towel or other similar services, except at such reasonable hours and
under such reasonable regulations as may be fixed by Lessor.
13. Each Lessee shall see that the doors of its premises are closed and
locked and that all water faucets, water apparatus and utilities are shut off
before Lessee or Lessee's employees leave the premises, so as to prevent waste
or damage, and for any default or carelessness in this regard Lessee shall
make good all injuries sustained by other tenants or occupants of the Building
or Lessor. On multiple-tenancy floors, all Lessees shall keep the doors to the
Building corridors closed at all times except for ingress and egress.
14. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall
not be used for any purpose other than that for which they were constructed,
no foreign substance of any kind whatsoever shall be thrown therein and the
expense of any breakage, stoppage or damage resulting from the violation of
this rule shall be borne by the Lessee who, or whose employees or invitees,
shall have caused it.
15. Except with the prior written consent of Lessor, no Lessee shall sell, or
permit the sale at retail, or newspapers, magazines, periodicals, theatre
tickets or any other goods or merchandise to the general public in or on the
premises, nor shall any Lessee carry on, or permit or allow any employee or
other person to carry on, the business of stenography, typewriting or any
similar business in or from the premises for the service or accomodation of
occupants of any other portion of the Building, nor shall the premises of any
Lessee be used for manufacturing of any kind, or any business or activity
other that that specifically provided for in such Lessee's lease.
16. No Lessee shall install any radio or television antenna, loudspeaker, or
other device on the roof, overheads, planters, or exterior walls of the
Building.
17. There shall not be used in any space, or in the public halls of the
Building, either by any Lessee or others, any hand trucks except those
equipped with rubber tires and side guards or such other material handling
equipment as Lessor may approve. No other vehicles of any kind shall be
brought by any Lessee into the Building or kept in or about its premises.
18. Each Lessee shall store all its trash and garbage within its premises. No
material shall be placed in the trash boxes or receptacles if such material is
of such nature that it may not be disposed of in the ordinary and customary
manner of removing and disposing of trash and garbage in the City of Concord
without being in violation of any law or ordinance governing such disposal.
All garbage and refuse disposal shall be made only through entryways and
elevators provided for such purposes and at such times as Lessor shall
designate.
19. No vending machines or machines of any description shall be installed,
maintained or operated upon the Premises without the written consent of
Lessor.
20. Landlord shall have the right to control and operate the public portions
of the Building, and the public facilities, and heating and air conditioning,
as well as facilities furnished for the common use of the tenants, in such
manner as it deems best for the benefit of the tenants generally.
21. Canvassing, peddling, soliciting, and distribution of handbills or any
other written materials in the Building are prohibited, and each Lessee shall
cooperate to prevent the same.
22. The requirements of the Lessees will be attended to only upon application
by telephone or in person at the office of the Building. Employees of Lessor
shall not perform any work or do anything outside of their regular duties
unless specifically instructed by Lessor.
23. Lessor may waive any one or more of these Rules and Regulations for the
benefit of any particular Lessee or Lessees, but no such waiver by Lessor
shall be construed as a waiver of such Rules and Regulations in favor or any
other Lessee or Lessees, nor prevent Lessor from thereafter enforcing any such
Rules and Regulations against any or all of the Lessees of the Building.
24. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify or amend, in whole or in part, the terms,
covenants, agreements and conditions of any lease of premises in the Building.
25. Lessor reserves the right to make such other and reasonable rules and
regulations as in its judgment may from time to time be needed for the safety,
care and cleanliness of the Building, and for the preservation of good order
therein.
******************************************************************************
SALVIO PACHECO SQUARE
- ---------------------
EXHIBIT "F"
- ---------------------
SIGNAGE
- ---------------------
Lessee may utilize the existing sign above the entry by having the sign face
changed as approved by Lessor and City of Concord.
******************************************************************************
ADDENDUM A
1. RENT ADJUSTMENTS: After commencement of Lease, rents to be adjusted as
follows:
10/1/97 to 9/30/99 $1.30/sq. ft. = $3,725.80
2. SECURITY DEPOSIT: Continental Pacific Bank will post a security deposit in
the form of a Certificate of Deposit in a major California bank, payable to
Lessor in the amount of three (3) times the monthly base rent with interest
thereon accruing to the account to Continental Pacific Bank. Lessor shall have
the right to draw upon the Certificate of Deposit in the event of default by
Lessee in the payment of rent or additional charges under the Lease for a
period of 30 days after notice is given by Lessor.
3. OPTION TO RENEW: Tenant shall have the option to extend the Term on all
the provisions herein for an additional five years (the Extended Term),
commencing immediately on the day following the expiration of the initial term
and expiring five years after the Extended Term Commencement Date. Tenant may
exercise its option hereunder by giving written notice of the exercise of the
Option to Landlord at least 30 days before the expiration of the initial term.
The monthly rend payable under paragraph 1.5 of attached Lease will not be
more that $1.30/sq. ft. adjusted for any increase in the Consumer Price Index
of the Bureau of Labor Statistics of the U.S. Department of Labor for CPIU
(All Urban Consumers) for San Francisco, Oakland, San Jose, California. The
minimum annual increase shall be three percent (3%) and the maximum annual
increase shall be five percent (5%). The base CPI will be September, 1999.
LESSOR:
SALVIO PACHECO SQUARE INVESTORS
By: IRM Corporation, General Partner
--------------------------------
By: /s/ Lawrence Van Duyn
--------------------------------
Lawrence Van Duyn, President
LESSEE:
CONTINENTAL PACIFIC BANK
--------------------------------
By: /s/ ANDREW S. POPOVICH
--------------------------------
Andrew S. Popovich
EVP/CFO
9/10/96
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<ARTICLE> 9
<LEGEND>
FORM 10KSB
Condensed Consolidated Balance Sheet &
Condensed Statements of Income
</LEGEND>
<CIK> 0001009325
<NAME> CALIFORNIA COMMUNITY BANCSHARES CORPORATION
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 10,825
<INT-BEARING-DEPOSITS> 0
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<TRADING-ASSETS> 0
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<LOANS> 113,026
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<TOTAL-ASSETS> 191,829
<DEPOSITS> 170,343
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<LONG-TERM> 3,690
0
0
<COMMON> 11,135
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<TOTAL-LIABILITIES-AND-EQUITY> 191,829
<INTEREST-LOAN> 10,704
<INTEREST-INVEST> 2,398
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<INTEREST-TOTAL> 13,102
<INTEREST-DEPOSIT> 4,957
<INTEREST-EXPENSE> 5,465
<INTEREST-INCOME-NET> 7,637
<LOAN-LOSSES> 411
<SECURITIES-GAINS> 83
<EXPENSE-OTHER> 6,781
<INCOME-PRETAX> 2,477
<INCOME-PRE-EXTRAORDINARY> 2,477
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,559
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.31
<YIELD-ACTUAL> 8.65
<LOANS-NON> 70
<LOANS-PAST> 67
<LOANS-TROUBLED> 974
<LOANS-PROBLEM> 2,027
<ALLOWANCE-OPEN> 1,158
<CHARGE-OFFS> 496
<RECOVERIES> 28
<ALLOWANCE-CLOSE> 1,101
<ALLOWANCE-DOMESTIC> 1,018
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 83
</TABLE>
