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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1999
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from ________ to .
Commission File No. 000-26505
COMMUNITY BANCORP INC.(1)
----------------------
(Name of Small Business Issuer in its charter)
DELAWARE 33-0859334
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
130 WEST FALLBROOK STREET, FALLBROOK, CA 92028
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (760) 723-8811
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Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act:
COMMON STOCK, $0.625 PAR VALUE PER SHARE
----------------------------------------
(Title of class)
Check whether the Company (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or 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 Bank'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. [ ]
State the Company's revenues for its most recent fiscal year: $17,714,000
As of February 29, 2000, the aggregate market value of the common stock held by
non-affiliates of the Company was: $11,745,000.
Number of shares of common stock of the Company outstanding as of February 29,
2000: 2,536,981 shares
Portions of the definitive proxy statement for the 2000 Annual Meeting of the
Company's shareholders are incorporated into Part III of this Report by
reference.
(1) The Company is the successor registrant to Fallbrook National
Bank which previously filed reports pursuant to the Exchange Act with the
Comptroller of the Currency.
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TABLE OF CONTENTS
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS PAGE 3
ITEM 2. DESCRIPTION OF PROPERTIES PAGE 23
ITEM 3. LEGAL PROCEEDINGS PAGE 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS PAGE 23
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PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS PAGE 24
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION PAGE 25
ITEM 7. FINANCIAL STATEMENTS PAGE 38
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE PAGE 66
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PART III
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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT PAGE 66
ITEM 10. EXECUTIVE COMPENSATION PAGE 66
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT PAGE 66
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PAGE 66
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K PAGE 67
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NOTE
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Certain statements contained in this Report, including, without limitation,
statements containing the words "believes", "anticipates", "intends",
"expects", and words of similar import, constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. Such forward looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions in those areas in which the Company operates, demographic changes,
competition fluctuations in interest rates, changes in business strategy or
development plans, changes in governmental regulation, credit quality, the
availability of capital to fund the expansion of the Company's business and
other factors referenced in this report. Given these uncertainties,
shareholders are cautioned not to place undue reliance on such
forward-looking statements. The company disclaims any obligation to update
any such factors or to publicly announce the results of any revisions to any
of the forward-looking statements contained herein to reflect future events
or developments.
This discussion should be read in conjunction with the financial statements
of the Company, including the notes thereto, appearing elsewhere in this
report.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMMUNITY BANCORP INC.
Community Bancorp Inc. (the "Company") is a Delaware corporation organized to
act as the bank holding company for Fallbrook National Bank (the "Bank")
(unless the context requires otherwise, the term "Company" includes the
"Bank"). Other than holding the shares of the Bank, the Company conducts no
significant activities, although it is authorized, with the prior approval of
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"), the Company's principal regulator, to engage in a variety of
activities which are deemed closesly related to the business of banking. At
December 31, 1999, the Company had approximately $175.4 million in
consolidated assets, $144.2 million in consolidated net loans, $158.1 million
in consolidated deposits, and $11.3 million in consolidated equity.
The Company was formed through a holding company reorganization of the Bank,
wherein the Bank became the wholly owned subsidiary of the Company as of June
25, 1999. The transaction was based on an exchange of shares in which
shareholders of the Bank exchanged their shares of the Bank for shares of the
common stock of the Company on a one share for one share basis. The transaction
was not considered a taxable event for federal income tax purposes. At the same
time, the Company was listed on the Nasdaq National Market under the symbol of
CMBC, and the Bank's stock was removed from public trading on the same date.
FALLBROOK NATIONAL BANK
The Bank was licensed by the Comptroller of the Currency (the "Comptroller") on
September 5, 1985 and commenced operation as a national banking association on
the same day. As a national banking association, the Bank is subject to primary
supervision, examination and regulation by the Comptroller. The Bank is also
subject to certain other federal laws and regulations. In addition, the Bank is
subject to applicable provisions of California law insofar as such provisions do
not conflict with or are not preempted by federal banking laws. The deposits of
the Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC")
up to the applicable limits thereof, and like all national banks, the Bank is a
member of the Federal Reserve System. The Bank presently has no subsidiaries.
The Bank has focused primarily on providing commercial banking products and
services to small and medium sized businesses in its primary service area. In
the early 1990's the Bank began its Small Business Administration (the "SBA")
lending program. The Bank is currently a "Preferred Lender" with the SBA and
is the 34th largest originator of SBA loans in United States, based on loan
originations for SBA 7A loans during the SBA's fiscal year ended September
30, 1999.
In January 1996, the Board of Directors appointed Thomas E. Swanson as President
and Chief Executive Officer of the Bank. The Board empowered Mr. Swanson to
develop a strategic plan for the Bank to prepare the Bank for future growth and
increased profitability. The key elements of this plan are as follows:
REORGANIZED MANAGEMENT STRUCTURE. Mr. Swanson restructured the management of the
Bank by implementing strategic planning and budgeting by department, and by
revising the Bank's incentive compensation program. Prior to 1996, incentive
compensation paid to Bank employees was based on individual production. Mr.
Swanson and current management initially revised the incentive compensation to
be based on revenues by department and by individuals within the department
rather than production. As of January 1, 2000, management revised the incentive
compensation of the Bank further to be based on profit thereby encouraging
employees to focus not only on revenues but also on the costs associated with
the Bank's operations for which they are responsible.
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DIVERSIFIED PROFIT CENTERS. Current management has diversified the Bank's lines
of business primarily by hiring relationship managers and other qualified
personnel with ties to the Bank's primary market area and experienced in
specialty lending and hired loan officers with specific expertise in these
areas. In this regard, the Bank has increased its commercial lending
capabilities by adding additional commercial loan officers to each of its retail
branches. Additionally, the Bank has opened strategically located loan
production offices in La Mirada, Ontario, Los Angeles, the City of Orange,
Sacramento and Castro Valley, California. The Bank also commenced originating
aircraft loans and its Business Manager program in June 1998. See "--Lending
Activities--Aircraft Lending" and "--Business Manager."
DIVERSIFIED LENDING ACTIVITIES. For the year ended, December 31, 1999, $38.5
million, or 21%, of the loans originated by the Company were SBA 504 and 7a
loans compared to $33.3 million, or 21%, of the loans originated in 1998. In
June 1998, the Company hired loan officers in an effort to build specialty
lending expertise. Since such time the Company has implemented its Business
Manager program and began originating loans secured by aircraft. While the
Company intends to continue to be a leading SBA lender, it has and will continue
to hire relationship managers experienced within the Company's primary market
area in order to increase non-SBA commercial lending.
INVESTED IN INFRASTRUCTURE TO SUPPORT DIVERSIFICATION. Current management has
invested capital in technology infrastructure and in DE NOVO offices. The
Company expanded its retail banking division with additional offices in
Temecula, California in May of 1996 and Vista, California in August of 1998. The
Bank has also invested in upgrades to its computer system as part of its year
2000 compliance program and to support future products and services. In that
regard, the Bank has currently developed a cash management system to offer to
commercial customers and, on an outsourced basis, home banking. The Bank has
also begun creating a master customer information file ("MCIF") in order to
monitor customer profitability and relationships.
LISTED COMMON STOCK ON NASDAQ. In order to increase the liquidity of the Bank's
common stock, the Bank filed an application with the Nasdaq SmallCap Market to
approve the quotation of the Bank's common stock. The application was approved
and the Bank's common stock began trading on the Nasdaq SmallCap Market on
July 21, 1997. In connection with the formation of the Company and becoming the
holding company for the Bank, the Company's common stock was listed on Nasdaq's
National Market as of June 25, 1999, and the Bank's stock was removed from
public trading on the same date
STRATEGY
GENERAL. The business strategy of the Company will be to continue implementing
the measures outlined above while building upon the Company's existing business.
While the Company intends to continue to be a leader in SBA loans, its strategic
plan includes the expansion and growth of other products and services for small
to mid-sized businesses. The Company intends to expand geographically and within
its market areas primarily by hiring relationship managers who have strong
community ties, have experience in specialty lending and have their own existing
customer base.
NEW STRATEGIC INITIATIVE. With the announcement of earnings for 1999,
management announced that the Company is changing its strategy for future
earnings and growth. This new strategy addresses the following areas:
- - Retain the guaranteed portion of SBA 7A loans
Fund loan growth with core deposits and limited use of
wholesale deposits Seek additional, non-dilutive capital
sources Reduce reliance on gain on sale of SBA loans -
stabilizing quarterly earnings Expand the SBA lending
operations through the addition of loan production offices
- - Focused geographic expansion of the financial services
organization
Open additional community banking offices Expand
our e-commerce capabilities Add new services, including
securities and investment products Enhance and expand existing
core lending profit centers
- - Improve profitability and efficiency by growing core earnings and
controlling operating costs
Management expects that the retention of the guaranteed portion of SBA 7A
loans will result in a significant reduction in earnings for 2000 due to
the lack of gain income from the sale of these loans. However, management
expects that following 2000, net income will be significantly enhanced as
the interest on these retained loans offsets the loss of gain income.
These new initiatives are more fully addressed below:
RETENTION OF SBA 7A GUARANTEED LOANS. Prior to 2000, the Company sold most of
the guaranteed portion of SBA 7A loans, and during 1999 sold a portion of the
unguaranteed portion of SBA 7A loans. Beginning in 2000, the Company has changed
its strategy of generating fee income from the gain on sale of these loans to
one of increasing interest income through the retention of most of the
guaranteed and unguaranteed portions of these loans. During 1999, 1998 and 1997,
the Company sold $89.1 million in SBA guaranteed and unguaranteed loans.
FUND LOAN GROWTH WITH CORE DEPOSIT GROWTH AS WELL AS LIMITED USE OF WHOLESALE
DEPOSITS. The Company's ratio of core deposits to total deposits was 53.9% at
December 31, 1999. The Company anticipates that it will experience retail
deposit growth through the growth and development of the Temecula and Vista
branch offices. Due to the retention of SBA loans, the Company's core deposit to
total deposit ratio is expected to decline. Management's intent is to acquire
deposits economically and efficiently at competitive market rates. As the
Company makes loans to small and mid-sized businesses, it will cross-market its
core deposit products to the small and mid-sized business and its employees.
However, in order to fund the retention of the government guaranteed portion of
SBA loans, the Company has implemented a wholesale deposit management system,
which has the goal of matching the funding needs of the SBA guaranteed loans
with deposits which have similar terms with regards to the frequency of interest
rate changes. The Company is planning on expanding its retail deposit base
through either acquisitions of branches of institutions or de novo offices.
OBTAIN ADDITIONAL CAPITAL. Based on the accelerated growth due to the retention
of SBA loans in the future, the Company intends to seek capital sources that
have minimal dilutive impact to existing shareholders.
REDUCE RELIANCE ON GAIN ON SALE OF SBA LOANS - STABILIZING QUARTERLY EARNINGS.
Management believes the improved consistency in growth of core earnings
outweighs the volatile income associated with gains on sale of loans and the
risks associated with the servicing assets generated from the sale and servicing
of SBA 7A loans. For the year ended December 31, 1999, the Company generated
$2.5 million in gains from the sale of SBA guaranteed and unguaranteed loans,
which will not reoccur under the new strategic initiative. Management estimates
it will take three to four quarters before the net interest income on the
retained loans offsets the income associated with the gains on sale of the same
loans.
EXPAND OUR SBA LENDING OPERATIONS THROUGH THE ADDITION OF LOAN PRODUCTION
OFFICES. The Bank currently has six loan production offices outside of its
primary market area in La Mirada, Ontario, Los Angeles, Huntington Beach,
Sacramento and Castro Valley, California which predominantly originate SBA
loans. The Company's business strategy includes continued expansion of its loan
production offices into markets throughout California which are not contiguous
to the Company's primary market area. The Company has and will continue to open
such loan production offices in strategic locations where it is able to hire a
relationship manager with strong commercial lending ties to the community to be
served.
FOCUSED GEOGRAPHIC EXPANSION OF THE FINANCIAL SERVICES ORGANIZATION. The
Company's geographic expansion of its branch network is currently focused on
three corridors defined by local highways: State Route 78, Interstate Highway 5
and Interstate Highway 15.
OPEN ADDITIONAL COMMUNITY BANKING OFFICES. The Company's business strategy
includes making "in-market" acquisitions of branch offices of other banks or
establish "de novo" branch offices.. The Company has hired a seasoned management
team and plans to build on the strengths of that team. The Company has no
current arrangements, understandings or agreements regarding any such
acquisitions. Further, the Company would need regulatory approval before such
acquisitions could be consummated. No assurance can be made that such regulatory
approval would be obtained.
EXPAND OUR E-COMMERCE CAPABILITIES. The Company has established an award winning
web page, and is now operating a competitive cash management product for its
business customers and home banking for its consumer banking customers.
Management intends to add additional web based commercial services, including
the ability to apply for many of the Company's loan products, as well as buy and
sell securities via the internet.
ADD NEW SERVICES, INCLUDING SECURITIES AND INVESTMENT PRODUCTS. As part of its
strategic plan, the Company intends to offer securities through its community
banking offices as well as its web site. This is intended to be accomplished
through the use of a third party vendor.
ENHANCE AND EXPAND OUR EXISTING LOAN PROFIT CENTERS. The Company has
successfully acquired individual commercial lenders from other financial
institutions as the financial services industry has continued to consolidate.
The Company intends to expand and enhance our existing loan profit centers via
this process, and add these commercial lenders to the expanding banking network,
as well as through the addition of loan production offices, as appropriate.
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IMPROVE EFFICIENCY RATIO: As the company expands its operations through growth
and retention of assets, management expects net interest income to improve
dramatically as the interest is earned on these additional assets. Furthermore,
since much of the infrastructure for managing this growth is already in place,
and the lending production is already built into the overhead, the increase in
operating expenses should be considerably less than the increase in operating
income, thereby improving the efficiency ratio.
MARKET AREA AND COMPETITION
The Company's primary market area is North San Diego County consisting of the
communities of Fallbrook and Vista, and Southwestern Riverside County in the
community of Temecula. The populations of Fallbrook, Temecula and Vista are
approximately 39,000, 47,000 and 80,000, respectively. In 1999, the average
household incomes for Fallbrook, Temecula and Vista are $42,000, $63,000 and,
$61,000, respectively. The combined growth rate for the North San Diego
County and Southwestern Riverside Counties is approximately 4.5% per annum.
The banking and financial services business in California generally, and in
the Company's primary market area specifically, is highly competitive. The
increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems and the
accelerating pace of consolidation among financial service providers. As a
result of this consolidation, there were 9 community Companys located in the
Company's primary market area as of December 31, 1999.
The Company competes for loans, deposits and customers for financial services
with other commercial banks, savings and loan associations, securities and
brokerage companies, mortgage companies, insurance companies, finance
companies, money market funds, credit unions, and other nonbank financial
service providers. Many of these competitors are much larger in total assets
and capitalization, have greater access to capital markets and offer a
broader array of financial services than the Company. In order to compete
with the other financial services providers, the Company principally relies
upon local promotional activities, personal relationships established by
officers, directors and employees with its customers, and specialized
services tailored to meet its customers' needs.
There were approximately $1.8 billion in deposits in the Company's primary
market area as of June 30, 1999. The Company maintains three full service
banking offices in Fallbrook, Temecula and Vista, California. As of June 30,
1999, the Fallbrook Office deposit market share of the Fallbrook market was
approximately 25% and the Temecula Office deposit market share of the
Temecula market was approximately 4%. The Vista Office was opened in August
1998, and as of June 30, 1999 its market share was approximately 1%.
The Company is a "Preferred Lender" and has authority throughout the state of
California to originate SBA loans. For the SBA's fiscal year ended September
30, 1999, $1.9 billion of SBA guaranteed loans were originated in the State
of California, of which $45.3 million were originated by the Company.
Generally, the Company's small business customer is a small to mid-sized
business with annual sales between $1 million and $10 million.
UNDERWRITING PROCESS
The lending acitivities of the Company are guided by the basic lending policies
established by the Board of Directors. Each loan must meet minimum underwriting
criteria established in the Company's lending policies and must fit within the
Company's strategies for yield and portfolio enhancement.
For all newly-originated loans, upon receipt of a completed loan application
from a prospective borrower, a credit report is ordered and, if necessary,
additional financial information is requested. An independent appraisal is
required on every property securing a Company loan. In addition, the loan
officer conducts a review of these appraisals for accuracy, reasonableness
and conformance to the Company's lending policy on all applications. All
revisions to the Company's approved appraiser list must be approved by the
President.
Credit approval authority is segregated into three distinct levels, namely the
Directors' Loan Committee, Officers' Loan Committee and the individual lending
limits of loan officers. The limits for the various levels are
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determined by the Board of Directors and/or the President and reviewed
periodically. The Directors' Loan Committee consists of the President, who is
the chairman, and at least three outside directors of the Company. The committee
meets at least once a month or more frequently as needed. The Officers' Loan
Committee consists of the President, Executive Vice President, the Senior Credit
Officer, the First Vice President - Commercial Loans, the First Vice President -
SBA loans and the First Vice President, Corporate lending. The committee is
chaired by the Senior Credit Officer and meets twice a week or more frequently
as needed.
All loans to borrowing relationships where the aggregate amount of secured
credit is $500,000 or more or the aggregate amount of unsecured credit is
$250,000 or more must be submitted to the Officers' Loan Committee for approval.
The Officers' Loan Committee has authority to approve loans up to the Company's
legal lending limit. The Directors' Loan Committee reviews all real estate
secured loans originated of $200,000 or more and all other loans of $50,000 or
more, as well as classification of assets, delinquencies and the current status
of the loan portfolio. See "-Concentrations of Credit"
Loan applicants are notified of the credit decision by letter. If the loan is
approved, the loan commitment specifies the terms and conditions of the proposed
loan including the amount, interest rate, amortization term, a brief description
of the required collateral, and the required insurance coverage. The borrower
must provide proof of fire, flood (if applicable) and casualty insurance on the
property serving as collateral, which insurance must be maintained during the
full term of the loan. Generally, title insurance endorsed to the Company is
required on all first mortgage loans.
The Company maintains loan production offices in La Mirada, Ontario,
Sacramento, Los Angeles, Castro Valley and the City of Orange, California.
The loan production offices are typically staffed with a loan officer who
prepares the loan applications and compiles the necessary information
regarding the applicant. The completed loan file is then sent to the Bank's
main office in Fallbrook where the credit decision is made. The loan
production offices predominantly originate loans guaranteed by the SBA.
SBA LENDING PROGRAMS
The SBA lending program is designed by the federal government to assist the
small business community in obtaining financing from financial institutions
which are given government guaranty as an incentive to make the loan. The
Company is a "Preferred Lender" with the SBA. As a "Preferred Lender," the
Company can approve a loan within the authority given it by the SBA without
prior approval from the SBA. "Preferred Lenders" approve, package, fund and
service SBA loans within a range of authority that is not available to other
SBA lenders without the "Preferred Lender" designation. The Company has been
a "Preferred Lender" since 1992 and has this authority throughout the state
of California. For the SBA fiscal year ended September 30, 1999, the Company
was the 34th largest originator of SBA loans in the United States.
The Company's SBA loans fall into two categories, loans originated under the
SBA's 7A Program ("7A Loans") and loans originated under the SBA's 504
Program ("504 Loans"). Historically, 7A Loans have represented approximately
82% of the SBA Loans originated by the Company while 504 Loans have
represented the balance. During the year ended December 31, 1999, 504 Loans
have constituted approximately 24% of all SBA loans originated. Of all SBA
loans originated, approximately 96% are collateralized by commercial real
estate, while the balance are commercial business loans generally for the
purpose of funding working capital, equipment purchases and accounts
receivable. See "-Lending Activities-Commercial Real Estate Lending" and
"-General Business Lending."
Under the SBA's 7A Program, the SBA guarantees 75% of the loan in excess of
$100,000. This guarantee may become invalid only if the loan does not meet
the SBA documentation guidelines. The Company has never had a guarantee
invalidated by the SBA.
The Company's policy permits SBA 7A Loans in amounts up to $1.0 million.
Under certain circumstances for loans in excess of $1.0 million, the Company
enters into a guaranteed second trust arrangement with a second financial
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institution which makes the first trust loan. Loans collateralized by real
estate have terms of up to 25 years, while loans collateralized by equipment
and working capital have terms of up to 10 years and 7 years, respectively.
The Company requires a 10% down payment on most 7A Loans, with a 15% to 20%
down payment on loans collateralized by hotels, motels and service stations.
Beginning in 2000, the Company intends to retain the guaranteed portion of
most of the SBA loans it originates. Funding for these assets will come from
a mix of wholesale and retail deposit sources. Management's goal is to match
the interest rate sensitivity of these loans, which adjust on a quarterly
basis, with deposits which also adjust or mature with approximately the same
duration. The SBA loans generally have an interest rate of 1.5% to 2% over
prime, while the wholesale 90 day CD rates 2.25% to 2.75% under prime. The
retained portion is guaranteed by the government as to principal and up to
120 days of interest upon default, and therefore the strategy has the added
benefit of producing minimal credit risk to the Company.
Prior to 2000, the Company's strategy was to sell the guaranteed portion of
most of the SBA loans it originates. The Company retained the servicing on
such loans. This strategy was adopted to allow the Company to manage its
capital levels and to ensure that funding is always available to meet the
local community loan demand. Upon sale in the secondary market, the purchaser
of the guaranteed portion of 7A Loans pays a premium to the Company which,
generally, is equal to 9% of the guaranteed amount. The Company also receives
a servicing fee equal to 1% to 2% of the amount sold in the secondary market.
In the event that a 7A Loan goes into default within 270 days of its sale, or
prepays within 90 days, the Company is required to repurchase the loan and
refund the premium to the purchaser. In the past three years, the Company has
repurchased twenty one (21) loans and refunded premiums totaling $74,000 to
the purchasers.
Under the SBA's 504 Program, the Company requires a 10% down payment. The
Company then enters into a 50% first trust loan to the borrower and an
interim 40% second trust loan. The first trust has a term of 20 years. The
second trust is for a term of 120 days. Within the 120 day period of entering
into the loan, the second trust deed loans are sold by SBA certified
development companies as collateral for SBA guaranteed debentures. For 504
construction loans, the 120 day period does not commence until the notice of
completion is filed. The first trusts are pre-sold by the Company with no
recourse, prior to releasing the funds to the purchaser. The Company retains
no servicing on 504 Loans.
In addition to SBA lending, the Company makes a limited number of building and
industrial loans ("B&I Loans") guaranteed by the Farmers Home Administration
("FmHA"). The FmHA guarantee program for B&I Loans generally provides for a 80%
guarantee of the loan amount with no maximum loan amount limitations. This
program is generally available for businesses located in agricultural market
areas.
The Company's SBA lending program and portions of its real estate lending are
dependent on the continual funding and programs of certain federal agencies
or quasi-government corporations including, the SBA, the Federal Home Loan
Mortgage Corporation (the "FHLMC"), and the Federal National Mortgage
Association (the "FNMA"). The guaranteed portion of an SBA loan does not
count towards the Company's loans-to-one-borrower limitation which, at
December 31, 1999 was $2.4 million.
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LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The following table sets forth information
concerning the composition of the Company's loan portfolio at the dates
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loan portfolio composition:
Commercial loans............................ $ 6,064 4.16% $ 7,510 6.67% $ 5,271 6.82%
Aircraft loans.............................. 17,113 11.75 6,007 5.33 - -
Real estate:
Construction loans..................... 27,661 18.99 21,046 18.68 12,518 16.20
Secured by one- to four-family residential
Properties......................... 21,601 14.83 14,087 12.51 13,727 17.76
Secured by commercial properties....... 61,263 42.04 55,788 49.54 41,850 54.15
Consumer:
Home equity lines of credit.......... 2,649 1.82 2,033 1.80 1,270 1.64
Other................................ 9,342 6.41 6,166 5.47 2,652 3.43
-------- -------- ------- -------- ------- --------
Total Gross loans outstanding............... 145,693 100.00% 112,637 100.00% 77,288 100.00%
====== ====== ======
Deferred loan fees, unamortized gains, allowance
for loan losses...................... (1,499) (3,928) (3,404)
-------- ------ ------
Net loans................................... $144,194 $108,709 $73,884
======== ======== =======
</TABLE>
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LOAN MATURITY
The following table sets forth the contractual maturities of the
Company's gross loans at December 31, 1999.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
--------------------------------------------------------
MORE THAN MORE THAN
ONE YEAR 1 YEAR TO 3 YEARS MORE THAN TOTAL
OR LESS 3 YEARS TO 5 YEARS 5 YEARS LOANS
-------- ------ ------- ------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loan portfolio composition:
Commercial loans..................................... $ 7,549 $ 1,468 $ 1,675 $ 12,238 $ 22,930
Real estate:
Construction loans............................. 27,078 369 - 931 28,378
Secured by one- to four-family residential
properties.................................... 7,182 3,068 2,055 8,963 21,268
Secured by commercial properties............... 8,660 4,649 5,751 42,086 61,146
Consumer:
Home equity lines of credit..................... 175 204 39 2,231 2,649
Other........................................... 444 939 2,594 5,345 9,322
-------- -------- -------- -------- ---------
Total Gross loans outstanding........................ $ 51,088 $ 10,697 $ 12,114 $ 71,794 $ 145,693
======== ======== ======== ======== =========
</TABLE>
The following table sets forth, as of December 31, 1999, the dollar amounts of
gross loans receivable that are contractually due after December 31, 2000 and
whether such loans have fixed or adjustable rates.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 2000
----------------------------------
FIXED ADJUSTABLE TOTAL
---------- ------------ --------
(dollars in thousands)
<S> <C> <C> <C>
Loan portfolio composition:
Commercial loans............................................. $ 12,965 $ 2,415 $ 15,380
Real estate:
Construction loans..................................... 95 1,206 1,301
Secured by one- to four-family residential properties.. 10,579 3,507 14,086
Secured by commercial properties....................... 22,974 29,513 52,487
Consumer:
Home equity lines of credit............................. - 2,474 2,474
Other................................................... 8,859 18 8,877
-------- -------- --------
Gross loans outstanding...................................... $ 55,472 $ 39,133 $ 96,905
======== ======== ========
</TABLE>
9
<PAGE>
LOAN ORIGINATION AND SALE. The following table sets forth the Company's loan
originations by category and purchases, sales and principal repayments of loans
for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Beginning balance $ 108,709 $ 73,884 $ 65,496
Loans originated:
Commercial loans........................ 25,292 12,298 4,785
Real estate:
Construction loans..................... 56,151 39,677 26,292
One- to four-family.................... 41,605 56,868 7,595
Commercial(2).......................... 57,787 44,996 41,051
Consumer................................. 5,880 5,389 1,904
----------------------------------------------------------------------
Total loans originated................. 186,715 159,228 81,627
Loans sold..................................
Real estate:
One- to four-family............... 24,802 32,933 -
Commercial........................ 37,562 25,308 26,250
----------------------------------------------------------------------
Total loans sold...................... 62,364 58,241 26,250
Less:
Principal repayments..................... 86,437 66,686 48,110
Other net changes(1)..................... 2,429 (524) (1,121)
----------------------------------------------------------------------
Total loans:........................... $ 144,194 $ 108,709 $ 73,884
======================================================================
</TABLE>
- --------------
(1) Other net changes includes changes in allowance for loan losses, deferred
loan fees, loans in process and unamortized premiums and discounts.
(2) See "Retention of SBA 7A Loans"
COMMERCIAL REAL ESTATE LENDING. The Company focuses on originating loans
secured by commercial real estate, such as retail centers, small office and
light industrial buildings and other mixed use commercial properties. The
Company will make loans secured by special purpose properties such as
motels, and, from time-to-time, restaurants. Pursuant to the Company's
underwriting policies, commercial real estate loans, which are not SBA loans,
may be made in amounts up to the lesser of 70% of the appraised value of the
property or the sales price. These loans may be made with terms up to 10
years and are either adjustable rate loans or fixed with a maximum term of 5
years. The Company generally requires a minimum debt service ratio (the
ratio of net earnings on a property to debt service) of 1.2 to 1 or more. In
addition to commercial real estate lending, and to a much lesser extent, the
Company originates loans secured by multi-family residential properties.
Loans secured by commercial real estate and multi-family residential
properties are generally larger and involve a greater degree of risk than
one- to four-family residential loans. The liquidation value of commercial
and multi-family properties may be adversely affected by risks generally
incident to interests in real property, including changes or continued
weakness in general or local economic conditions and/or specific industry
segments; declines in real estate values; declines in rental room or
occupancy rates; increases in interest rates, real estate and personal
property tax rates and other operating expenses (including energy costs); the
availability of refinancing; changes in governmental rules, regulations and
fiscal policies, including rent control ordinances, environmental
legislation, taxation and other factors beyond the control of the borrower or
the lender. Because of this, the Company considers the borrower's experience
in owning and managing similar properties and the Company's lending
experience with the borrower.
GENERAL BUSINESS LENDING. The Company offers commercial business loans to
businesses operating in the Company's primary market area. The Company's
commercial business loans consist of lines of credit which require annual
renewals, adjustable-rate loans with terms of five to seven years, and short
term fixed-rate loans with terms of up to three years. Such loans are made up
to $2.4 million, the Company's loans-to-one-borrower limit at December 31,
1999. The Company will also enter into commercial loans in excess of $2.4
million but will participate out that portion in excess of its legal lending
limit.
10
<PAGE>
BUSINESS MANAGER. During the second quarter of 1998, in order to diversify
its loan portfolio, develop extended business relationships and increase its
yield, the Company initiated its business manager program ("Business
Manager"). The Company has contracted with an outside vendor to provide
software, forms and materials to allow the Company to purchase and manage
accounts receivable in its primary market area, on a full recourse basis.
Business Manager is available to borrowers with characteristics generally
unsuited for conventional lines of credit or who may lack the sophistication
and do not want the concerns of full accounts receivable management. As this
is a new line of business for the Company, involving a higher degree of risk,
the Company has hired an officer with 5 years of experience in accounts
receivable purchases and financing to manage and increase the level of such
loans. The Company derives revenues from Business Manager by purchasing a
company's receivables at a discount and collecting the outstanding invoice on
a timely basis at face value. The discount rate generally ranges from 2% to
6%. The yield on such loans generally ranges from 15% to 17%. A portion of
the discount is shared with the third party vendor of Business Manager.
An initial reserve, generally in the form of a deposit at the Company, is
also established by the customer of the Company which is selling the
receivables based on a percentage of the initial receivables funded which
generally is equal to 10% of all receivables purchased. Receivables that
cannot be collected by the Company are charged back to the customer against
this reserve. The reserve is actively monitored by the Company and any
deficiency must be replenished in a timely manner. These recourse agreements
are collateralized by business assets and/or guarantees. The Company
typically requires personal guarantees from persons owning more than 20% of
the customer. Additional collateral may also be required to minimize the
Company's risk. The collection of the receivables is serviced by the
Company's Note Department. See "--Loan Servicing." The Company also purchases
fraud insurance to partially protect against the risks involved in this type
of lending. The policy generally provides for a $20,000 deductible per
borrower with a maximum coverage of $200,000 per event. In addition,
quarterly audits of the borrowers are conducted by independedent third
parties contracted by the Company. Customers are also randomly checked to
verify the existence of the receivables. At December 31, 1999, the Company
had $2.9 million of Business Manager loans in its commercial loan portfolio.
AIRCRAFT LENDING. The Company's commercial loan portfolio also includes loans
secured by used aircraft. These loans range in size from $17,000 to $950,000,
have 15 year terms and are offered at variable or fixed interest rates. The
market for loans secured by used aircraft is dominated by a few financial
institutions. Typically these loans have maturities of 15 to 20 years but are
refinanced approximately every three to four years. Lenders mostly rely on
relationships with aircraft dealers to compete for aircraft loans. In April
1998, the Company hired a loan officer with 15 years experience in aircraft
lending and relationships with several aircraft dealers.
Aircraft loan customers are generally professionals and other high net worth
individuals. The primary consideration on a loan application for an aircraft
loan is the credit worthiness of the borrower and ability to repay the loan
amount. The Company's loan officers consider the costs of tie down space or
hanger rental, maintenance requirements and insurance coverage in assessing
the cash flow analysis of the borrower as such expenses can be substantial.
In addition to the credit worthiness of the borrower, the Company will review
the wholesale value of the aircraft. For loans over $200,000, an appraisal is
performed on the aircraft which provides both a wholesale value and a retail
value of the aircraft. Generally speaking, the wholesale value approximates
70% of the retail value. The Company will finance up to 100% of the wholesale
value of the aircraft. A title search is conducted on all aircraft loans. In
addition, appropriate ground and air coverage insurance and title insurance
must be obtained by the borrower. The Company requires a minimum down payment
of 15% and maturities are generally no more than 20 years. At December 31,
1999, the Company had $17.1 million of aircraft loans in its commercial loan
portfolio.
CONSTRUCTION LENDING. The Company originates construction loans on both one- to
four- family residences and on commercial real estate properties. The Company
originates two types of residential construction loans, consumer and builder.
The Company originates consumer construction loans to build single family
residences. The Company will originate builder construction loans to companies
engaged in the business of constructing homes for resale. These loans may be for
homes currently under contract for sale, model homes from which other homes will
be marketed within a subdivision or homes built for speculative purposes to be
marketed for sale during construction. For single family residences, the
borrower and the property must qualify for permanent financing. Prequalification
for single
11
<PAGE>
family residences can be accomplished through the Company's Mortgage Banking
Department. For commercial property, the borrower must qualify for permanent
financing and the debt service coverage must be 1.2 to 1 or more.
Qualification for commercial properties can be determined by the loan officer
as part of the credit presentation. Absent such prequalification, a
construction loan will not be approved by the Company. The Company originates
land acquisition and development loans with the source of repayment being
either the sale of finished lots or the sale of homes to be constructed on
the finished lots. The Company will originate land acquisition, development,
and construction loans on a revolving line of credit basis for subdivisions
whereby the borrower may draw upon such line of credit as lots are sold for
the purpose of improving additional lots. Construction loans are generally
offered with terms up to twelve months.
Construction loans are generally made in amounts up to 80% of the value of the
security property for "spec" single family residences and commercial properties
and up to 85% for owner-occupied single family residences. During construction,
loan proceeds are disbursed in draws as construction progresses based upon
inspections of work in place by the loan officer and independent construction
inspectors. At December 31, 1999, the Company had construction loans, including
land acquisition and development loans totaling $27.7 million or 19.0% of the
Company's total loan portfolio.
Construction loans are generally considered to involve a higher degree of
credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the security property's value upon completion of
construction as compared to the estimated costs of construction, including
interest. Also, the Company assumes certain risks associated with the
borrower's ability to complete construction timely and in a workmanlike
manner. If the estimate of value proves to be inaccurate, or if construction
is not performed timely or accurately, the Company may be confronted with a
project which, when completed, has a value which is insufficient to assure
full repayment.
CONSUMER LENDING. The Company's portfolio of consumer loans primarily
consists of adjustable-rate home equity lines of credit and installment loans
secured by new or used automobiles and loans secured by deposit accounts.
Unsecured consumer loans are made with a maximum term of three years and a
maximum loan amount of $5,000. At December 31, 1999, unsecured consumer loans
totaled $9.3 million.
As of December 31, 1999, home equity loans totaled $2.6 million, or 1.8% of
the Company's gross loan portfolio. The Company's home equity loans are
adjustable-rate and reprice with changes in the WALL STREET JOURNAL prime
rate. Adjustable-rate home equity lines of credit are offered in amounts up
to 75% of the appraised value with a maximum loan amount of $150,000. Home
equity lines of credit are offered with terms up to ten years.
ONE- TO FOUR-FAMILY RESIDENTIAL LENDING. The Company presently offers
adjustable-rate mortgage ("ARM") loans secured by one- to four-family
residences, substantially all of which are owner-occupied, with loan maturities
of up to 30 years. The Company's policy is to originate one- to four-family
residential loans in amounts generally up to 80% of the lower of the appraised
value or the selling price of the property securing the loan, although this
percentage is generally lower and varies depending upon an internal credit
rating of the proposed loan and borrower, which is based upon a credit scoring
matrix.
The majority of the one-to four-family loans originated by the Company are
originated to FNMA or FHLMC standards except in the case of certain loans, as
to size. Such loans are entered into only when the Company has a firm
commitment from a purchaser to acquire the loans prior to settlement. The
loans are recorded on the Company's books for a limited period of two to
three days. The Company generally sells these loans into the secondary market
without recourse, servicing released. The Company also originates a limited
number of one-to four-family loans in its immediate market area which it
retains in its portfolio.
The Company's one- to four-family residential loan portfolio at December 31,
1999, was $21.6 million. As of December 31, 1999, the average loan size for
one- to four-family residential loans was $124,000, the average maturity was
9 years, the average interest rate was 9.48%, and the average loan-to-value
ratio was 61.4%.
12
<PAGE>
The Company also operates a mortgage department that originates FNMA and
FHLMC loans, and it brokers other types of mortgage loans. Over 90% of the
loans that are originated for FNMA and FHLMC are immediately sold in the
secondary market. Many of these mortgage loans are the result of earlier
interim construction financing by the Company.
LOAN SERVICING. Loans are serviced by the loan officer except for loans
secured by single family residences and loans guaranteed by the SBA. The
Company outsources loan servicing on loans secured by single family
residences. Loan servicing retained from the sale of the guaranteed portion
of SBA loans is centralized at the Company's corporate headquarters and
handled through the Company's SBA Lending Department. As of December 31, 1999,
the SBA Lending Department was servicing $92.2 million of loans originated by
the Company but subsequently sold to other institutions.
The Company's loan servicing operations are intended to provide prompt
customer service and accurate and timely information for account follow-up,
financial reporting and management review. Following the funding of an
approved loan, all pertinent loan data is entered into the Company's data
processing system, which provides monthly billing statements, tracks payment
performance, and effects agreed upon interest rate adjustments on loans.
Regular loan service efforts include payment processing and collection follow
up, as well as tracking the performance of additional borrower obligations
with respect to the maintenance of casualty insurance coverage, payment of
property taxes and senior liens, if any, and periodically requesting required
information, including current borrower and property financial and operating
statements. When payments are not received by their contractual due date,
collection efforts begin on the tenth day of delinquency with a telephone
contact. If the borrower is non-responsive or the loan officer feels more
stringent action may be required, the Senior Credit Officer is consulted. All
formal demands for payment are reviewed by the Senior Credit Officer. Notices
of default are generally filed when the loan has become 60-90 days past due.
CREDIT RISK AND LOAN REVIEW
Credit risk represents the possibility that a customer or counterparty may
not perform in accordance with contractual terms. The Company incurs credit
risk whenever it extends credit to, or enters into other transactions with,
its customers. The risks associated with extensions of credit include general
risk, which is inherent in the lending business, and risk specific to
individual borrowers. Loan review and other loan monitoring practices provide
a means for the Company's management to ascertain whether proper credit,
underwriting and loan documentation policies, procedures and practices are
being followed by the Company's loan officers and are being applied uniformly
throughout the Company. Implementation and daily administration of loan
review rests with the Chief Credit Officer and the President who approve loan
officer requests for changes in risk ratings. Loan officers are responsible
for continually grading their loans so that individual credits properly
reflect the risk inherent therein. On an annual basis, the Board of Directors
provides for a third-party outside loan review of all loans that meet certain
criteria originated since the previous review. While the Company continues to
review these and other related functional areas, there can be no assurance
that the steps the Company has taken to date will be sufficient to enable it
to identify, measure, monitor and control all credit risk.
CONCENTRATIONS OF CREDIT
Under federal law, the Company's ability to make aggregate
loans-to-one-borrower is limited to 15% of unimpaired capital and surplus (as
of December 31, 1999, this amount was $2.4 million) plus an additional 10% of
unimpaired capital and surplus if a loan is secured by readily-marketable
collateral (defined to include only certain financial instruments and gold
bullion).
INVESTMENT ACTIVITIES
The investment policy of the Company, as established by the Board of
Directors, attempts to provide for and maintain liquidity, generate a
favorable return on investments without incurring undue interest rate and
credit risk, and complement the Company's lending activities. Specifically,
the Company's policies generally limit investments to government and federal
agency-backed securities and other non-government guaranteed securities,
including
13
<PAGE>
corporate debt obligations, that are investment grade. The Company's policies
provide the authority to invest in mortgage-backed securities guaranteed by
the U.S. government and agencies thereof. The Company's policies provide that
all investment purchases which increase or decrease the levels total
investment portfolio by $2 million in any one month (not including overnight
fed funds), or that are outside the policy guidelines, be approved by the
Board of Directors. Purchases and sales under this limitation and within the
guidelines of the policies may be done at the discretion of the President,
Chief Financial Officer or Controller. At December 31, 1999, the Company had
$7.0 million in U.S. Treasury and agency securities. At December 31, 1999,
the Company had federal funds sold of $6.9 million and had interest bearing
deposits in financial institutions totaling $800,000.
The following table sets forth the carrying values and estimated fair values of
the Company's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and other............. $ 6,710 $ 6,587 $ 1,676 $ 1,672 $ 705 $ 708
========= ========== ========= ========== ========= ==========
</TABLE>
The contractual maturities of securities held to maturity at December
31, 1999 were as follows:
<TABLE>
<CAPTION>
HELD TO MATURITY
-----------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
-----------------------------
(dollars in thousands)
<S> <C> <C>
Due in one year or less................................... $ 502 $ 499
Due from one year through five years...................... 6,208 6,088
-----------------------------
Total..................................................... $ 6,710 $ 6,587
=============================
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments and prepayments, proceeds from the sales of
loans, cash flows generated from operations and Federal Reserve borrowings are
the primary sources of the Company's funds for use in lending, investing and for
other general purposes.
DEPOSITS. The Company offers a variety of deposit accounts with a range of
interest rates and terms. The Company's deposits consist of checking
accounts, money market accounts, passbook accounts and certificates of
deposit. For the year ended December 31, 1999, core deposits constituted
64.2% of total average deposits. As of December 31, 1999, the average deposit
account was $15,000. The flow of deposits is influenced significantly by
general economic conditions, changes in money market rates, prevailing
interest rates and competition. The Company's deposits are attracted
primarily from individuals and small and medium-sized businesses.
The Company relies primarily on customer service, aggressive marketing and
cross-selling to customers and prospects to attract and retain deposits.
However, market interest rates and products, and rates offered by competing
financial institutions significantly affect the Company's ability to grow and
retain deposits.
Beginning in 2000, the Company began retaining the guaranteed portion of SBA
loans. In order to fund these retained assets, the Company began a program of
originating wholesale deposits with similar interest rate characterstics to
the SBA guaranteed loans. While the Company intends to continue funding these
loans using wholesale sources of funds, it is management's intent to expand
its retail deposit base through the acquisition of branches of other
institutions, or through the addition of de novo branches.
14
<PAGE>
The following table sets forth the distribution of the Company's average deposit
accounts for the periods indicated and the weighted average interest rates for
each category of deposits presented.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- -------------------------------
PERCENT PERCENT OF PERCENT OF
OF TOTAL TOTAL TOTAL
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
------- -------- ------- ------- --------- ------- ------- ---------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MMDA and NOW accounts.............. $ 52,295 37.80% 2.36% $ 52,816 47.85% 3.22% $ 41,818 47.38% 3.43%
Savings accounts................... 11,580 8.37 2.76 10,132 9.18 3.14 10,747 12.18 3.21
Non-interest-bearings accounts..... 24,999 18.07 -- 18,265 16.55 -- 14,673 16.63 --
Time deposits less than $100,000... 36,120 26.11 5.14 23,864 21.62 5.53 18,212 20.64 5.57
Time deposits of $100,000 or more.. 13,349 9.65 5.01 5,303 4.80 5.46 2,795 3.17 5.69
-------- -------- --------
Total average deposits............. $138,343 100.00% 3.60% $110,380 100.00% 3.29% $ 88,245 100.00% 3.35%
======== ======== ========
</TABLE>
The following table represents the deposit activity of the Bank for the periods
indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------------------------
1999 1998 1997
--------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Net deposits....................... $ 30,007 $ 24,259 $ 13,286
Interest credited on deposit accounts 3,970 3,518 2,908
-------- -------- --------
Total increase (decrease) in deposit account $ 33,977 $ 27,777 $ 16,194
======== ======== ========
</TABLE>
At December 31, 1999, the Bank had $17.4 million in time deposits in amounts of
$100,000 or more, consisting of 169 accounts, maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
MATURITY PERIOD AMOUNT RATE
--------------- ------ ----
(dollars in thousands)
<S> <C> <C>
Three months or less................ $13,707 5.13%
Three to Six Months................. 1,440 5.58%
Six to Twelve Months................ 1,667 5.61%
Over 12 months...................... 631 5.28%
-------
Total............................... $17,445
=======
</TABLE>
EMPLOYEES
As of December 31, 1999, the Company had a total of 104 full-time employees and
11 part-time employees. The management of the Company believes that its employee
relations are satisfactory.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the Company on its deposits and
its other borrowings and the interest rate received by the Company on loans
extended to its customers and securities held in the Company's portfolio
comprise the major portion of the Company's earnings. These rates are highly
sensitive to many factors that are beyond the control of the Company.
Accordingly, the earnings and growth of the Company are subject to the
influence of domestic and foreign economic conditions, including inflation,
recession and unemployment.
The commercial banking business is not only affected by general economic
conditions but is also influenced by monetary and fiscal policies of the federal
government and the policies of regulatory agencies, particularly the Federal
Reserve Board. The Federal Reserve Board implements national monetary policies
(with objectives such as curbing inflation and combating recession) by its
open-market operations in United States Government
15
<PAGE>
securities, by adjusting the required level of reserves for financial
institutions subject to its reserve requirements and by varying the discount
rates applicable to borrowings by depository institutions. The actions of the
Federal Reserve Board in these areas influence the growth of bank loans,
investments and deposits and also affect interest rates charged on loans and
paid on deposits. The nature and impact of any future changes in monetary
policies cannot be predicted.
From time to time, legislation is enacted which has the effect of increasing
the cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, in the California legislature
and before various bank regulatory and other professional agencies. For
example, legislation has been recently signed into law that, among other
things, repeals the statutory restrictions on affiliations between commercial
banks and securities firms. See " Financial Modernization Legislation."
SUPERVISION AND REGULATION
The Company and the Bank are extensively regulated under both federal and state
law. Set forth below is a summary description of certain laws which relate to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to the applicable laws
and regulations.
THE COMPANY
The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the "Bank Holding Company Act"), and is
registered as such with, and subject to the supervision of, the Federal Reserve
Board. The Company is required to file with the Federal Reserve Board quarterly
and annual reports and such additional information as the Federal Reserve Board
may require pursuant to the Bank Holding Company Act. The Federal Reserve Board
may conduct examinations of bank holding companies and their subsidiaries.
The Company is required to obtain the approval of the Federal Reserve Board
before it may acquire 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 of shares, the Company would own or control more than 5% of the
voting shares of such bank. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of the Company and another bank holding
company.
The Company's ability to engage in non-banking activities is also regulated by
the Federal Reserve Board. See "Financial Modernization Legislation."
Under the Federal Reserve Board's regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe and unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving as
a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both.
16
<PAGE>
The Company is subject to the periodic reporting requirements of Section
12(g) of the Securities Exchange Act of 1934, as amended, and files certain
reports and proxy statements pursuant to such Act with the Securities and
Exchange Commission (the "SEC").
THE BANK
The Bank, as a national banking association, is subject to primary supervision,
examination and regulation by the Comptroller. If, as a result of an examination
of a bank, the Comptroller should determine that the financial condition,
capital resources, asset quality, earnings prospects, management, liquidity or
other aspects of the Bank's operations are unsatisfactory or that the Bank or
its management is violating or has violated any law or regulation, various
remedies are available to the Comptroller. Such remedies include the power to
enjoin "unsafe or unsound practices," to require affirmative action to correct
any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in
capital, to restrict the growth of the Bank, to assess civil monetary penalties,
and to remove officers and directors. The FDIC has similar enforcement
authority, in addition to its authority to terminate a bank's deposit insurance
in the absence of action by the Comptroller and upon a finding that a bank is in
an unsafe or unsound condition, is engaging in unsafe or unsound activities, or
that its conduct poses a risk to the deposit insurance fund or make prejudice
the interest of its depositors. The Bank has never been subject to any such
actions by the Comptroller or the FDIC.
The deposits of the Bank are insured by the FDIC in the manner and to the extent
provided by law. For this protection, the Bank pays a semiannual statutory
assessment. The Bank is also subject to certain regulations of the Federal
Reserve Board and applicable provisions of California law, insofar as they do
not conflict with or are not preempted by federal banking law. Various other
requirements and restrictions under the laws of the United States and the State
of California affect the operations of the Bank. Federal and California statutes
and regulations relate to many aspects of the Bank's operations, including
reserves against deposits, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends, locations of
branch offices, capital requirements and disclosure obligations to depositors
and borrowers. Further, the Bank is required to maintain certain levels of
capital.
CAPITAL STANDARDS
The Federal Reserve Board and the Comptroller have adopted risk-based minimum
capital guidelines intended to provide a measure of capital that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. Treasury securities, to 100% for assets with
relatively high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which includes off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock,
retained earnings, noncumulative perpetual preferred stock (cumulative perpetual
preferred stock for bank holding companies) and minority interests in certain
subsidiaries, less most intangible assets. Tier 2 capital may consist of a
limited amount of the allowance for possible loan and lease losses, cumulative
preferred stock, long term preferred stock, eligible term subordinated debt and
certain other instruments with some characteristics of equity. The inclusion of
elements of Tier 2 capital is subject to certain other requirements and
limitations of the federal banking agencies. The federal banking agencies
require a minimum ratio of qualifying total capital to risk-adjusted assets of
8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%.
17
<PAGE>
In addition to the risked-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio. For a banking organization rated in
the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. For all banking organizations not rated in the highest category, the minimum
leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or
4% to 5%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
For information concerning the capital ratios of the Company and the Bank, see
ITEM 6 of this report, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION."
Under applicable regulatory guidelines, the Bank was considered "Well
Capitalized" as of December 31, 1999.
PROMPT CORRECTIVE ACTION
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. The law required each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized".
An insured depository institution generally will be classified in the following
categories based on capital measures indicated below:
<TABLE>
<CAPTION>
"WELL CAPITALIZED" "ADEQUATELY CAPITALIZED"
<S> <C>
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"UNDERCAPITALIZED" "SIGNIFICANTLY UNDERCAPITALIZED"
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"CRITICALLY UNDERCAPITALIZED"
Tangible equity to total assets less than 2%.
</TABLE>
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for a hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
The law prohibits insured depository institutions from paying management fees to
any controlling persons or, with certain limited exceptions, making capital
distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory
18
<PAGE>
approval for acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital plan unless, among other things, it determines that the plan (i)
specifies the steps the institution will take to become adequately capitalized,
(ii) is based on realistic assumptions and (iii) is likely to succeed in
restoring the depository institution's capital. In addition, each company
controlling an undercapitalized depository institution must guarantee that the
institution will comply with the capital plan until the depository institution
has been adequately capitalized on an average basis during each of four
consecutive calendar quarters and must otherwise provide adequate assurances of
performance. The aggregate liability of such guarantee is limited to the lesser
of (a) an amount equal to 5% of the depository institution's total assets at the
time the institution became undercapitalized, or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution as of the time the institution fails to comply
with its capital restoration plan. Finally, the appropriate federal banking
agency may impose any of the additional restrictions or sanctions that it may
impose on significantly undercapitalized institutions if it determines that such
action will further the purpose of the prompt correction action provisions.
An insured depository institution that is significantly undercapitalized, or is
undercapitalized and fails to submit, or in a material respect to implement, an
acceptable capital restoration plan, is subject to additional restrictions and
sanctions. These include, among other things: (i) a forced sale of voting shares
to raise capital or, if grounds exist for appointment of a receiver or
conservator, a forced acquisition; (ii) restrictions on transactions with
affiliates; (iii) further limitations on interest rates paid on deposits; (iv)
further restrictions on growth or required shrinkage; (v) modification or
termination of specified activities; (vi) replacement of directors or senior
executive officers; (vii) prohibitions on the receipt of deposits from
correspondent institutions; (viii) restrictions on capital distributions by the
holding companies of such institutions; (ix) required divestiture of
subsidiaries by the institution; or (x) other restrictions as determined by the
appropriate federal banking agency. Although the appropriate federal banking
agency has discretion to determine which of the foregoing restrictions or
sanctions it will seek to impose, it is required to force a sale of voting
shares or merger, impose restrictions on affiliate transactions and impose
restrictions on rates paid on deposits unless it determines that such actions
would not further the purpose of the prompt corrective action provisions. In
addition, without the prior written approval of the appropriate federal banking
agency, a significantly undercapitalized institution may not pay any bonus to
its senior executive officers or provide compensation to any of them at a rate
that exceeds such officer's average rate of base compensation during the 12
calendar months preceding the month in which the institution became
undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or to
an acquisition or merger as required by the regulator.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
19
<PAGE>
PREMIUMS FOR DEPOSIT INSURANCE
All deposits of the Bank are insured by the FDIC and are subject to FDIC
insurance assessments. The amount of FDIC assessments paid by individual insured
depository institutions is based upon their relative risk as measured by
regulatory capital ratios and certain other factors. The Bank pays an assessment
of $0.0052 per $100 of deposits as a result of its "Well Capitalized" status.
FINANCIAL MODERNIZATION LEGISLATION
On November 12, 1999, the President signed into law the Gramm-Leach-Bliley
Act, or ("GLB Act"), which significantly changed the regulatory structure and
oversight of the financial services industry. The GLB Act revises the Bank
Holding Company Act of 1956 and repeals the affiliation provisions of the
Glass-Steagall Act of 1933, permitting a qualifying holding company, called a
financial holding company, to engage in a full range of financial activities,
including banking, insurance, and securities activities, as well as merchant
banking and additional activities that are "financial in nature" or
"complementary to such financial activities. The GLB Act thus provides
expanded financial affiliation opportunities for existing bank holding
companies and permits various non-bank financial services providers to
acquire banks by allowing bank holding companies to engage in activities such
as securities underwriting, and underwriting and brokering of insurance
products. The GLB Act also expands passive investments by financial holding
companies in any type of company, financial or nonfinancial, through merchant
banking and insurance company investments. In order for a bank holding
company to qualify as a financial holding company, its subsidiary depository
institution must be "well-capitalized" and "well-managed" and have at least a
"satisfactory" Community Reinvestment Act rating.
The GLB Act also reforms the regulatory framework of the financial services
industry. Under the GLB Act, financial holding companies are subject to
primary supervision by the Federal Reserve Board while current federal and
state regulators of financial holding company regulated subsidiaries such as
insurers, broker-dealers, and investment companies and banks generally retain
their jurisdiction and authority. In order to implement its underlying
purposes, the GLB Act preempts state laws restricting the establishment of
financial affiliations authorized or permitted under the GLB Act, subject to
specified exceptions for state insurance regulators. With regard to
securities laws, the GLB Act removes the current blanket exemption for banks
from the broker-dealer registration requirements under the Securities
Exchange Act of 1934, amends the Investment Company Act of 1940 with respect
to bank common trust fund and mutual fund activities, and amends the
Investment Advisers Act of 1940 to require registration of banks that act as
investment advisers for mutual funds.
The GLB Act also includes provisions concerning subsidiaries of national
banks, permitting a national bank to engage in most financial activities
through a financial subsidiary, provided that the bank and its depository
institution affiliates are "well-capitalized" and "well-managed" and meet
certain other qualification requirements relating to total assets,
subordinated debt, capital, risk management, and affiliate transactions. With
respect to subsidiaries of the state banks, new activities as "principal"
would be limited to those permissible for a national bank financial
subsidiary. The GLB Act requires a state bank with a financial subsidiary
permitted under the GLB Act as well as its depository institution affiliates
to be "well-capitalized," and also subjects the bank to the same capital,
risk management and affiliate transaction rules as applicable to national
banks. The provisions of the GLB Act relating to financial holding companies
became effective 120 days after its enactment, or about March 15, 2000,
excluding, the federal preemption provisions, which became effective on the
date of enactment.
The GLB Act will likely increase competition in the markets in which the Company
operates, although it is difficult to assess the impact that such increased
competition may have on the Company's operations.
The Company currently meets all the requirements for financial holding company
status. However, the Company does not expect to elect financial holding company
status unless and until it intends to engage in any of the expanded activities
under the GLB Act which require such status. Unless and until it elects such
status, the Company will only be permitted to engage in non-banking activities
that were permissible for bank holding companies as of the date of the enactment
of the GLB Act.
20
<PAGE>
COMMUNITY REINVESTMENT ACT
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
In connection with its assessment of CRA performance, the appropriate bank
regulatory agency assigns a rating of "outstanding." "satisfactory," "needs to
improve" or "substantial noncompliance." At its last examination by the
Comptroller, the Bank received a CRA rating of "Satisfactory."
POTENTIAL ENFORCEMENT ACTIONS
The Company and/or the Bank may be subject to potential enforcement actions by
the Comptroller, the Federal Reserve Board and the FDIC for unsafe or unsound
practices in conducting their businesses or for violations of any law, rule,
regulation or any condition imposed in writing by the agency or any written
agreement with the agency. Enforcement actions may include the imposition of a
conservator or receiver, the issuance of a cease and desist order that can be
judicially enforced, the termination of insurance of deposits (in the case of a
depository institution), the imposition of civil money penalties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the enforcement of such actions through
injunctions or restraining orders based upon a judicial determination that the
agency would be harmed if such equitable relief was not granted. Neither the
Company nor the Bank has ever been subject to any such enforcement action.
21
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTIES
The Company occupies a permanent headquarters facility which is located at 130
West Fallbrook Street, Fallbrook, California. The purchase price for the
headquarters was approximately $550,000 for the land, building and improvements.
The building has approximately 4,000 square feet. The Bank also leases
approximately 9,207 square feet in a building across the parking lot from its
headquarters building. This extension houses certain of the Bank's
administrative functions.
On March 24, 1997, the Bank relocated its Temecula branch office to 27541 Ynez
Road, Temecula, California. The office contains approximately 6,338 square feet
and is leased pursuant to a lease expiring in March 2007. On August 4, 1998, the
Bank opened a branch office located at 1690 S. Melrose Drive, Vista, California.
This office contains approximately 5,700 square feet and is leased pursuant to a
lease expiring on June 3, 2008. The Bank also maintains loan production offices
in leased premises at 14241 E. Firestone Boulevard, Suite 400, La Mirada,
California; 1688 S. Melrose Drive, Suite 203, Vista; 333 City Blvd., Suite 1700,
The City of Orange, California; 3535 Inland Empire Blvd., Ontario, California;
and 112 Llewellyn Court, Folsom, California. The Bank also leases some
additional office space in Fallbrook to house administrative and lending
personnel. The branch offices and the additional offices are considered adequate
for the Bank's current needs. The Bank's rental expense for 1999 was $433,000.
See Note 13 of the Company's financial statements included in Item 7 of this
Report for certain additional information concerning the amount of the Bank's
lease commitments.
ITEM 3. LEGAL PROCEEDINGS
The Bank is, from time to time, subject to various pending and threatened legal
actions which arise out of the normal course of its business. Except as
described in the next paragraph, the Bank is not a party to any pending legal or
administrative proceedings (other than ordinary routine litigation incidental to
the Bank's business) and no such proceedings are known to be contemplated.
The Bank has been subject to a lawsuit by a former employee alleging, amongst
other things, breach of contract and fraud. Trial commenced on July 19, 1999
in Riverside County Superior Court, with the jury rendering a verdict on
August 2, 1999. The jury awarded compensatory damages of approximately
$65,000, punitive damages of $750,000, court costs and legal fees. On October
26, 1999, the Superior Court ordered a new trial on punitive damages only
unless the plaintiff consented to a reduction of the punitive damage award to
$250,000. On November 4, 1999, the plaintiff consented to the punitive damage
verdict of $250,000. The Bank has filed a notice of appeal in connection with
the judgement. For the year ended December 31, 1999, the Company accrued
$298,000 in connection with this verdict.
There are no other material proceedings adverse to the Bank to which any
director, officer, affiliate of the Bank or 5% shareholder of the Bank, or any
associate of any such director, officer, affiliate or 5% shareholder of the Bank
is a party, and none of the above persons has a material interest adverse to the
Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
22
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
Prior to the Holding Company formation, the Bank's common stock was listed on
the Nasdaq SmallCap Market under the symbol "FBRK." At the effective time of the
Holding Company Formation on June 25, 1999, the Company's common stock became
listed on the Nasdaq National Market under the symbol "CMBC."
The information in the following table indicates for each quarterly period
during the last two years (i) the high and low closing sale prices of the Bank's
common stock prior to the Holding Company Formation and (ii) the high and low
closing sale prices of the Company's common stock after the Holding Company
Formation. Prices do not include retail mark-ups, mark downs or commission. The
information has been adjusted to reflect the 5% stock dividends in the fourth
quarters of 1998 and 1999.
<TABLE>
<CAPTION>
Quarter Ended Closing Prices
- ----------------------------------------------------------
1998 Low High
- ---------------------------------------------------------------------------
<S> <C> <C>
March 31 $ 7.823 $ 8.844
June 30 $ 6.803 $ 8.844
September 30 $ 5.896 $ 8.390
December 31 $ 5.896 $ 7.738
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended Closing Prices
- -----------------------------------------------------------
1999 Low High
- ---------------------------------------------------------------------------
<S> <C> <C>
March 31 $ 6.905 $ 8.095
June 30 $ 6.786 $ 7.857
September 30 $ 6.667 $ 8.095
December 31 $ 5.000 $ 7.738
</TABLE>
HOLDERS
As of February 28, 2000, there were approximately 374 shareholders of record of
the Company's common stock, and approximately 1,100 beneficial shareholders,
including the shareholders of record. There are no other classes of common
equity outstanding.
DIVIDENDS
The Company is a legal entity separate and distinct from the Bank. The Company's
shareholders are entitled to receive dividends when and as declared by its Board
of Directors, out of funds legally available therefore, subject to the
restrictions set forth in the Delaware General Corporation Law (the "Corporation
Law"). The Corporation Law provides that a corporation may dividend out of any
surplus, and, if it has no surplus, out of any net profits for the fiscal year
in which the dividend was declared or for the preceding fiscal year (provided
that the payment will not reduce capital below the amount of capital represented
by all classes of shares having a preference upon the distribution of assets).
The availability of operating funds for the Company and the ability of the
Company to pay a cash dividend depends largely on the Bank's ability to pay a
cash dividend to the Company. The payment of cash dividends by
23
<PAGE>
the Bank is subject to restrictions set forth in the National Bank Act. In
general, dividends may not be paid from any of the Bank's capital. Dividends
must be paid out of available net profits, after deduction of all current
operating expenses, actual losses, accrued dividends on preferred stock, if any,
and all federal and state taxes. Additionally, a national bank is prohibited
from declaring a dividend on its shares of common stock until its surplus fund
equals its common capital, or, if its surplus fund does not equal its common
capital, until at least one-tenth of such bank's net profits, for the preceding
half year in the case of quarterly or semi-annual dividends, or the preceding
two half-years in the case of an annual dividend, are transferred to its surplus
fund each time dividends are declared. The approval of the Comptroller is
required if the total of all dividends declared by a national bank in any
calendar year exceeds the total of its net profits for that year combined with
its retained net profits of the two preceding years, less any required transfers
to surplus or a fund for the retirement of any preferred stock. Furthermore, the
Comptroller also has authority to prohibit the payment of dividends by a
national bank when it determines such payment to be an unsafe and unsound
banking practice.
Additionally, bank regulatory agencies have authority to prohibit banks from
engaging in activities that, in their respective opinions, constitute unsafe
and unsound practices in conducting its business. It is possible, depending
upon the financial condition of the bank in question and other factors, that
the bank regulatory agencies could assert that the payment of dividends or
other payments might, under some circumstances, be an unsafe or unsound
practice. Further, the bank regulatory agencies have established guidelines
with respect to the maintenance of appropriate levels of capital by banks or
bank holding companies under their jurisdiction. Compliance with the
standards set forth in such guidelines and the restrictions that are or may
be imposed under the prompt corrective action provisions of federal law could
limit the amount of dividends which the Bank may pay.
The following table sets forth the per share amount and month of payment for all
quarterly cash dividends paid since January 1, 1998.
<TABLE>
<CAPTION>
Month Paid Amount per Share
-----------------------------------------------------
<S> <C>
January 1998 $0.05
April 1998 $0.05
July 1998 $0.05
</TABLE>
Effective with the third quarter of 1998, the Bank discontinued paying cash
dividends to its shareholders in favor of retaining earnings for future growth.
The Bank declared a five percent (5%) stock dividend to shareholders of record
as of November 30, 1998, which was paid on December 11, 1998. Subsequent to the
Holding Company Formation, the Company declared a five percent (5%) stock
dividend to shareholders of record as of November 15, 1999, which was paid on
November 30, 1999. Whether or not stock dividends or any cash dividends will be
paid in the future will be determined by the Board of Directors after
consideration of various factors. The Company's and the Bank's profitability and
regulatory capital ratios in addition to other financial conditions will be key
factors considered by the Board of Directors in making such determinations
regarding the payment of dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
OVERVIEW
The Fallbrook National Bank ("the Bank") commenced operations in 1985 and has
focused primarily on providing commercial banking products and services to
small and mid-sized businesses in its primary market area. In the early
1990's the Bank began its SBA
24
<PAGE>
lending program. The Bank is currently a "Preferred Lender" with the SBA and the
7th largest originator of SBA loans in California and 34th in the Nation based
on loan originations for SBA 7A loans originated during the SBA's fiscal year
ended September 30, 1999. In January 1996, the Board of Directors promoted
Thomas E. Swanson to President of the Bank. Prior to Mr. Swanson's appointment,
the Bank employed a no growth business strategy due to local market conditions,
and did not engage in strategic planning. In 1996, Mr. Swanson began
implementing changes designed to prepare the Bank for future growth. These
changes included: (i) reorganizing the management structure; (ii) diversifying
the Bank's profit centers; (iii) investing in infrastructure to support
diversification and (iv) listing the common stock on Nasdaq.
On June 25, 1999, the Bank became the wholly owned subsidiary of Community
Bancorp Inc. (the "Company") through a holding company reorganization, where
each share of Bank stock was exchanged for a share of Company stock on a one
for one basis. The reorganization was accounted for on a basis similar to the
pooling of interest method, resulting in a tax free exchange. No additional
equity was issued as part of this transaction. NOTE: In the consolidated
financial statements and footnotes presented herein, references to the Bank
are references to Fallbrook National Bank. References to the Company are
references to Community Bancorp Inc. (including the Bank), except for periods
prior to June 25, 1999, in which case, references to the Company are
references to the Bank.
The Company's primary market area is northern San Diego County consisting of
the communities of Fallbrook and Vista, and Southwestern Riverside County
consisting of the community of Temecula. The populations of Fallbrook,
Temecula and Vista are, 39,000, 47,000 and 80,000, respectively. The average
household incomes for Fallbrook, Temecula and Vista are $42,000, $63,000 and,
$61,000, respectively. The combined growth rate for the northern San Diego
County and Southwestern Riverside Counties is approximately 4.5% per annum.
NEW STRATEGIC INITIATIVE. With the announcement of earnings for 1999,
management announced that the Company is changing its strategy for future
earnings and growth. This new strategy addresses the following areas:
- - Retain the guaranteed portion of SBA 7A loans
Fund loan growth with core deposits and limited use of
wholesale deposits
Seek additional non-dilutive capital sources
Reduce reliance on gain on sale of SBA loans - stabilizing earnings
Expand the SBA lending operations through the addition of loan
production offices
- - Focused geographic expansion of the financial services organization
Open additional community banking offices
Expand our e-commerce capabilties
Add new services, including securities and investment products
Enhance and expand existing core lending profit centers
- - Improve profitability and efficiency by growing core earnings and
controlling operating costs.
Management expects that the retention of the guaranteed portion of SBA 7A
loans will result in a significant reduction in earnings for 2000 due to the
lack of gain income from the sale of these loans. However, management expects
that following 2000, net income will be significantly enhanced as the
interest on these retained loans offsets the loss of gain income.
RESULTS OF OPERATIONS
NET INCOME
Net income was $1.6 million for the year ended December 31, 1999 compared to
$1.3 million for the years ended December 31, 1998 and 1997. Basic earnings
per share were $0.65, $0.53 and $0.51 for the years ended December 31, 1999,
1998 and 1997, respectively. Diluted earnings per share was $0.63, $0.52 and
$0.49 for the years ended December 31, 1999, 1998 and 1997, respectively.
Earnings per share for 1998 and 1997 have been adjusted for the effects of
the stock dividends in 1998 and 1999. The Company incurred non-recurring
expenses of $362,000 in 1999 due to the establishment of a $298,000 reserve
for a lawsuit plus the cost of formation of the holding company, and in 1997
the Company incurred non-recurring expenses of $150,000 due to an attempted
hostile takeover. Income increased in 1999 and 1998 due to growth in SBA
lending and related gains from the sale of some of these loans in the
secondary market, from growth in real estate construction lending, and from
the Bank's mortgage brokerage operations. The Company's equity to assets
ratio for the years ended December 31, 1999, 1998 and 1997 was 6.45%, 7.27%
and 8.88%, respectively.
The return on average assets for the year ended December 31, 1999 was 1.02%
compared with 1.04% for the year ended December 31, 1998 and 1.27% for the
year ended December 31, 1997. The dividend payout ratio for the year ended
December 31, 1998 was 18.22%, compared to 36.32% for the year ended December
31, 1997. There were no cash dividends paid in 1999. The decrease in the
return on average assets from 1997 to 1998 was due to the 27% growth in total
assets, which was part of the Company's strategic plan. The return on average
equity was 15.32% for the year ended December 31, 1999 compared to 14.26% for
the year ended December 31, 1998, and 14.34% for the year ended December 31,
1997.
25
<PAGE>
Quarterly cash dividends of $0.05 per share were paid on January 2, April 1, and
July 1, 1998 and on January 2, April 1, July 1, and October 1 in 1997. The Bank
changed its dividend policy in 1998 as part of its strategic plan, discontinuing
cash dividends in favor of retaining earnings to support internal growth.
INTEREST INCOME
NET INTEREST INCOME. Net interest income is the most significant component of
the Company's income from operations. Net interest income is the difference (the
"interest rate spread") between the gross interest and fees earned on the loan
and investment portfolios and the interest paid on deposits and other
borrowings. Net interest income depends on the volume of and interest rate
earned on interest earning assets and the volume of and interest rate paid on
interest bearing liabilities.
The following table sets forth a summary of average balances with corresponding
interest income and interest expense as well as average yield and cost
information for the periods presented. Average balances are derived from daily
balances, and nonaccrual loans are included as interest bearing loans for the
purpose of this table.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998
----------------------------------- ---------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID RATE/YIELD BALANCE EARNED/PAID RATE/YIELD
----------- ----------- ----------- ---------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average Assets:
Securities and time deposits
at other Banks................ $ 5,327 $ 301 5.65% $ 1,904 $ 108 5.67%
Federal funds sold............... 9,976 482 6.46 16,169 896 5.54
Loans:
Commercial.................... 53,404 5,128 9.60 42,551 4,657 10.94
Real estate................... 62,393 6,350 10.18 45,747 4,878 10.66
Consumer...................... 6,129 564 9.20 4,014 414 10.31
-------- ---------- --------- -------
Total loans...................... 121,926 12,042 9.88 92,312 9,949 10.78
-------- ---------- --------- -------
Total earning assets............. 137,229 12,825 9.35 110,385 10,953 9.92
Non earning assets............... 15,569 10,868
-------- ---------
Total average assets............. $152,798 $ 121,253
======== =========
Average liabilities and
shareholders' equity:
Interest bearing deposits:
Savings and interest bearing
Accounts.................... $ 63,875 $ 1,556 2.44 $ 62,948 $ 2,015 3.20
Time deposits ................ 49,469 2,490 5.03 29,167 1,611 5.52
-------- ---------
Total interest bearing deposits.. 113,344 4,046 3.57 92,115 3,626 3.94
Demand deposits.................. 24,999 -- -- 18,265 -- --
Other borrowings................. 2,822 235 8.33 1,120 114 10.18
-------- ---------- ---------
Total interest bearing
liabilities................... 141,165 4,281 3.03 111,500 3,740 3.35
Accrued expenses and other
liabilities................... 1,507 940
Net shareholders' equity......... 10,126 8,813
-------- ---------
Total average liabilities and
shareholders' equity.......... $152,798 $ 121,253
======== =========
Net interest rate spread......... 6.32% 6.57%
==== =====
Net interest income.............. $8,544 $ 7,213
====== =======
Net yield on interest-earning 6.23% 6.53%
assets........................ ==== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997
----------------------------------
AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID RATE/YIELD
-------- ------------ ------------
<S> <C> <C> <C>
Average Assets:
Securities and time deposits
at other Banks................ $ 1,846 $ 100 5.42%
Federal funds sold............... 13,463 759 5.64
Loans:
Commercial.................... 34,818 3,776 10.84
Real estate................... 35,389 3,943 11.14
Consumer...................... 3,605 382 10.60
------- -------
Total loans...................... 73,812 8,101 10.98
------- -------
Total earning assets............. 89,121 8,960 10.05
Non earning assets............... 9,013
-------
Total average assets............. $98,134
=======
Average liabilities and
shareholders' equity:
Interest bearing deposits:
Savings and interest bearing
Accounts.................... $54,098 $ 1,779 3.29
Time deposits ................ 19,474 1,174 6.03
------- -------
Total interest bearing deposits.. 73,572 2,953 4.01
Demand deposits.................. 14,673 -- --
Other borrowings................. 288 48 16.67
------- -------
Total interest bearing
liabilities................... 88,533 3,001 3.39
Accrued expenses and other
liabilities................... 887
Net shareholders' equity......... 8,714
-------
Total average liabilities and
shareholders' equity.......... $98,134
=======
Net interest rate spread......... 6.66%
====
Net interest income.............. $ 5,959
=======
Net yield on interest-earning 6.69%
assets........................ ====
</TABLE>
26
<PAGE>
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For
each category of interest earning assets and interest bearing liabilities,
information is provided on changes attributable to: (i) changes in volume
(change in average volume multiplied by old rate); (ii) changes in rate
(change in rate multiplied by old average volume); (iii) changes in
rate-volume (change in rate multiplied by the change in average volume).
Changes due to both rate and volume are allocated to rate.
<TABLE>
<CAPTION>
1999 VS. 1998 1998 VS. 1997
---------------------------------------------- ----------------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------------- ------------- --------------- -------------- --------------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Securities and time deposits at
other Banks.................. $ 194 $ (1) $ 193 $ 3 $ 5 $ 8
Federal funds sold............... (343) (71) (414) 153 (16) 137
Loans:
Commercial................... 1,187 (716) 471 839 42 881
Real estate.................. 1,774 (302) 1,472 1,154 (219) 935
Consumer..................... 218 (68) 150 43 (11) 32
--------------- ------------- --------------- -------------- --------------- ---------------
Total loans...................... 3,179 (1,086) 2,093 2,036 (188) 1,848
--------------- ------------- --------------- -------------- --------------- ---------------
Total earning assets............. 3,030 (1,158) 1,872 2,192 (199) 1,993
Interest bearing liabilities:
Interest bearing deposits:
Savings and interest bearing
Accounts................. 30 (489) (459) 291 (55) 236
Time deposits.............. 1,121 (242) 879 584 (147) 437
--------------- ------------- --------------- -------------- --------------- ---------------
Total interest bearing deposits.. 1,151 (731) 420 875 (202) 673
Other borrowings................. 168 (47) 121 142 (76) 66
--------------- ------------- --------------- -------------- --------------- ---------------
Total interest bearing
liabilities................. 1,319 (778) 541 1,017 (278) 739
--------------- ------------- --------------- -------------- --------------- ---------------
Change in net interest income.... $ 1,711 $ (380) $ 1,331 $ 1,175 $ 79 $ 1,254
=============== ============= =============== ============== =============== ===============
</TABLE>
Interest income for the year ended December 31, 1999 increased to $12.8
million, compared to $11.0 million for the year ended December 31, 1998 and
$9.0 million for the year ended December 31, 1997. This increase was due to
an increase in the average balance of interest earning assets, partially
offset by a decrease in the yield on those assets. Average interest earning
assets increased to $137.2 million for the year ended December 31, 1999
compared to $110.4 million for the year ended December 31, 1998, and were
$89.1 million for the year ended December 31, 1997. The yield on interest
earning assets decreased to 9.35% for the year ended December 31, 1999
compared to 9.92% for the year ended December 31, 1998 and was 10.05% for the
year ended December 31, 1997. The largest single component of interest
earning assets was loans receivable, which had an average balance of $121.9
million with a yield of 9.88% for the year ended December 31, 1999, compared
to $92.3 million with a yield of 10.78% for the year ended December 31, 1998
and $73.8 million with a yield of 10.98% for the year ended December 31,
1997. The increase in the average balance of loans receivable was
attributable to the expansion of the Company as part of the Company's
strategic plan, including the addition of new loan production offices and a
branch office in California and two new product lines.
Interest expense for the year ended December 31, 1999 increased to $4.3
million compared to $3.7 million for the year ended December 31, 1998, and
was $3.0 million for the year ended December 31, 1997. This increase was due
to an increase in average deposits and other borrowings. Average
interest-bearing liabilities increased to $141.2 million for the year ended
December 31, 1999 from $111.5 million for the year ended December 31, 1998
and were $88.5 million for the year ended December 31, 1997. The increase in
interest expense reflects a change in the composition of interest-bearing
liabilities, including the addition of borrowed funds at the holding company,
combined with the increase in average interest-bearing liabilities, and was
partially offset by a decline in the cost of funds. Average time deposits
increased to $49.5 million with a cost of 5.03% for the year ended December
31, 1999 from $29.2 million with a cost of 5.52% for the year ended December
31, 1998, and were $19.5 million with a cost of 6.03% for the year ended
December 31, 1997. Average borrowings increased to $2.8 million with a cost
of 8.33%, from $1.1 million with a cost of 10.18% for the year ended December
31, 1998 and $288,000 with a cost of 16.67% for the year ended December 31,
1997. The increase in average borrowings when comparing 1998 to 1997 was the
result of loans from another bank utilized to fund the Employee Stock
Ownership Plan (the ESOP). During 1999, following the holding company
reorganization, the Company borrowed $3.2 million from a correspondent bank,
which it used to increase capital at the Bank.
27
<PAGE>
NET INTEREST INCOME BEFORE PROVISION FOR ESTIMATED LOAN LOSSES
Net interest income before provision for estimated loan losses for the year
ended December 31, 1999 was $8.5 million compared to $7.2 million for the
year ended December 31, 1998 and was $6.0 million for the year ended December
31, 1997. This increase was primarily due to the increase in the average
interest earning assets, partially offset by a decrease in the net interest
margin. Average interest earning assets were $137.2 million with a net
interest margin of 6.23% for the year ended December 31, 1999 compared to
$110.4 million with a net interest margin of 6.53% for the year ended
December 31, 1998, and were $89.1 million with a margin of 6.69% for the year
ended December 31, 1997. The decline in net interest margin reflects the
change in the composition of liabilities, including the increased use of
borrowed funds as a source of capital, combined with an increase in the use of
certificates of deposit as a funding source.
PROVISION FOR ESTIMATED LOAN LOSSES
Net loans charged off totaled $50,000 for the year ended December 31, 1999
compared to $196,000 for the year ended December 31, 1998 and were $244,000
for the year ended December 31, 1997. Due to the reduction in net charge
offs, offset by the growth in loans, the provision for loan losses totaled
$385,000 for the year ended December 31, 1999, compared to $538,000 for the
year ended December 31, 1998 and $490,000 for the year ended December 31,
1997. As a result of the increase in total loans outstanding, management
increased the allowance for loan losses to $1,327,000 as of December 31, 1999
compared to $992,000 as of December 31, 1998 and $650,000 as of December 31,
1997. As of December 31, 1999 the allowance was 0.91% of total gross loans
compared to 0.88% as of December 31, 1998 and 0.84% as of December 31, 1997.
For the year ended December 31, 1999, net charge offs as a percentage of
average loans outstanding was 0.04%, compared to 0.21% for the year ended
December 31, 1998 and 0.33% for the year ended December 31, 1997. The
allowance for loan losses as a percentage of nonaccrual loans was 73.36% as
of December 31, 1999, compared to 102.37% as of December 31, 1998 and was
173.80% as of December 31, 1997. The reason for the large fluctuation between
years is partly due to the small amount of nonaccrual loans used in the
calculation, whereby a small increase or decrease in nonaccrual loans causing
a significant change in the percentage.
OTHER OPERATING INCOME
Other operating income represents non-interest types of revenue and is
comprised primarily of gains from the sale of loans, other fee income, income
for servicing SBA loans, and service charges on deposit accounts. Other
operating income was $5.6 million for the year ended December 31, 1999
compared to $3.9 million for the year ended December 31, 1998 and was $2.7
million for the year ended December 31, 1997. This represents an increase of
$1.7 million, or 43.6% when comparing the years ended December 31, 1999 to
1998, which was mainly due to the sales of SBA loans, including guaranteed
and unguaranteed portions.
A major portion of this income is generated through the sale of loans
consisting of SBA loans and mortgage loans. During the year ended December
31, 1999 the Company originated $38.5 million in SBA government guaranteed
loans compared to $33.3 million during the year ended December 31, 1998 and
$36.4 million during the year ended December 31, 1997. The Company originated
$23.6 million in mortgage loans during the year ended December 31, 1999
compared to $28.9 million during the year ended December 31, 1998 and none
during the year ended December 31, 1997. During 1997 the Company brokered all
of its mortgage loans without funding them directly. The Company sold
approximately $37.6 million in SBA loans and $24.8 million in mortgage loans
during the year ended December 31, 1999 compared to $25.3 million in SBA
loans and $32.9 million in mortgage loans during the year ended December 31,
1998. These sales generated net gains on sale of approximately $3.6 million
for the year ended December 31, 1999 compared to $2.2 million for the year
ended December 31, 1998. Gains on sale of loans totaled $1.8 million for
1997. The new strategic initiative for 2000 calls for the retention of the
guaranteed portion of SBA 7A loans, which will result in a significant
decline in gains on sale of loans for 2000. See "New Strategic Initiative" in
OVERVIEW section. The Company intends to continue to sell its mortgage loans
in the future.
Other fee income totaled $1.2 million for the year ended December 31, 1999
compared to $870,000 for the year ended December 31, 1998 and $253,000 for the
year ended December 31, 1997. This increase is directly related to the increase
in other SBA non-guaranteed loan production and mortgage loan production as well
as the additional volume of other types of loans.
Loan servicing fees, net, decreased to $321,000 for the year ended December
31, 1999 compared to $453,000 for the year ended December 31, 1998 and
$406,000 for the year ended December 31, 1997. The Company and the industry
experienced a significant increase in prepayments during the year ended
December 31, 1999, compared to prior years, which resulted in a $742,000
write down of the servicing asset. The Company measures its servicing asset
and Interest Only (the "IO") strips using industry prepayment speeds. The
Company's SBA servicing for others increased to $92.2
28
<PAGE>
million as of December 31, 1999 compared to $82.8 million as of December 31,
1998 and $67.8 million as of December 31, 1997.
Customer service charges increased to $404,000 in 1999 compared to $373,000 in
1998 and $316,000 in 1997. Total deposits in transaction accounts, including
demand, savings and money market accounts, increased to $85.2 million as of
December 31, 1999 compared to $83.3 million and $73.7 million as of December 31,
1998 and 1997, respectively.
OTHER OPERATING EXPENSES
Other operating expenses are non-interest types of expenses and are incurred by
the Company in its normal course of business. Salaries and employee benefits,
occupancy, telephone, premises and equipment, marketing and promotions, data
processing, professional services, director/officer/employee expenses, office
expenses, ESOP loan expense and other expenses are the major categories of
other operating expenses. Other operating expenses, excluding non-recurring
expenses, increased 29.9% to $10.9 million for the year ended December 31, 1999
compared to $8.4 million and $5.9 million for the years ended December 31, 1998
and 1997, respectively.
As a percentage of average assets these expenses, excluding non-recurring
expenses, increased to 7.1% for the year ended December 31, 1999 compared to
6.9% for the year ended December 31, 1998 and 7.1% for the year ended
December 31, 1997. The majority of the cost increases can be attributed to
loan production and to the Company's growing balance sheet. Salary and
benefit expenses increased 27.3% to $6.0 million for the year ended December
31, 1999 compared to $4.7 million for the year ended December 31, 1998, and
were $3.0 million for the year ended December 31, 1997. Much of the salary
and benefit expense increases were related to sales incentives paid to
business development employees. During 1998, the Company opened its Vista
Office adding both operations personnel and commercial lenders. Furthermore,
the Company added Loan Production Offices (the LPOs) in Los Angeles, and
Sacramento, California. In addition, the Company established two new product
lines, Aircraft lending and Business Manager (an accounts receivable
financing program). As of December 31, 1999, the Company had 104 full time
employees and 11 part time employees, compared to 98 full time employees and
9 part time employees as of December 31, 1998.
Occupancy, telephone, premises and equipment, data processing, professional
services, director/officer/employee expenses, office expenses, ESOP loan
expense and other expenses increased to $854,000, $266,000, $508,000,
$761,000, $667,000, $410,000, $357,000, $204,000 and $654,000, respectively,
for the year ended December 31, 1999. This compares to $604,000, $175,000,
$351,000, $606,000, $512,000, $362,000, $325,000, $170,000 and $195,000 for
the year ended December 31, 1998 and were $308,000, $124,000, $230,000,
$491,000, $601,000, $290,000, $261,000, $32,000 and $247,000 for the year
ended December 31, 1997. The increases in these operating expenses are a
direct result of the implementation of the Company's strategic plan,
including the addition of the new branch, two new LPOs and the new product
lines. Marketing and promotions decreased to $230,000 for the year ended
December 31, 1999, compared to $389,000 and $261,000 for the years ended
December 31, 1998 and 1997, respectively.
Non-recurring expenses were incurred during the years ended December 31, 1999
and 1997. No non-recurring expenses were incurred during 1998. During 1999,
the Company accrued $298,000 for a lawsuit, which is currently under appeal.
In addition, $64,000 was expensed during 1999 in connection with the
formation of the holding company. During 1997, $150,000 was expended in
connection with an attempted hostile takeover.
PROVISION FOR INCOME TAXES
The effective income tax rate was 36.7%, 41.3% and 43.1% for the years ended
December 31, 1999, 1998 and 1997, respectively. Provisions for income taxes
totaled $900,000, $885,000 and $948,000 for the years ended December 31,
1999, 1998 and 1997, respectively. See Footnote 10 of the consolidated
Financial Statements for additional information.
FINANCIAL CONDITION
GENERAL
The improvement in the Southern California economy in 1999 and 1998 and the
community bank sales opportunities created by the large banks' continued
industry consolidation are reflected in the growth of the Company's balance
sheet in 1999. In 1999 the Company attracted quality customers from the
larger banks because of the higher level of personalized service offered by
community banks. As of December 31, 1999 total assets increased 29% to
29
<PAGE>
$175.8 million compared to $136.2 million as of December 31, 1998. Gross loans
increased to $145.7 million as of December 31, 1999, or 29%, compared to $112.6
million as of December 31, 1998.
Deposits grew to $158.1 million, or 27%, as of December 31, 1999 compared to
$124.2 million as of December 31, 1998. Federal funds sold decreased to $6.9
million, or 33%, as of December 31, 1999 compared to $10.3 million as of
December 31, 1998. The decrease in Federal funds was due to the additional 1999
loan demand.
Shareholders' equity increased to $11.3 million, or 19%, as of December 31, 1999
compared to $9.5 million as of December 31, 1998. Please refer to the capital
section of this discussion for further information.
INVESTMENTS
The Company's investment portfolio consists primarily of certificates of
deposit with other financial institutions, US Treasury and agency securities
and overnight investments in the Federal Funds market. As of December 31,
1999 and 1998, certificates of deposit with other financial institutions were
$800,000, of which $500,000 are securing the Employee Stock Ownership Plan
(ESOP) loan from another California bank which is funding the Company's ESOP.
As of December 31, 1999 the Company held $6,710,000 in US Government agency
and other securities compared to $776,000 as of December 31, 1998. The
Company held $900,000 in US Treasury securities as of December 31, 1998, and
there were no US Treasury securities at the end of 1999. Of these securities,
$3.2 million were held as collateral for public funds, treasury, tax and loan
deposits, and for other purposes at December 31, 1999. Average Federal Funds
sold for the year ended December 31, 1999 was $10.0 million compared to $16.2
million for the year ended December 31, 1998.
LOANS
Loan balances, net of the allowance for loan losses, increased to $144.2 million
as of December 31, 1999 compared to $108.7 million as of December 31, 1998. A
healthy loan demand resulted in a 31.4% increase in construction lending, a
53.3% increase in loans secured by one- to four family residences, a 9.8%
increase in commercial and multi-family real estate lending, a 30.3% increase in
home equity lines of credit, a 51.5% increase in consumer loans and a 184.9%
increase in loans secured by aircraft. The large increase in aircraft lending is
due to 1999 being the first full year of operation for the aircraft lending
department, while all of the other lending areas grew due to the expansion of
the Company's core lending businesses. The servicing portfolio, which consists
primarily of SBA loans sold to other investors, being serviced by the Company
was $92.2 million as of December 31, 1999 compared to $82.8 million as of
December 31, 1998.
NONPERFORMING ASSETS. Nonperforming assets consist of nonperforming loans and
Other Real Estate Owned (OREO). Nonperforming loans are those loans which
have: (i) been placed on nonaccrual status, (ii) been subject to troubled debt
restructurings, (iii) been classified as doubtful under the Company's asset
classification system, or (iv) become contractually past due 90 days or more
with respect to principal or interest and have not been restructured or
otherwise placed on nonaccrual status.
30
<PAGE>
The following table sets forth the Company's nonperforming assets at
the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1999 1998 1997
----------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans..........................................$ 1,809 $ 969 $ 374
Troubled debt restructurings.............................. - 723 727
Loans contractually past due 90 days or more with respect
to either principal or interest and still accruing
interest............................................. - 203 -
-------- --------- --------
Total nonperforming loans............................ 1,809 1,895 1,101
Other real estate owned................................... - - -
-------- --------- --------
Total nonperforming assets.............................. $ 1,809 $ 1,895 $ 1,101
======== ========= ========
Government guaranteed portion of non-performing loans $ 1,395 $ 293 $ 103
Allowance for loan losses.................................$ 1,327 $ 992 $ 650
Allowance for loan losses to total gross loans............ 0.91% 0.88% 0.84%
Allowance for loan losses to nonaccrual assets............ 73.36 102.37 173.80
Allowance for loan losses to nonperforming loans.......... 73.36 52.35 59.04
Allowance for loan losses to nonperforming loans, net of
govt guarantees........................................... 320.53 61.92 65.13
Allowance for loan losses to nonperforming assets......... 73.36 52.35 59.04
Total nonperforming assets to total assets................ 1.03 1.39 1.03
Total nonperforming loans to total gross loans............ 1.24% 1.68% 1.42%
</TABLE>
NONACCRUAL LOANS. Nonaccrual loans are impaired loans where the original
contractual amount may not be fully collectible. The Company measures its
impaired loans by using the fair value of the collateral if the loan is
collateral-dependent and the present value of the expected future cash flows
discounted at the loan's effective interest rate if the loan is not
collateral-dependent. As of December 31, 1999 and 1998, all impaired or
nonaccrual loans were collateral-dependent. The Company places loans on
nonaccrual status that are delinquent 90 days or more or when a reasonable
doubt exists as to the collectibility of interest and principal. As of
December 31, 1999, the Company had eight loans on nonaccrual status, totaling
$1,809,000. Of this total, $1,395,000 is guaranteed by the government. The
Company had four loans on nonaccrual status as of December 31, 1998, totaling
$969,000. Of this total $293,000 is guaranteed by the SBA. As of December 31,
1997 the Company had three loans on nonaccrual status, totaling $374,000 with
$103,000 guaranteed by the SBA. Interest income that would have been recorded
on loans on nonaccrual status, under the original terms of such loans, would
have totaled $74,000 for the year ended December 31, 1999, $49,000 for 1998
and $30,000 for 1997.
CLASSIFIED ASSETS. From time to time, management has reason to believe that
certain borrowers may not be able to repay their loans within the parameters of
the present repayment terms, even though, in some cases, the loans are current
at the time. These loans are graded in the classified loan grades of
"substandard," "doubtful," or "loss" and include non-performing loans. Each
classified loan is monitored monthly. Classified assets (consisting of
nonaccrual loans, loans graded as substandard or lower and REO) at December 31,
1999 and 1998 were $3.8 million and $3.9 million, respectively.
RISK MANAGEMENT. The investment of the Company's funds is primarily in loans
where a greater degree of risk is normally assumed than in other forms of
investments. Sound underwriting of loans and continuing evaluations of the
underlying collateral and performance of the borrowers are an integral part
in the maintenance of a high level of quality in the total assets of the
Company. Net loan charge-offs for the year ended December 31, 1999 were
$50,000, or 0.04% of average gross loans outstanding, compared to $196,000,
or 0.21% of average gross loans outstanding, for the year ended December 31,
1998. The decrease was due, in part, to continued refinements in the loan
review process, combined with a strong economy.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through
a provision for loan losses based on management's evaluation of the risks
inherent in its loan portfolio and the general economy. The allowance is
increased by provisions charged against earnings and reduced by net loan
chargeoffs. Loans are charged off when they are deemed to be uncollectible, or
partially charged off when portions of a loan are deemed to be uncollectible.
Recoveries are generally recorded only when cash payments are received.
31
<PAGE>
In determining the adequacy of the allowance for loan losses, management
initially considers the allowances specifically allocated to individual impaired
loans, and next considers the level of general loss allowances deemed
appropriate for the balance of the portfolio based on factors including the
levels of classified assets, general portfolio trends relative to asset and
portfolio size, asset categories, potential credit concentrations, nonaccrual
loan levels, historical loss experience, risks associated with changes in
economic and business conditions, and other factors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to make additional provisions for loan losses based upon
judgments which differ from those of management.
The following table sets forth information regarding the Bank's allowance for
loan losses at the dates and for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS
ENDED DECEMBER 31,
----------------------------------------------------------
1999 1998 1997
----------------- ------------------- ------------------
(dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period................... $992 $650 $404
Chargeoffs:
Real estate loans:
One- to four- family.................... - 85 134
Commercial.............................. 67 127 136
Consumer.................................... 5 4 6
----------------- ------------------- ------------------
Total chargeoffs........................ 72 216 276
Recoveries:
Real estate loans:
One- to four-family..................... - - 32
Commercial.............................. 21 9 -
Consumer.................................... 1 11 -
----------------- ------------------- ------------------
Total recoveries................. 22 20 32
----------------- ------------------- ------------------
Net chargeoffs................................... 50 196 244
Provision for loan losses........................ 385 538 490
----------------- ------------------- ------------------
Balance at end of period......................... $1,327 $992 $650
================= =================== ==================
Net charge offs to average loans................. 0.04% 0.21% 0.33%
</TABLE>
As of December 31, 1999 the balance in the allowance for loan losses was
$1,327,000 compared to $992,000 as of December 31, 1998. As a percentage of
gross loans, the allowance was 0.91% as of December 31, 1999, and 0.88% as of
December 31, 1998. During the year ended December 31, 1999 management charged
off $50,000 (net of recoveries) to the allowance while it provided $385,000 to
the provision for loan losses. During the year ended December 31, 1998
management charged off $196,000 (net of recoveries) and provided $538,000 to the
provision for loan losses. Management believes the allowance at December 31,
1999 is adequate based upon its ongoing analysis of the loan portfolio,
historical loss trends and other factors.
Nonaccrual loans, net of the government guaranteed portion, decreased to
$414,000 or 0.28% of total gross loans as of December 31, 1999 compared to
$676,000 or 0.60% of total loans as of December 31, 1998. As of December 31,
1999 and 1998, the Company had no other real estate owned properties.
32
<PAGE>
The following table sets forth the Company's percent of allowance for
loan losses to total allowance for loan losses and the percent of
loans to total loans in each of the categories listed at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1999 1998
---------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
PERCENT OF PERCENT OF
PERCENT OF LOANS IN PERCENT OF LOANS IN
ALLOWANCE EACH ALLOWANCE EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
<S> <C> <C> <C> <C> <C> <C>
Commercial loans.......... $ 83 6.25% 7.59% $ 127 12.85% 12.00%
Real estate:
Construction Loans..... 319 24.04 17.28 132 13.33 18.68
Secured by one-to four-
family Residential
properties........ 164 12.36 10.15 167 16.81 12.51
Secured by commercial
properties........ 494 37.23 59.05 418 42.13 49.54
Consumer:
Home equity lines of
credit............ 163 12.28 1.83 74 7.46 1.80
Other................ 104 7.84 4.10 74 7.42 5.47
------ -----
Total Allowance $1,327 100.00% 100.00% $ 992 100.00% 100.00%
====== =====
</TABLE>
OTHER ASSETS
Premises and equipment, accrued interest and other assets, servicing assets,
net and the interest only strip, are the four major components of other
assets. Premises and equipment decreased to $2.4 million, or 4.0% as of
December 31, 1999 compared to $2.5 million as of December 31, 1998.
Accrued interest and other assets increased to $3.0 million, or 7.1%, as of
December 31, 1999 compared to $2.8 million as of December 31, 1998. The major
component of accrued interest and other assets is interest accrued and not yet
received on loans.
Servicing asset, net, decreased to $1.8 million as of December 31, 1999,
compared to $2.2 million as of December 31, 1998. The valuation of the
servicing asset reflects estimates as to the expected life of the underlying
loans which may be adversely affected by higher than expected levels of
pay-offs in periods of lower rates or charge-offs in periods of economic
difficulty. In addition, when property values increase due to general
economic conditions, borrowers have refinancing opportunities available to
them, which may result in higher prepayment rates. Beginning January 1, 1998,
the Company increased its estimated constant prepayment rate on all new
originations to 15%. Management periodically evaluates the servicing assets
for impairment. For purposes of measuring impairment, the rights are
stratified based on original term to maturity. The amount of impairment
recognized is the amount by which the servicing assets for a stratum exceeds
their fair value. For the years ended December 31, 1998 and 1997, the Company
measured impairment on a loan by loan basis. See the footnotes to the
financial statements, found elsewhere in this report, for further information
on servicing assets.
Rights to future interest income from serviced loans that exceeds contractually
specified servicing fees are classified as interest-only strip. Interest-only
strip decreased to $551,000 as of December 31, 1999, compared to $763,000 as of
December 31, 1998.
DEPOSITS AND BORROWINGS
Total deposits increased 27.3% to $158.1 million as of December 31,1999
compared to $124.2 million as of December 31, 1998. Interest bearing and
non-interest bearing deposits increased to $129.8 million and $28.3 million,
respectively, as of December 31, 1999 compared to $102.9 million and $21.3
million, respectively, as of December 31, 1998.
The ability of the Company to meet the demand for loans as they arise,
together with the normal withdrawal requests of depositors, requires that an
adequate level of liquidity be maintained. Historically, the Company has used
overnight investments in Federal Funds and other short-term investments to
assure that these requirements are met. Additionally, the Bank has obtained a
$4.0 million line of credit with another bank to cover exceptional demands
for funds that may occur. During 1999, the average balance outstanding on
this line of credit was $25,000. This line of credit was not used during
1998. See the footnotes to the financial statements, found elsewhere in this
report, for further information on borrowings.
33
<PAGE>
INTEREST RATE SENSITIVITY AND LIQUIDITY
The Company closely follows the maturities and repricing opportunities of
both assets and liabilities to reduce gaps in interest spreads. An analysis
is performed periodically for all major balance sheet items to determine the
various interest sensitivity gaps that exist. In general, the Company is
liability sensitive, meaning that when interest rates change assets (loans)
will reprice slower than short-term liabilities (deposits). Therefore, lower
interest rates improve short-term profits and lower rates increase short-term
profits. Currently, management's analysis indicates that the Company's asset
sensitive position would not materially affect income for interest rate
changes of less than one percent in one year.
The following table presents the Bank's contractual GAP position at December 31,
1999 and 1998.
<TABLE>
<CAPTION>
CONTRACTUAL GAP POSITION AS OF DECEMBER 31, 1999(1):
TOTAL
2000 2001-2002 2003-2004 THEREAFTER BALANCE
-----------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST SENSITIVE ASSETS:
LOANS RECEIVABLE:
Adjustable rate loans, gross $ 85,823 $ 550 $ 259 $ 430 $ 87,062
Fixed rate loans, gross(2) 6,501 3,982 9,740 36,600 56,823
Investment securities held-to-maturity 502 3,244 2,957 - 6,703
Federal funds sold 6,877 - - - 6,877
Other investments 800 - - - 800
-----------------------------------------------------------------
Total interest sensitive assets $100,503 $ 7,776 $ 12,956 $ 37,030 $ 158,265
=================================================================
INTEREST SENSITIVE LIABILITIES
DEPOSITS:
Non-interest bearing - - - 28,337 28,337
Interest bearing 124,680 4,808 307 - 129,795
Other Borrowings 204 3,583 184 3,971
-----------------------------------------------------------------
Total interest sensitive liabilities $124,884 $ 8,391 $ 491 $ 28,337 $ 162,103
=================================================================
GAP Analysis
Interest rate sensitivity gap $(24,381) $ (615) $ 12,465 $ 8,693 $ (3,838)
Gap as % of total interest sensitive (15.41%) (0.39%) 7.88% 5.49% (2.43%)
assets
Cumulative interest rate sensitivity gap $(24,381) $ (24,996) $(12,531) $ (3,838) $ (3,838)
Cumulative gap as % of total assets
interest sensitive assets (15.41%) (15.79%) (7.92%) (2.43%) (2.43%)
</TABLE>
The Company closely monitors its liquidity so that the cash requirements for
loans and deposit withdrawals are met in an economical manner. Management
monitors liquidity in relation to trends of loans and deposits for short term
and long term requirements. Liquidity sources are cash, deposits with other
banks, overnight Federal Funds investments, unpledged interest bearing
deposits at other banks, investment securities and the ability to sell loans.
As of December 31, 1999 liquid assets as a percentage of deposits were 12.1%
compared to 13.4% in 1998.
- --------
1 Fixed rate loans and time deposits are assumed to mature on their contractual
maturity date, and no adjustments have been assumed for historical prepayment
experience. The actual maturities of these instruments could vary substantially
if future prepayments differ from the Bank's assumptions.
2 Nonaccrual loans are included as fixed rate loans with a maturity of one year
or less for purposes of this table.
34
<PAGE>
CONTRACTUAL GAP POSITION AS OF DECEMBER 31, 1998(1):
<TABLE>
<CAPTION>
TOTAL
1999 2000-2001 2002-2003 THEREAFTER BALANCE
-----------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST SENSITIVE ASSETS:
LOANS RECEIVABLE:
Adjustable rate loans, gross $ 80,065 $ 369 $ - $ - $ 80,434
Fixed rate loans, gross(2) 6,831 2,680 5,416 17,276 32,203
Investment securities held-to-maturity 900 776 - - 1,676
Federal funds sold 10,250 - - - 10,250
Other investments 800 - - - 800
-----------------------------------------------------------------
Total interest sensitive assets $ 98,846 $ 3,825 $ 5,416 $ 17,276 $ 125,363
=================================================================
INTEREST SENSITIVE LIABILITIES
DEPOSITS:
Non-interest bearing - - - 21,286 21,286
Interest bearing 98,313 4,341 215 - 102,869
Other Borrowings 192 384 384 40 1,000
-----------------------------------------------------------------
Total interest sensitive liabilities $ 98,505 $ 4,725 $ 599 $ 21,326 $ 125,155
=================================================================
GAP Analysis
Interest rate sensitivity gap $ 341 $ (900) $ 4,817 $ (4,050) $ 208
Gap as % of total interest sensitive
assets 0.27% (0.72)% 3.84% (3.23)% 0.17%
Cumulative interest rate sensitivity gap $ 341 $ (559) $ 4,258 $ 208 $ 208
Cumulative gap as % of total assets
interest sensitive assets 0.27% (0.45)% 3.40% 0.17% 0.17%
</TABLE>
The Company closely monitors its liquidity so that the cash requirements for
loans and deposit withdrawals are met in an economical manner. Management
monitors liquidity in relation to trends of loans and deposits for short term
and long term requirements. Liquidity sources are cash, deposits with other
banks, overnight Federal Funds investments, unpledged interest bearing deposits
at other banks, investment securities and the ability to sell loans. As of
December 31, 1999 liquid assets as a percentage of deposits were 12.1% compared
to 13.4% in 1998.
- --------
(1) Fixed rate loans and time deposits are assumed to mature on their
contractual maturity date, and no adjustments have been assumed for historical
prepayment experience. The actual maturities of these instruments could vary
substantially if future prepayments differ from the Bank's assumptions.
(2) Nonaccrual loans are included as fixed rate loans with a maturity of one
year or less for purposes of this table.
35
<PAGE>
CAPITAL
The Company's capital increased 19% to $11.3 million as of December 31, 1999
compared to $9.5 million as of December 31, 1998. In 1997, the Company
implemented an Employee Stock Ownership Plan which was funded with borrowings
of $1,000,000 that year. In 1998, an additional loan advance of $200,000 was
taken, which was subsequently paid during the same year. As of December 31,
1999 the indebtedness of the ESOP in the amount of $796,000 is shown as a
deduction from shareholders' equity. In future years capital will be
increased as the unearned ESOP contributions are made by the Company. During
the years ended December 31, 1999 and 1998, the Company repaid principal
totaling $204,000 and $170,000, respectively, and is planning to contribute
approximately $192,000 annually to this program.
As part of the Company's strategic plan, during the third quarter of 1998 the
Board elected to eliminate cash dividends in favor of retaining earnings to
support future growth. The Company paid $229,000 in dividends prior to this
change in dividend policy during the year ended December 31, 1998. A 5% stock
dividend was declared and paid to shareholders of record as of November 30,
1998, and an additional 5% stock dividend was declared and paid to
shareholders of record as of November 15, 1999.
At the end of 1999, all Bank capital ratios were above all current Federal
capital guidelines for a "well-capitalized" bank. During 1999, the Bank
increased its capital through the formation of a holding company, which
borrowed money from a correspondent lending institution and invested $3.0
million of that money in the Bank, improving the Bank's capital ratios. As of
December 31, 1999 the regulatory total capital to risk-weighted assets ratio
was 10.87% compared to 8.86% as of December 31, 1998. The regulatory tier 1
capital to risk-weighted assets ratio was 9.94% as of December 31, 1999
compared to 7.98% as of December 31, 1998. The regulatory tier 1 capital to
average assets ratio was 8.50% as of December 31, 1999 compared to 6.61% as
of December 31, 1998.
As of December 31, 1999, the Company capital ratios were above all current
Federal capital guidelines for capital adequacy purposes. As of December 31,
1999, the Company's regulatory total capital to risk-weighted assets ratio
was 8.71%. The regulatory tier 1 capital to risk-weighted assets ratio was
7.78% as of December 31, 1999, and the tier 1 capital to average assets ratio
was 6.67%.
The Company's strategic plan addresses the future capital needs of the
Company through increasing retained earnings and potential sources of
additional capital such as debt which qualifies for regulatory capital, or
additional equity offerings. Management estimates that it will need to raise
additional regulatory capital in order to execute the Company's new strategic
initiative. Management will seek between $7.0 and $10.0 million (of which a
portion will be tier 1 Capital) in a form of regulatory capital which is
non-dilutive to current shareholders. See "New Strategic Initiative" for
further information.
36
<PAGE>
YEAR 2000 ISSUES
Year 2000 expenditures during 1999 were approximately $60,000. At this time
based on the assessments and testing to date, the Company does not foresee
any Year 2000 issues that would materially impair the Company's ability to
conduct business.
There were no material adverse effects of the Year 2000 transition.
NOTE
Certain statements contained in this report, including, without limitation,
statements containing the words "believes", "anticipates", "intends",
"expects", and words of similar import, constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. Such forward looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among
others, the following: general economic and business conditions in those
areas in which the Company operates, demographic changes, competition,
fluctuations in interest rates, changes in business strategy or development
plans, changes in governmental regulation, credit quality, the availability
of capital to fund the expansion of the Company's business, and other factors
referenced in this report. Given these uncertainties, shareholders are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the results of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
This discussion should be read in conjunction with the consolidated financial
statements of the Company, including the notes thereto, appearing elsewhere
in this report.
37
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 15,376 $ 16,314
Interest bearing deposits in financial institutions 800 800
Federal Reserve Bank stock 253 132
Investment securities held-to-maturity, at amortized cost; estimated
fair value of $6,587 (1999) and $1,672 (1998) 6,710 1,676
Loans held for investment 142,667 103,101
Less allowance for loan losses (1,327) (992)
-------------------- --------------------
NET LOANS HELD FOR INVESTMENT 141,340 102,109
Loans held for sale 2,854 6,600
Premises and equipment, net 2,392 2,460
Accrued interest and other assets 2,957 2,805
Deferred tax asset 744 377
Servicing asset, net 1,796 2,187
Interest-only strip, at fair value 551 763
-------------------- --------------------
TOTAL ASSETS $ 175,773 $ 136,223
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS
Interest bearing $ 129,795 $ 102,869
Non-interest bearing 28,337 21,286
-------------------- --------------------
TOTAL DEPOSITS 158,132 124,155
Other Borrowings 3,971 1,000
Accrued expenses and other liabilities 2,333 1,522
-------------------- --------------------
TOTAL LIABILITIES 164,436 126,677
COMMITMENTS AND CONTINGENCIES (NOTE 14)
SHAREHOLDERS' EQUITY
Common stock, $ .625 par value;
authorized 10,000,000 shares,
issued and outstanding, 2,537,000 at December 31, 1999 and
2,407,000 at December 31, 1998 1,585 1,505
Additional paid-in capital 4,713 3,856
Unearned ESOP contribution (796) (1,000)
Retained earnings 5,835 5,185
-------------------- --------------------
TOTAL SHAREHOLDERS' EQUITY 11,337 9,546
-------------------- --------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 175,773 $ 136,223
==================== ====================
</TABLE>
See accompanying notes to financial statements.
38
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------
<S> <C> <C> <C>
Interest Income:
Interst and fees on loans $ 12,042 $ 9,949 $ 8,101
Interest on cash equivalents 482 896 759
Interest on interest bearing deposits in financial institutions 39 42 30
Interest on investment securities 262 66 70
-------- ------- -------
Total interest income 12,825 10,953 8,960
Interest Expense
Interest expense - deposits 4,046 3,626 2,953
Interest expense - other borrowed money 235 114 48
-------- ------- -------
Total interest expense 4,281 3,740 3,001
Net interest income before provision for loan losses 8,544 7,213 5,959
Provision for loan losses 385 538 490
Net interest income after provision for loan losses 8,159 6,675 5,469
-------- ------- -------
Other operating income:
Customer service charges 404 373 316
Other fee income 1,220 870 253
Net gain on sale of loans 3,631 2,181 1,770
Loan servicing fees, net 321 453 406
-------- ------- -------
Total other operating income 5,576 3,877 2,745
Other operating expenses:
Salaries and employee benefits 6,011 4,721 3,021
Occupancy 854 604 308
Telephone 266 175 124
Premises and equipment 508 351 230
Marketing and promotions 230 389 261
Data processing 761 606 491
Professional services 667 512 601
Director, officer and employee expenses 410 362 290
Office expenses 357 325 261
ESOP loan expense 204 170 32
Other non-recurring expenses 362 - 150
Other expenses 654 195 247
-------- ------- -------
Total other operating expenses 11,284 8,410 6,016
-------- ------- -------
Income before taxes 2,451 2,142 2,198
Income taxes 900 885 948
-------- ------- -------
NET INCOME $ 1,551 $ 1,257 $ 1,250
======== ======= =======
COMPREHENSIVE INCOME $ 1,551 $ 1,257 $ 1,250
======== ======= =======
BASIC EARNINGS PER SHARE $ 0.65 $ 0.53 $ 0.51
======== ======= =======
Diluted earnings per share $ 0.63 $ 0.52 $ 0.49
======== ======= =======
</TABLE>
See accompanying notes to financial statements.
39
<PAGE>
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Additional Unearned
Common Stock Paid-In ESOP Retained
Shares Amount Capital Contribution Earnings Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 2,264,000 $ 1,415 $ 2,900 $ - $ 4,277 $ 8,592
Dividends paid
($.05 per share, quarterly) - - - - (454) (454)
Options exercised 20,000 13 72 - - 85
Unearned contributions to ESOP - - - (1,000) - (1,000)
Net income - - - - 1,250 1,250
-----------------------------------------------------------------------------
Balance at December 31, 1997 2,284,000 1,428 2,972 (1,000) 5,073 8,473
-----------------------------------------------------------------------------
Dividends paid
($.05 per share, 2 quarters only) - - - - (229) (229)
Options exercised 8,000 6 39 - - 45
Stock dividend (5% of outstanding) 115,000 71 845 - (916) -
Unearned contributions to ESOP - - - (200) - (200)
Allocation of contributions to ESOP - - - 200 - 200
Net income - - - - 1,257 1,257
-----------------------------------------------------------------------------
Balance at December 31, 1998 2,407,000 1,505 3,856 (1,000) 5,185 9,546
-----------------------------------------------------------------------------
Options exercised 9,000 6 30 - - 36
Stock dividend (5% of outstanding) 121,000 74 827 - (901) -
Allocation of contributions to ESOP - - - 204 - 204
Net income - - - - 1,551 1,551
=============================================================================
Balance at December 31, 1999 2,537,000 $ 1,585 $ 4,713 $ (796) $ 5,835 $11,337
=============================================================================
</TABLE>
See accompanying notes to financial statements.
40
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,551 $ 1,257 $ 1,250
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 657 737 456
Provision for loan losses 385 538 490
Net gain on sale of loans (3,631) (2,181) (1,770)
Gain on sale of other real estate owned (93) (58) -
Deferred income taxes (367) (221) (35)
Loans originated for sale (42,328) (60,751) (27,341)
Net decrease (increase) in interest only strip 212 (9) (266)
Capitalization of servicing asset (472) (344) (881)
Amortization of servicing asset 121 286 163
Writedown of servicing asset 742 - -
Proceeds from sale of loans 63,840 60,699 26,250
Decrease/(increase) in accrued interest and other assets (101) 10 (241)
Increase in accrued expenses and other liabilities 811 404 177
--------- --------- ---------
Net cash provided by (used in) operating activities 21,327 367 (1,748)
--------- --------- ---------
Cash flows from investing activities:
Net increase in loans (54,232) (33,784) (6,445)
Net maturities of (additions to) interest bearing deposits - - (204)
Maturities of securities held-to-maturity 1,401 - 1,200
Purchases of securities held-to-maturity (6,435) (973) (1,199)
Purchases of Federal Reserve Bank stock (121) - (3)
Proceeds from sale of other real estate owned 610 258 437
Net additions to premises and equipment (472) (1,117) (669)
--------- --------- ---------
Net cash used in investing activities (59,249) (35,616) (6,883)
--------- --------- ---------
Cash flows from financing activities:
Net increase in deposits:
Interest bearing 26,926 22,768 14,241
Non-interest bearing 7,051 5,009 1,953
Exercise of stock options 36 45 85
Cash dividends paid - (229) (454)
Repayment of other borrowings (204) (200) -
Proceeds from other borrowings 3,175 200 1,000
Advances to ESOP - - (1,000)
--------- --------- ---------
Net cash provided by financing activities 36,984 27,593 15,825
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (938) (7,656) 7,194
Cash and cash equivalents at beginning of year 16,314 23,970 16,776
--------- --------- ---------
Cash and cash equivalents at end of year $ 15,376 $ 16,314 $ 23,970
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 3,934 $ 3,622 $ 2,908
========= ========= =========
Income Taxes $ 1,765 $ 818 $ 921
========= ========= =========
Supplemental disclosure of noncash investing activities:
Loans transferred to other real estate owned $ 517 $ 742 $ 346
========= ========= =========
Loans to facilitate the sale of other real estate owned $ - $ 542 $ 145
========= ========= =========
Loans held for investment transferred to held for sale $ 16,290 $ - $ -
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
41
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Community
Bancorp Inc. and its wholly owned subsidiary, Fallbrook National Bank (the
"Bank")(collectively the "Company"). Intercompany accounts and transactions
have been eliminated in consolidation.
Community Bancorp Inc. is a bank holding company, incorporated in the state of
Delaware, that was organized for the purpose of acquiring all the capital stock
of the Bank through a holding company reorganization (the "Reorganization") of
the Bank, which was consummated on June 25, 1999. The Reorganization was based
on a one for one exchange of shares of Bank stock for shares of common stock of
Community Bancorp Inc. Such business combination was accounted for at historical
cost similar to a pooling of interests. The consolidated financial condition and
results of operations of the Company for the periods prior to the date of the
Reorganization consist of those of the Bank.
NATURE OF OPERATIONS
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to general practices within the banking
industry. The Company is headquartered in Fallbrook, California and operates
additional branch offices in Temecula and Vista, California. The Company's
primary sources of revenue are Small Business Administration ("SBA"),
construction, and other real estate based loans to individuals and small to
middle-market businesses. The following is a description of the more
significant policies.
INVESTMENT SECURITIES
Management determines the appropriate classification of securities at the time
of purchase. If management has the intent and the Company has the ability at the
time of purchase to hold securities until maturity, they are classified as
held-to-maturity. Investment securities held-to-maturity are stated at cost,
adjusted for amortization of premiums and accretion of discounts over the period
to maturity of the related security using the interest method. Securities to be
held for indefinite periods of time, but not necessarily to be held-to-maturity
or on a long-term basis, are classified as available-for-sale and carried at
fair value with unrealized gains or losses reported as a separate component of
accumulated other comprehensive income, net of deferred taxes. Realized gains or
losses on the sale of securities available-for-sale, if any, are determined
using the amortized cost of the specific securities sold.
LOANS AND LOAN FEES
Loans held for investment are stated at the principal amount outstanding.
Loans held for sale are carried at the lower of cost or market, determined on
an aggregate basis, where market is determined based on market prices and
dealer quotes.
Interest income on loans is recorded on an accrual basis in accordance with the
terms of the respective loan. The accrual of interest on loans is discontinued
when, in management's judgment, a reasonable doubt exists as to the
collectibility of interest and principal or when the principal and interest due
on a loan becomes delinquent for 90 days. When loans are placed on nonaccrual
status, all interest previously accrued, but not collected, is reversed against
current period interest income. Income on nonaccrual loans is subsequently
recognized only to the extent that cash is received and the loan's principal
balance is deemed collectible. Nonaccrual loans that become current as to both
principal and interest are returned to accrual status.
Nonrefundable fees and related direct costs associated with the origination of
loans are deferred and netted against outstanding loan balances. Net deferred
fees and costs are recognized into interest income over the contractual life of
the loan using the interest method. The amortization of loan fees is
discontinued on nonaccrual loans.
Other fees on loans are recorded as income when earned.
42
<PAGE>
LOAN SALES AND SERVICING
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." SFAS No. 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996 and is to be applied prospectively. This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of financial components approach that focuses on control.
It distinguishes transfers of financial assets that are sales from transfers
that are secured borrowings.
The Company originates loans to customers under a SBA program that generally
provides for SBA guarantees of 70% to 90% of each loan. The Company routinely
sells the guaranteed portion of these loans to third parties and retains the
unguaranteed portion of the loans sold. The Company allocates the carrying value
of such loans between the portion sold and the portion retained, based upon
estimates of their relative fair value at the time of sale. The difference
between the adjusted carrying value and the face amount of the portion retained
is amortized to interest income over the life of the related loan using the
interest method.
Servicing assets are recognized when loans are sold with servicing retained.
Servicing assets are amortized in proportion to and over the period of
estimated future net servicing income. The fair value of servicing assets is
estimated by discounting the future cash flows at estimated future current
market rates for the expected life of the loans. The Company uses industry
prepayment statistics in estimating the expected life of the loan. Management
periodically evaluates servicing assets for impairment. For the year ending
December 31, 1999, for purposes of measuring impairment, the rights are
stratified based on original term to maturity. The amount of impairment
recognized is the amount by which the servicing asset for a stratum exceeds
their fair value. In estimating fair values at December 31, 1999, the Company
utilized a weighted average prepayment assumption of approximately 11% and a
discount rate of 12%. For the years ended December 31, 1998 and 1997, the
Company measured impairment on a loan by loan basis. Servicing assets in 1998
were initially measured at discount rates ranging from 9.25% to 11.25% with a
constant prepayment speed of 15%. Management has reviewed the servicing asset
related to loan sales prior to January 1, 1999, and has determined that the
servicing asset related to these loans is not impaired.
Rights to future interest income from serviced loans that exceeds contractually
specified servicing fees are classified as interest-only strips. The
interest-only strips are accounted for as trading securities and recorded at
fair value with any unrealized gains or losses recorded in earnings in the
period of change of fair value. Unrealized gain or losses on interest-only
strips were not material during the years ended December 31, 1999, 1998 and
1997. At December 31, 1999 and 1998, the fair value of interest-only strips was
estimated using a weighted average prepayment assumption of approximately 11%
and 13%, respectively, and a discount rate of 12%.
The Company originates and services certain loans sold to the Federal National
Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC"), the SBA and Farmers Home Administration ("FmHA"). The principal
balances of loans serviced was $92,210,000, $82,836,000 and $67,837,000 at
December 31, 1999, 1998 and 1997, respectively.
REAL ESTATE OWNED
Real estate acquired through foreclosure or deed-in-lieu of foreclosure are
initially recorded at the lower of cost or fair value less estimated costs to
sell through a charge to the allowance for estimated loan losses. Subsequent
declines in value are charged to operations.
ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is maintained at a level deemed appropriate by
management to adequately provide for known and inherent risks in the loan
portfolio and other extensions of credit, including off-balance sheet credit
extensions. The allowance is based upon a continuing review of the portfolio,
past loan loss experience and current economic conditions, which may affect the
borrowers' ability to pay, and the underlying collateral value of the loans.
Loans which are deemed to be uncollectible are charged off and deducted from the
allowance. The provision for loan losses and recoveries on loans previously
charged off are added to the allowance.
The Company's impaired loans comprise all nonaccrual loans and any loan where
the original contractual amount may not be fully collectible. The Company
43
<PAGE>
measures its impaired loans by using the fair value of the collateral if the
loan is collateral-dependent and the present value of the expected future
cash flows discounted at the loan's effective interest rate if the loan is
not collateral-dependent.
A loan is considered impaired when it is probable that a creditor will be unable
to collect all amounts due according to the original contractual terms of the
loan agreement. If the measure of the impaired loan is less than the recorded
investment in the loan, a valuation allowance is established with a
corresponding charge to the provision for loan losses.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is charged to operating expense using the straight-line method over
the estimated useful lives of the assets, which range from three to twenty-five
years. Leasehold improvements are capitalized and amortized to operating expense
on a straight-line basis over the terms of the leases or the estimated useful
life of the improvement, whichever is less. Expenditures for maintenance and
repairs are charged to expense as incurred.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Diluted
earnings per share is computed by dividing net income by the weighted average
number of shares of common stock, common stock equivalents, and other
potentially dilutive securities outstanding during the period.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, cash and cash equivalents include
cash due from banks, federal funds sold and liquid investments with original
maturities of three months or less. At December 31, 1999 and 1998 cash and cash
equivalents included federal funds sold of $6,877,000 and $10,250,000
respectively.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period to
prepare these financial statements in conformity with generally accepted
accounting principles. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for loan losses. Actual results could differ from those estimates.
STOCK OPTION PLANS
The Company accounts for stock options under the provisions of Accounting
Principles Board Opinion No. 25 and provides proforma net income and proforma
earnings per share disclosures for employee stock option grants as if the
fair-value-based method, defined in SFAS No. 123, "Accounting for Stock-Based
Compensation" had been applied.
44
<PAGE>
RECENT ACCOUNTING DEVELOPMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
was issued in June 1998 and establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 was effective for all fiscal quarters of fiscal
quarters of fiscal years beginning after June 15, 1999. In July 1999, SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133" was issued, which delays the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.
Earlier application is encouraged, but it is permitted only as of the beginning
of any fiscal quarter that begins after June 1998. The adoption of the
provisions of SFAS No. 133, as amended by SFAS No. 137, is not expected to have
a material impact on the results of operations, the financial position, or cash
flows of the Company.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
2. FEDERAL RESERVE STOCK:
As of December 31, 1999 and 1998, the amortized cost of Federal Reserve Bank
stock approximates the fair value and there were no sales of these securities
during 1999, 1998 or 1997.
3. INVESTMENT SECURITIES HELD-TO-MATURITY:
The amortized cost, gross unrealized gains and losses, and estimated fair value
of investment securities held-to-maturity as of December 31, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
1999
US Government agency and other securities $ 6,710 $ - $ (123) $ 6,587
--------------------------------------------------------------
Total $ 6,710 $ - $ (123) $ 6,587
==============================================================
1998
US Treasury securities $ 900 $ 5 $ - $ 905
US Government agency and other securities 776 - (9) 767
--------------------------------------------------------------
Total $ 1,676 $ 5 $ (9) $ 1,672
==============================================================
</TABLE>
The scheduled maturities of US Government agencies and other securities as of
December 31, 1999 were as follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED COST FAIR VALUE
------------------- --------------------
<S> <C> <C>
Year maturing (dollars in thousands)
Due in one year or less $ 502 $ 499
Due after one year through five years 6,208 6,088
------------------- --------------------
Total $6,710 $6,587
=================== ====================
</TABLE>
As of December 31, 1999, the Bank had pledged $3.2 million of its securities for
public deposits.
45
<PAGE>
4. LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES:
A summary of loans as of December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------
(dollars in thousands)
<S> <C> <C>
Construction loans $ 27,661 $ 21,046
21,601 14,087
Real estate commercial & multi-family 61,263 55,788
Consumer home equity lines of credit 2,649 2,033
Other consumer 9,342 6,166
Commercial 6,064 7,510
Aircraft 17,113 6,007
----------------------------------------
Total Gross loans 145,693 112,637
Deferred loan origination costs (fees) 688 (362)
Discount on unguaranteed portion of SBA loans retained (860) (2,574)
Allowance for loan losses (1,327) (992)
----------------------------------------
Net loans $144,194 $108,709
========================================
</TABLE>
Included in net loans are $478,000 and $4,015,000 in mortgage loans and
$2,376,000 and $2,585,000 in SBA loans held for sale at December 31, 1999 and
1998, respectively. The Company's lending activities are concentrated
primarily in Riverside and San Diego Counties of Southern California.
Although the Company seeks to avoid undue concentrations of loans to a single
industry based upon a single class of collateral, real estate and real estate
associated business areas are among the principal industries in the Company's
market area. As a result, the Company's loan and collateral portfolios are,
to a significant degree, concentrated in those industries. The Company
evaluates each credit on an individual basis and determines collateral
requirements accordingly. When real estate is taken as collateral, advances
are generally limited to a certain percentage of the appraised value of the
collateral at the time the loan is made, depending on the type of loan, the
underlying property and other factors.
As of December 31, 1999 and 1998, the Company had loans in process of $95.3
million and $16.2 million, respectively.
The maturity distribution of the loan portfolio as of December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Less than one year $ 51,089
One to five years 22,810
After five years 71,794
-------------------------
Total gross loans $145,693
=========================
</TABLE>
The interest rate sensitivity of the loan portfolio as of December 31, 1999 is
as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Fixed rate loans $ 61,946
Variable rate loans 83,747
=========================
Total Gross Loans $145,693
=========================
</TABLE>
46
<PAGE>
A summary of the activity in the allowance for loan losses, which includes
provisions for impaired loans, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 992 $ 650 $ 404
Provision for loan losses 385 538 490
Losses charged off (72) (216) (276)
Recoveries 22 20 32
------------------------------------------------
Balance, end of year $ 1,327 $ 992 $ 650
================================================
</TABLE>
Loans with principal balances of $1,809,000 ($1,395,000 guaranteed by the SBA),
$969,000 ($293,000 guaranteed by the SBA), and $374,000 ($103,000 guaranteed by
the SBA) were on nonaccrual status as of December 31, 1999, 1998, and 1997,
respectively. Additional interest income of $74,000, $49,000, and $30,000 would
have been recorded for the years ended December 31, 1999, 1998, and 1997,
respectively, if nonaccrual loans had been performing in accordance with their
original terms. Interest income of $150,000, $145,000, and $12,000 was recorded
on loans subsequently transferred to nonaccrual status for the years ended
December 31, 1999, 1998, and 1997, respectively.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize estimated losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions and the repayment capabilities of the borrowers. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments related to information available to them at the time of their
examinations.
The Company's allowance for loan losses consists of a specific and general
allowance. The specific allowance is further broken down to provide for those
impaired loans and the remaining internally classified loans. The impairment
allowance is defined as the difference between the recorded value and the fair
value of the impaired loans. The general allowance is determined by an
assessment of the overall quality of the unclassified portion of the loan
portfolio as a whole, and by loan type. Management maintains the percentage
assigned to the general allowance based on charge-off history and management's
knowledge of the quality of the portfolio.
Loans are evaluated for impairment as part of the Company's normal internal
asset review process. The Company evaluates all loans in its portfolio on an
individual basis with the exception of one- to four family real estate loans and
consumer loans, which are evaluated on a collective basis. Also loans which have
delays in payments of less than four months are not necessarily considered
impaired unless other factors apply to the loans such as the knowledge that the
collection of the loan will only come from the collateral and that collateral is
known to have deteriorated. Where impairment is considered permanent, a
charge-off is recorded; where impairment is considered temporary, an allowance
is established. Impaired loans which are performing under the contractual terms
are reported as performing loans, and cash payments are allocated to principal
and interest in accordance with the terms of the loan.
47
<PAGE>
The following table presents a breakdown of impaired loans and any impairment
allowance related to impaired loans as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
Impaired Impairment Impaired Impairment
Loans Allowance Loans Allowance
----------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial $ - $ - $ 1,044 $ -
SBA 1,713 - - -
Real estate 75 130 75 75
Consumer 21 21 1 1
----------------------------------------------------------
$ 1,809 $ 151 $ 1,120 $ 76
==========================================================
</TABLE>
Based on the Company's evaluation process to determine the level of the
allowance for loan losses mentioned previously and the fact that a majority of
the Company's nonperforming loans are secured, management believes the allowance
level to be adequate as of December 31, 1999 to absorb the estimated known and
inherent risks identified through its analysis. For the years ended December 31,
1999, 1998 and 1997 interest income of $75,000, $76,000 and $92,000 was recorded
on impaired loans on a cash basis, respectively, and the average balance of
impaired loans was $2,251,000, $1,459,000 and $1,396,000, respectively. Loans
contractually past due 90 days or more and still accruing as of December 31,
1999, 1998 and 1997 were none, $203,000 and none, respectively.
In the normal course of business, the Company has granted loans to certain
directors and their affiliates under terms which are consistent with the
Company's general lending policies. The activity for loans outstanding with
these directors and their affiliates as of December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
-----------------------------------
(dollars in thousands)
<S> <C> <C>
Balance, beginning of year $ 495 $ 514
Loans granted, including renewals 263 241
Repayments (28) (260)
-----------------------------------
Balance, end of year $ 730 $ 495
===================================
</TABLE>
The Company had no additional commitments for loans to affiliates as of December
31, 1999 and 1998.
5. PREMISES AND EQUIPMENT:
Premises and equipment as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
(dollars in thousands)
<S> <C> <C>
Land $ 357 $ 357
Building 200 200
Furniture, fixtures and equipment 2,522 2,125
Leasehold improvements 826 758
-------------- --------------
3,905 3,440
Accumulated depreciation and amortization (1,513) (980)
-------------- --------------
$ 2,392 $ 2,460
============== ==============
</TABLE>
6. SALES AND SERVICING OF SBA LOANS:
The Company generates revenues from the origination of loans guaranteed by the
SBA and the sale of guaranteed portions of those loans in the secondary market.
The Company retains the servicing on the sale of SBA guaranteed loans that
creates loan servicing income.
48
<PAGE>
The activity for the servicing asset for the years ended December 31, 1999, 1998
and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
(dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 2,187 $ 2,129 $ 1,411
Servicing assets recognized on SBA loans sold 472 344 881
Amortization (121) (286) (163)
Direct write down (742) - -
================== ================== ==================
Balance at end of year $ 1,796 $ 2,187 $ 2,129
================== ================== ==================
</TABLE>
The direct write down is included in loan servicing fees in the consolidated
statements of income and comprehensive income. The Company and the industry
experienced a significant increase in prepayments during the year ended
December 31, 1999, compared to prior years which resulted in a $742,000 write
down of the servicing asset.
7. DEPOSITS AND INTEREST EXPENSE:
Deposits by major classification as of December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------
(dollars in thousands)
<S> <C> <C>
Non-interest bearing demand $ 28,337 $ 21,286
Interest bearing demand 20,354 17,496
Money market savings 25,356 33,354
Savings 11,175 11,195
Time deposits, $100,000 or more 17,445 9,223
Time deposits under $100,000 55,465 31,601
------------------------------------------
Total $ 158,132 $124,155
==========================================
</TABLE>
Interest expense on deposits for the years ended December 31, 1999, 1998, and
1997 is comprised of the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Interest bearing demand $ 184 $ 145 $ 126
Money market savings 1,052 1,552 1,308
Savings 320 318 345
Time deposits, $100,000 or more 669 290 159
Time deposits under $100,000 1,821 1,321 1,015
-------------------------------------------------
Total $4,046 $3,626 $2,953
=================================================
</TABLE>
The following summarizes the scheduled maturity of time deposits as of December
31, 1999:
<TABLE>
<CAPTION>
1999
-------------------------
Maturing in: (dollars in thousands)
<S> <C>
2000 $71,976
2001 612
2002 121
2003 138
2004 63
-------------------------
Total $72,910
=========================
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
1999
-------------------------
(dollars in thousands)
<S> <C>
Three months or less $18,189
Over three months to six months 17,942
Over six months to twelve months 35,845
Over twelve months 934
-------------------------
Total $72,910
=========================
</TABLE>
8. OTHER BORROWED FUNDS:
During 1997, the Fallbrook National Bank Employee Stock Ownership Plan obtained
a line of credit with a lender which provides up to $1,200,000 through March 1,
2004 bearing interest at the prime rate plus one percent, as defined in the
agreement. The line of credit was obtained to fund the Bank's employee stock
ownership plan (ESOP). Interest is payable monthly beginning September 1, 1997
and the effective rate at December 31, 1999 and 1998 was 9.50% and 8.75%,
respectively. The weighted average interest rate was 9.3%, 9.4% and 9.5% for the
years ended December 31, 1999, 1998 and 1997, respectively. Under this
agreement, $796,000 and $1,000,000 in borrowings were outstanding at December
31, 1999 and 1998, respectively. Maximum borrowings during the year ended
December 31, 1999 and 1998, respectively, were $1,000,000 and $1,200,000. The
line of credit is collateralized by the Company's common stock purchased by the
ESOP and five $100,000 certificates of deposit with the lender.
The ESOP will repay the loan in accordance with the defined payment schedule,
which as of December 31, 1999 is as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
March 1, 2000 $ 192
March 1, 2001 192
March 1, 2002 192
March 1, 2003 192
Thereafter 28
-------------------------
$ 796
=========================
</TABLE>
During 1999, the Company obtained a line of credit with a lender which provides
up to $3,175,000 through August 1, 2005 bearing interest at the prime rate plus
one percent, as defined in the agreement. The line of credit was obtained to
increase capital at the Bank. Interest is payable quarterly beginning November
1, 1999 and the effective rate at December 31, 1999 was 9.50%. Principal and
interest payments begin on November 1, 2000. The weighted average interest rate
was 9.3% for the year ended December 31, 1999. Under this agreement, $3,175,000
in borrowings were outstanding at December 31, 1999 and maximum borrowings
during the year ended December 31, 1999 were $3,175,000. The line of credit is
collateralized by the Bank's common stock.
The Company will repay the loan in accordance with the defined payment schedule,
which as of December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Year ending December 31, (dollars in thousands)
<S> <C>
2000 $ 159
2001 635
2002 635
2003 635
2004 635
Thereafter 476
-------------------------
$ 3,175
=========================
</TABLE>
The Company maintains a line of credit with a lender which provides up to
$4,000,000 through July 31, 2000 bearing a variable interest rate as established
by the lender on a daily basis. The line of credit was obtained to provide
additional liquidity on a short term basis to the Bank. Interest is payable on
the daily basis, and the principal is callable at any time by the lender. The
weighted average interest rate was 5.60% for the year ended December 31,
50
<PAGE>
1999. Under this agreement, there were no borrowings outstanding at December 31,
1999 and maximum borrowings during the year ended December 31, 1999 were
$3,000,000. The average balance outstanding during the year ended December 31,
1999 was $25,000. There were no borrowings on this line of credit during the
years ended December 31, 1998 and 1997. The line of credit is unsecured.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Estimated fair values for the Company's financial instruments and a description
of the methodologies and assumptions used to determine such amounts follows:
Cash and Cash Equivalents and Interest Bearing Deposits: The carrying amount
is assumed to be the fair value because of the liquidity of these instruments.
Federal Reserve Bank stock: The carrying value approximates the fair value
because the stock can be redeemed at par.
Investment Securities: Fair values are based on quoted market prices available
as of the balance sheet date. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
Loans: Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type and further segmented into fixed
and adjustable rate interest terms and by credit risk categories. The fair value
estimates do not take into consideration the value of the loan portfolio in the
event the loans had to be sold outside the parameters of normal operating
activities.
The fair value of fixed rate loans and non-performing or adversely classified
adjustable rate loans is calculated by discounting scheduled cash flows through
the estimated maturity using estimated market discount rates that reflect the
credit and interest rate risk inherent in the loans. The discount rates used for
performing fixed rate loans are the Bank's current offer rates for comparable
instruments with similar terms.
The fair value of performing adjustable rate loans is estimated to be the
carrying value. These loans reprice frequently at market rates and the credit
risk is not considered to be greater than normal.
The fair value of loans held for sale is determined based on quoted market
prices or dealer quotes.
Interest only strip: The fair value of the interest-only strip has been
determined by discounted cash flow methods, using market discount rates and
prepayment factors.
Deposits: The fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, savings and checking accounts, is equal to
the amount payable on demand as of the balance sheet date. The fair value of
time deposits is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for deposits with
similar remaining maturities.
Other Borrowings: The carrying amount is assumed to be the fair value because
the interest rate is the same as rates currently offered for borrowings with
similar remaining maturities and characteristics.
Commitments to Extend Credit and Standby Letters of Credit: The fair value of
commitments to extend credit is estimated to be zero since the current
competitive financial community does not routinely charge fees for commitments
to extend credit. The fair value of standby letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
them or otherwise settle the obligations with the counterparties.
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a portion of the Company's
financial instruments, fair value estimates are based on what management
believes to be conservative judgments regarding expected future cash flows,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with
51
<PAGE>
precision. Changes in assumptions could significantly affect the estimates.
Since the fair values have been estimated as of December 31, 1999 and 1998, the
amounts that will actually be realized or paid at settlement or maturity of the
instruments could be significantly different.
The fair values of the Company's financial instruments as of December 31, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------
CARRYING OR FAIR VALUE CARRYING OR FAIR VALUE
CONTRACT AMOUNT ESTIMATES CONTRACT AMOUNT ESTIMATES
------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 15,376 $ 15,376 $ 16,314 $ 16,314
Interest bearing deposits 800 800 800 800
Federal Reserve Bank stock 253 253 132 132
Investment securities held-to-maturity 6,710 6,587 1,676 1,672
Loans held for investment, net 141,340 137,712 102,109 105,094
Loans held for sale 2,854 2,859 6,600 6,793
Interest-only strip 551 551 763 763
FINANCIAL LIABILITIES:
Deposits 158,132 158,120 124,155 124,611
Other borrowings 3,971 3,971 1,000 1,000
OFF-BALANCE SHEET
FINANCIAL INSTRUMENTS:
Commitments to extend credit 8,450 - 29,000 -
Standby letters of credit 289 3 226 6
</TABLE>
10. INCOME TAXES:
The components of income taxes for the years ended December 31, 1999, 1998, and
1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
(dollars in thousands)
<S> <C> <C> <C>
Current:
Federal $ 944 $ 814 $ 736
State 323 292 247
---------------- ---------------- ----------------
1,267 1,106 983
---------------- ---------------- ----------------
Deferred:
Federal (304) (162) (25)
State (63) (59) (10)
---------------- ---------------- ----------------
(367) (221) (35)
---------------- ---------------- ----------------
900 $ 885 $ 948
================ ================ ================
</TABLE>
52
<PAGE>
Income taxes attributable to income before income taxes for the years ended
December 31, 1999, 1998, and 1997 differed from the amounts computed by
applying the US federal income rate of 35% for 1999 and 34% for 1998 and 1997
to pretax income before taxes as a result of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
(dollars in thousands)
<S> <C> <C> <C>
Computed "expected" income taxes $ 833 $ 728 $ 747
State income taxes, net of federal income tax benefit
172 154 156
Other, net (105) 3 45
---------------- ---------------- ----------------
$ 900 $ 885 $ 948
================ ================ ================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities as of December 31, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------
(dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Loan loss allowance, due to differences in computation of bad debts $ 436 $ 265
Nonaccrual interest recognized as income for taxes but not for books 0 55
State taxes 47 99
Mark to market loans held for sale 9 15
Deferred loan fees 99 38
Accrued expenses 144 -
Litigation reserve 134 -
------------------------------
869 472
Deferred tax liabilities - bank premises and equipment, principally
due to differences in depreciation (125) (95)
------------------------------
$ 744 $ 377
==============================
</TABLE>
Based upon the level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that the Bank will realize the
benefits of these deductible differences.
As of December 31, 1999 and 1998 income taxes payable totaled approximately
$471,000 and $286,000, respectively.
11. STOCK DIVIDEND:
In November 1999, the Board of Directors declared a 5% stock dividend to
shareholders of record on November 15, 1999. In November 1998, the Board of
Directors announced a 5% stock dividend to shareholders of record on November
30, 1998. All share and per share amounts have been restated to reflect
retroactively the stock dividends.
12. STOCK OPTION PLANS:
In 1985 and 1993, the Bank adopted stock option plans ("the 1985 Plan" and "the
1993 Plan")(collectively, the "Plans") pursuant to which the Bank's Board of
Directors may grant stock options to officers and key employees. As part of the
Reorganization, the Company adopted the Bank's Plans.
The 1985 Plan, which expired in September 1996, authorized grants of options to
purchase up to 407,484 shares of common stock after adjustments for stock
dividends and stock splits (original authorized number of shares was 42,000) and
the 1993 Plan authorizes grants of options to purchase up to 733,162 shares of
common stock after adjustments for stock dividends and stock splits (original
authorized number of shares was 51,000). Stock options are granted with an
exercise price equal to the stock's fair market value at the date of grant. All
stock options have 10 year terms and generally one-fifth vest annually over the
five years following date of grant, subject to certain restrictions.
53
<PAGE>
As of December 31, 1999, there were no additional shares available for grant
under the 1985 Plan. There were no stock options granted under the 1985 Plan
during 1999, 1998 or 1997.
At the shareholders' meeting held on May 27, 1998, the shareholders approved an
amendment to the 1993 Plan increasing the maximum number of shares under the
plan to 733,162 from the 247,401 share maximum then outstanding (after adjusting
for the stock dividends).
As of December 31, 1999 there were 156,309 shares available for grant under
the 1993 Plan. The per share weighted-average fair value of stock options
granted under the 1993 Plan during 1999, 1998 and 1997 were $3.05, $2.76 and
$3.21, respectively, on the date of the grant, using a Black-Scholes option
pricing model with the following weighted-average assumptions: 1999- no
expected dividend yield, risk-free interest rate of 6.58%, expected life of
5.0 years, and volatility of 48%; 1998- no expected dividend yield, risk-free
interest rate of 4.71%, expected life of 5.0 years, and volatility of 37%;
1997- expected dividend yield 2.5%, risk-free interest rate of 5.75% and an
expected life of 5.1 years, and a volatility of 50%.
Stock option activity for the periods indicated is as follows:
<TABLE>
<CAPTION>
1985 PLAN 1993 PLAN
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance as of December 31, 1996 24,033 $3.77 182,021 $4.26
Granted - - 3,306 7.14
Exercised - - (22,233) 3.81
Expired - - - -
-----------------------------------------------------------------------
Balance as of December 31, 1997 24,033 3.77 163,094 4.38
Granted - - 313,313 8.12
Exercised - - (9,334) 4.75
Expired (1,102) 7.83 (19,770) 6.07
-----------------------------------------------------------------------
Balance as of December 31, 1998 22,931 3.58 447,303 6.91
Granted - - 73,193 7.35
Exercised (9,702) 3.35 - -
Expired - - (5,631) 7.38
-----------------------------------------------------------------------
Balance as of December 31, 1999 13,229 $3.74 514,865 $6.97
=======================================================================
</TABLE>
As of December 31, 1999, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $3.25 to $7.83 and 2.1
years, respectively, for the 1985 Plan. As of December 31, 1999, the range of
exercise prices and weighted-average remaining contractual life of outstanding
options was $3.71 to $8.51 and 7.4 years, respectively, for the 1993 Plan.
As of December 31, 1999, 1998 and 1997, the number of options exercisable was
13,229, 22,931 and 23,299, respectively, and the weighted-average exercise price
of those options was $3.74, $3.58 and $3.65, respectively for the 1985 Plan. As
of December 31, 1999, 1998 and 1997, the number of options exercisable was
360,104, 309,273 and 104,297, respectively, and the weighted-average exercise
price of those options was $6.96, $7.00 and $4.16, respectively, for the 1993
Plan.
54
<PAGE>
The Company applies the intrinsic value method in accounting for its plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Net income, as reported $1,551,000 $1,257,000 $1,250,000
Proforma net income $1,365,000 $1,107,000 $1,220,000
Basic income per share, as reported $0.65 $0.53 $0.51
Proforma income per share $0.57 $0.47 $0.49
Diluted income per share, as reported $0.63 $0.52 $0.49
Proforma diluted income per share $0.56 $0.45 $0.48
</TABLE>
13. RENTAL COMMITMENTS:
As of December 31, 1999, aggregate minimum rental commitments for certain real
property under non-cancellable operating leases having an initial or remaining
term of more than one year are as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
2000 $ 472
2001 458
2002 307
2003 276
2004 292
THEREAFTER 843
--------------------------
$2,648
==========================
</TABLE>
Total rental expense was $433,000, $301,000, and $202,000 in 1999, 1998, and
1997, respectively. Management expects that in the normal course of business,
leases that expire will be renewed or replaced by other leases.
14. COMMITMENTS AND CONTINGENCIES:
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business. These financial instruments include commitments
to extend credit, standby letters of credit and financial guarantees. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheets. The contract or
notional amounts of these instruments reflect the extent of involvement the
Company has in particular classes of financial instruments. The Company uses the
same credit policies in making commitments and conditional obligations.
Commitments to extend credit amounting to $8,450,000 and $29,001,000 were
outstanding at December 31, 1999 and 1998, respectively. Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements.
Standby letters of credit and financial guarantees amounting to $289,000 and
$226,000 were outstanding at December 31, 1999 and 1998, respectively. Standby
letters of credit and financial guarantees are conditional commitments issued by
the Company to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support private borrowing arrangements. Most
guarantees carry a one year term or less.
55
<PAGE>
The Company generally requires collateral or other security to support financial
instruments with credit risk. Management does not anticipate any material loss
will result from the outstanding commitments to extend credit, standby letters
of credit, and financial guarantees.
As of December 31, 1999 and 1998, the Company had non-mandatory commitments to
sell loans of $478,000 and $14,076,000, respectively.
Because of the nature of its activities, the Company is, from time to time,
subject to pending and threatened legal actions which arise out of the normal
course of its business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
The Bank has been subject to a lawsuit by a former employee alleging, amongst
other things, breach of contract and fraud. Trial commenced on July 19, 1999
in Riverside County Superior Court, with the jury rendering a verdict on
August 2, 1999. The jury awarded compensatory damages of approximately
$65,000, punitive damages of $750,000, court costs and legal fees. On
October 26, 1999, the Superior Court ordered a new trial on punitive damages
only, unless the plaintiff consented to a reduction of the punitive damage
award to $250,000. On November 4, 1999, the plaintiff consented to the
punitive damage verdict of $250,000. The Bank has filed a notice of appeal in
connection with the judgement. During the year ended December 31, 1999, the
Company accrued $298,000 in connection with this verdict.
The Company has negotiated employment agreements with certain officers. These
agreements provide for the payment of base salaries plus incentives based on
agreed upon minimum standards of performance. While there is no provision for
payment due to termination for cause, the agreements specify payment of the base
salary for up to 12 months for termination without cause, and up to 24 months
upon a change in control, as defined in the agreements.
15. EMPLOYEE BENEFIT PLANS:
The Bank's employee savings and retirement plan (the "401k Plan") is for the
benefit of substantially all employees. Contributions to the 401k Plan by the
Bank are at the discretion of the Board of Directors and are subject to
certain limitations described in the plan. The Bank made contributions to the
401k Plan of $121,000, $78,000 and $66,000 in 1999, 1998 and 1997,
respectively. Beginning in 1998, Bank employees were able to choose (now
Company) stock as an investment option. Also, beginning in 1998, the Bank
contributions to this 401K Plan, if any, were made in Bank (now Company)
stock purchased in the open market rather than in cash.
In July 1997, the Bank established the Fallbrook National Bank Employee Stock
Ownership Plan (ESOP) for substantially all employees. The ESOP authorizes the
Trust to purchase shares of the Bank's (now Company) common stock in the open
market or in privately negotiated transactions from time to time. In July 1997,
the ESOP entered into a line of credit borrowing agreement in the amount of
$1,200,000 with another bank in order to fund the ESOP. This line of credit is
payable in annual installments through 2004 (Note 8). During 1998, the ESOP made
open market purchases of 19,245 shares at an average cost of $9.375 and $8.440
per share. Future Bank contributions to the ESOP plus dividends earned will be
used to service the debt. The Bank absorbs the administrative costs of this
program, which totaled approximately $20,000, $5,000 and $16,000 in 1999, 1998
and 1997, respectively.
On December 31, 1999 and 1998, the Board of Directors allocated 24,323 and
23,337 shares to the ESOP for distribution to the participants, leaving 109,663
unallocated shares in the ESOP trust as of December 31, 1999 with a fair market
value of $644,000. As of December 31, 1999, the ESOP owned 6.2% of the total
outstanding shares of the Bank's (now Company) common stock.
According to the terms of the ESOP, contributions to the ESOP from the Bank's
net income are determined at the Bank's discretion. Management expects that the
amount and timing of these contributions will be tied into the loan repayment
schedule. Dividend income for the ESOP was approximately $19,000 in 1998. During
1999, 1998 and 1997, the Bank repaid principal totaling $204,000, $170,000 and
$32,000, and the interest expense on the outstanding loan totaled $83,000,
$114,000 and $48,000, respectively.
As of December 31, 1999, and 1998, the indebtedness of the ESOP in the
amounts of $796,000 and $1,000,000 respectively, are shown as a deduction
from shareholders' equity in the balance sheets. Dividends paid on ESOP
shares are recorded as reductions in retained earnings in the balance sheets.
The number of allocated and unallocated ESOP shares are treated as
outstanding common stock in the computation of income per share when they
have been allocated.
56
<PAGE>
The Company entered into salary continuation agreements in 1996 with certain
members of its Board of Directors. The agreements provide monthly cash
payment to the board members or their beneficiaries in the event of death or
disability, beginning in the month after retirement date or upon death, and
extending for a minimum period of 3 years, or until death, whichever is
greater. The commitment is funded by a life insurance policy owned by the
Company, and the present value of the Company's liability under the agreement
is included in accrued expenses and other liabilities in the accompanying
consolidated balance sheets.
16. RESTRICTED CASH BALANCES:
The Bank is required to maintain reserve balances with the Federal Reserve Bank.
Reserve requirements are based on a percentage of deposit liabilities. The
average reserves held at the Federal Reserve Bank for the years ended December
31, 1999 and 1998 were approximately $250,000.
17. REGULATORY MATTERS:
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the 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 and Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
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,
1999 and 1998, that the Company and the Bank met all capital adequacy
requirements to which they are subject.
As of December 31, 1999 and 1998, the most recent notification from the Office
of the Comptroller of the Currency (OCC) categorized the Bank as well
capitalized at December 31, 1999 and adequately capitalized at December 31, 1998
under the regulatory framework for prompt corrective 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. Because of the
categorization of being adequately capitalized at December 31, 1998, the Bank
was subject to certain restrictions with regards to paying cash dividends and
the accepting of brokered deposits. During 1998, the Bank changed its dividend
policy by eliminating cash dividends. As of December 31, 1999 and 1998, the Bank
did not have any brokered deposits.
57
<PAGE>
The Bank's actual capital amounts and ratios are presented in the table as of
December 31, 1999 and 1998.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED UNDER
ACTUAL FOR CAPITAL PROMPT CORRECTIVE ACTION
ADEQUACY PURPOSES PROVISIONS
---------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total Capital
(to Risk weighted Assets) $15,485 10.87% $11,395 greater than or equal to 8.0% $14,244 greater than or equal to 10.0%
Tier 1 Capital
(to Risk weighted Assets) $14,158 9.94% $ 5,698 greater than or equal to 4.0% $ 8,546 greater than or equal to 6.0%
Tier 1 Capital
(to Average Assets) $14,158 8.50% $ 6,662 greater than or equal to 4.0% $ 8,327 greater than or equal to 5.0%
As of December 31, 1998
Total Capital
(to Risk weighted Assets) $ 9,975 8.86% $ 9,008 greater than or equal to 8.0% $11,261 greater than or equal to 10.0%
Tier 1 Capital
(to Risk weighted Assets) $ 8,983 7.98% $ 4,504 greater than or equal to 4.0% $ 6,756 greater than or equal to 6.0%
Tier 1 Capital
(to Average Assets) $ 8,983 6.61% $ 5,433 greater than or equal to 4.0% $ 6,791 greater than or equal to 5.0%
</TABLE>
Under federal banking law, dividends declared by the Bank in any calendar year
may not, without the approval of the OCC, exceed its net income for that year
combined with its retained income from the preceding two years. However, the OCC
has previously issued a bulletin to all national banks outlining guidelines
limiting the circumstances under which national banks may pay dividends even if
the banks are otherwise statutorily authorized to pay dividends. The limitations
impose a requirement or in some cases suggest that prior approval of the OCC
should be obtained before a dividend is paid if a national bank is the subject
of administrative action or if the payment could be viewed by the OCC as unsafe
or unusual.
The holding company's actual capital amounts and ratios are presented in the
table as of December 31, 1999. The holding company was formed on June 25, 1999,
therefore, there are no capital amounts or ratios as of December 31, 1998. There
are no prompt corrective action thresholds at the holding company.
58
<PAGE>
<TABLE>
<CAPTION>
ACTUAL FOR CAPITAL
ADEQUACY PURPOSES
------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO
-----------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
As of December 31, 1999
Total Capital
(to Risk weighted Assets) $12,429 8.71% $11,415 greater than or equal to 8.0%
Tier 1 Capital
(to Risk weighted Assets) $11,102 7.78% $5,707 greater than or equal to 4.0%
Tier 1 Capital
(to Average Assets) $11,102 6.67% $6,662 greater than or equal to 4.0%
</TABLE>
18. NET EARNINGS PER SHARE:
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share (EPS):
<TABLE>
<CAPTION>
Income Shares Per share
(numerator) (denominator) Amounts
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic 1999 EPS
Net income available to common
shareholders $ 1,551,000 2,401,000 $0.65
Effect of dilutive stock options - 55,000 (0.02)
- -----------------------------------------------------------------------------------------------------------------
Diluted 1999 EPS $ 1,551,000 2,456,000 $0.63
- -----------------------------------------------------------------------------------------------------------------
Basic 1998 EPS
Net income available to common
shareholders $ 1,257,000 2,372,000 $0.53
Effect of dilutive stock options - 66,000 (0.01)
- -----------------------------------------------------------------------------------------------------------------
Diluted 1998 EPS $ 1,257,000 2,438,000 $0.52
- -----------------------------------------------------------------------------------------------------------------
Basic 1997 EPS
Net income available to common
shareholders $ 1,250,000 2,470,000 $0.51
Effect of dilutive stock options - 60,000 (0.02)
- -----------------------------------------------------------------------------------------------------------------
Diluted 1997 EPS $ 1,250,000 2,530,000 $0.49
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
<TABLE>
<CAPTION>
Quarters Ended (1)
-------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
1999 1999 1999 1999
-------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $ 3,338 $ 3,331 $ 3,203 $ 2,953
Interest expense 1,268 1,116 1,006 891
------------ ------------ ------------ ------------
Net interest income 2,070 2,215 2,197 2,062
Provision for loan losses - 70 165 150
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 2,070 2,145 2,032 1,912
Other income 2,029 721 1,414 1,412
Other expenses 2,831 2,934 2,797 2,722
------------ ------------ ------------ ------------
Income (loss) before income tax provision 1,268 (68) 649 602
Income tax provision 412 (28) 267 249
------------ ------------ ------------ ------------
Net income $ 856 $ (40) $ 382 $ 353
============ ============ ============ ============
Earnings per share:
Basic $ 0.36 $ (0.02) $ 0.16 $ 0.15
============ ============ ============ ============
Fully diluted $ 0.35 $ (0.02) $ 0.16 $ 0.14
============ ============ ============ ============
Cash dividends per common share declared and paid $ - $ - $ - $ -
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Quarters Ended (1)
-------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
1998 1998 1998 1998
-------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $ 2,994 $ 2,965 $ 2,604 $ 2,390
Interest expense 994 974 918 854
------------ ------------ ------------ ------------
Net interest income 2,000 1,991 1,686 1,536
Provision for loan losses 128 179 141 90
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 1,872 1,812 1,545 1,446
Other income 1,375 993 806 703
Other expenses 2,424 2,289 2,036 1,661
------------ ------------ ------------ ------------
Income before income tax provision 823 516 315 488
Income tax provision 340 213 131 201
------------ ------------ ------------ ------------
Net income $ 483 $ 303 $ 184 $ 287
============ ============ ============ ============
Earnings per share:
Basic $ 0.20 $ 0.13 $ 0.08 $ 0.12
============ ============ ============ ============
Fully diluted $ 0.20 $ 0.12 $ 0.08 $ 0.12
============ ============ ============ ============
Cash dividends per common share declared and paid $ - $ - $ 0.05 $ 0.05
============ ============ ============ ============
</TABLE>
(1) Certain amounts have been reclassified to conform the quarterly information
to the audited financial statements.
60
<PAGE>
20. SEGMENT INFORMATION
The following disclosure about segments of the Company is made in accordance
with the requirements of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company changed its internal
reporting during 1999, and now segregates its operations into two primary
segments: Banking Division and SBA Lending Division. The Company determines
operating results of each segment based on an internal management system that
allocates certain expenses to each segment.
<TABLE>
<CAPTION>
1999
Banking SBA Lending
Division Division Totals
----------------------------------------------------
<S> <C> <C> <C>
Interest income $ 9,174 $ 3,651 $12,825
Interest expense 2,268 2,013 4,281
----------------------------------------------------
Net interest income before provision 6,906 1,638 8,544
Provision for loan losses 385 - 385
Other operating income 2,353 3,223 5,576
Other operating expenses 8,826 2,458 11,284
-----------------------------------------------------
Income before income taxes 48 2,403 2,451
Income taxes 6 894 900
Net income $ 42 $ 1,509 $ 1,551
=====================================================
Assets employed at year end $140,796 $34,977 $175,773
=====================================================
</TABLE>
<TABLE>
<CAPTION>
1998
Banking SBA Lending
Division Division Totals
-----------------------------------------------------
<S> <C> <C> <C>
Interest income $ 6,042 $ 4,911 $ 10,953
Interest expense 1,893 1,847 3,740
-----------------------------------------------------
Net interest income before provision 4,149 3,064 7,213
Provision for loan losses 538 538
Other operating income 2,214 1,663 3,877
Other operating expenses 6,574 1,836 8,410
-----------------------------------------------------
Income (loss) before income taxes (749) 2,891 2,142
Income taxes (309) 1,194 885
=====================================================
Net income (loss) $ (440) $ 1,697 $ 1,257
=====================================================
Assets employed at year end $95,036 $41,187 $136,223
=====================================================
</TABLE>
<TABLE>
<CAPTION>
1997
Banking SBA Lending
Division Division Totals
-----------------------------------------------------
<S> <C> <C> <C>
Interest income $ 4,939 $ 4,021 $ 8,960
Interest expense 1,438 1,563 3,001
-----------------------------------------------------
Net interest income before provision 3,501 2,458 5,959
Provision for loan losses 490 - 490
Other operating income 1,082 1,663 2,745
Other operating expenses 4,624 1,392 6,016
-----------------------------------------------------
Income (loss) before income taxes (531) 2,729 2,198
Income taxes (229) 1,177 948
======================================================
Net income (loss) $ (302) $ 1,552 $ 1,250
======================================================
Assets employed at year end $74,859 $32,110 $106,969
======================================================
</TABLE>
61
<PAGE>
21. PARENT COMPANY FINANCIAL INFORMATION
The following presents the unconsolidated financial statements of the parent
company only, Community Bancorp, Inc. (Note 1) as of December 31 (in thousands):
COMMUNITY BANCORP, INC. (Parent company only)
<TABLE>
<CAPTION>
1999 1998
---------------- ------------------
<S> <C> <C>
BALANCE SHEETS
ASSETS:
Cash $ 34 $ 0
Accrued interest and other assets 84
Investment in subsidiary 14,394 9,546
----------------------------------
TOTAL ASSETS $14,512 $ 9,546
==================================
LIABILITIES:
Other borrowings $ 3,175 $ 0
----------------------------------
TOTAL LIABILITIES 3,175 0
TOTAL SHAREHOLDERS' EQUITY 11,337 9,546
==================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $14,512 $ 9,546
==================================
</TABLE>
COMMUNITY BANCORP, INC. (Parent company only)
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- ---------------
<S> <C> <C> <C>
STATEMENTS OF INCOME
Interest expense $ 150 $ 0 $ 0
Other operating expenses 205 0 0
Equity in net earnings of subsidiary 1,774 1,257 1,250
-------------------------------------------
Earnings before income taxes 1,419 1,257 1,250
Income tax benefit 132 0 0
===========================================
NET INCOME $1,551 $ 1,257 $ 1,250
===========================================
</TABLE>
62
<PAGE>
COMMUNITY BANCORP, INC. (Parent company only)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
SUMMARY STATEMENT OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,551 $ 1,257 $ 1,250
Adjustments to reconcile net income to cash used in operating activities:
Increase in other assets (84) 0 0
Equity in net income of subsidiary (1,774) (1,257) (1,250)
---------- ---------- ----------
Net cash used in operating activities (307) 0 0
CASH FLOWS FROM INVESTING ACTIVITIES
Capital contributions to subsidiary (3,000) 0 0
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from other borrowings 3,175 0 0
Cash dividend received from subsidiary 150
Exercise of stock options 16
---------- ---------- ----------
Net cash provided by financing activities 3,341 0 0
---------- ---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 34 0 0
CASH AND CASH EQUIVALENTS, beginning of year 0 0 0
========== ========== ==========
CASH AND CASH EQUIVALENTS, end of year $ 34 $ 0 $ 0
========== ========== ==========
</TABLE>
63
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Community Bancorp Inc.
We have audited the accompanying consolidated balance sheet of Community
Bancorp Inc. and subsidiary (the Company) as of December 31, 1999 and the
related consolidated statements of income and comprehensive income,
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Community Bancorp Inc. and
subsidiary as of December 31, 1999, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 6, 2000
64
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders,
Community Bancorp Inc.
We have audited the accompanying consolidated balance sheet of
Community Bancorp Inc. and subsidiary (formerly Fallbrook National
Bank)(the Company) as of December 31, 1998, and the related statements
of income and comprehensive income, shareholders' equity and cash flows
for each of the years in the two-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
of Community Bancorp Inc. and subsidiary as of December 31, 1998,
and the results their operations and their cash flows for each of the
years in the two-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
KPMG LLP
San Diego, California
January 13, 1999
65
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On October 8, 1999, the Company dismissed KPMG LLP as the Company's certifying
accountant. The decision to dismiss KPMG LLP was made by the Board of Directors
upon the recommendation of the Audit Committee.
For the years ended December 31, 1998 and 1997, the audit report of KPMG LLP did
not contain an adverse opinion nor a disclaimer of opinion on the financial
statements of the Bank, the subsidiary of the Company (the Company commenced
operation on June 25, 1999). There were also no qualifications or modifications
as to uncertainty, audit scope or accounting principles. Additionally, during
the two most recent fiscal years and the subsequent interim period preceding
their dismissal, there have been no disagreements with KPMG LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures.
On October 8, 1999, the Company appointed Deloitte & Touche as its certifying
accountants (as approved by the Board of Directors and recommended by its Audit
Committee).
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by Item 9 of Form 10-KSB is incorporated by reference
from the information contained in the Company's Proxy Statement for the 2000
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 of Form 10-KSB is incorporated by reference
from the information contained in the Company's Proxy Statement for the 2000
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 11 of Form 10-KSB is incorporated by reference
from the information contained in the Company's Proxy Statement for the 2000
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 of Form 10-KSB is incorporated by reference
from the information contained in the Company's Proxy Statement for the 2000
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
66
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
3.1 Certificate of Incorporation, as amended, of Community Bancorp Inc*
3.2 Bylaws of Community Bancorp Inc.*
4.1 Specimen Share Certificate for Common Stock
10.1 Data Processing Service Agreement, dated May 28, 1997 between Fallbrook
National Bank and First National Bank as amended
10.2 1993 Stock Option Plan **
10.3 Form of stock option agreement for use pursuant to 1993 Stock Option
Plan**
10.4 Head Office Extension Leases
10.5 Temecula Branch Office Lease
10.6 Vista Branch Lease
10.7 Fallbrook National Bank 401(k) Profit Sharing Plan***
10.8 Director Indexed Fee Continuation Program
10.9 Employment Agreement with Thomas E. Swanson
10.10 Employment Agreement with Gary M. Youmans
10.11 Employment Agreement with L. Bruce Mills, Jr.
10.12 Employment Agreement with Donald W. Murray
10.13 Employment Agreement with Barbara C. Ernst
10.14 Fallbrook National Bank Employee Stock Ownership Plan
23.1 Consent of KPMG LLP
23.2 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
- -------------------------------------------------
* Previously filed with the Company's 10-QSB for the quarter ended June 30, 1999
** Previously filed with the Company's S-8 Registration Statement (333-88473)
*** Previously filed with the Company's S-8 Registration Statement (333-88457)
(b) REPORTS ON FORM 8-K
During the fourth quarter of 1999, the Company filed two reports on Form 8-K.
67
<PAGE>
On October 15, 1999, the Company filed an 8-K Report pursuant to Item 4 of such
Form. The Report discussed the change in the Company's certifying accountant.
See Item 8 of this Report.
On November 3, 1999, the Company filed an 8-K Report pursuant to Item 5 of such
Form. The Report discussed (I) the litigation matter described in Item 3 of this
Report and (ii) a five percent (5%) stock dividend payable on November 30, 1999
to shareholders of record on November 15, 1999.
68
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Company has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMMUNITY BANCORP INC.
By: /s/ Thomas E. Swanson
------------------------------------------
THOMAS E. SWANSON
President and Chief Executive Officer
Dated: March ??, 2000
By: /s/ L. Bruce Mills, Jr.
-----------------------------------------
L. BRUCE MILLS, JR.
Senior Vice President and Chief Financial Officer
Dated: March ??, 2000
69
<PAGE>
In accordance with the Securities Exchange Act of 1934, this report has
been signed by the following persons on behalf of the Bank and in the capacities
and on the dates indicated.
Dated:
/s/ Granger Haugh Chairman of the March ??, 2000
- ---------------------------------- Board
GRANGER HAUGH
/s/ E. Steve Lefevre Director March ??, 2000
- ----------------------------------
E. STEVE LEFEVRE
/s/ Roy B. Hiscock Director March ??, 2000
- ----------------------------------
ROY B. HISCOCK
/s/ Robert H. S. Kirkpatrick Director March ??, 2000
- -------------------------------
ROBERT H.S. KIRKPATRICK
/s/ Philip D. Oberhansley Director March ??, 2000
- ----------------------------------
PHILIP D. OBERHANSLEY
/s/ Corey A. Seale Director March ??, 2000
- ----------------------------------
COREY A. SEALE
/s/ Thomas E. Swanson Director March ??, 2000
- ----------------------------------
THOMAS E. SWANSON
/s/ Gordon T. Tucker Director March ??, 2000
- ----------------------------------
GORDON T. TUCKER
/s/ Gary M. Youmans Director March ??, 2000
- ----------------------------------
GARY M. YOUMANS
70
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
4.1 Specimen Share Certificate for Common Stock
10.1 Data Processing Service Agreement, dated May 28, 1997 between Fallbrook
National Bank and First National Bank as amended
10.4 Head Office Extension Leases
10.5 Temecula Branch Office Lease
10.6 Vista Branch Lease
10.8 Director Indexed Fee Continuation Program
10.9 Employment Agreement with Thomas E. Swanson
10.10 Employment Agreement with Gary M. Youmans
10.11 Employment Agreement with L. Bruce Mills, Jr.
10.12 Employment Agreement with Donald W. Murray
10.13 Employment Agreement with Barbara C. Ernst
10.14 Fallbrook National Bank Employee Stock Ownership Plan
23.1 Consent of KPMG LLP
23.2 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
</TABLE>
71
<PAGE>
64204
<TABLE>
<S><C>
NUMBER SHARES
CB COMMUNITY BANCORP INC.
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE CUSIP 20342P 10 9
This Certifies that
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.625 PAR VALUE, OF
------------------- --------------------
---------------------- COMMUNITY BANCORP INC. ------------------------
------------------- --------------------
transferable on the books of the Corporation by the holder hereof in person or by duly authorized
attorney upon surrender of this certificate properly endorsed. This certificate is not valid until
countersigned by the Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated:
/s/ [illegible] /s/ [illegible] [SEAL] /s/ [illegible]
CHAIRMAN PRESIDENT AND CHIEF EXECUTIVE OFFICER SECRETARY
</TABLE>
COUNTERSIGNED AND REGISTERED
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
DATA PROCESSING SERVICE AGREEMENT
This DATA PROCESSING SERVICE AGREEMENT executed this 28th. day of
MAY, 1997 by and between
FIRST NATIONAL BANK,
a national banking corporation,
(hereafter "FNB")
and
FALLBROOK NATIONAL BANK
(hereafter "BANK")
is made and entered into with reference to the following facts:
A. FNB has available certain data processing services utilizing
programs and the like developed and used by FNB in its own business as well as
programs and the like licensed to FNB by others and which FNB may utilize in
providing services to customers such as BANK.
B. BANK desires to utilize certain data processing services
available from FNB.
NOW, THEREFORE, in consideration of the foregoing and of the
mutual covenants and agreements contained herein, the parties promise and agree
as follows:
1. SERVICES PROVIDED BY FNB
FNB shall be the sole provider to BANK the processing
services and reports set forth and described in Exhibit "A" attached hereto and
incorporated herein by this reference as though set forth in full. FNB may make
additions or modifications to the services from time to time. The specific
services to be provided under this Agreement may be modified or amended from
time to time by a written addendum to Exhibit "A" endorsed or otherwise executed
by the parties.
1
<PAGE>
2. TERM
The initial term of this Agreement is for a period of three
(3) years commencing JUNE 01, 1997 (the "Commencement Date"). Unless previously
terminated as provided in this Agreement, the term shall be extended for an
additional three (3) month term at the end of the initial term and of each
subsequent term year. BANK may choose to continue this agreement on a
month-to-month basis, after expiration of the three month extended term, at the
fees and charges in effect at the end of the initial term plus 10%.
3. FEES AND CHARGES
a. BANK shall pay fees and charges to FNB in accordance with
its current fee schedule as shown in the attached Exhibit "C", which is
incorporated herein by this reference as though set forth in full. The Exhibit
"C" schedule of fees and charges may be amended by FNB annually during the
initial term of this Agreement or any extension thereof upon written notice to
BANK at least sixty (60) days in advance of the annual anniversary of the
commencement date of this Agreement.
b. It is provided, however, that any increase in FNB's fees
and charges at the end of each term year shall not exceed the lesser of either
(i) five percent (5%) or (ii) the percentage of any increase in the Consumer
Price Index (CPI), "All Urban Consumers - U.S. City Average" as reported by the
Department of Commerce or other governmental agency providing such reports for
the preceding twelve month period closest to and preceding the anniversary of
the Commencement Date on this Agreement. In the event the Department of Commerce
discontinues the publication of a CPI, "All Urban Consumers - U.S. City Average"
index, then the CPI index most closely approximating such index shall be used.
c. BANK shall pay to FNB promptly upon demand FNB'S then
current standard fees for any additional services which may be necessary or
required.
4. INPUT DATA PREPARATION BY BANK
BANK covenants and agrees that it will comply with all of the
requirements concerning input data preparation and with the responsibilities set
forth and described in Exhibit "B", attached hereto and incorporated herein by
this reference as though set forth in full. Exhibit "B" may be modified or
amended from time to time by a written addendum endorsed or otherwise executed
by the parties.
2
<PAGE>
5. PROCEDURES MANUALS
FNB shall provide BANK with procedures manuals, at cost,
containing information as to preparation of input data, procedure steps, report
auditing, and error reporting. FNB will provide reasonable notification to BANK
to keep such manuals updated and to inform BANK of any systems, schedule and
procedural changes as may become necessary from time to time. FNB may, from time
to time, make modifications, changes or adjustments in the systems and
procedures utilized in providing the services contemplated hereby which its
deems appropriate, in its sole discretion.
6. FURTHER AGREEMENTS BY FNB
FNB agrees to:
a. Retain copies of the transaction, master and history
files of BANK at an off-site location for the period set forth below in order to
provide the ability to reconstruct records in case of equipment or human error
on the part of FNB.
All files are kept on magnetic tapes. Off-site file retention
schedule cycles are as follows:
Daily files --- 7 days
Month-end files --- 4 months
Quarter-end files --- 12 months
Year-end files --- 7 years
b. Maintain a Disaster Recovery and Contingency Plan
including backup agreements with other financial institution(s) and/or a company
providing "Hot Site" facilities with compatible hardware;
c. Treat BANK's records in the same confidential manner as
it treats its own records;
d. Keep all of BANK's records, while in FNB's possession,
insured under FNB's casualty insurance policy for fire and extended coverage;
e. Assist BANK in the initial installation of the service
system and in the initial training of BANK's staff for a period and a fee a
indicated in Exhibit "C". Both new training and any re-training following the
installation of the service system will be provided by FNB and/or by the
licensor of any of the programs utilized in connection with the program. BANK
shall pay for such training at its sole expense at the rates set forth in
Exhibit "C" for training by FNB and at the standard rates then prevailing for
training by any licensor;
3
<PAGE>
f. Use its best efforts to reconstruct any file, re-run any
report, or re-do any job which is incorrect due to electrical or mechanical
error or malicious mischief or human error on the part of any FNB employee at no
additional charge to BANK, provided it is possible, and reasonable, to do so and
provided that FNB has received prompt notification from BANK;
g. Maintain a financial institution bond and/or fidelity
insurance, with a minimum coverage of $1,000,000, to cover loss due to dishonest
and/or fraudulent acts of FNB's employees.
h. Use due care in processing the work of BANK. However, it
is agreed that FNB will be responsible only to the extent of correcting errors
or omissions which are due to the machines, operators or programmers of FNB, and
such errors will be corrected at no additional charge to BANK. FNB shall
maintain insurance in the amount of $500,000 for data loss resulting from errors
or omissions which are due to the machines, operators or programmers of FNB and
BANK agrees that the liability of FNB with respect to this Agreement shall in
any event be limited to the amount of the total errors and omissions insurance
and shall not include any contingent liability or third party claims;
i. Provide BANK with FNB's relevant financial information no
less often than quarterly;
j. Examine certain customer checks, as identified in Exhibit
"B" paragraph "14", for irregularities such as stale date (over 6 months old),
post dated, or a difference between the legal amount, the courtesy amount and
the MICR encoded amount, and, compare and identify differences between the
signature(s) on the checks to the specimen signature card provided by BANK.
Endorsements will not be examined. Furthermore, it is agreed that FNB does not
employ fraud, forgery and/or handwriting experts, and whether or not an expert
may be retained, FNB will not be responsible for any loss of BANK if the check
in dispute has a signature that through forgery or photomechanical means
reasonably resembles the appearance of the signature on the specimen signature
card. BANK has the right to review FNB's Check Scrutinization Procedure and
request changes, which may or may not effect the fee charged for the service
should FNB agree to the changes. BANK and/or FNB may elect to have certain
checks, or copies of checks, delivered to BANK's employees. FNB shall have no
responsibility or liability to BANK for any check, or copy of a check, which
BANK reviews or is given the opportunity to review. BANK will use its best
efforts to defend claims that any check has been altered, and/or forged and to
mitigate any damage which may result from an altered check, including, without
limitation, undertaking reasonable collection efforts against the parties
responsible for such alteration or forgery. In the event losses actually
incurred by BANK and reimbursed by FNB due to the proper scrutinization of
checks by FNB exceed fifty percent (50%) of the anticipated annual billings
under this contract during any twelve (12) month period, FNB shall have the
right to discontinue the scrutinization of checks service upon 90 days written
notice to BANK; and
4
<PAGE>
k. Provide services in compliance with current banking
regulation, subject to limitations of the current software provider.
7. FURTHER AGREEMENTS BY BANK
BANK agrees to:
a. Pay all fees and charges to FNB for the services and
reports listed in Exhibit "A" in accordance with the schedule listed in Exhibit
"C" as submitted in monthly billing statements by FNB;
b. Pay such fees and charges no later than ten (10) days
following the date of each monthly billing;
c. Refrain from making any deduction or setoff from FNB's
billing statements without the prior written consent of FNB;
d. Treat as confidential any information acquired by it or
its employees, agents or representatives from or as a result of being on the
premises of FNB or disclosed from the procedures manuals provided by FNB or its
licensor;
e. Perform its duties and responsibilities as set forth in
Exhibit "B" and in the manuals generally described herein above. Such manuals
and any supplements, amendments and modifications thereto are incorporated
herein by this reference as though set forth in full;
f. Indemnify, defend and hold FNB harmless of and from all
claims, liabilities, losses, damages, expenses, or costs, including but not
limited to reasonable attorney fees, arising out of or in connection with the
negligence, acts, omissions or other conduct of BANK, its agents, employees,
officers, directors or, to the extent permitted hereunder, its assigns. It is
agreed that FNB shall not be responsible for any loss, damages, expenses or
delay caused directly or indirectly by or arising out of any electrical or
mechanical failure, strike, riot, fire, flood, water, or act of God which
damages, disrupts, or delays in any manner whatsoever any of the services or
reports contemplated by this Agreement;
g. With respect to services provided to BANK, as a result of
this agreement, BANK agrees to limit FNB's liability solely for such loss,
damages and expenses which are the actual and direct result of bad faith,
willful misconduct, or gross negligence of FNB, its agents, employees, officers,
directors or, to the extent permitted hereunder, its assigns; and, provided
further, that BANK will undertake reasonable collection efforts to recover any
loss or potential loss at its own expense and that FNB's liability even for such
loss, damages and expenses shall not exceed the limits of insurance provided by
FNB, as identified in paragraph "6" of this agreement, and shall not cover loss
of profits, earnings or business resulting from a covered cause of loss and
shall not include any contingent liability or third party claims;
5
<PAGE>
h. Separately bag source documents and that source documents
will not be under dual custody or control in transit; and
i. Assume all responsibility for the delivery and/or
retrieval of all source documents to or from FNB and to hold FNB harmless for
the loss of property in transit to or from FNB.
8. WORK AND DELIVERY SCHEDULES
All computer processing is performed in a multi-task
environment with priorities based on availability of incoming work and
prescheduled deadlines. Current schedules for outgoing transit and courier
dispatching are set forth on Exhibit "D", attached hereto and incorporated
herein by this reference. Exhibit "D" may be amended or modified by FNB from
time to time on reasonable notice to BANK. Work produced on a daily basis must
be delivered to the designated FNB branch office or to the data processing
center in accordance with the schedule set forth in Exhibit "D".
Where the provisions of this Agreement require FNB or BANK to
perform specific acts on a designated date, it is agreed that reasonable
adjustments shall be made when such date is a holiday for either or both
parties. FNB currently observes as legal holidays the same holidays as observed
by the Federal Reserve Bank of San Francisco. Work performed by FNB on such
holidays shall be billed to BANK on a time cost basis as set forth in Exhibit
"C", and BANK agrees to pay these charges and fees in accordance with the
procedure for payment set forth above.
9. OWNERSHIP OF COMPUTERIZED PROGRAMS AND OTHER MEDIA
All computer programs, written procedures, related
documentation and software and other supporting items referenced by Exhibit "A"
and used in the work performed for BANK are the property of or are licensed for
use by FNB. This Agreement shall not be construed as granting to BANK any rights
of ownership in or to such computer programs, written procedures, related
documentation and software and/or any other supporting items referenced by
Exhibit "A" or otherwise utilized by FNB.
10. AUTHORIZATION FOR AUDIT
BANK hereby grants and authorizes all official regulatory
agencies and BANK's independent public accountants, internal auditors, and/or
third party auditors (to be named by written notice delivered to FNB) the right
during normal business hours to examine and audit the records of BANK maintained
by FNB. FNB agrees to make said records of BANK available during normal business
hours (Monday - Friday, 08:00 a.m. - 05:00 p.m.), except for legal holidays as
defined herein, at FNB's operations center at 3821 Calle Fortunada, Suite "D",
San Diego, California.
6
<PAGE>
11. TERMINATION
This Agreement may be terminated by the non-defaulting party,
without penalty, in the event either party fails to perform any duties or comply
with any of the covenants or agreements contained herein. The other party shall
deliver thirty (30) days written notice specifying the nature of the default to
the defaulting party. If the defaulting party fails to cure the default within
the thirty (30) day period, the Agreement may thereupon be terminated at the
option of the non-defaulting party.
FNB may elect not to renew this Agreement at the end of its
initial term, or any subsequent term, by giving six (6) months notice of its
intention not to renew prior to the expiration of this Agreement's current term.
BANK may terminate this agreement without penalty by giving
three (3) months notice of it intent not to renew this agreement at the end if
its initial term or during any subsequent term as described in paragraph two (2)
of this agreement.
12. RESTRICTION ON ASSIGNABILITY
This Agreement shall not be assigned by BANK, except by
merger or acquisition, without the prior written consent of FNB, which consent
may not be given or withheld in FNB's sole discretion.
13. RETURN OF RECORDS
Upon any cancellation, termination or expiration of this
Agreement, FNB shall release to BANK all master file records on magnetic tape at
a cost to BANK as shown on Exhibit "C"; provided, that BANK pays to FNB the cost
of all materials used in the preparation of such records.
14. ATTORNEY FEES
In the event either party commences any legal action or
proceeding to enforce or interpret any of the covenants, terms or provisions of
this Agreement, the prevailing party shall, in addition to any other relief, be
entitled to recover its reasonable attorney fees and costs of suit.
7
<PAGE>
15. NOTICES
Any notice under or in connection with this Agreement shall
be given by mailing the same by Certified first class mail, postage prepaid, and
shall be deemed delivered when deposited in the United States mail. The notices
shall be addressed as follows, unless changed by subsequent written notice:
TO BANK:
Attn. Chief Financial Officer
FALLBROOK NATIONAL BANK
130 W. Fallbrook Street
Fallbrook, California 92028
TO FNB:
Attn: SVP / CIO
FIRST NATIONAL BANK
P.O. Box 85625
San Diego, CA 92186-5625
16. ENTIRE AGREEMENT
This document contains the entire agreement and understanding
between the parties on the subject matter hereof and there are no other
contract or agreements, written or oral, other than contained herein.
17. AMENDMENTS
Except as otherwise specifically permitted hereunder, This
Agreement may be amended only in writing executed by both parties.
18. BINDING EFFECT
The covenants and agreements contained herein shall be
binding upon and inure to the benefit of the parties and their respective heirs,
beneficiaries, legal representatives and, to the extent permitted hereunder,
their successors or assigns.
8
<PAGE>
19. HEADINGS
The paragraph headings in this Agreement are for convenience
only and shall not be used to supplement or interpret the contents of this
Agreement.
20. GOVERNING LAW
The validity,, interpretation and performance of this
Agreement shall be controlled and construed in accordance with the laws of the
State of California and of such Federal laws, rules and regulations as are
applicable to the parties.
IN WITNESS WHEREOF, the parties have executed this DATA
PROCESSING SERVICE AGREEMENT the day and year first written above.
FNB: BANK:
FIRST NATIONAL BANK, FALLBROOK NATIONAL BANK
a national banking corporation, a national banking corporation,
By: /s/ Leonard F. Wise By: /s/ [Illegible]
---------------------------- -----------------------------
Its SVP, CEO Its SVP, CFO
--------------- --------------
By: By: /s/ [Illegible]
---------------------------- -----------------------------
Its Its President CEO
-------------- --------------
9
<PAGE>
EXHIBIT "A"
SERVICES PROVIDED*
<TABLE>
<CAPTION>
COMMENCEMENT
DATE*
SERVICES
<S> <C> <C>
I. ITI Financial Information System, 06/01/97
Central Information File, Demand Deposits, Savings, Certificates of Deposit,
Loan Accounting, Item Entry, Exception Item Processing, SMART Reporting,
On-line Terminal Access
II. Paperless Item Processing (ACH) 06/01/97
III. Teller Terminal System
---------------
IV. Fixed Assets 06/01/97
V. Check Reconciliation 06/01/97
VI. TeleBanc - (Telephone Banking) 06/01/97
VII. ExecuBanc - (Business P.C. Banking)
---------------
VIII. Accounts Payable 06/01/97
IX. Item Processing, including: 06/01/97
Proof and Encoding of Deposits, Deposit Capture, Cash Letter Preparation,
Inclearings Capture, Microfilming of Items
X. Centralized Bank Services, including: 06/01/97
Checkfiling, Statement Rendering, Centralized Returns,
Photo Copy Retrieval from Microfilm
XI. Microfiche Services 06/01/97
XII. CFI Deposit Pro & Laser Pro Interface 06/01/97
XIII. Director
---------------
XIV. PRIME
---------------
XV. Signature Management Module
---------------
XVI. Bill Payment Module
---------------
XVII.
-------------------------------------------- ---------------
</TABLE>
Reports provided as part of any of the above services are defined in procedure
manuals provided to BANK at the commencement of each service. Specific
processing instructions for each service are as defined in the "Specification
Worksheets" completed at the commencement of each service and as modified from
time to time by mutual consent and endorsement by both parties.
* Services provided are to be selected 90 days prior to start of processing.
** Commencement Date to be determined by mutual consent and endorsement by both
parties.
10
<PAGE>
EXHIBIT "B"
RESPONSIBILITY DEFINITIONS
The following definitions will be applicable to all accounting areas, with the
exception of those noted with reference to a specific area.
<TABLE>
<CAPTION>
<S> <C>
BANK FNB
1. MICR-ENCODED INPUT DOCUMENTS
BANK agrees to order and use documents with FNB reserves the right to perform acceptability
MICR-encoding of specifications and test of MICR-encoded documents and to require the
quality acceptable to FNB's data handling of below-standard documents to be the subject
processing equipment. of separate negotiations with BANK.
2. DATA MICROFILMING
BANK agrees to microfilm all transactions
and other detail input prior to submitting it
to FNB for processing to provide BANK with its
own back-up and look-up facility.
3. INCOMING AND OUTGOING ITEMS
BANK agrees to hold FNB harmless from any and all On BANK's request, FNB will make available information
losses and/or damages which might be occasioned from required by BANK for communication with sending and/or
the processing of incoming and outgoing items to and receiving sources, provided such information has not
from the Federal Reserve Bank; BANK's correspondent yet been made available to Bank.
bank(s); clearing banks; other sending and receiving
sources; and Bank agrees to conduct any and all
communications with such receiving and/or sending
sources.
11
<PAGE>
RESPONSIBILITY DEFINITIONS (cont'd.)
BANK FNB
4. TRANSMITTAL OF TRANSACTIONS
BANK agrees to send to FNB all "over the counter" FNB will audit the groups of work received from each branch
and other branch generated transactions under the delivery to the transmittal letter sent with the groups of
controlled environment of Batch headers and transmittal work by BANK. FNB will notify BANK's designated employees
letters as defined by FNB. BANK releases and holds FNB upon discovery of any discrepancy in the audit of groups
harmless from any and all liability for missing work of work to the transmittal letter.
not sent to FNB in accordance with this procedure.
5. FILE MAINTENANCE INPUT
BANK agrees to be soley responsible for:
a. The accuracy of all data input.
b. Auditing all input submitted for processing
to the output reports generated.
6. OUT OF BALANCE TRANSACTIONS
BANK authorizes FNB to create General Ledger FNB will prepare and process a deposit correction
suspense entries for invalid or unprocessable to the depositing account in any deposit transaction
transactions and to return such to BANK, where there has been an error made in addition or
which will be solely responsible for clearing listing of checks, and to prepare and process General
all such entries. Ledger entries to suspense assets or liabilities accounts
to balance transactions involving teller's cash tickets
or General Ledger tickets in accordance with BANK's
instructions.
Copies of deposit corrections and reversing entries to
suspense and pertinent supporting documents will
be sent to BANK for disposition.
12
<PAGE>
RESPONSIBILITY DEFINITIONS (cont'd)
BANK FNB
7. STOP & HOLD
Bank shall be entirely responsible for auditing
stop payments and holds maintenance to output reports
generated.
8. REPORT AUDITING
BANK shall be responsible for the daily auditing of FNB will inform BANK of any irregularities which it
all EDP reports and the initiating of corrective recognizes in any of the reports delivered, stating action
measures if required. required for recovery and/or correction.
If BANK discovers an apparent discrepancy in any of
the reports which has not already been reported to
FNB, BANK agrees to promptly inform FNB. In order to
assure recovery of the required data by FNB, such
notification must be received by FNB on the same day as
receipt by BANK of the report in question.
9. SUBSIDIARY FILE BALANCING
BANK authorizes FNB to create General Ledger suspense In order to complete daily processing under extremely tight
entries and to return them to BANK, which will be solely time scheduling, FNB may occasionally make General Ledger
responsible for clearing such entries when necessary suspense entries to correct "out-of-balance" conditions
to balance subsidiary files to the General Ledger. which cannot, at the time, be located and corrected. FNB
will notify BANK of such conditions as well as the
corrective measures required as soon as the error source
is located.
10. STATEMENT CYCLE-DEMAND DEPOSIT ACCOUNTING
BANK shall establish pre-determined cycle dates
and shall not deviate from these dates without
the prior written consent of FNB.
13
<PAGE>
RESPONSIBILITY DEFINITIONS (cont'd.)
BANK FNB
11. BANK PROCESSING PROCEDURES
BANK recognizes the extreme importance of having at FNB will make its facilities available for the
least one BANK employee per Branch who is thoroughly indoctrination and training of Branch EDP personnel.
familiar with procedures, requirements and, specifically, FNB management may prepare formal and informal
the details of the Procedures Manuals. BANK agrees: To presentations and seminars for such indoctrination
designate such person(s) and require them to and training as it deems necessary.
participate in:
1) basic indoctrination course
2) subsequent information and education seminars.
BANK's executive management agrees to be available
for periodic reviews of current procedures and results,
as well as participation in the planning and definition
of future requirements.
12. NON-POST, STOP PAY & SUSPECT ITEMS
BANK understands and agrees that it has sole FNB will provide information concerning any of
responsibility to review and dispose of: these items to BANK to assist BANK in making a
determination of whether to return or to pay an item.
a. All items appearing on the daily Non-Post
Items report, including stop pay items; and
b. All stop suspect items appearing on the stop
suspect screen.
13. SIGNATURE CARDS
BANK shall furnish FNB with a Signature Card FNB will maintain a file with BANK's demand deposit
for each open account at time of conversion. Signature Cards and will pull from it daily all
BANK shall also furnish FNB with a Signature purged accounts and return such cards to Branch.
Card for all new accounts daily. BANK will
provide updated Signature Cards on accounts
as requested by FNB.
14
<PAGE>
RESPONSIBILITY DEFINITIONS (cont'd.)
BANK FNB
14. EXAMINATION OF CHECKS
X BANK elects to have FNB randomly select 1% An check in question due to irregularities in
- -- of items for examination by FNB. negotiability and/or differences in authorized
signatures will be reversed and charged back to
the last endorsing bank.
X BANK elects to have FNB select all checks
- -- over $5,000 for examination by FNB. A
larger amount may be designated by BANK upon
two (2) weeks written notice to FNB.
X BANK elects to have all items selected,
- -- as identified above, returned to BANK
for examination.
BANK elects not to have any items slected
- -- for examination.
15. STATEMENT PREPARATION AND MAILING
BANK agrees to provide FNB, at FNB's request, FNB will insert advertising stuffers provided
the quantity of envelopes requested for statement by BANK into the regular statement mailing at
mailing. BANK agrees to notify FNB one (1) week the request of BANK.
in advance of any advertisement that is to be
mailed along with the depositor's statement. BANK
agrees to reimburse FNB for all postage costs
incurred in mailing BANK's monthly statements.
16. MISSING ITEMS
BANK agrees to provide FNB with missing document Where there is a missing document, FNB will
forms as requested by FNB. include a missing document ticket in the
statement for the benefit of the account holder.
</TABLE>
15
<PAGE>
EXHIBIT "C"
SCHEDULE OF FEES AND CHARGES
<TABLE>
<S> <C>
C.I.S. CHARGES:
Portfolio .05
Addenda .01
Tax Addenda .01
Safe Deposit Box .10
Debit Card Issued .01
SMART Report Set-Up Charge 50.00
SMART Report Production:
One Time/On-Call (per report) 25.00
Auto Recurring (per report, over 25 per month) 5.00
Minimum Charge 250.00
DEPOSIT ACCOUNTS (DDA, DDL, SAV, COD):
Account .35
Account on Analysis with history 1.00
Addenda Day .01
Stop Pay Day .01
Manual Transaction .01
Automated Transaction .01
Checking Statement .10
Notice .25
Check Issued .25
Minimum Charge (per application) 250.00
LOANS (INSTALLMENT, COMMERCIAL & MORTGAGE):
Line .05
Note .35
Addenda .01
Manual Transaction .01
Automated Transaction .01
Notice .25
Minimum Charge 250.00
FINANCIAL MANAGEMENT:
Account .35
Manual Non-Descriptive Transaction .01
Manual Descriptive Transaction .01
Automated Transaction .01
Minimum Charge 250.00
EXCEPTION ITEM MODULE:
Included n/c
</TABLE>
17
<PAGE>
SCHEDULE OF FEES AND CHARGES (CONT'D.)
<TABLE>
<S> <C>
TELLER TERMINAL CHARGES:
Terminal Address (Station Number) 10.00
Transaction .01
Minimum Charge 250.00
ON-LINE CHARGES:
Terminal Address (Station Number) 10.00
Printer Address (Station Number) 10.00
Inquiry .01
File Maintenance .01
Calculation Function .01
Minimum Charge 250.00
Balance File Transmission (ATM) 200.00
ITEM ENTRY SYSTEM:
Warehouse Item .01
Manual Descriptive Item .01
Manual Non-Descriptive Item .01
Inclearings Processing:
First 50,000 items .02
Next 50,000 items .015
Over 100,000 items .0125
Teller Processing (including P.O.D. & encoding):
First 50,000 items .04
Next 50,000 items .03
Over 100,000 items .025
Endorse Item on Request (per item) .01
Manual Re-Entered Items (per item) .05
Transit Float Analysis (per report) 100.00
Transit Float Analysis (per item) .005
Additional Transit Pockets over four (per item) .005
ACH Processing (per file) 10.00
ACH Return 1.00
ACH Notification of Change 1.00
Minimum Charge 500.00
</TABLE>
18
<PAGE>
SCHEDULE OF FEES AND CHARGES (CONT'D.)
<TABLE>
<S><C>
MISCELLANEOUS SERVICES:
On-site Training & Support (per hour) 100.00
Programming Time (per hour) 150.00
Travel Time over 30 min. (per hour) 35.00
Mileage (per mile) .31
Fine Sort - Reject Filing (per hour) 15.00
Special Fine Sort (per item pass)($25 min. per account) .005
Microfiche Original 1.75
Microfiche Copy .20
Laser Statements (per page) .05
Credit Reporting Tape (per tape) 25.00
Coupon Ordering Tape (per tape) 25.00
Frame Relay Ports (per month, each) 10.00
PASS THRU CHARGES:
Postage Cost
Microfilm Processing Cost + 10%
Courier Services Customer Contracted
Phone Line Charges Cost + 10%
Supplies Cost + 10%
TELEPHONE BANKING:
Monthly Costs:
First 5,000 Accounts (per account) .10
Over 5,000 Accounts (per account) .075
Phone Lines Cost
</TABLE>
20
<PAGE>
SCHEDULE OF FEES AND CHARGES (cont'd.)
EXECUBANC
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERVICE BUREAU SET-UP COSTS
- --------------------- ------------
<S> <C>
ONE-TIME COSTS
Product Use Fee $ 2,500
Product Conversion Fee 1,000
Two Line Card* 5,500
------------
Total One-Time Costs $ 9,000
============
MONTHLY FEES
Minimum Fee $ 250
Per Line 50.00
Per Client 25.00
</TABLE>
FALLBROOK NATIONAL BANK RESPONSIBILITIES
Responsible for cost of phone lines from Fallbrook to the
Operations Center. INFOSERV will assist with the ordering and
installation.
Responsible for verifying that customer PC setup is capable of
communication with ExecuBanc.
Responsible for training customer on the use of ExecuBanc.
Responsible for customer setup.
Responsible for on-going support of customers.
OTHER CONSIDERATIONS
Fallbrook National Bank (FNB) could install two Fallbrook telephone
numbers that automatically call forward to San Diego. FNB would
then absord the toll charge to San Diego.
FNB could install an 800 number for Temecula customers.
* Prices are based upon current supplier quotes and subject to
change without notice. Taxes and shipping are not included.
21
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF FEES AND CHARGES (cont'd.)
DIRECTOR
- -------------------------------------------------------------------------------
SERVICE BUREAU SET-UP COSTS
- --------------------- ------------
<S> <C>
ONE-TIME COSTS
Product Use Fee $ 5,000
Conversion Fee 1,000
Named users @ $595 ea., est. 3 1,785
Concurrent users (1-5) 4,995
------------
Total One-Time Costs $ 12,780
============
MONTHLY FEES
Access & Storage Fee:
Administration + 1st. Branch $ 750
Each additional branch 250
</TABLE>
22
<PAGE>
SCHEDULE OF FEES AND CHARGES (cont'd.)
PREMIER PRIME
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ANNUAL
SERVICE BUREAU SET-UP COSTS COSTS
- --------------------- ------------ ------------
<S> <C> <C>
ONE-TIME COSTS
Product Use Fee $ 2,500
Conversion Fee 1,000
Impromptu User Run-Time License est. 3 2,085
($695 per workstation)
Annual Support Fee and Usage Charge - 20% $ 417
------------ ------------
Total One-Time Costs $ 5,585 $ 417
============ ============
MONTHLY FEES
Monthly Access Fee $ 250
Database refresh charge, per data base 25
Database carrying charges, per data base 10
</TABLE>
23
<PAGE>
SCHEDULE OF FEES & CHARGES (cont'd.)
PREMIER PRIME
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ANNUAL
IN-HOUSE SET-UP COSTS COSTS
- --------------- ----------- ----------
<S> <C> <C>
ONE-TIME COSTS
SERVICE BUREAU CHARGES
Product Use Fee $ 1,500
Conversion Fee 500
-----------
Total Service Bureau Charges 2,000
SOFTWARE
Database Server software 1,423 $ 285
ITIConnect per server 195
Impromptu Administrator (at least one per server) 895 179
Impromptu User Run-Time License est. 3 2,085 417
($695 per workstation)
Microsoft SQL SVR v6.5 - 25 user 4,491
NT 3.5 Server 1 - processors 1,129 11
Symantac pcAnywhere Win95 & NT 197
-----------
Total Software 10,415
HARDWARE
Prime Server - Standard 12,517 480
Network Communications Products 50
UPS 1000 VA 900
USRobitcs Sportster ext 33.6 v.34 219
Miscellaneous 1,000
-----------
Total Hardware 14,686
UNISYS CONNECT SERVICES
LAN/WAN Connect Charges 3,500
----------- ----------
Total One-Time Costs $ 30,601 $ 1,372
=========== ==========
MONTHLY FEES
Monthly Access Fee $ 100
Database refresh charge, per data base 25
(Estimate one per week and month-end.)
</TABLE>
24
<PAGE>
SCHEDULE OF FEES & CHARGES (cont'd.)
SIGNATURE MANAGEMENT MODULE
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERVICE BUREAU SET-UP COSTS
--------------------- ---------
<S> <C>
ONE-TIME COSTS
Product Use Fee $ 500
Product Conversion Fee 500
Signature Conversion Fee @ $.20
per signature, est. 8,500 sig's. 1,700
---------
Total One-Time Costs - $ 2,700
=========
MONTHLY FEES
Minimum Fee $ 250
Per signature 1 - 5,000 0.025
Per signature over 5,000 0.020
</TABLE>
25
<PAGE>
SCHEDULE OF FEES & CHARGES (cont'd)
PROPOSAL FOR BILL PAYMENT MODULE
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERVICE BUREAU SET-UP COSTS
- --------------------- ----------
<S> <C>
ONE-TIME COSTS
Product Use Fee $ 2,500.00
MONTHLY FEES
Minimum Fee $ 250.00
Per Vendor 0.05
Per Transaction (transfer, ACH or check) 0.10
</TABLE>
FALLBROOK NATIONAL BANK RESPONSIBILITIES
Responsible for setting up vendor files, transfer addenda, etc.
Responsible for settling customer/vendor disputes.
Responsible for training customer on the use of the Bill Payment Module.
Responsible for reconciling disbursements.
Responsible for on-going support of customers.
OTHER CONSIDERATIONS
Fallbrook National Bank (FNB) would be responsible for contacting vendors
and obtaining vendor information necessary for transmitting bill
payment transactions.
When payment volume warrants, there is an interface to Check Free that can
be installed. Check Free makes all vendor payments on behalf of vendor,
but it is costly.
26
<PAGE>
EXHIBIT "D"
COURIER SCHEDULES
<TABLE>
<CAPTION>
Availability for Courier Pick-up:
<S> <C>
A.M. Reports and Notices 7:00 a.m.
---------------
Cash Letters - Mon. thru Thur. 9:30 p.m.
---------------
Cash Letters - Friday 10:30 p.m.
---------------
----------------------------- ---------------
Delivery of Work from Bank:
Teller Work:
Monday thru Thursday:
Main Office & Annex 7:20 p.m.
---------------
Temecula 7:20 p.m.
---------------
Friday:
Main Office & Annex 8:30 p.m.
---------------
Temecula 8:30 p.m.
---------------
</TABLE>
27
<PAGE>
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE IS MADE EFFECTIVE AS OF MARCH 1, 1995 BY AND
BETWEEN FALLBROOK MERCANTILE, A CALIFORNIA GENERAL PARTNERSHIP ("LANDLORD")
AND FALLBROOK NATIONAL BANK ("TENANT") WITH REFERENCE TO THE FACTS SET FORTH
BELOW.
RECITALS
- --------
A. Landlord and Tenant are parties to that certain lease dated
March 1, 1994, and hereby express their mutual desire and intent to
amend the terms of the Lease by this First Amendment to Lease with
those terms, covenants, and conditions as hereinafter provided.
B. Landlord leased to Tenant a certain retail space consisting of
approximately 8,272 square feet identified as 855-I, J, K, L, M, N, and
O South Main Avenue, Fallbrook, California 92028 (the "Premises").
C. Landlord and Tenant desire to amend and modify the lease document
effective April 1, 1995.
NOW, THEREFORE, IN CONSIDERATION OF THE RECITALS AND FOR OTHER GOOD AND
VALUABLE CONSIDERATION, THE RECEIPT AND SUFFICIENCY OF WHICH ARE HEREBY
ACKNOWLEDGED, THE PARTIES HERETO AGREE TO SET FORTH BELOW.
1. SECTION 1.4 shall now read, "the original location of the Premises was
outlined in red on the site plan of the Shopping Center, attached to the
original Lease as Exhibit "A" and made a part thereof." The Landlord and
Tenant are now amending the Lease to eliminate Suite 855-I South Main
Avenue, Fallbrook, California 92028 from the Lease premises. Therefore,
the revised Premises shall otherwise be known as 855-J, K, L, M, N, and O
South Main Avenue, Fallbrook, California 92028 ("Address"). Said Premises
being agreed to for the purposes of this Lease to be reduced by
eliminating 855-I South Main Avenue, Fallbrook, California 92028 and
thereby reducing the overall square footage by 1,300 square feet,
resulting in a total approximate area of the new Premises of 6,972 square
feet.
2. SECTION 1.11(a) - MINIMUM MONTHLY RENT shall be Seven Thousand Six
Hundred Sixty-Nine Dollars and Twenty Cents ($7,669.20) per month for
the period of April 1, 1995 through March 31, 1996, and shall be
increased pursuant to Section 1.11(a) of the Lease Agreement.
3. SECTION 11.1(b) - OTHER PERIODIC PAYMENTS shall be Two Thousand Two
Hundred Thirty-One Dollars and Four Cents ($2,231.04).
4. Except as modified herein, the Lease shall remain in full force and
effect as modified.
IN WITNESS WHEREOF THIS AMENDMENT TO LEASE IS EXECUTED AS OF THE DATE FIRST
WRITTEN ABOVE.
LANDLORD: FALLBROOK MERCANTILE
A California Partnership
By: /s/ Robert W. Carson
-----------------------------------
Robert W. Carson, General Partner
By: /s/ Michael R. Perry
-----------------------------------
Michael R. Perry, General Partner
TENANT: FALLBROOK NATIONAL BANK
A California Corporation
By: [ILLEGIBLE]
-----------------------------------
Its: President/CEO
-----------------------------------
By: [ILLEGIBLE]
-----------------------------------
Its: Senior Vice President
-----------------------------------
<PAGE>
STANDARD SHOPPING CENTER LEASE
-----------------------------------------------------------
SHOPPING CENTER:
FALLBROOK MERCANTILE
--------------------------------------------------
--------------------------------------------------
TENANT:
FALLBROOK NATIONAL BANK
--------------------------------------------------
--------------------------------------------------
-----------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1. GRANT AND BASIC TERMS.........................................1
SECTION 1.1 EFFECTIVE DATE OF LEASE...................................1
SECTION 1.2 LANDLORD..................................................1
SECTION 1.3 TENANT....................................................1
SECTION 1.4 PREMISES..................................................1
SECTION 1.5 LENGTH OF TERM............................................1
SECTION 1.6 COMMENCEMENT OF TERM......................................1
SECTION 1.7 ACKNOWLEDGEMENT OF COMMENCEMENT DATE......................1
SECTION 1.8 PERMITTED USES............................................1
SECTION 1.9 TENANT'S GUARANTOR........................................1
SECTION 1.10 INITIAL SECURITY DEPOSIT..................................2
SECTION 1.11 RENT AND OTHER CHARGES PAYABLE BY TENANT..................2
SECTION 1.12 EXCUSE OF LANDLORD'S PERFORMANCE..........................2
SECTION 1.13 RIDERS....................................................2
ARTICLE II. LEASE TERM....................................................2
SECTION 2.1 LEASE OF PREMISES FOR LEASE TERM..........................2
SECTION 2.2 DELAY IN COMPLETION.................................DELETED
SECTION 2.3 EARLY OCCUPANCY...........................................2
SECTION 2.4 HOLDING OVER..............................................2
SECTION 2.5 SURRENDER OF PREMISES.....................................2
SECTION 2.6 SUCCESSORS................................................3
ARTICLE III. MINIMUM MONTHLY RENT..........................................3
SECTION 3.1 TIME AND MANNER OF PAYMENT................................3
SECTION 3.2 COST OF LIVING INCREASES..................................3
SECTION 3.3 PERCENTAGE RENT.....................................DELETED
SECTION 3.4 GROSS RECEIPTS DEFINED..............................DELETED
SECTION 3.5 SECURITY DEPOSIT INCREASES..........................DELETED
SECTION 3.6 TERMINATION; ADVANCE PAYMENTS.............................3
ARTICLE IV. OTHER CHARGES PAYABLE BY TENANT...............................3
SECTION 4.1 ADDITIONAL RENT...........................................3
SECTION 4.2 REAL PROPERTY TAXES.......................................3
(a) PAYMENT OF TAXES......................................3
(b) DEFINITION OF "REAL PROPERTY TAX."....................4
(c) TENANT'S RIGHT TO CONTEST TAXES.......................4
SECTION 4.3 PERSONAL PROPERTY TAXES...................................4
SECTION 4.4 UTILITIES.................................................4
SECTION 4.5 COST OF MAINTENANCE OF COMMON AREAS.......................5
(a) TENANT TO BEAR PRO RATA SHARE OF EXPENSE..............5
(b) OPERATING COST........................................5
SECTION 4.6 INSURANCE PREMIUMS........................................5
(a) LIABILITY INSURANCE...................................5
(b) HAZARD AND RENTAL INCOME INSURANCE....................5
(c) INSURANCE OF IMPROVEMENTS.............................6
(d) PAYMENT OF PREMIUMS; INSURANCE POLICIES...............6
(e) INCREASE IN FIRE INSURANCE PREMIUM....................6
(f) PLATE GLASS...........................................6
(g) BOILER INSURANCE................................DELETED
(h) WAIVER OF SUBROGATION.................................6
(i) FORM OF POLICIES......................................6
SECTION 4.7 INTEREST ON PAST DUE OBLIGATIONS..........................7
SECTION 4.8 IMPOUNDS FOR OPERATING COSTS..............................7
ARTICLE V. RECORDS AND BOOKS OF ACCOUNT............................DELETED
ARTICLE VI. AUDIT...................................................DELETED
(i)
<PAGE>
ARTICLE VII. CONSTRUCTION OF PREMISES......................................7
SECTION 7.1 LANDLORD AND TENANT IMPROVEMENTS..........................7
SECTION 7.2 PARKING FACILITIES........................................7
SECTION 7.3 CHANGES AND ADDITIONS TO BUILDINGS........................7
SECTION 7.4 FINANCING...........................................DELETED
SECTION 7.5 RIGHT TO ADJUST.....................................DELETED
ARTICLE VIII. USE OF PROPERTY...............................................8
SECTION 8.1 PERMITTED USES............................................8
SECTION 8.2 MANNER OF USE.............................................8
(a) INTERFERENCE WITH USE/NUISANCE........................8
(b) VIOLATION OF LAW/INSURANCE PROVISIONS.................8
(c) PERMITS...............................................8
(d) STORE OPERATION.......................................8
(e) CHANGE OF NAME........................................8
(f) SOLICITATION OF BUSINESS..............................8
SECTION 8.3 COMPETITION.........................................DELETED
SECTION 8.4 INDEMNIFICATION OF LANDLORD...............................8
SECTION 8.5 LANDLORD'S ACCESS.........................................9
SECTION 8.6 EXCAVATION................................................9
SECTION 8.7 QUIET POSSESSION..........................................9
SECTION 8.8 WINDOW COVERINGS..........................................9
ARTICLE IX. PARKING AND COMMON USE AREAS AND FACILITIES...................9
SECTION 9.1 CONTROL OF COMMON AREAS BY LANDLORD.......................9
SECTION 9.2 TENANT'S RIGHT TO USE.....................................9
SECTION 9.3 MERCHANTS' ASSOCIATION..............................DELETED
ARTICLE X. SIGNS, AWNINGS, CANOPIES,
FIXTURES, ALTERATIONS, IMPROVEMENTS..........................10
SECTION 10.1 SIGNS AND AUCTIONS.......................................10
SECTION 10.2 INSTALLATION BY TENANT...................................10
SECTION 10.3 IMPROVEMENTS........................................DELETED
SECTION 10.4 NONREMOVAL BY TENANT.....................................10
SECTION 10.5 REMOVAL AND RESTORATION..................................10
SECTION 10.6 LIENS....................................................10
SECTION 10.7 SIGNS, AWNINGS AND CANOPIES..............................10
ARTICLE XI. CONDITIONS OF PROPERTY;
MAINTENANCE, REPAIRS AND ALTERATIONS.........................11
SECTION 11.1 EXISTING CONDITIONS......................................11
SECTION 11.2 EXEMPTION OF LANDLORD FROM LIABILITY; WAIVER.............11
SECTION 11.3 TENANT'S OBLIGATIONS.....................................11
SECTION 11.4 LANDLORD'S OBLIGATIONS...................................11
SECTION 11.5 RULES AND REGULATIONS....................................12
SECTION 11.6 CONDITION UPON TERMINATION...............................12
ARTICLE XII. DAMAGE OR DESTRUCTION........................................13
SECTION 12.1 PARTIAL DAMAGE TO LEASED PREMISES........................13
SECTION 12.2 TOTAL OR SUBSTANTIAL DESTRUCTION.........................13
SECTION 12.3 PARTIAL DESTRUCTION OF SHOPPING CENTER...................13
SECTION 12.4 UNINSURED CASUALTY.......................................14
SECTION 12.5 LANDLORD'S OBLIGATIONS...................................14
SECTION 12.6 TEMPORARY REDUCTION OF RENT..............................14
SECTION 12.7 WAIVER...................................................14
ARTICLE XIII. CONDEMNATION.................................................14
SECTION 13.1 TOTAL CONDEMNATION.......................................14
SECTION 13.2 TOTAL CONDEMNATION OF PARKING AREA.......................14
SECTION 13.3 PARTIAL CONDEMNATION.....................................14
SECTION 13.4 PARTIAL CONDEMNATION OF PARKING AREA.....................15
SECTION 13.5 CONDEMNATION OF LESS THAN A FEE..........................15
SECTION 13.6 DISTRIBUTION OF CONDEMNATION AWARD.......................15
(ii)
<PAGE>
ARTICLE XIV. ASSIGNMENT AND SUBLETTING............................15
Section 14.1 LANDLORD'S CONSENT REQUIRED....................15
Section 14.2 GRANT OF CONCESSIONS;
CONDITIONS TO GRANT............................16
Section 14.3 NO RELEASE OF TENANT...........................16
Section 14.4 LANDLORD'S ELECTION............................16
Section 14.5 NO MERGER......................................16
Section 14.6 ASSIGNMENT FEES AND PROCEDURES.................16
ARTICLE XV. DEFAULTS; REMEDIES...................................16
Section 15.1 COVENANTS AND CONDITIONS.......................16
Section 15.2 DEFAULTS.......................................16
Section 15.3 DEFAULT BY LANDLORD............................17
Section 15.4 REMEDIES.......................................17
Section 15.5 THE RIGHT TO RELET THE PREMISES................18
Section 15.6 WAIVER OF RIGHTS OF REDEMPTION.................18
Section 15.7 CUMULATIVE REMEDIES............................18
Section 15.8 LATE CHARGES...................................18
ARTICLE XVI. PROTECTION OF CREDITORS..............................18
Section 16.1 SUBORDINATION..................................18
Section 16.2 ATTORNMENT.....................................19
Section 16.3 SIGNING OF DOCUMENTS...........................19
Section 16.4 ESTOPPEL CERTIFICATES..........................19
Section 16.5 TENANT'S FINANCIAL CONDITION..............DELETED
Section 16.6 MORTGAGE PROTECTION CLAUSE.....................19
ARTICLE XVII. LEGAL COSTS..........................................19
Section 17.1 LEGAL PROCEEDINGS..............................19
Section 17.2 LANDLORD'S CONSENT.............................19
ARTICLE XVIII. MISCELLANEOUS PROVISIONS.............................19
Section 18.1 NON-DISCRIMINATION.............................19
Section 18.2 LANDLORD'S LIABILITY; CERTAIN DUTIES...........20
Section 18.3 SEVERABILITY...................................20
Section 18.4 INTERPRETATION.................................20
Section 18.5 ENTIRE AGREEMENT...............................20
Section 18.6 NOTICES........................................20
Section 18.7 WAIVERS........................................20
Section 18.8 NO RECORDATION.................................20
Section 18.9 BINDING EFFECT; CHOICE OF LAW..................20
Section 18.10 CORPORATE AUTHORITY;
PARTNERSHIP AUTHORITY..........................20
Section 18.11 NO PARTNERSHIP.................................21
Section 18.12 JOINT AND SEVERAL LIABILITY....................21
Section 18.13 FORCE MAJEURE..................................21
Section 18.14 NO OPTION......................................21
Section 18.15 ACCORD AND SATISFACTION........................21
Section 18.16 PROVISIONS ARE COVENANTS
AND CONDITIONS.................................21
Section 18.17 UNION WORKERS.............................DELETED
Section 18.18 REMODEL........................................21
Section 18.19 OPTION TO EXTEND..........................DELETED
</TABLE>
(iii)
<PAGE>
STANDARD SHOPPING CENTER LEASE
ARTICLE I
GRANT AND BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Our Articles, Sections and Paragraphs of the
Lease referred to in this Article I explain and define the Basic Terms and
are to be read in conjunction with the Basic Terms.
Section 1.1 EFFECTIVE DATE OF LEASE. March 1, 1994
Section 1.2 LANDLORD. Fallbrook Mercantile
c/o Wall Street Property Company.
Address of Landlord: Post Office Box 2633
La Jolla, California 92038.
Section 1.3 TENANT. Fallbrook National Bank.
Address of Tenant: Post Office Box 927
Fallbrook, California 92028.
Section 1.4 PREMISES. In consideration of the rents, covenants and
agreements on the part of Tenant to be paid and performed, the Landlord
leases to the Tenant, and Tenant leases from Landlord, for the Term, at the
rental and upon the conditions of this Lease, that certain space (referred to
herein as the "Premises"), now or hereafter to be erected in the Fallbrook
Mercantile Shopping Center (herein called the "Shopping Center") in Fallbrook
(City) San Diego (County) California (State). The location of the Premises is
outlined in red on the site plan of the Shopping Center, attached hereto as
Exhibit "A" and made a part hereof, and otherwise known as 855-I, J, K, L, M,
N, and O South Main Avenue, Fallbrook, California 92028, (address) said
Premises being agreed for purposes of this Lease, to have an area of
approximately 8,272 (eight thousand two hundred seventy-two) square feet.
Tenant acknowledges that the site plan shown on Exhibit "A" is tentative and
that Landlord may change the shape, size, location, number and extent of the
improvements shown thereon and eliminate or add any improvements to any
portion of the Shopping Center as provided in Article VII herein.
Section 1.5 LENGTH OF TERM. The term of this Lease shall be for Eight
(8) years and Zero (0) months following the commencement date, commencing at
8:00 A.M. on such commencement date and terminating at 5:00 P.M. on the last
day of the term, unless sooner terminated under any provision hereof.
Section 1.6 COMMENCEMENT OF TERM. The term of this Lease, and Tenant's
obligation to pay rent, shall commence on April 1, 1994. The Landlord shall
waive three thousand three hundred seventy-eight dollars and ten cents
($3,378.10) of the Minimum Monthly Rental, which is the rental attributible to
Suites M, N, and O, for the months of April, May and June of 1994.
All lease expirations, renewal dates, notices of options
to renew, and any other provision hereof relating to the Commencement Date
of this Lease shall be determined by reference to the Commencement Date as
herein defined, which in all cases shall be the first day of the month.
Section 1.7 ACKNOWLEDGEMENT OF COMMENCEMENT DATE. When the
commencement and expiration date of the Lease Term have been ascertained
pursuant to Section 1.6 and Article II herein, the parties shall immediately
execute a confirmation of said dates and the Term of this Lease in the form
and content as set forth in Exhibit "X" attached hereto and made a part
hereof.
Section 1.8 PERMITTED USES. The Premises shall be used and occupied
only for administrative office and/or branch office of a banking office, or
any other use approved by Landlord, which approval shall not be unreasonably
withheld. Provided, however, the parties agree that it shall be commercially
reasonable for Landlord to disapprove any use that (i) violates the Declaration
of Restrictions and Grant of Easements ("Declaration") affecting the Premises
recorded on May 4, 1984 in the Office of the County Recorder of San Diego as
File No. 81-163288; or (ii) violates any then existing exclusive use that has
heretofore been granted by Landlord to any other tenant in the Shopping Center
in which the Premises are located; or (iii) adversely impacts the tenant mix of
the Shopping Center as such tenant mix exists at the time that Tenant seeks to
obtain Landlord's consent to a change in use.
Section 1.9 TENANT'S GUARANTOR. (If none, so state.) None.
1
<PAGE>
Section 1.10 INITIAL SECURITY DEPOSIT. (See Section 3.5.) None
Dollars ($__________).
Section 1.11 MINIMUM MONTHLY RENT AND OTHER CHARGES PAYABLE BY
TENANT.
(a) Minimum Monthly Rent. Nine Thousand
Ninety-Nine Dollars and Twenty Cents ($9,099.20) per month for the first
twenty-four months, as provided in Section 3.1, which shall be increased on
the second (2nd) anniversary of the day and the month on which the
Commencement Date occurs on each consecutive second (2nd) anniversary
thereafter, (the "Anniversary Date"), in accordance with the increase in
the United States Department of Labor, Bureau of Labor Statistics, Consumer
Price Index for Urban Wage Earners and Clerical Workers (all Items for the
Los Angeles-Anaheim-Riverside Statistical Area on the basis of 1982-84 =
100 [the "Index"]) as provided in Section 3.2.
(b) Other Periodic Payments. Monthly Payments of
Operating Costs (see Section 4.8) including, without limitation, Taxes,
Utilities, Insurance Premiums, or other amounts as provided in this Lease.
The initial monthly charge for such Operating Costs is Two Thousand Six
Hundred Forty-Seven Dollars and Four Cents ($2,647.04).
Section 1.12 EXCUSE OF LANDLORD'S PERFORMANCE. Anything in this
Lease to the contrary notwithstanding, providing such cause is not due to
the willful act or neglect of Landlord, Landlord shall not be deemed in
default with respect to the performance of any of the terms, covenants and
conditions of this Lease if same shall be due to any strike, lockout, civil
commotion, war-like operation, invasion, rebellion, hostilities, military
or usurped power, sabotage, governmental regulations or controls, inability
to obtain any material, service or financing, rain or muddy conditions,
through act of God or other cause beyond the control of Landlord.
Section 1.13 RIDERS. The following Riders are attached to and made
a part of this Lease: (If none, so state) Rider No. 1, No. 2, No. 3, No 4,
and No. 5.
ARTICLE II
LEASE TERM
Section 2.1 LEASE OF PREMISES FOR LEASE TERM. Landlord leases the
Premises to Tenant and Tenant leases the Premises from Landlord for the
Lease Term. The Lease Term is for the period stated in Section 1.5 above
and shall begin and end on the dates specified in Section 1.6 above, unless
the beginning or end of the Lease Term is changed under any provision of
this Lease. The "Commencement Date" shall be the date specified in Section
1.6 above for the beginning of the Lease Term, unless advanced or delayed
under any provision of this Lease.
Section 2.2 DELAY IN COMPLETION. In the event the Premises herein
demised are not substantially completed on or before_______, 199__, this
Lease shall be deemed null and void at the election of either party by
notice in writing within ten (10) days from said date, and any security
deposit shall be returned to Tenant. The aforementioned date shall be
automatically extended for a reasonable period of time provided Landlord is
diligently pursuing the completion of the Premises. Should either party
elect to declare this Lease null and void as hereinafter provided, Landlord
shall, except for the return of the Tenant's security deposit, have no
obligations or liabilities to Tenant for damages of any kind relating to
the failure to complete construction of the Premises by the date herein
specified.
Section 2.3 EARLY OCCUPANCY. If Tenant occupies the Premises prior
to the Commencement Date, Tenant's occupancy of the Premises shall be
subject to all of the provisions of this Lease. Early occupancy of the
Premises shall not advance the expiration date of this Lease. Upon mutual
execution of this lease document, Tenant shall be provided occupancy to the
Premises, however, Tenant shall not be required to pay Minimum Monthly Rent
and other charges specified in this Lease for the early occupancy period.
Section 2.4 HOLDING OVER. Tenant shall vacate the Premises upon the
expiration or earlier termination of this Lease. Tenant shall reimburse
Landlord for and indemnify Landlord against all damages incurred by
Landlord caused by any delay in Tenant vacating the Premises. If Tenant
remains in possession of all or any part of the Premises after the
expiration of the Term hereof, with or without the express or implied
consent of Landlord, such tenancy shall be from month-to-month only and not
a renewal hereof or an extension for any further term, and in such case,
Minimum Monthly Rent then in effect shall be increased by fifty percent
(50%) and other monetary sums due hereunder shall be payable in the amount
and at the time specified in this Lease, and such month-to-month tenancy
shall be subject to every other term, covenant and agreement contained
herein, except that the month-to-month tenancy will be terminable on thirty
(30) days notice given at any time by either party.
Section 2.5 SURRENDER OF PREMISES. Upon the termination of this
Lease, Tenant shall surrender the Premises to Landlord in the condition
specified in and according to Section 12.6.
Section 2.6 SUCCESSORS. All rights and liabilities herein given to,
or imposed upon, the respective parties hereto shall extend to and bind the
several respective heirs, executors, administrators, successors, and
assigns of the said parties; and if there shall be more than one Tenant,
they shall all be bound jointly and severally by the terms, covenants and
agreements herein. No rights, however, shall inure to the benefit of any
assignee or other transferee of Tenant unless the transfer has been
approved by Landlord in writing as provided in Section 15.1 hereof.
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ARTICLE III
MINIMUM MONTHLY RENT
Section 3.1 TIME AND MANNER OF PAYMENT. Upon execution of this
Lease, Tenant shall pay Landlord the Minimum Monthly Rent in the amount
stated in Section 1.11(a) above for the first month of the Lease Term. On
the first day of the second month of the Lease Term and each month
thereafter, Tenant shall pay Landlord the Minimum Monthly Rent and any
other charges and sums provided for herein as Additional Rent, in advance,
without offset, deduction or prior demand. All such rents and charges shall
be payable at Landlord's address or at such other place as Landlord may
designate in writing.
Section 3.2 COST OF LIVING INCREASES. The Minimum Monthly Rent shall
be increased every two (2) years as provided in Section 1.11(a) above, in
proportion to increases in the Index. The first such adjustment shall be
made by multiplying the Minimum Monthly Rent by the percentage increase in
the Index published for the month which is three (3) months prior to the
second Anniversary Date of the Commencement Date of the Lease over the
Index published for the month which is three (3) months prior to the first
month of the Lease Term. Each subsequent adjustment shall be made by
multiplying the Minimum Monthly Rent which is then in effect (as increased
pursuant to the last adjustment) by the percentage increase in the Index
published for the month which is three (3) months prior to each consecutive
second (2nd) Anniversary Date of the Commencement Date of the Lease Term
over the Index published for the month which is three (3) months prior to
the last adjustment date. Landlord shall notify Tenant of each increase by
delivering a written statement setting forth the two Indexes utilized in
computing the adjustment, the percentage increase between those two
Indexes, and the new amount of the Minimum Monthly Rent. In no event
however, shall the Minimum Monthly Rent be increased more than five percent
(5%) per year or over ten percent (10%) over the last previously adjusted
Minimum Monthly Rent. Tenant shall pay the new Minimum Monthly Rent from
its effective date, i.e. the bi-annual Anniversary Date, until the next
periodic increase. Landlord's notice may be given after the effective date
of the increase since the Index for the appropriate month may be
unavailable on the effective date. In such event, Tenant shall pay monthly
rent in the amount required for the previous lease year until the Index
figures are available. Once the Index figures are available and the
adjustment has been computed, the Tenant shall pay Landlord the necessary
rental adjustment for the months elapsed between the effective date of the
increase and Landlord's notice of such increase within ten (10) days after
Landlord's notice. If the format or components of the Index are materially
changed after the date of this Lease, Landlord shall substitute an index
which is published by the Bureau of Labor Statistics or similar agency and
which is most nearly equivalent to the Index in effect on the date of this
Lease. Landlord shall notify Tenant of the substituted index, which shall
be used to calculate the increase in the Minimum Monthly Rent unless Tenant
objects in writing within fifteen (15) days after receipt of Landlord's
notice. If Tenant objects, the substitute index shall be determined in
accordance with the rules and regulations of the American Arbitration
Association. The cost of such arbitration shall be borne equally by
Landlord and Tenant.
Section 3.3 PERCENTAGE RENT. DELETED
Section 3.4 GROSS RECEIPTS DEFINED. DELETED
Section 3.5 SECURITY DEPOSIT INCREASES. DELETED.
Section 3.6 TERMINATION; ADVANCE PAYMENTS. Upon termination of this
Lease under Article XII (Damage or Destruction), Article XIII
(Condemnation) or any other termination not resulting from Tenant's
default, and after Tenant has vacated the Premises in the manner required
by this Lease, an equitable adjustment shall be made concerning advance
rent, any other advance payments made by Tenant to Landlord, and accrued
real property taxes, and Landlord shall refund the unused portion of the
Security Deposit to Tenant or Tenant's successor.
ARTICLE IV
OTHER CHARGES PAYABLE BY TENANT
Section 4.1 ADDITIONAL RENT. All charges payable by Tenant other
than Minimum Monthly Rent are called "Additional Rent." Unless this Lease
provides otherwise, all Additional Rent shall be paid with the next monthly
installment of Minimum Monthly Rent. The term "rent" shall mean Minimum
Monthly Rent and Additional Rent.
Section 4.2 REAL PROPERTY TAXES.
(a) PAYMENT OF TAXES. Tenant agrees to pay Tenant's
prorata share of all real property taxes, as hereinafter defined, and
assessments which may be levied or assessed by any lawful authority against
the land on which buildings are located and improvements thereon in the
Shopping Center (collectively referred to as "real property taxes"). Tenant
shell pay its prorata share of property taxes in the manner specified in
Sections 4.8 and 1.11(b). Tenant's prorata share shall be apportioned
according to the floor area of the Premises as it relates to the total
floor area of the building or buildings which include the premises. All
taxes for the year in which this Lease commences shall be apportioned and
adjusted.
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(b) DEFINITION OF "REAL PROPERTY TAX." "Real Property
Tax" means: (i) any fee, license fee, license tax, business license fee,
commercial rental tax, levy, charge, assessment, penalty or tax (other than
inheritance or estate taxes) imposed by any authority having the direct or
indirect power to tax, including any city, county, state or federal
government, or any school, agriculture, lighting, drainage or other
improvement district thereof, as against any legal or equitable interest of
Landlord in the Premises; (ii) any tax on the Landlord's right to receive, or
the receipt of, rent or income from the Premises or against Landlord's business
of leasing the Premises; (iii) any tax or charge for fire protection,
streets, sidewalks, road maintenance, refuse or other services provided to
the Premises by any governmental agency; (iv) any tax imposed upon this
transaction or based upon a reassessment of the Premises due to a change in
ownership or transfer of all or part of Landlord's interest in the Premises;
and (v) any charge or fee replacing any tax previously included within the
definition of Real Property Tax. "Real Property Tax" does not, however,
include Landlord's federal or state income, franchise, inheritance or estate
taxes.
(c) TENANT'S RIGHT TO CONTEST TAXES. Tenant may attempt
to have the assess valuation of the Premises reduced or may initiate
proceedings to contest the Real Property Tax. If required by law, Landlord
shall join in the proceedings brought by Tenant. However, Tenant shall pay
all costs of the proceedings, including any costs or fees incurred by
Landlord. Upon the final determination of any proceeding or contest, Tenant
shall immediately pay the Real Property Tax due, together with all costs,
charges, interest and penalties incidental to the proceedings. If Tenant does
not pay the Real Property Tax when due and contests such taxes, Tenant shall
not be in default under this Lease for nonpayment of such taxes if Tenant
deposits funds with Landlord or opens an interest bearing account reasonably
acceptable to Landlord in the joint names of Landlord and Tenant. The amount
of such deposit shall be sufficient to pay the Real Property Tax plus a
reasonable estimate of the interest, costs, charges and penalties which may
accrue if Tenant's action is unsuccessful, less any applicable tax impounds
previously paid by Tenant to Landlord. The deposit shall be applied to the
Real Property Tax due, as determined at such proceedings. The Real Property
Tax shall be paid under protest from such deposit if such payment under
protest is necessary to prevent the Premises from being sold under a "tax
sale" or similar enforcement proceeding.
Section 4.3 PERSONAL PROPERTY TAXES.
(a) Tenant shall pay prior to delinquency all taxes
charged against trade fixtures, furnishings, equipment or any other personal
property belonging to Tenant. Tenant shall attempt to have such personal
property taxed separately from the Premises.
(b) If any such taxes on Tenant's personal property are
levied against Landlord or Landlord's property, or if the assessed value of
the Premises is increased by the inclusion therein of a value placed upon
such personal property or trade fixtures of Tenant, then Landlord, after
written notice to Tenant, shall have the right to pay the taxes based upon
such increased assessments, regardless of the validity thereof, but only under
proper protest if requested by Tenant in writing. If Landlord shall do so,
then Tenant shall, upon demand, repay to Landlord the taxes levied against
Landlord, or the proportion of such taxes resulting from such increase in the
assessment. In any such event, however, Tenant, at Tenant's sole cost and
expense, shall have the right, in the name of Landlord and with Landlord's
full cooperation, to bring suit in any court of competent jurisdiction to
recover the amount of any such taxes so paid under protest; any amount so
recovered to belong to Tenant.
(c) If any of Tenant's personal property is taxed with
the Property, Tenant shall pay Landlord the taxes for the personal property
within fifteen (15) days after Tenant receives a written statement from
Landlord for such personal property taxes.
Section 4.4 UTILITIES. Landlord shall provide sewer service, water,
and refuse disposal to the Premises. Tenant shall pay, directly to the
appropriate supplier, the cost of all natural gas, heat, light, power,
telephone, and other utilities and services supplied to the Premises.
Maintenance for any heating or air conditioning equipment and
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ducts on the Premises shall be furnished by Landlord, and Tenant, upon
presentation of a bill therefore, shall pay Landlord, or its agent or assigns,
for such maintenance service. If any services or utilities are jointly
metered with other properties, Landlord shall determine and the Tenant shall
pay, the Tenant's pro rata share of the monthly costs of such utilities and
services. The Tenant's pro rata share shall be determined by the ratio of the
square footage of the Premises as compared to the square footage of all the
property subject to the common metering. In the event Tenant shall require
such services or utilities in excess of that usually furnished or supplied
for use of the Premises as general retail space, Tenant shall pay a
reasonable proportion, to be determined by Landlord, of all such jointly
metered charges. Tenant shall pay its pro rata share of the monthly cost of
such utilities and services in the manner specified in Sections 4.8 and
1.11(b). Landlord reserves the right to require Tenant to install and
maintain, at Tenant's sole expense, separate meters for any public utility
servicing the Premises for which a separate meter is not presently
installed.
Section 4.5 COST OF MAINTENANCE OF COMMON AREAS.
(a) TENANT TO BEAR PRO RATA SHARE OF EXPENSE. In each
lease year, as defined in Section 3.3(c) hereof, Tenant will pay to Landlord,
in addition to the rentals specified in Article II hereof, as further
Additional Rent, subject to the limitation hereinafter set forth, a
proportion of the Shopping Center's operating cost, hereinafter defined,
based upon the ratio of the square feet of the Premises to the total leasable
square feet of all the building space in the Shopping Center.
(b) OPERATING COST. For the purpose of this Section 4.5
the "Shopping Center's operating cost" means the total cost and expense
incurred in operating and maintaining the common facilities, hereinafter
defined, actually used or available for use by Tenant and the employees,
agents, servants, customers and other invitees of Tenant, specifically
including without limitation, gardening and landscaping, the cost of
liability and property damage insurance, repairs, roof maintenance, line
painting, painting, utilities, sanitary control, pest control, removal of
trash, rubbish, garbage and other refuse, reasonable reserves for
replacements and repairs, property management, bookkeeping, Real Property
Taxes and assessments thereon, and the cost of personnel to implement such
services, to direct parking, and to police the common facilities. In
addition, said operating costs shall include an administrative charge equal
to ten percent (10%) of the actual operating costs and this charge shall be
subsumed in and billed as a part of the common area expenses as Additional
Rent. "Common facilities" means all areas, space, equipment and special
services provided by Landlord for the common or joint use and benefit of the
occupants of the Shopping Center, their employees, agents, servants,
customers and other invitees, including without limitation parking areas,
access roads, driveways, retaining walls, landscaped areas, truck serviceways
or tunnels, loading docks, pedestrian malls, courts, stairs, ramps and
sidewalks, comfort and first aid stations, washrooms and parcel pick-up
stations.
(c) The Additional Rent provided to be paid in this
Section 4.5 shall be paid in the manner specified in Sections 4.8 and 1.11(b).
(d) Changes in the square footage of the Premises
occurring during any monthly period shall be effective on the first day of
the next succeeding monthly period, and the amount of any square footage in
effect for the whole of any quarterly period shall be the average of the
total amounts in effect on the first day of each calendar month in such
quarterly period.
Section 4.6 INSURANCE PREMIUMS.
(a) LIABILITY INSURANCE. During the Lease Term, Tenant
shall maintain a policy of comprehensive public liability insurance at
Tenant's expense, insuring Landlord against liability arising out of the
ownership, use, occupancy or maintenance of the Premises, the sidewalks in
front of the Premises, and the business operated by Tenant and any subtenants
of Tenant in the Premises. The initial amount of such insurance shall be at
least One Million Dollars ($1,000,000.00) combined single limit bodily
injury, property damage and personal injury, and shall be subject to
periodic increase based upon inflation, increased liability awards,
recommendations of professional insurance advisers, and other relevant
factors. However, the amount of such insurance shall not limit Tenant's
liability nor relieve Tenant of any obligation hereunder. The policy shall
contain cross-liability endorsements, if applicable, and shall insure
Tenant's performance of the indemnity provisions of Section 8.4. Tenant
shall, at Tenant's expense, maintain such other liability insurance as Tenant
deems necessary to protect Tenant.
(b) HAZARD AND RENTAL INCOME INSURANCE. During the Lease
Term, Landlord shall maintain policies of insurance at Tenant's expense,
covering loss of
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or damage to the Premises in the full amount of its replacement value. Such
policies shall provide protection against all perils included within the
classification of fire, extended coverage, vandalism, malicious mischief, and
may include endorsements or coverage for special extended perils (all risk),
sprinkler leakage, inflation guard, and any other perils (including flood and
earthquake), which Landlord deems necessary. Landlord may obtain insurance
coverage for Tenant's fixtures, equipment or building improvements installed
by Tenant in or on the Premises. Tenant shall, at Tenant's expense, maintain
such primary or additional insurance on its fixtures, equipment and building
improvements as Tenant deems necessary to protect its interest. During the
Lease Term, Landlord may also maintain a rental income insurance policy at
Tenant's expense, with loss payable to Landlord in an amount equal to one
year's Minimum Monthly Rent (as adjusted periodically), plus estimated Real
Property Taxes and insurance premiums. Tenant shall not do or permit to be
done anything which invalidates any such insurance policies.
(c) INSURANCE OF IMPROVEMENTS. Tenant shall at all times
maintain fire insurance with extended coverage in the name of the Landlord
and the Tenant, in an amount adequate to cover the cost of replacement of all
trade fixtures, alterations, decorations, additions or improvements made to
the Premises by Tenant or by Landlord on Tenant's behalf in the event of fire
or extended coverage loss. Such insurance policy shall be maintained with an
insurance company approved by Landlord. Tenant shall deliver to the Landlord,
certificates of such fire insurance policies which shall contain a clause
requiring the insurer to give the Landlord thirty (30) written days' notice
of cancellation of such policies.
(d) PAYMENT OF PREMIUMS; INSURANCE POLICIES. Tenant shall
pay its pro rata share of all premiums for insurance policies maintained by
Landlord pursuant to Subsection 4.6(b) in the manner specified in Sections
4.8 and 1.11(b). If the insurance policies maintained by Landlord cover
improvements or real property other than the Premises, Landlord shall also
deliver to Tenant a statement of the amount of the premiums applicable to the
Premises showing, in reasonable detail, how such amount was computed. If the
Lease Term expires before the expiration of the insurance policy period,
Tenant's liability for insurance premiums shall be prorated on an annual
basis. Tenant shall be liable for the payment of any deductible amount under
Landlord's insurance policies.
(e) INCREASE IN FIRE INSURANCE PREMIUM. Tenant agrees that
it will not keep, use, manufacture, assemble, sell or offer for sale in or
upon the Premises any article which may be prohibited by the standard form of
fire insurance policy. Tenant agrees to pay any increase in premiums for fire
and extended coverage insurance that may be charged during the term of this
Lease on the amount of such insurance which may be carried by Landlord on
said Premises or the building of which it is a part, resulting from the acts
or omission of the Tenant, its agents, servants or employees, or the use or
occupancy of the Premises by the Tenant or from the type of materials or
products stored, manufactured, assembled or sold by Tenant in the Premises,
whether or not Landlord has consented to the same. In determining whether
increased premiums are the result of Tenant's use of the Premises, a
schedule, issued by the organization making the insurance rate on the
property, showing the various components of such rate, shall be conclusive
evidence of the several items and charges which make up the fire insurance
rate on the Premises.
(f) PLATE GLASS. Landlord shall replace, at the expense of
Tenant, any and all plate and other glass, frames or glazing damaged or broken
from any cause whatsoever in and about the Premises. Landlord is responsible for
plate glass replacement caused by structural or similar failure.
(g) BOILER INSURANCE. DELETED
(h) WAIVER OF SUBROGATION. Landlord and Tenant each hereby
waive any and all rights of recovery against the other or against the
officers, employees, agents and representatives of the other, on account of
loss or damage occasioned to such waiving party or its property or the
property of others under its control, to the extent that such loss or damage
is insured against under any fire and extended coverage insurance policy
which either may have in force at the time of such loss or damage. Tenant
shall, upon the policies of insurance required under this Lease, give notice
to the insurance carrier or carriers that the foregoing mutual waiver of
subrogation is contained in this Lease.
(i) FORM OF POLICIES. All policies shall be written in a
form satisfactory to Landlord and shall be maintained with insurance
companies holding a "General Policyholder's Rating" of A, and a financial
rating of X, or better, as set forth in the most current issue of "Best's
Insurance Guide." Tenant shall deliver to Landlord
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copies of policies or certificates evidencing the existence of the amounts and
forms of coverage satisfactory to Landlord. No such policy shall be cancellable
or reducible in coverage except after thirty (30) days prior written notice to
Landlord. Tenant shall, within ten (10) days prior to the expiration of such
policies, furnish Landlord with renewals or "binders" thereof, or Landlord may
order such insurance and charge the cost thereof to Tenant as Additional Rent.
Section 4.7 INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant to
Landlord which is not paid within ten (10) days after such amount is due shall
bear interest at the rate of fifteen percent (15%) per annum from the due date
of such amount. However, interest shall not be payable on late charges to be
paid by Tenant under this Lease. The payment of interest on such amounts shall
not excuse or cure any default by Tenant under this Lease. If the interest rate
specified in this Lease is higher than the rate permitted by law, the interest
rate is hereby decreased to the maximum legal interest rate permitted by law.
Section 4.8 IMPOUNDS FOR OPERATING COSTS. Within forty-five (45) days
after the end of each calendar year, Landlord shall deliver to Tenant an
accounting of Tenant's actual pro rata share, together with reasonable
documentation of actual costs, and the amounts paid by Tenant during said
calendar year. If Tenant's payments made during the calendar year exceed
Tenant's pro rata share, Landlord shall pay Tenant the excess at the time
Landlord furnishes the accounting to the Tenant. If Tenant's pro rata share
exceeds the payments made by Tenant, Tenant shall pay Landlord the deficiency
within fifteen (15) days after Tenant's receipt of Landlord's accounting.
Landlord shall keep at its place of business full, accurate,
and separate books of account covering the charges provided for under this
Article IV, and the accounting to Tenant shall accurately reflect the total
costs and Tenant's pro rata share. The books of account shall be retained for
at least twelve (12) months after the end of each calendar year. Tenant shall
have the right at all reasonable times to inspect the books of account.
ARTICLE V
RECORDS AND BOOKS OF ACCOUNT
DELETED
ARTICLE VI
AUDIT
DELETED
ARTICLE VII
CONSTRUCTION OF PREMISES
Section 7.1 LANDLORD AND TENANT IMPROVEMENTS. Construction of the
improvements on the Premises has been completed on the date of this Lease and
Tenant hereby represents and warrants to Landlord that Tenant has inspected the
Premises and accepts such Premises in the condition existing as of the date
hereof. With respect to 855 South Main Street -- Suites M, N, and 0, Landlord
shall ensure that, at the beginning of the term of the Lease, the Heating,
Ventilation and Air Conditioning, electrical, and plumbing systems are in good
working order. Tenant to advise Landlord within thirty (30) days of occupancy
relative to any deficiencies and Landlord, at Landlord's expense, shall promptly
repair same. After said thirty (30) day period or immediately after any initial
repairs are made as a result of the 30-day warranty, Tenant shall be responsible
for any repairs to the Heating, Ventilation and Air Conditioning, electrical or
plumbing systems in accordance with the Lease herein. Prior to the commencement
of construction of Tenant's improvements, Tenant shall deliver plans and
specifications with respect to Tenant's leasehold improvements to the Landlord
or Landlord's architect.
Section 7.2 PARKING FACILITIES. The Landlord has constructed upon the
Shopping Center site at its own cost access roads, sidewalks and parking lots or
facilities as shown on Exhibit "A."
Section 7.3 CHANGES AND ADDITIONS TO BUILDINGS. Landlord hereby reserves
the right at any time to make alterations or additions to and to build
additional stories on the building in which the Premises are contained and to
build another building adjoining the Premises. Landlord also reserves the
right to construct other buildings or improvements in the Shopping Center
from time to time and to make alterations thereof or additions thereto and to
build additional stories on any such building or buildings and to build
adjoining same. Notwithstanding the foregoing, Landlord agrees to perform all
work in connection with construction of any buildings or improvements, or
alterations or additions to existing buildings, in such a manner that said
work shall not materially interfere with access to or visibility of the
Premises. Easements for light and air are not included in the leasing of
these Premises to Tenant. Landlord further reserves the exclusive right to
the roof except as provided in this Lease.
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Section 7.4 FINANCING. DELETED
Section 7.5 RIGHT TO ADJUST. DELETED
ARTICLE VIII
USE OF PROPERTY
Section 8.1 PERMITTED USES. Tenant may use the Premises only for the
Permitted Uses set forth in Section 1.8 above.
Section 8.2 MANNER OF USE.
(a) INTERFERENCE WITH USE/NUISANCE. Tenant shall not do or
permit anything to be done in or about the Premises which will in any way
obstruct or interfere with or infringe on the rights of other occupants or
customers of the Shopping Center, or injure or annoy them, or use or allow
the Premises to be used for any improper, immoral, or objectionable purposes;
nor shall Tenant cause, maintain or permit any nuisance in, on or about the
Premise or commit or suffer to be committed any waste in, on or about the
Premises. Tenant shall not be liable to Landlord for any other occupant's
failure to so conduct itself.
(b) VIOLATION OF LAW/INSURANCE PROVISIONS. Tenant shall not
do or permit to be done in or about the Premises, nor bring, keep or permit
to be brought or kept therein, anything which is prohibited by or will in
any way conflict with any law, statute, ordinance or governmental rule or
regulation now in force or which may hereafter be enacted or promulgated, or
which is prohibited by any standard form of fire insurance policy or will in
any way increase the existing rate of or affect any fire or other insurance
upon the building or any part thereof or any of its contents, or cause a
cancellation of any insurance policy covering the building or any part
thereof or any of its contents. Tenant shall comply with all governmental
laws, ordinances and regulations applicable to the Premises, and the
requirements of any Board of Fire Underwriters or other similar body now or
hereafter instituted, with any order, directive or certificate of occupancy
issued pursuant to any law, ordinance or regulation by any public officer
insofar as the same relates to or affects the condition, use or occupancy of
the Premises, including but not limited to, requirements of structural
changes related to or affected by Tenant's acts, occupancy or use of the
Premises, all at Tenant's sole expense. The judgment of any court of
competent jurisdiction or the admission of Tenant in any action against
Landlord, whether or not Tenant is a party to such action, shall be
conclusive in establishing such violations between Landlord and Tenant.
(c) PERMITS. Tenant shall obtain and pay for all permits,
including a certificate of occupancy, required for Tenant's occupancy of the
Premises and shall promptly take all substantial and nonsubstantial actions
necessary to comply with all applicable statutes, ordinances, rules,
regulations, orders and requirements regulating the use by Tenant of the
Premises, including the Occupational Health and Safety Act.
(d) STORE OPERATION. Tenant shall conduct its business in
the Premises during the regular customary days and hours for such type of
business in the city or trade area in which the Shopping Center is located.
(e) CHANGE OF NAME. Tenant agrees not to change the
advertised name of the business operated in the Premises without the written
permission of Landlord, said consent not to be unreasonably withheld.
(f) SOLICITATION OF BUSINESS. Tenant and Tenant's employees
and agents shall not solicit business in the parking or other common areas,
nor shall Tenant distribute any handbills or other advertising matter in
automobiles parked in the parking area or in other common areas.
Section 8.3 COMPETITION. DELETED
Section 8.4 INDEMNIFICATION OF LANDLORD. Tenant shall indemnify and hold
Landlord harmless from all damages arising out of loss of life, personal injury,
and/or damage to the property occurring in, on, or about the Premises, except
that Landlord shall be liable to Tenant for such damages resulting from the acts
or omissions of Landlord or its authorized representatives and shall indemnify
and hold Tenant harmless from all such damages. A party's obligation under this
paragraph to indemnify and hold the other party harmless shall be limited to the
sum that exceeds the amount of insurance proceeds, if any, received by the
party being indemnified.
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Section 8.5 LANDLORD'S ACCESS. Landlord or its agents may enter the
Premises at all reasonable times to show the Premises to potential buyers,
investors or tenants or other parties, or for any other purpose Landlord deems
necessary. Landlord shall give Tenant twenty-four (24) hours' prior notice of
such entry, except in the case of an emergency. Landlord may not place "For
Sale" signs on the Premises. Landlord may place customary "For Lease" signs on
the Premises not sooner than ninety (90) days prior to the end of the then
unexpired term of this Lease.
Section 8.6 EXCAVATION. If an excavation shall be made upon land
adjacent to or under the Premises, or shall be authorized to be made, Tenant
shall afford to the person causing or authorized to cause such excavation,
license to enter upon the Premises for the purpose of doing such work as
Landlord shall deem necessary to preserve the wall or the building of which the
Premises form a part from injury or damage and to support the same by proper
foundations, without any claim for damages or indemnification against Landlord
or diminution or abatement of rent. Provided, however, that Landlord shall cause
such work to be performed in such a manner that said work shall not materially
interfere with the operation of Tenant's business.
Section 8.7 QUIET POSSESSION. If Tenant pays the rent and complies with
all other terms of this Lease, Tenant may occupy and enjoy the Premises for the
full Lease Term, subject to the provisions of this Lease.
Section 8.8 WINDOW COVERINGS. Landlord shall select a standard window
covering and color for use throughout the building and Tenant shall use this
standard window covering for any windows Tenant shall cover. Tenant shall be
required to provide, at its expense, prescribed coverings in front of windows in
which the space is utilized for other than office use, such as storage or
manufacturing.
ARTICLE IX
PARKING AND COMMON USE AREAS AND FACILITIES
Section 9.1 CONTROL OF COMMON AREAS BY LANDLORD. All automobile parking
areas, driveways, entrances and exits thereto, and other facilities furnished by
Landlord in or near the Shopping Center, including employee parking areas, the
truck way or ways, loading docks, package pick-up stations, sidewalks and ramps,
landscaped areas, exterior stairways, first-aid stations, comfort stations and
other areas and improvements provided by Landlord for the general use, in
common, of tenants, their officers, agents, employees and customers, shall at
all times be subject to the exclusive control and management of Landlord, and
Landlord shall have the right from time to time to establish, modify and enforce
reasonable rules and regulations with respect to all facilities and areas
mentioned in this Article. Landlord shall have the right to construct, maintain
and operate lighting facilities on all said areas and improvements; to police
the same; from time to time to change the area, level, location and arrangement
of parking areas and other facilities hereinabove referred to; to restrict
parking by tenants, their officers, agents and employees to employee parking
areas; to enforce parking charges (by operation of meters or otherwise), with
appropriate provisions for free parking ticket validating by tenants; to close
all or any portion of said areas or facilities to such extent as may, in the
opinion of Landlord's counsel, be legally sufficient to prevent a dedication
thereof or the accrual of any rights to any person or the public therein; to
close temporarily all or any portion of the parking areas or facilities; to
discourage non-customer parking; and to do and perform such other acts in and
to said areas and improvements as, in the use of good business judgment, the
Landlord shall determine to be advisable with a view to the improvement of the
convenience and use thereof by tenants, their officers, agents, employees and
customers. Landlord will operate and maintain the common facilities referred to
above in such manner as Landlord, in its sole discretion, shall determine from
time to time. Without limiting the scope of such discretion, Landlord shall have
the full right and authority to employ all personnel and to make all rules and
regulations pertaining to and necessary for the proper operation and maintenance
of the common areas and facilities. Notwithstanding any other provision of this
Section, Landlord shall not have the right to make changes that materially
interfere with access to or visibility of the Premises. Furthermore, Landlord
shall not reduce the ratio of parking spaces to square feet of leasable floor
area in the entire Shopping Center below that in existence on the date of
execution of this Lease.
Section 9.2 TENANT'S RIGHT TO USE. Landlord gives to Tenant and its
authorized representatives and invitees the nonexclusive right to use the common
areas, with others who are entitled to use the common areas, subject to
Landlord's rights set forth in Section 9.1.
Section 9.3 MERCHANTS' ASSOCIATION. DELETED
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ARTICLE X
SIGNS, AWNINGS, CANOPIES,
FIXTURES, ALTERATIONS, IMPROVEMENTS
Section 10.1 SIGNS AND AUCTIONS. No auction, fire or bankruptcy sales may
be conducted in the Premises, and no signs advertising such sales shall be
posted on the Premises without the previous written consent of Landlord.
Section 10.2 INSTALLATION BY TENANT. Tenant shall not make or cause to be
made any alterations, additions or improvements or install or cause to be
installed any trade fixtures, exterior signs, exterior machinery, floor
covering, interior or exterior lighting, plumbing fixtures, shades or awnings or
make any changes to the Premises without first obtaining Landlord's written
approval and consent. All fixtures installed by Tenant shall be new or
completely reconditioned. Tenant shall present to the Landlord plans and
specifications for such work at the time approval is sought. Landlord shall not
unreasonably withhold its approval and consent, and further Landlord shall not
withhold its approval and consent to Tenant's installation of any facilities
required in order to comply with the requirements of any regulatory agency.
Improvements that do not materially alter structural portions of the Premises,
and that do not exceed $25,000 in cost, shall not require the prior consent of
the Landlord.
Section 10.3 IMPROVEMENTS. DELETED
Section 10.4 NONREMOVAL BY TENANT. All alterations, additions and
improvements, including signs and sign cases, made by Tenant, or made by the
Landlord on the Tenant's behalf and for which Tenant has paid Landlord in
accordance with this Lease, shall remain the property of the Tenant for the term
of the Lease, or any extension or renewal thereof. Such alterations, additions
and improvements shall not be removed from the Premises. At the expiration or
termination of this Lease Term, or any extensions or renewals thereof, all such
alterations, additions and improvements become the property of the Landlord.
Section 10.5 REMOVAL AND RESTORATION. Landlord may, in its sole and
absolute discretion, require Tenant upon expiration or termination of this Lease
Term to return all or part of the leased Premises to their condition as existed
at the commencement of the Lease Term, removing any alteration, addition or
improvement made by Tenant, or made by Landlord on the Tenant's behalf. In
removing any such alteration, addition or improvement as may be required by the
Landlord, the Tenant shall repair any damage to the Premises caused by such
removal and, prior to such removal, Tenant shall post a bond or other security
as may be required by the Landlord in order to insure the Landlord that the
Premises will be repaired in a prompt and workmanlike manner.
Section 10.6 LIENS. Tenant shall keep the Premises and any building of
which the Premises are a part free from any liens arising out of work performed,
materials furnished or obligations incurred by Tenant and shall indemnify, hold
harmless and defend Landlord from any liens and encumbrances arising out of any
work performed or materials furnished by, or at the direction of, Tenant. In the
event that Tenant shall not, within twenty (20) days following the imposition of
any lien, cause such lien to be released of record by payment or posting of a
proper bond, Landlord shall have, in addition to all other remedies provided
herein and by law, the right, but not the obligation, to cause the same to be
released by such means as it shall deem proper, including payment of the claim
giving rise to such lien. All such sums paid by Landlord and all expenses
incurred by it in connection therewith shall bear interest at the rate of ten
percent (10%) per annum from the date expended until the date repaid. Landlord
shall have the right at all times to post and keep posted on the Premises any
notices permitted or required by law, or which Landlord shall deem proper, for
the protection of Landlord and the Premises, and any other party having an
interest therein from mechanics' and materialmen's liens, and Tenant shall give
to Landlord at least fifteen (15) business days prior written notice of the
expected date of commencement of any work relating to alterations or additions
to the Premises.
Section 10.7 SIGNS, AWNINGS AND CANOPIES. Tenant will not place or suffer
to be placed or maintained on any exterior door, wall or window of the Premises
any sign, awning or canopy, or advertising matter or other thing of any kind,
and will not place or maintain any decoration, lettering or advertising matter
on the glass of any window or door of the Premises without first obtaining
Landlord's written approval and the approval and consent of any governmental
body having jurisdiction over signs in the Shopping Center. Notwithstanding any
other provision of this Section, Tenant shall have the right, without prior
approval of the Landlord, to install on windows and/or doors any signs that
shall be required by regulatory authorities.
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Tenant further agrees to maintain such signs, awnings,
canopy, decoration, lettering or other advertising matter as may be approved, in
good condition and repair at all times. Tenant also agrees, at Tenant's sole
cost, to obtain canopy sign faces which shall conform to Tenant's logo and
letter style. A drawing of proposed signs shall be submitted by Tenant to
Landlord for written approval. Such approval shall be made promptly by Landlord
and shall not be unreasonably withheld.
ARTICLE XI
CONDITION OF PROPERTY;
MAINTENANCE, REPAIRS AND ALTERATIONS
Section 11.1 EXISTING CONDITIONS. Tenant accepts the Premises in its
condition as of the execution of this Lease, subject to all recorded matters,
laws, ordinances, and governmental regulations and orders. Tenant acknowledges
that neither Landlord nor any agent of Landlord has made any representation as
to the condition of the Premises or the suitability of the Premises for Tenant's
intended use.
Section 11.2 EXEMPTION OF LANDLORD FROM LIABILITY; WAIVER. Landlord shall
not be liable for any damage or injury to the person, business (or any loss of
income therefrom), goods, wares, merchandise or other property of Tenant,
Tenant's employees, invitees, customers or any other person in or about the
Premises, whether such damage or injury is caused by or results from: (a) fire,
steam, electricity, water, gas or rain; (b) the breakage, leakage, obstruction
or other defects of pipes, sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures or any other cause; (c) conditions arising in
or about the Premises or upon other portions of any building of which the
Premises is a part, or from other sources or places; or (d) any act or omission
of any other tenant or occupant of the Shopping Center or of any building of
which the Premises is a part. Landlord shall not be liable for any such damage
or injury even though the cause of or the means of repairing such damage or
injury are not accessible to Tenant. Tenant, as a material part of the
consideration to be rendered to Landlord, hereby waives all claims against
Landlord for the foregoing damages from any cause arising at any time. The
provisions of this Section 11.2 shall not, however, exempt Landlord from
liability for Landlord's negligence or willful misconduct.
Section 11.3 TENANT'S OBLIGATIONS.
(a) Tenant shall keep the Premises (including all
nonstructural, interior and exterior portions, systems and equipment, all glass,
glazing, window moldings, partitions, doors, door hardware, interior painting,
fixtures and appurtenances thereof including electrical, lighting, plumbing and
plumbing fixtures) in good order, condition and repair during the Lease Term.
Tenant shall promptly replace any portion of the Premises or system or equipment
in the Premises which cannot be fully repaired, regardless of whether the
benefit of such replacement extends beyond the Lease Term. Landlord shall
obtain, at Tenant's expense, a preventive maintenance contract providing for the
regular inspection and maintenance of the heating and air conditioning system
(including leaks around ducts, pipes, vents, or other parts of the air
conditioning) by a licensed heating and air conditioning contractor. It is the
intention of Landlord and Tenant that, at all times during the Lease Term,
Tenant shall maintain the Premises in an attractive, first-class and fully
operative condition.
(b) All of Tenant's obligations to maintain and repair
shall be accomplished at Tenant's sole expense. If Tenant refuses or neglects to
repair properly as required hereunder and to the reasonable satisfaction of
Landlord, Landlord may, on ten (10) days' prior notice (except that no notice
shall be required in case of emergency) enter the Premises and perform such
repair and maintenance on behalf of Tenant without liability to Tenant for any
loss or damage that may accrue to Tenant's merchandise, fixtures, or other
property or to Tenant's business by reason thereof, and upon completion thereof,
Tenant shall pay Landlord's costs for making such repairs plus twenty percent
(20%) for overhead, upon presentation of a bill therefore, as Additional Rent.
Said bill shall include interest at ten percent (10%) on said costs from the
date of completion of repairs by Landlord.
Section 11.4 LANDLORD'S OBLIGATIONS. Subject to the provisions of Article
XII (Damage or Destruction), Article XIII (Condemnation) and Article IX (Parking
and Common Use Facilities), other than structural repairs Landlord shall have
absolutely no responsibility to repair, maintain or replace any portion of the
Premises at any time. Tenant waives the benefit of any present or future law
which might give Tenant the right to repair the Premises at Landlord's expense
or to terminate the Lease due to the condition of the Premises.
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Section 11.5 RULES AND REGULATIONS.
(a) The Tenant agrees as follows:
(1) All garbage and refuse shall be kept in the kind of
container specified by Landlord, and shall be placed outside of the Premises
in specified trash containers prepared for collection in the manner and at
the times and places specified by Landlord. If Landlord shall provide or
designate a service for picking up refuse and garbage, Tenant shall use same
at Tenant's cost. Tenant shall pay the cost of removal of any of Tenant's
refuse or rubbish.
(2) No aerial shall be erected on the roof or exterior walls of
the Premises, or on the grounds, without in each instance, the written consent
of the Landlord. Any aerial so installed without such written consent shall be
subject to removal without notice at any time.
(3) No loudspeakers, televisions, phonographs, radios, or other
devices shall be used in a manner so as to be heard or seen outside of the
Premises without the prior written consent of the Landlord.
(4) The outside areas immediately adjoining the building shall
be kept clean and free from dirt and rubbish by the Tenant to the satisfaction
of the Landlord and Tenant shall not place or permit any obstruction or
materials in such areas. No exterior storage shall be allowed without permission
in writing from Landlord.
(5) Tenant and Tenant's employees shall park only the number of
cars approved and only in those portions of the parking area designated for that
purpose by Landlord.
(6) The plumbing facilities shall not be used for any other
purpose than that for which they are constructed, and no foreign substance of
any kind shall be thrown therein, and the expense of any breakage, stoppage, or
damage resulting from a violation of this provision shall be borne by Tenant,
who shall, or whose employees, agents or invitees shall have caused it.
(7) Tenant shall use at Tenant's cost such pest extermination
contractor as Landlord may direct and at such intervals as Landlord may require.
(8) Tenant shall not burn any trash or garbage of any kind in
or about the Premises, or the building.
(b) Landlord reserves the right from time to time to amend or
supplement the foregoing rules and regulations, and to adopt and promulgate
additional reasonable rules and regulations applicable to the Premises.
Notice of such reasonable rules and regulations and amendments and
supplements thereto, if any, shall be given to the Tenant and Tenant agrees
to comply with all such reasonable rules and regulations upon receipt of
notice. Landlord shall not be liable in any way to Tenant for any damage or
inconvenience caused by any other tenant's non-compliance with these
reasonable rules and regulations.
Section 11.6 CONDITION UPON TERMINATION. Upon the termination of this
Lease, Tenant shall surrender the Premises to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provision of this Lease. However,
Tenant shall not be obligated to repair any damage which Landlord is required to
repair under Article XII (Damage or Destruction). In addition, Landlord may
require Tenant to remove any alterations, additions or improvements (whether or
not made with Landlord's consent) prior to the termination of this Lease and to
restore the Premises to its prior condition, all at Tenant's expense. All
alterations, additions and improvements which Landlord has not required Tenant
to remove shall become Landlord's property and shall be surrendered to Landlord
upon the termination of this Lease, except that Tenant may remove any of
Tenant's machinery or equipment which can be removed without material damage to
the Premises. Tenant shall repair, at Tenant's expense, any damage to the
Premises caused by the removal of any such machinery or equipment. In no event,
however, shall Tenant remove any of the following materials or equipment without
Landlord's prior written consent: any power wiring or power panels; lighting or
lighting fixtures; wall coverings; drapes, blinds or other window coverings;
carpets or other floor coverings; heaters, air conditioners or any other heating
or air conditioning equipment; fencing or security gates; or other similar
building operating equipment and decorations.
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ARTICLE XII
DAMAGE OR DESTRUCTION
Section 12.1 PARTIAL DAMAGE TO LEASED PREMISES. Tenant shall notify
Landlord in writing immediately upon the occurrence of any damage to the
Premises. If the premises is only partially damaged and if the proceeds received
by Landlord from the insurance policies described in Article IV are sufficient
to pay for the necessary repairs, this Lease shall remain in effect and Landlord
shall repair the damage as soon as reasonably possible. Landlord may elect to
repair any damage to Tenant's fixtures, equipment, or improvements. If the
insurance proceeds received by Landlord are not sufficient to pay the entire
cost of repair, or if the cause of the damage is not covered by the insurance
policies which Landlord maintains under Article IV, Landlord may elect either to
(a) repair the damage as soon as reasonably possible, in which case this Lease
shall remain in full force and effect, or (b) terminate this Lease as of the
date the damage occurred. Landlord shall notify Tenant within thirty (30) days
after receipt of notice of the occurrence of the damage, whether Landlord elects
to repair the damage or terminate this Lease. If Landlord elects to repair the
damage, Tenant shall pay Landlord the "deductible amount" (if any) under
Landlord's insurance policies or the Tenant's pro rata share thereof if the
Premises is in a multi-tenant building, and, if the damage was due to the
negligence or willful misconduct of Tenant, the difference between the actual
cost of repair and any insurance proceeds received by Landlord. If Landlord
elects to terminate this Lease, Tenant may elect to continue this Lease in full
force and effect, in which case Tenant shall repair any damage to the Premises
and any building in which the Premises is located. Tenant shall pay the cost of
such repairs, except that, upon satisfactory completion of such repairs,
Landlord shall deliver to Tenant any insurance proceeds received by Landlord for
the damage repaired by Tenant. Tenant shall give Landlord written notice of such
election within ten (10) days after receiving Landlord's termination notice. If
the damage to the Premises occurs during the last six (6) months of the Lease
Term, Landlord may elect to terminate this Lease as of the date the damage
occurred, regardless of the sufficiency of any insurance proceeds and Landlord
may retain all such proceeds. In such event, Landlord shall not be obligated to
repair or restore the Premises and Tenant shall have no right to continue this
Lease. Landlord shall notify Tenant of its election within thirty (30) days
after receipt of notice of the occurrence of the damage. If the Landlord elects
to repair the damage, Landlord shall include in Landlord's notice of such
election an estimate of the time necessary to complete such repairs. Tenant
shall have the right to terminate the Lease if (a) Landlord's estimate of the
time required to repair the damage exceeds 120 days after the occurrence of such
damage, or (b) such repairs are not completed within 180 days after the
occurrence of such damage, or (c) the damage occurs within six months of the end
of the Term of the Lease.
Section 12.2 TOTAL OR SUBSTANTIAL DESTRUCTION. If the Premises is totally
or substantially destroyed by any cause whatsoever, or if the Premises is in a
building which is substantially destroyed (even though the Premises is not
totally or substantially destroyed), this Lease shall terminate as of the date
the destruction occurred regardless of whether Landlord receives any insurance
proceeds. However, if the Premises can be rebuilt within 180 days after the date
of destruction, Landlord may elect to rebuild the Premises at Landlord's own
expense (with all insurance proceeds being made available to the Landlord to
apply against such costs), in which case, this Lease shall remain in full force
and effect. Landlord shall notify Tenant of such election within thirty (30)
days after the occurrence of total or substantial destruction. If the
destruction was caused by the negligence or willful misconduct of Tenant, Tenant
shall pay Landlord the difference between the actual cost of rebuilding and any
insurance proceeds received by Landlord. Tenant shall have the right to
terminate the Lease if such rebuilding is not completed within said 180-day
period or if the destruction occurs within six months of the end of the Term of
the Lease.
Section 12.3 PARTIAL DESTRUCTION OF SHOPPING CENTER. In the event that
fifty percent (50%) or more of the rentable area of the Shopping Center shall be
damaged or destroyed by fire or other cause, notwithstanding that the Premises
may be unaffected by such fire or other cause. Landlord shall have the right, to
be exercised by notice in writing delivered to Tenant within sixty (60) days
from and after said occurrence, to elect to cancel and terminate this Lease.
Upon the giving of such notice to Tenant, the term of this Lease shall expire by
lapse of time upon the ninetieth (90th) day after such notice is given, and
Tenant shall vacate the Premises and surrender the same to Landlord. Nothing in
this Section nor any other Section hereof shall be construed as a limitation of
Tenant's liability for such occurrence, should such liability otherwise exist.
Section 12.4 UNINSURED CASUALTY. In the event the Premises is damaged or
destroyed to the extent of fifteen percent (15%) or more of the replacement
value thereof by any casualty not covered under the fire and extended coverage
insurance covered by Landlord or Tenant, then Landlord may elect to terminate
this Lease.
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Landlord shall notify Tenant of its exercise of such election within thirty (30)
days after the occurrence of the damage or destruction. In the event of such
termination the rights and obligations of the parties hereunder shall cease. If
the Landlord does not elect to so terminate, then the Landlord shall promptly
commence repairing such damage at the Landlord's cost and expense. If the
Landlord elects to repair the damage, Landlord shall include in Landlord's
notice of such election an estimate of the time necessary to complete such
repairs. Tenant shall have the right to terminate the Lease if (a) Landlord's
estimate of the time required to repair the damage exceeds 120 days after the
occurrence of such damage, or (b) such repairs are not completed within 180 days
after the occurrence of such damage, or (c) the damage occurs within six months
of the end of the Term of the Lease.
Section 12.5 LANDLORD'S OBLIGATIONS. Landlord shall not be required to
repair any injury or damage by fire or other cause, or to make any restoration
or replacement of any panelings, decorations, partitions, railings, floor
coverings, office fixtures or any other improvements or property installed in
the Premises by Tenant or at the direct or indirect expense of Tenant which are
not part of the original Tenant improvements paid for by Landlord. Tenant shall
be required to restore or replace same in the event of damage except for damage
caused solely by the Landlord's negligence or intentional misconduct. Tenant
shall have no claim against Landlord for any damage suffered by reason of any
such damage, destruction, repair or restoration, nor shall Tenant have the right
to terminate this Lease as the result of any statutory provision now or
hereafter in effect pertaining to the damage and destruction of the Premises,
except as expressly provided herein.
Section 12.6 TEMPORARY REDUCTION OF RENT. If the Premises are destroyed or
damaged and Landlord or Tenant repairs or restores the Premises pursuant to the
provisions of this Article XII, any rent payable during the period of such
damage, repair and/or restoration shall be reduced based on the extent to which
the destruction interferes with Tenant's use of the Premises. Except for such
possible reduction in payments required from the Tenant, Tenant shall not be
entitled to any compensation, reduction, or reimbursement from Landlord as a
result of any damage, destruction, repair, or restoration of or to the leased
Premises.
Section 12.7 WAIVER. Tenant waives the protection of any statute, code or
judicial decision which grants a tenant the right to terminate a lease in the
event of damage or destruction of the Premises. Tenant agrees that the
provisions of this Article XII shall govern the rights and obligations of
Landlord and Tenant in the event of any damage or destruction of the Premises.
ARTICLE XIII
CONDEMNATION
Section 13.1 TOTAL CONDEMNATION. If the whole of the Premises shall be
acquired or condemned by eminent domain for any public or quasi-public use or
purpose, then the term of this Lease shall cease and terminate as of the date of
title vesting in such proceeding and all rentals shall be paid up to that date
and Tenant shall have no claim against Landlord for the value of any unexpired
term of this Lease.
Section 13.2 TOTAL CONDEMNATION OF PARKING AREA. If the whole of the common
parking areas in the Shopping Center shall be acquired or condemned by eminent
domain for any public or quasi-public use or purpose, then the term of this
Lease shall cease and terminate as of the date of title vesting in such
proceeding unless Landlord shall take reasonable steps to provide other parking
facilities substantially equal to the previously existing ratio between the
common parking areas and the Premises, and such substantially equal parking
facilities shall be provided by Landlord at its own expense within ninety (90)
days from the date of acquisition. In the event that Landlord shall provide such
other substantially equal parking facilities, then this Lease shall continue in
full force and effect. In any event, Tenant shall have no claim against Landlord
for the value of any unexpired term of this Lease.
Section 13.3 PARTIAL CONDEMNATION. If any part of the Premises shall be
acquired or condemned by eminent domain for any public or quasi-public use or
purpose, and in the event that such partial taking or condemnation shall render
the Premises unsuitable for the business of the Tenant, then the term of this
Lease shall cease and terminate as of the date of title vesting in such
proceeding and Tenant shall have no claim against Landlord for the value of any
unexpired term of this Lease. In the event of a partial taking or condemnation
which is not extensive enough to render the Premises unsuitable for the business
of the Tenant, then Landlord shall within a reasonable time restore the Premises
to a condition comparable to its condition at the time of such condemnation less
the portion lost in the taking, and this Lease shall continue in full force and
effect, except that (i) the Minimum Monthly Rent payable hereunder shall be
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reduced by an amount that is in the same ratio to Minimum Monthly Rent as the
total number of square feet in the Premises taken bares to the total number of
square feet in the Premises immediately before the date of taking, and (ii) the
square footage of the Premises set forth in Section 1.4 shall be reduced to the
number of square feet in the Premises after the date of the taking, and (iii)
Tenant's pro rata share of amounts due pursuant to Article IV of this Lease
shall be calculated in accordance with such revised square footage.
Section 13.4 PARTIAL CONDEMNATION OF PARKING AREA. If any part of the
parking area in the Shopping Center shall be acquired or condemned by eminent
domain for any public or quasi-public use or purpose and if, as the result of
such partial taking the ratio of square feet of parking area and common use
areas and facilities as described in Section 9.1 hereof to square feet of the
sales area of the entire Shopping Center buildings is reduced to a ratio below
two to one, then the term of this Lease shall cease and terminate from the date
of title vesting in such proceeding, unless the Landlord shall take reasonable
steps toward increasing said ratio to a ratio equal to or in excess of two to
one, in which event this Lease shall be unaffected and remain in full force and
effect as between the parties. In any event, Tenant shall have no claim against
Landlord for the value of any unexpired term of this Lease.
Section 13.5 CONDEMNATION OF LESS THAN A FEE. If as a result of
condemnation proceeds, a leasehold interest or a right of possession only is
taken by condemnation under the power of eminent domain, and is for a limited
period of time less than the then unexpired Term, this Lease shall continue in
full force and effect and the award shall be payable to Landlord and shall be
credited by Landlord against the rentals payable by Tenant hereunder; provided,
however, that if the taking is for a period of more than one (1) year, Tenant
shall have the right to terminate the Lease by giving written notice of
termination to Landlord within thirty (30) days following such taking. If the
award received by Landlord is in excess of the Rent due, Tenant shall be
entitled to receive such excess, and, if the amount go received by Landlord is
less than Rent due, then Tenant shall pay the amount of such deficiency. If such
condemnation shall be for a period of time extending beyond the expiration of
the Term, the foregoing provisions shall apply only to the date of termination
of the Term, and upon the expiration of said Term, Landlord shall receive all
awards thereafter payable and no accounting shall be made to Tenant for such
period extending beyond the termination of the Term, and Tenant shall have no
liability whatsoever under the terms of this Lease after such termination date.
If the taking is such that it will render the Premises
unsuitable for the business of the Tenant for a period exceeding one hundred
twenty (120) days, then Tenant, at its option, may terminate the Lease.
Section 13.6 DISTRIBUTION OF CONDEMNATION AWARD. Any condemnation award or
payment shall be distributed in the following order: (a) first, to any ground
lessor, mortgagee or beneficiary under a deed of trust encumbering the Premises,
the amount of its interest in the Premises; (b) second, to Tenant, only the
amount of any award specifically designated for loss of or damage to Tenant's
trade fixtures or removable personal property, and the Tenant hereby assigns any
other rights which the Tenant may have now or in the future to any other award
to the Landlord; and (c) third, to Landlord, the remainder of such award,
whether as compensation for reduction in the value of the leasehold the taking
of the fee, or otherwise. If this Lease is not terminated, Landlord shall repair
any damage to the Premises caused by the condemnation, except that Landlord
shall not be obligated to repair any damage for which Tenant hag been reimbursed
by the condemning authority. If the severance damages received by Landlord are
not sufficient to pay for such repair, Landlord shall have the right to either
terminate this lease or make such repair at landlord's expense.
ARTICLE XIV
ASSIGNMENT AND SUBLETTING
Section 14.1 LANDLORD'S CONSENT REQUIRED. No portion of the Premises or of
Tenant's interest in this Lease may be acquired by any other person or entity,
whether by assignment, mortgage, sublease, transfer, operation of law, or act of
Tenant, without Landlord's prior written consent. Any attempted transfer without
consent shall be void and shall constitute a noncurable breach of this Lease. If
Tenant is a partnership, any cumulative transfer of more than twenty percent
(20%) of the partnership interests shall require Landlord's consent. Landlord's
consent shall not be unreasonably withheld; provided, however, the parties agree
that it shall be commercially reasonable for Landlord to withhold consent to any
proposed transfer if the proposed transferee's use would (i) violate the
Declaration; or (ii) violate any exclusive use granted by Landlord to any other
tenant in the Shopping Center; or (iii) adversely impacts the tenant mix of the
Shopping Center as such tenant mix exists at the time that Tenant seeks to
obtain Landlord's consent.
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Section 14.2 GRANT OF CONCESSIONS; CONDITIONS TO GRANT. The provision
against subletting elsewhere contained in this Lease shall not prohibit Tenant
from granting concessions for the operation of one or more departments of the
business which Tenant is permitted by Section 1.8 to conduct in or upon the
Premises; provided, however, that (a) each such concession may be granted only
upon receipt by Tenant of the written consent of the Landlord and shall be
subject to all the terms and provisions of this Lease; (b) the gross receipts,
as defined in Section 3.4 hereof, from the operation of each such concession,
shall be deemed to be a part of the gross receipts of Tenant for the purpose of
determining the additional rental payable to Landlord; (c) all of the provisions
hereof applying to the business of Tenant including the provisions concerning
reports and audits shall apply to each such concession; and (d) at least
seventy-five (75%) percent of the sales floor area of the Premises shall at all
times be devoted to the business of and be operated by Tenant. Landlord's
consent shall not be unreasonably withheld; provided, however, the parties agree
that it shall be commercially reasonable for Landlord to withhold consent to any
proposed transfer if the proposed transferee's use would (i) violate the
Declaration; or (ii) violate any exclusive use granted by Landlord to any other
tenant in the Shopping Center; or (iii) adversely impacts the tenant mix of the
Shopping Center as such tenant mix exists at the time that Tenant seeks to
obtain Landlord's consent.
Section 14.3 NO RELEASE OF TENANT. No transfer permitted by this Article
XIV, shall release Tenant or change Tenant's primary liability to pay the rent
and to perform all other obligations of Tenant under this Lease. Landlord's
acceptance of rent from any other person is not a waiver of any provision of
this Article XIV. Consent to one transfer is not a consent to any subsequent
transfer. If Tenant's transferee defaults under this Lease, Landlord may proceed
directly against Tenant without pursuing remedies against the transferee.
Landlord may consent to subsequent assignments or modifications of this Lease by
Tenant's transferee, without notifying Tenant or obtaining its consent. Such
action shall not relieve Tenant's liability under this Lease.
Section 14.4 LANDLORD'S ELECTION. Tenant's request for consent to any
transfer described in Section 14.1 above shall be accompanied by a written
statement setting forth the details of the proposed transfer, including the
name, business and financial condition of the prospective transferee, financial
details of the proposed transfer (e.g., the term of and rent and security
deposit payable under any assignment or sublease), and any other information
Landlord deems relevant. Landlord shall have the right (a) to withhold consent,
if reasonable; or (b) to grant consent.
Section 14.5 NO MERGER. No merger shall result from Tenant's sublease of
the Premises under this Article XIV, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event, Landlord may
terminate any or all subtenancies or succeed to the interest of Tenant as
sublandlord thereunder.
Section 14.6 ASSIGNMENT FEES AND PROCEDURES. In the event Landlord shall be
requested to consent to a sublease, assignment, pledge, encumbrance, or any
other transfer of all or any portion of Tenant's rights hereunder, as specified
in Section 14.1 hereof, Tenant shall pay Landlord a reasonable fee not to exceed
Two Hundred Fifty Dollars ($250.00) to reimburse Landlord for costs and
expenses, excluding attorneys fees which shall be reimbursed pursuant to
Section 17.2 herein, incurred in connection with reviewing Tenant's request for
consent. Tenant's check for the assignment fee shall be delivered to Landlord
concurrent with Tenant's request for consent.
ARTICLE XV
DEFAULTS; REMEDIES
Section 15.1 COVENANTS AND CONDITIONS. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Premises is conditioned upon
such performance. Time is of the essence in the performance of all covenants and
conditions.
Section 15.2 DEFAULTS. Tenant shall be in material default under this
Lease:
(a) If Tenant abandons or vacates the Premises or if such
abandonment or vacation of the Premises results in the cancellation of any
insurance described in Section 4.6;
(b) If Tenant fails to pay rent or any other charge required to
be paid by Tenant within ten (10) days of when due;
(c) If Tenant fails to perform any of Tenant's nonmomenetary
obligations under this Lease for a period of fifteen (15) days after written
notice from
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Landlord; provided that if more time is required to complete such performance,
Tenant shall not be in default if Tenant commences such performance within the
fifteen (15) day period and thereafter diligently pursues its completion.
However, Landlord shall not be required to give such notice if Tenant's failure
to perform constitutes a non-curable breach of this Lease. The notice required
by this Paragraph is intended to satisfy any and all notice requirements
imposed by law on Landlord prior to the commencement of an unlawful detainer
action and is not in addition to any such requirement;
(d) (i) If Tenant makes a general assignment or general
arrangement for the benefit of creditors; (ii) if a petition for adjudication
of bankruptcy or for reorganization or rearrangement is filed by or against
Tenant and is not dismissed within thirty (30) days; (iii) if a trustee or
receiver is appointed to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease and possession is
not restored to Tenant within thirty (30) days; or (iv) if substantially all of
Tenant's assets located at the Premises or of Tenant's interest in this Lease is
subjected to attachment, execution or other judicial seizure which is not
discharged within thirty (30) days. If a court of competent jurisdiction
determines that any of the acts described in this subparagraph (d) is not a
default under this Lease, and a trustee is appointed to take possession (or if
Tenant remains a debtor in possession) and such trustee or Tenant transfers
Tenant's interest hereunder, then Landlord shall receive, as Additional Rent,
the difference between the rent (or any other consideration) paid in connection
with such assignment or sublease and the rent payable by Tenant hereunder.
Section 15.3 DEFAULT BY LANDLORD. Landlord shall not be in default unless
Landlord fails to perform obligations required of Landlord within a reasonable
time, but in no event later than thirty (30) days after written notice by Tenant
to Landlord and to the holder of any first mortgage or deed of trust covering
the Premises whose name and address shall have theretofore been furnished to
Tenant in writing, specifying wherein Landlord has failed to perform such
obligation; provided, however, that if the nature of Landlord's obligation is
such that more than thirty (30) days are required for performance, then Landlord
shall not be in default if Landlord commences performance within such thirty
(30) day period and thereafter diligently prosecutes the same to completion.
Section 15.4 REMEDIES. On the occurrence of any material default by Tenant,
Landlord may, at any time thereafter, with or without notice or demand and
without limiting Landlord in the exercise of any right or remedy which Landlord
may have:
(a) Terminate Tenant's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Premises to Landlord. In such event
Landlord shall have the immediate right to re-enter the Premises and remove all
persons and property and such property may be removed and stored in a public
warehouse or elsewhere at the cost of, and for the account of Tenant, all
without service of notice or resort to legal process and without being deemed
guilty of trespass, or becoming liable for any loss or damage which may be
occasioned thereby; and Landlord shall be entitled to recover from Tenant all
damages incurred by Landlord by reason of Tenant's default, including (i) the
worth at the time of the award of all Minimum Monthly Rent, Additional Rent and
other charges which were earned or were payable at the time of the termination;
(ii) the worth at the time of the award of the amount by which the unpaid
Minimum Monthly Rent, Additional Rent and other charges which would have been
earned or were payable after termination until the time of the award exceeds the
amount of such rental loss that Tenant proves could have been reasonably
avoided; (iii) the worth at the time of the award of the amount by which the
unpaid Minimum Monthly Rent, Additional Rent and other charges which would have
been payable for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could have been reasonably
avoided; and (iv) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom, including, but not limited to, any costs or expenses incurred
by Landlord in maintaining or preserving the Premises after such default, the
cost of recovering possession of the Premises, expenses of reletting, including
necessary renovation or alteration of the Premises, Landlord's reasonable
attorneys' fees, and any real estate commissions or other such fees paid or
payable. As used in subparts (i) and (ii) above, the "worth at the time of the
award" is computed by allowing interest on unpaid amounts at the rate of fifteen
percent (15%) per annum, or such lesser amount as may then be the maximum lawful
rate. As used in subpart (iii) above, the "worth at the time of the award" is
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of the award, plus one percent (1%). If Tenant
shall have abandoned the Premises, Landlord shall have the option of (i)
retaking possession of the Premises and recovering from Tenant the amount
specified in this Section 15.4(a), or (ii) proceeding under Section 15.4(b);
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(b) Maintain Tenant's right to possession, in which case this
Lease shall continue in effect whether or not Tenant shall have abandoned the
Premises. In such event, Landlord shall be entitled to enforce all of
Landlord's rights and remedies under this Lease, including the right to recover
the rent as it becomes due hereunder;
(c) Pursue any other remedy now or hereafter available to
Landlord under the laws or judicial decisions of the state in which the Premises
Is located.
Section 15.5 THE RIGHT TO RELET THE PREMISES. Should Landlord elect to
re-enter, as herein provided, or should it take possession pursuant to legal
proceedings or pursuant to any notice provided for by law, it may either
terminate this Lease or it may from time to time without terminating this Lease,
make such alterations and repairs as may be necessary in order to relet the
Premises, and relet said Premises or any part thereof for such term or terms
(which may be for a term extending beyond the term of this Lease) and at such
rental or rentals and upon such other terms and conditions as Landlord in its
sole discretion may deem advisable; upon each such reletting all rentals
received by the Landlord from such reletting shall be applied, first, to the
repayment of any indebtedness other than rent due hereunder from Tenant to
Landlord; second, to the payment of any costs and expenses of such reletting,
including brokerage fees and attorneys' fees and of costs of such alterations
and repairs; third, to the payment of rent due and unpaid hereunder, and the
residue, if any, shall be held by Landlord and applied in payment of future rent
as the same may become due and payable hereunder. If such rentals received from
such reletting during any month are less than that to be paid during that month
by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such
deficiency shall be calculated and paid monthly. No such re-entry or taking
possession of said Premises by Landlord shall be construed as an election on its
part to terminate this Lease unless a written notice of such intention be given
to Tenant or unless the termination thereof be decreed by a court of competent
jurisdiction.
Section 15.6 WAIVER OF RIGHTS OF REDEMPTION. Tenant hereby expressly waives
any and all rights of redemption granted by or under any present or future laws
in the event of Tenant being evicted or dispossessed for any cause, or in the
event of Landlord obtaining possession of the Premises, by reason of the
violation by Tenant of any of the covenants or conditions of this Lease, or
otherwise.
Section 15.7 CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
Section 15.8 LATE CHARGES. Tenant hereby acknowledges that late payment by
Tenant to Landlord of rent and other sums due hereunder will cause Landlord to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult and costly to ascertain. Such costs include, but are not
limited to, processing, administrative and accounting charges, and late charges
which may be imposed on Landlord by the terms of any mortgage or trust deed
covering the Premises. Accordingly, if any installment of rent or any other sum
due from Tenant shall not be received by Landlord or Landlord's designee within
ten (10) days after such amount shall be due, Tenant shall pay to Landlord a
late charge as liquidated damages as that term is used in Section 1671 of the
California Civil Code, equal to ten percent (10%) of such overdue amount. The
parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Landlord will incur as a consequence of late payment by
Tenant. Acceptance of such late charge by Landlord shall in no event constitute
a waiver of Tenant's default with respect to such overdue amount, nor prevent
Landlord from exercising any of the other rights and remedies granted hereunder.
ARTICLE XVI
PROTECTION OF CREDITORS
Section 16.1 SUBORDINATION. Landlord shall have the right to require Tenant
to subordinate this Lease to any ground lease, deed of trust or mortgage
encumbering the Premises, any advances made on the security thereof and any
renewals, modifications, consolidations, replacements or extensions thereof,
whenever made or recorded, provided that the Landlord first obtains from the
ground lessor or lender a written agreement that provides substantially the
following: "As long as Tenant performs its obligations under this Lease, no
foreclosure of, deed given in lieu of foreclosure of, or sale under the
encumbrance, and no steps or procedures taken under the encumbrance, shall
affect Tenant's rights under this Lease. The provisions of this Lease concerning
the disposition of insurance proceeds on destruction of the Premises, and the
provisions of the Lease concerning the disposition of any condemnation award,
shall prevail over any conflicting provisions in the encumbrance." However,
Tenant's right to quiet possession of the Premises during the Lease Term shall
not be disturbed if Tenant pays the rent and
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performs all of Tenant's obligations under this Lease and is not otherwise in
default. if any ground lessor, beneficiary or mortgagee elects to have this
Lease prior to the lien of its ground lease, deed of trust or mortgage and gives
written notice thereof to Tenant, this Lease shall be deemed prior to such
ground lease, deed of trust or mortgage whether this Lease is dated prior or
subsequent to the date of said ground lease, deed of trust or mortgage or the
date of recording thereof.
Section 16.2 ATTORNMENT. If Landlord's interest in the Premises is acquired
by any ground lessor, beneficiary under a deed of trust, mortgagee, or purchaser
at a foreclosure sale, Tenant shall attorn to the transferee of or successor to
Landlord's interest in the Premises and recognize such transferee or successor
as Landlord under this Lease. Tenant waives the protection of any statute or
rule of law which gives or purports to give Tenant any right to terminate this
Lease or surrender possession of the Premises upon the transfer of Landlord's
interest.
Section 16.3 SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instrument or documents necessary or appropriate to effectuate or evidence any
such attornment or subordination or agreement to do so. If Tenant fails to do so
within ten (10) days after written request, Tenant hereby makes, constitutes and
irrevocably appoints Landlord, or any transferee or successor of Landlord, the
attorney-in-fact of Tenant to execute and deliver any such instrument or
document.
Section 16.4 ESTOPPEL CERTIFICATES. Each party, within ten (10) days after
notice from the other party, shall execute and deliver to the other party, in
recordable form, a certificate stating that the Lease is unmodified and in full
force and effect, or in full force and effect as modified, and stating the
modifications. The certificate shall also state the amount of the Minimum
Monthly Rent, the dates to which the Rent has been paid in advance, the amount
of any security deposit or prepaid Rent and any other reasonable information
required for the circumstances.
Section 16.5 TENANT'S FINANCIAL CONDITION. DELETED
Section 16.6 MORTGAGEE PROTECTION CLAUSE. Tenant agrees to give any
mortgagees and/or trust deed holders, by registered mail, a copy of any notice
of default, served upon the Landlord, provided that prior to such notice Tenant
has been notified in writing (by way of Notice of Assignment of Rents and
Leases, or otherwise) of the addresses of such mortgagees and/or trust deed
holders, Tenant further agrees that if Landlord shall have failed to cure such
default within the time provided for in this Lease, then the mortgagees and/or
trust deed holders shall have an additional thirty days (30) within which to
cure such default or if such default cannot be cured within that time, then such
additional time as may be necessary if within such thirty days (30) any
mortgagee and/or trust deed holder has commenced and is diligently pursuing the
remedies necessary to cure such default (including but not limited to
commencement of foreclosure proceedings if necessary to affect such cure), in
which event this Lease shall not be terminated while such remedies are being so
diligently pursued.
ARTICLE XVII
LEGAL COSTS
Section 17.1 LEGAL PROCEEDINGS. Tenant shall reimburse Landlord, upon
demand, for any costs or expenses incurred by Landlord in connection with any
breach or default of Tenant under this Lease, whether or not suit is commenced
or judgment entered. Such costs shall include legal fees and costs incurred for
the negotiation of a settlement, enforcement of rights or otherwise.
Furthermore, if any action for breach of or to enforce the provisions of this
Lease is commenced, the court in such action shall award to the party in whose
favor a judgment is entered, a reasonable sum as attorneys' fees and costs. Such
attorneys' fees and costs shall be paid by the losing party in such action.
Section 17.2 LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable
attorneys' fees incurred in connection with Tenant's request for Landlord's
consent under Article XIV (Assignment and Subletting), or in connection with any
other act which Tenant proposes to do and which requires Landlord's consent.
ARTICLE XVIII
MISCELLANEOUS PROVISIONS
Section 18.1 NON-DISCRIMINATION. Tenant promises, and it is a condition to
the continuance of this Lease, that there will be no discrimination against, or
segregation of, any person or group of persons on the basis of race, color, sex,
creed, national origin or ancestry in the leasing, subleasing, transferring,
occupancy, tenure or use of the Premises or any portion thereof.
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Section 18.2 LANDLORD'S LIABILITY; CERTAIN DUTIES. As used in this Lease,
the term "Landlord" means only the current owner or owners of the fee title to
the Premises or the leasehold estate under a ground lease of the Premises at the
time in question. Each Landlord Is obligated to perform the obligations of
Landlord under this Lease only during the time such Landlord owns such interest
or title. Any Landlord who transfers its title or interest is relieved of all
liability with respect to the obligations of Landlord under this Lease to be
performed on or after the date of transfer. However, each Landlord shall deliver
to its transferee all funds previously paid by Tenant if such funds have not yet
been applied under the terms of this Lease.
Section 18.3 SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
Section 18.4 INTERPRETATION. The captions of the Articles or Sections of
this Lease are to assist the parties in reading this Lease and are not a part of
the terms or provisions of this Lease. Whenever required by the context of this
Lease, the singular shall include the plural and the plural shall include the
singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Premises with Tenant's expressed or
implied permission.
Section 18.5 ENTIRE AGREEMENT. This Lease and the Exhibits, and Rider, if
any, attached hereto and forming a part hereof, set forth all the covenants,
promises, agreements, conditions and understandings, either oral or written,
between Landlord and Tenant concerning the Premises and there are no covenants,
promises, agreements, conditions or understandings, either oral, or written,
between them other than are herein set forth. Except as herein otherwise
provided, no subsequent alteration, amendment, change or addition to this Lease
shall be binding upon Landlord or Tenant unless reduced to writing and signed by
the party to be charged with their performance.
Section 18.6 NOTICES. All notices required or permitted under this Lease
shall be in writing and shall be personally delivered or sent by certified mail,
return receipt requested, postage prepaid. Notices to Tenant shall be delivered
to the address specified in Section 1.3 herein. Notices to Landlord shall be
delivered to the address specified in Section 1.2 above. All notices shall be
effective upon personal delivery or three (3) days after deposit in the U.S.
Mail. Either party may change its notice address upon written notice to the
other party.
Section 18.7 WAIVERS. All waivers must be in writing and signed by the
waiving party. Landlord's failure to enforce any provision of this Lease or its
acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
Section 18.8 NO RECORDATION. Tenant shall not record this Lease without
prior written consent from Landlord. However, Landlord may require that a "Short
Form" memorandum of this Lease be executed by both parties and recorded.
Section 18.9 BINDING EFFECT; CHOICE OF LAW. This Lease binds any party who
legally acquires any rights or interest in this Lease from Landlord or Tenant.
However, Landlord shall have no obligation to Tenant's successor unless the
rights or interests of Tenant's successor are acquired in accordance with the
terms of this Lease. The laws of the state in which the Premises is located
shall govern this Lease.
Section 18.10 CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a
corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within five (5) days after this Lease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to Landlord. If Tenant is a partnership, each
person signing this Lease for Tenant represents and warrants that he is a
general partner of the partnership, that he has full authority to sign for the
partnership and that this Lease binds the partnership and all general partners
of the partnership. Tenant shall give written notice to Landlord of any general
partner's withdrawal or addition. Within five (5) days after this Lease is
signed, Tenant shall deliver to Landlord a copy of Tenant's recorded statement
of partnership or certificate of limited partnership.
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Section 18.11 NO PARTNERSHIP. Landlord shall not by virtue of this Lease,
in any way or for any purpose, be deemed to have become a partner of Tenant in
the conduct of its business, or otherwise, or joint venturer or a merger of a
joint enterprise with Tenant, nor is Tenant an agent of Landlord for any reason
whatsoever. The provisions of this Lease relating to the percentage rent payable
hereunder are included solely for the purpose of providing a method whereby the
rent is to be measured and ascertained.
Section 18.12 JOINT AND SEVERAL LIABILITY. All parties signing this Lease
as Tenant shall be jointly and severally liable for all obligations of Tenant.
Section 18.13 FORCE MAJEURE. If Landlord cannot perform any of its
obligations due to events beyond Landlord's control, the time provided for
performing such obligations shall be extended by a period of time equal to
the duration of such events. Events beyond Landlord's control include, but
are not limited to, acts of God, war, civil commotion, labor disputes,
strikes, fire, flood or other casualty, shortages of labor or material,
government regulation or restriction and weather conditions.
Section 18.14 NO OPTION. The submission of this Lease for examination does
not constitute a reservation of or option to lease the Premises and this Lease
becomes effective only upon execution and delivery thereof by Landlord and
Tenant.
Section 18.15 ACCORD AND SATISFACTION. No payment by Tenant or receipt by
Landlord of a lesser amount than the monthly rent herein stipulated shall be
deemed to be other than on account of the earliest stipulated rent, or shall any
endorsement or statement on any check or any letter accompanying any check or
payment as rent be deemed an accord and satisfaction, and Landlord may accept
such check or payment without prejudice to Landlord's right to recover the
balance of such rent or pursue any other remedy provided in this Lease.
Section 18.16 PROVISIONS ARE COVENANTS AND CONDITIONS. All provisions,
whether covenants or conditions, on the part of the Landlord, or on the part of
Tenant, shall be deemed to be both covenants and conditions.
Section 18.17 UNION WORKERS. DELETED
Section 18.18 REMODEL. Landlord may in the future remodel or refurbish
portions of the Shopping Center. Such remodeling and/or refurbishing may include
Tenant's Premises. The remodeling and/or refurbishing will be done in accordance
with the proper architect's design specifications which will be reviewed and
approved by Landlord and copies of such drawings will be made available to
Tenant. Tenant agrees to accept such specifications. Tenant further agrees that
Tenant will not, through any act or omission on the part of Tenant, in any way
hinder, impede, or frustrate the efforts of the Landlord in completing such
remodeling or refurbishing in a timely fashion. Provided, however, Landlord
agrees to perform all work in connection with such remodel or refurbishing in
such a manner that said work shall not materially interfere with access to or
visibility of the Premises. As part of architect's design specifications, a new
exterior Tenant sign criteria may be developed. Upon development of said new
sign criteria Tenant, at Tenant's expense, upon written notice from Landlord,
shall remove all existing signs and replace such exterior signs with a new sign
in accordance with the new sign criteria. Such resigning by Tenant shall be
completed within sixty (60) days after receipt of new sign criteria from
Landlord.
Section 18.19 OPTION TO EXTEND.
ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED HERETO OR
IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED, PLEASE
DRAW A LINE THROUGH THE SPACE BELOW.
21
<PAGE>
Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialled all Riders
which are attached to or incorporated by reference in this Lease.
LANDLORD:
DATED: MARCH 14, 1994 FALLBROOK MERCANTILE,
a California general partnership,
By: /s/ Robert W. Carson
---------------------------------
Robert W. Carson, General Partner
By: /s/ Michael R. Perry
---------------------------------
Michael R. Perry, General Partner
TENANT:
DATED: MARCH 8, 1994 FALLBROOK NATIONAL BANK,
a California corporation
By: /s/ [ILLEGIBLE]
---------------------------------
Its: PRESIDENT & CEO
----------------------------
By: /s/ [ILLEGIBLE]
---------------------------------
Its: SENIOR VICE PRESIDENT
----------------------------
22
<PAGE>
EXHIBIT A
* Landlord and Tenant acknowledge that this plot plan is for general
information purposes only. Landlord shall not be liable and makes no
representation or warranties whatsoever concerning the location of any
buildings or improvements, or tenants whatsoever depicted hereon this plot
plan and any buildings, improvements, and tenants depicted hereon shall be
subject to correction, modification or change at any time without notice at
Landlord's sole discretion.
[PLOT PLAN]
<PAGE>
FALLBROOK MERCANTILE
[DRAWING - SIGN CRITERIA]
<PAGE>
EXHIBIT "X"
CONFIRMATION OF TERM OF LEASE
This Confirmation of Term of Lease is made April 1, 1994, between
FALLBROOK MERCANTILE, a California General Partnership ("Landlord") and
FALLBROOK NATIONAL BANK, a California Corporation ("Tenant"), who agree as
follows:
1. Landlord and Tenant entered into a Lease dated April 1, 1994, in which
Landlord leased to Tenant and Tenant leased from Landlord the premises described
in Paragraph 1.4 of the Lease (the "Premises").
2. Pursuant to Paragraph 1.7 of the Lease, Landlord and Tenant agree to
confirm the commencement and expiration dates of the Term, and the commencement
date of rent, as follows:
a. April 1, 1994, is the Commencement Date of the Term of the Lease;
b. March 31, 2002, the Expiration Date of the Term of Lease;
c. April 1, 1994, is the Commencement Date of Rent under the Lease;
d. April 1, 1994, is the Commencement Date of Other Periodic Payments
under the Lease.
3. Tenant confirms that:
a. It has accepted possession of the Premises as provided in the Lease;
b. The improvements and space required to be furnished by Landlord under
the Lease have been furnished;
c. Landlord has fulfilled all its duties of an inducement nature;
d. The Lease has not been modified, altered, or amended, except as
follows:
NONE;
e. There are no setoffs or credits against rent, and no security deposit
has been paid except as provided by the Lease;
f. Tenant has no notice of a prior assignment, hypothecation, or pledge
of rent, or of the Lease; and
g. The Lease is in full force and effect.
4. The provisions of this Confirmation of Term of Lease shall inure to the
benefit, or bind, as the case may require, the parties and their respective
successors subject to the restrictions on assignment and subleasing contained in
the Lease.
Landlord: FALLBROOK MERCANTILE
A CALIFORNIA GENERAL PARTNERSHIP
By: /s/ Robert W. Carson
-----------------------------------------
Robert W. Carson, General Partner
By: /s/ Michael R. Perry
-----------------------------------------
Michael R. Perry, General Partner
Tenant: FALLBROOK NATIONAL BANK
A CALIFORNIA CORPORATION
By: /s/ [ILLEGIBLE]
-----------------------------------------
Its: PRESIDENT & CEO
-----------------------------------------
By: /s/ [ILLEGIBLE]
-----------------------------------------
Its: SENIOR VICE PRESIDENT
-----------------------------------------
<PAGE>
RIDERS
Riders One (1) through Five (5) of that certain Lease, dated March 1 1994, by
and between Fallbrook Mercantile, a California General Partnership ("Landlord")
and Fallbrook National Bank, a California Corporation ("Tenant").
RIDER ONE - SPACE CANCELLATION
Tenant shall have the option to vacate Suite 855-I on June 1, 1994 or April
1, 1995 after providing the Landlord with thirty (30) days written notice of
their intention to vacate. In the event that the Tenant elects to exercise
said option to vacate, Tenant will reinstall the demising wall necessary to
separate the suites as well as make any other construction changes such as
electrical and HVAC to separate the suites and create a separate suite for
Suite I. Additionally, Tenant will leave any carpeting, draperies or other
tenant improvements that have been installed in Suite I. Immediately after
notice has been received by Landlord from Tenant, Landlord will prepare a
Lease Amendment eliminating Suite I from the space and reducing the rental
and impounds effective either June 1, 1994 or April 1, 1995 depending upon
when the election is made in proportion to the reduction in the square
footage (i.e. 1,300 square feet x $1.10 per square foot = $1,430 minimum
monthly rental reduction).
RIDER TWO - SHEAR/LOAD BEARING WALLS
Tenant acknowledges that the demising wall between Suites L and M is a
shear or load-bearing wall and that the Tenant will be limited to creating,
at Tenant's expense, one access doorway in the subject wall. The four foot
(4') access doorway will be located in the immediate front (first four (4)
feet) of the subject demising wall. Tenant agrees to make no other access
penetrations in said shear/load bearing wall.
RIDER THREE - SIGNAGE
Tenant shall be allowed the standard tenant canopy signage on the east and north
elevations of the premises as well as a building sign facing Fallbrook Street
and a monument sign in the planter at the driveway located immediately adjacent
to the premises. Said monument sign may be located on either side of the subject
driveway at the discretion of Fallbrook National Bank. The size and location of
the signage on the north wall shall be approved by Landlord and the governmental
agencies prior to installation. The size of the monument sign will also require
approval by the Landlord and the appropriate governmental agencies prior to
installation.
RIDER FOUR - CONDITION OF THE PREMISES/TENANT IMPROVEMENT ALLOWANCE
In accordance with Section 7.1 of the Lease, Tenant shall take the Premises
in an "as-is" condition. Landlord, prior to the Lease Commencement Date of
the Lease, will have all of the existing restaurant equipment removed from
the Premises. The Landlord will provide a Tenant Improvement Allowance to
Tenant of Four Thousand Five Hundred Seventy-Eight Dollars ($4,578.00) for
tenant improvement construction in 855 Main Avenue, Suites M, N, and 0. Said
allowance will be payable on or before July 1, 1994.
RIDER FIVE - CONTINGENCY
This Lease Agreement is contingent upon Landlord's receipt of final written
approval of the Lease Transaction from Nationwide Life Insurance Company.
<PAGE>
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE IS MADE EFFECTIVE AS OF MARCH 1, 1995 BY AND
BETWEEN FALLBROOK MERCANTILE, A CALIFORNIA GENERAL PARTNERSHIP ("LANDLORD") AND
FALLBROOK NATIONAL BANK ("TENANT") WITH REFERENCE TO THE FACTS SET FORTH BELOW.
RECITALS
A. Landlord and Tenant are parties to that certain lease dated March 1, 1994,
and hereby express their mutual desire and intent to amend the terms of the
Lease by this First Amendment to Lease with those terms, covenants, and
conditions as hereinafter provided.
B. Landlord leased to Tenant a certain retail space consisting of
approximately 8,272 square feet identified as 855-I, J, K, L, M, N, and 0
South Main Avenue, Fallbrook, California 92028 (the "Premises").
C. Landlord and Tenant desire to amend and modify the lease document effective
April 1, 1995.
NOW, THEREFORE, IN CONSIDERATION OF THE RECITALS AND FOR OTHER GOOD AND
VALUABLE CONSIDERATION, THE RECEIPT AND SUFFICIENCY OF WHICH ARE HEREBY
ACKNOWLEDGED, THE PARTIES HERETO AGREE AS SET FORTH BELOW.
1. SECTION 1.4 shall now read, "the original location of the Premises was
outlined in red on the site plan of the Shopping Center, attached to the
original Lease as Exhibit "A" and made a part thereof." The Landlord and
Tenant are now amending the Lease to eliminate Suite 855-I South Main
Avenue, Fallbrook, California 92028 from the Lease premises. Therefore, the
revised Premises shall otherwise be known as 855-J, K, L, M, N, and 0 South
Main Avenue, Fallbrook, California 92028 ("Address"). Said Premises being
agreed to for the purposes of this Lease to be reduced by eliminating 855-I
South Main Avenue, Fallbrook, California 92028 and thereby reducing the
overall square footage by 1,300 square feet, resulting in a total
approximate area of the new Premises of 6,972 square feet.
2. SECTION 1.11(a) - MINIMUM MONTHLY RENT shall be Seven Thousand Six
Hundred Sixty-Nine Dollars and Twenty Cents ($7,669.20) per month for the
period of April 1, 1995 through March 31, 1996, and shall be increased
pursuant to Section 1.11(a) of the Lease Agreement.
3. SECTION 1.11(b) - OTHER PERIODIC PAYMENTS shall be Two Thousand Two
Hundred Thirty-One Dollars and Four Cents ($2,231.04).
4. Except as modified herein, the Lease shall remain in full force and effect
as modified.
IN WITNESS WHEREOF THIS AMENDMENT TO LEASE IS EXECUTED AS OF THE DATE FIRST
WRITTEN ABOVE.
LANDLORD: FALLBROOK MERCANTILE
A California General Partnership
By:
------------------------------------------
Robert W. Carson, General Partner
By:
------------------------------------------
Michael R. Perry, General Partner
TENANT: FALLBROOK NATIONAL BANK
A California Corporation
By: /s/ [ILLEGIBLE]
----------------------------------------
Its: PRESIDENT/CEO
By: /s/ [ILLEGIBLE]
----------------------------------------
Its: SENIOR VICE PRESIDENT
<PAGE>
RIDERS
Riders One (1) through Five (5) of that certain Lease, dated March 1 1994, by
and between Fallbrook Mercantile, a California General Partnership ("Landlord")
and Fallbrook National Bank, a California Corporation ("Tenant").
RIDER ONE - SPACE CANCELLATION
Tenant shall have the option to vacate Suite 855-I on June 1, 1994 or April
1, 1995 after providing the Landlord with thirty (30) days written notice of
their intention to vacate. In the event that the Tenant elects to exercise
said option to vacate, Tenant will reinstall the demising wall necessary to
separate the suites as well as make any other construction changes such as
electrical and HVAC to separate the suites and create a separate suite for
Suite I. Additionally, Tenant will leave any carpeting, draperies or other
tenant improvements that have been installed in Suite I. Immediately after
notice has been received by Landlord from Tenant, Landlord will prepare a
Lease Amendment eliminating Suite I from the space and reducing the rental
and impounds effective either June 1, 1994 or April 1, 1995 depending upon
when the election is made in proportion to the reduction in the square
footage (i.e. 1,300 square feet x $1.10 per square foot = $1,430 minimum
monthly rental reduction).
RIDER TWO - SHEAR/LOAD BEARING WALLS
Tenant acknowledges that the demising wall between Suites L and M is a
shear or load-bearing wall and that the Tenant will be limited to creating,
at Tenant's expense, one access doorway in the subject wall. The four foot
(4') access doorway will be located in the immediate front (first four (4)
feet) of the subject demising wall. Tenant agrees to make no other access
penetrations in said shear/load bearing wall.
RIDER THREE - SIGNAGE
Tenant shall be allowed the standard tenant canopy signage on the east and north
elevations of the premises as well as a building sign facing Fallbrook Street
and a monument sign in the planter at the driveway located immediately adjacent
to the premises. Said monument sign may be located on either side of the subject
driveway at the discretion of Fallbrook National Bank. The size and location of
the signage on the north wall shall be approved by Landlord and the governmental
agencies prior to installation. The size of the monument sign will also require
approval by the Landlord and the appropriate governmental agencies prior to
installation.
RIDER FOUR - CONDITION OF THE PREMISES/TENANT IMPROVEMENT ALLOWANCE
In accordance with Section 7.1 of the Lease, Tenant shall take the Premises
in an "as-is" condition. Landlord, prior to the Lease Commencement Date of
the Lease, will have all of the existing restaurant equipment removed from
the Premises. The Landlord will provide a Tenant Improvement Allowance to
Tenant of Four Thousand Five Hundred Seventy-Eight Dollars ($4,578.00) for
tenant improvement construction in 855 Main Avenue, Suites M, N, and 0. Said
allowance will be payable on or before July 1, 1994.
RIDER FIVE - CONTINGENCY
This Lease Agreement is contingent upon Landlord's receipt of final written
approval of the Lease Transaction from Nationwide Life Insurance Company.
<PAGE>
RIDERS
Riders One (1) through Five (5) of that certain Lease, dated March 1 1994, by
and between Fallbrook Mercantile, a California General Partnership ("Landlord")
and Fallbrook National Bank, a California Corporation ("Tenant").
RIDER ONE - SPACE CANCELLATION
Tenant shall have the option to vacate Suite 855-I on June 1, 1994 or April
1, 1995 after providing the Landlord with thirty (30) days written notice of
their intention to vacate. In the event that the Tenant elects to exercise
said option to vacate, Tenant will reinstall the demising wall necessary to
separate the suites as well as make any other construction changes such as
electrical and HVAC to separate the suites and create a separate suite for
Suite I. Additionally, Tenant will leave any carpeting, draperies or other
tenant improvements that have been installed in Suite I. Immediately after
notice has been received by Landlord from Tenant, Landlord will prepare a
Lease Amendment eliminating Suite I from the space and reducing the rental
and impounds effective either June 1, 1994 or April 1, 1995 depending upon
when the election is made in proportion to the reduction in the square
footage (i.e. 1,300 square feet x $1.10 per square foot = $1,430 minimum
monthly rental reduction).
RIDER TWO - SHEAR/LOAD BEARING WALLS
Tenant acknowledges that the demising wall between Suites L and M is a
shear or load-bearing wall and that the Tenant will be limited to creating,
at Tenant's expense, one access doorway in the subject wall. The four foot
(4') access doorway will be located in the immediate front (first four (4)
feet) of the subject demising wall. Tenant agrees to make no other access
penetrations in said shear/load bearing wall.
RIDER THREE - SIGNAGE
Tenant shall be allowed the standard tenant canopy signage on the east and north
elevations of the premises as well as a building sign facing Fallbrook Street
and a monument sign in the planter at the driveway located immediately adjacent
to the premises. Said monument sign may be located on either side of the subject
driveway at the discretion of Fallbrook National Bank. The size and location of
the signage on the north wall shall be approved by Landlord and the governmental
agencies prior to installation. The size of the monument sign will also require
approval by the Landlord and the appropriate governmental agencies prior to
installation.
RIDER FOUR - CONDITION OF THE PREMISES/TENANT IMPROVEMENT ALLOWANCE
In accordance with Section 7.1 of the Lease, Tenant shall take the Premises
in an "as-is" condition. Landlord, prior to the Lease Commencement Date of
the Lease, will have all of the existing restaurant equipment removed from
the Premises. The Landlord will provide a Tenant Improvement Allowance to
Tenant of Four Thousand Five Hundred Seventy-Eight Dollars ($4,578.00) for
tenant improvement construction in 855 Main Avenue, Suites M, N, and 0. Said
allowance will be payable on or before July 1, 1994.
RIDER FIVE - CONTINGENCY
This Lease Agreement is contingent upon Landlord's receipt of final written
approval of the Lease Transaction from Nationwide Life Insurance Company.
<PAGE>
LEASE TERMINATION
THIS LEASE TERMINATION ("TERMINATION") IS ENTERED INTO THIS 14TH DAY OF
MARCH, 1994 BY AND BETWEEN FALLBROOK MERCANTILE, A CALIFORNIA GENERAL
PARTNERSHIP, HEREINAFTER REFERRED TO AS "LANDLORD," AND FALLBROOK NATIONAL
BANK, HEREINAFTER REFERRED TO AS "TENANT," BASED ON THE FOLLOWING FACTS:
A. The Landlord and Tenant mutually desire to terminate the Lease
Agreements, dated January 25, 1990, November 22, 1991, and
May 17, 1993 by and between the parties.
B. An accounting of the amounts due under the Leases through March 31, 1994 is
attached hereto and incorporated herein by this reference as Exhibit A.
C. The Landlord and Tenant hereto desire to terminate each of the Lease
Agreements.
THEREFORE, FOR SUFFICIENT CONSIDERATION, THE RECEIPT OF WHICH IS HEREBY
ACKNOWLEDGED, THE PARTIES AGREE AS FOLLOWS:
1. Effective March 31, 1994, the subject Leases are hereby terminated and of
no further force and effect subject to the following conditions:
a. Tenant and Landlord to execute this Agreement.
b. Tenant to remit the amount set forth in Exhibit B to Landlord.
c. Tenant and Landlord to execute the New Lease Agreement, dated March
1, 1994 for Suites I, J, K, L, M, N, and O South Main Avenue,
Fallbrook, California.
2. Tenant represents and warrants to Fallbrook Mercantile, that Tenant is the
sole Tenant under the Leases; that Tenant has full right, power and
authority to enter into this termination; that Tenant has not assigned its
interest under these Leases to any other party; that Tenant will indemnify
Landlord against and discharge any obligations due by Tenant to any
subcontractors, materialmen, suppliers, or any third parties, due as a
result of Tenant's occupancy in the subject Premises that could result in
a lien against the Landlord's fee interest in the subject property.
3. In the event of any dispute arising out of the termination, the
prevailing party shall be entitled to reasonable attorneys fees in
additional to any other remedy or law or equity.
WHEREFORE, THE PARTIES HERETO HAVE EXECUTED THIS TERMINATION ON THE DATE FIRST
WRITTEN ABOVE.
LANDLORD: FALLBROOK MERCANTILE,
A CALIFORNIA CORPORATION
By: /s/ Robert W. Carson March 14, 1994
--------------------------------- ----------------------
Robert W. Carson, General Partner Date
By: /s/ Michael R. Perry March 14, 1994
--------------------------------- ----------------------
Michael R. Perry, General Partner Date
LESSEE: FALLBROOK NATIONAL BANK
By: /s/ [ILLEGIBLE] March 8, 1994
--------------------------------- ----------------------
PRESIDENT & CEO Date
/s/ [ILLEGIBLE]
---------------------------------
SENIOR VICE PRESIDENT
<PAGE>
EXHIBIT A
Amounts Due: None
<PAGE>
LEASE TERMINATION
THIS LEASE TERMINATION ("TERMINATION") IS ENTERED INTO THIS 14TH DAY OF
MARCH, 1994 BY AND BETWEEN FALLBROOK MERCANTILE, A CALIFORNIA GENERAL
PARTNERSHIP, HEREINAFTER REFERRED TO AS "LANDLORD," AND FALLBROOK NATIONAL
BANK, HEREINAFTER REFERRED TO AS "TENANT," BASED ON THE FOLLOWING FACTS:
A. The Landlord and Tenant mutually desire to terminate the Lease Agreements,
dated January 25, 1990, November 22, 1991, and May 17, 1993 by and between
the parties.
B. An accounting of the amounts due under the Leases through March 31, 1994 is
attached hereto and incorporated herein by this reference as Exhibit A.
C. The Landlord and Tenant hereto desire to terminate each of the Lease
Agreements.
THEREFORE, FOR SUFFICIENT CONSIDERATION, THE RECEIPT OF WHICH IS HEREBY
ACKNOWLEDGED, THE PARTIES AGREE AS FOLLOWS:
1. Effective March 31, 1994, the subject Leases are hereby terminated and of
no further force and effect subject to the following conditions:
a. Tenant and Landlord to execute this Agreement.
b. Tenant to remit the amount set forth in Exhibit B to Landlord.
c. Tenant and Landlord to execute the New Lease Agreement, dated March
1, 1994 for Suites I, J, K, L, M, N, and O South Main Avenue,
Fallbrook, California.
2. Tenant represents and warrants to Fallbrook Mercantile, that Tenant is the
sole Tenant under the Leases; that Tenant has full right, power and
authority to enter into this termination; that Tenant has not assigned its
interest under these Leases to any other party; that Tenant will indemnify
Landlord against and discharge any obligations due by Tenant to any
subcontractors, materialmen, suppliers, or any third parties, due as a
result of Tenant's occupancy in the subject Premises that could result in
a lien against the Landlord's fee interest in the subject property.
3. In the event of any dispute arising out of the termination, the
prevailing party shall be entitled to reasonable attorneys fees in
additional to any other remedy or law or equity.
WHEREFORE, THE PARTIES HERETO HAVE EXECUTED THIS TERMINATION ON THE DATE FIRST
WRITTEN ABOVE.
LANDLORD: FALLBROOK MERCANTILE,
A CALIFORNIA CORPORATION
By: /s/ Robert W. Carson March 14, 1994
--------------------------------- ----------------------
Robert W. Carson, General Partner Date
By: /s/ Michael R. Perry March 14, 1994
--------------------------------- ----------------------
Michael R. Perry, General Partner Date
LESSEE: FALLBROOK NATIONAL BANK
By: /s/ [ILLEGIBLE] March 8, 1994
--------------------------------- ----------------------
PRESIDENT & CEO Date
/s/ [ILLEGIBLE]
---------------------------------
SENIOR VICE PRESIDENT
<PAGE>
EXHIBIT A
Amounts Due: None
<PAGE>
LEASE
Landlord hereby leases to Tenant and Tenant hereby hires from Landlord
the Premises hereinafter described on the terms and conditions set forth in
this Lease Agreement (hereinafter called this "Lease"), dated for reference
proposes only November 20, 1996.
BASIC LEASE PROVISIONS
The words and figures set forth in Paragraph A to X, inclusive, are part
of this Lease wherever appropriate reference is made thereto, unless they are
expressly modified elsewhere in this Lease.
A. Landlord: Home Savings of America, FSB
B. Tenant: Fallbrook National Bank
C. Building The building consisting of approximately 6,338
rentable square feet, and improvements located
at 27541 Ynez Road, Temecula, CA 92591
D. Premises: The property described as 27541 Ynez Road,
Temecula, CA 92591, consisting of the building
and the surrounding walkways, driveways,
parking lot, and landscaping, as depicted on
the cross-hatched illustration on Exhibit A of
this Lease.
E. Use of Premises: Tenants shall use the Premises for a bank and
other general office business purposes, and for
related uses, and shall not permit the premises
to be used for any other purpose, without
Landlord approval.
F. Term Commencement Date: The earlier of Tenant's opening for business or
April 1, 1997. In no event will the
commencement date be earlier than March 1, 1997.
G. Termination Date: March 31, 2007.
H. Minimum Monthly Rent: $9,824.00 NNN. (Nine Thousand Eight Hundred
Twenty Four Dollars). Subject to annual CPI
increases thereafter, however in no event shall
the rent in the current year be less than the
rent in the prior year.
I. Security Deposit: Intentionally deleted.
J. Prepaid Rent: $9,824.00 (Nine Thousand Eight Hundred Twenty
Four Dollars). (To be applied towards the
fourth month's rental).
K. Index: The Consumer Price Index (All Urban customers)
- Los Angeles/Anaheim/Riverside - All Items
compiled by the U.S. Department of Labor,
Bureau of Labor Statistics, 1967 = 100.
L. Beginning Index: The index which is published for the month of
February 1997.
M. Comparison Index: The index which is published for the month of
February each succeeding year after 1997.
N. Real Property Taxes: Tenant shall pay Landlord for all real property
tax, as defined herein; applicable to the Land
and Building during the term of this Lease,
commencing with the Term commencement date).
1
<PAGE>
O. Utilities: Tenant shall pay for all charges for water,
sewer, gas, electricity, light, heat, power
and trash services rendered directly to the
Lease Premises, commencing with the Term
commencement date).
P. Common Area Charges: Tenant shall be responsible for all Common Area
Maintenance, insurance impounds and real estate
tax impounds; or reimburse Landlord for such
amounts if billed directly to Landlord, or if
common area maintenance services are provided
by Landlord.
Q. Brokers: CB Commercial Real Estate, Michael Wilder.
R. Tenant Improvement None. Space shall be delivered in an "as is"
Allowance: condition, provided Landlord shall ensure the
electrical systems, HVAC, plumbing, drains and
roof are in good condition and good working
order.
S. Landlord's Address: Home Savings of America, FSB
Asset Management Department #2040
4900 Rivergrade Road
Irwindale, California 91706
Tenant's Address: Fallbrook National Bank
Attn: President, Chief Financial Officer, or
Executive Vice President.
130 West Fallbrook Street
Fallbrook, Ca 92028
T. Options: Two (2) successive Five (5) year options to
renew.
U. Possession: Tenant shall be allowed to take possession of
the premises immediately following full
execution of this lease document, for the
purposes of making tenant improvements, and
satisfaction of the insurance requirements
pursuant to this lease, paragraph 17. Tenant
shall begin payment of full net charges on
either April 1, 1997 or on opening for
business, whichever is earlier, however not to
occur before March 1, 1997.
V. Free Rent: Months 1, 2, and 3, (after the commencement
date), shall be free from base rent. Tenant
shall pay all net charges pursuant to section
N, O & P above.
W. ATM Machine: Landlord shall leave the drive through ATM on
the premises, and it will become part of the
Tenant's property. Tenant shall be responsible
for all maintenance, insurance, repairs, and
servicing. Tenant may remove such ATM at the
end of Tenant's term.
X. Furniture: Landlord shall leave the furniture and
equipment on the premises as listed on Exhibit
C attached hereto which shall become part of
Tenant's property.
2
<PAGE>
LEASE
1. PREMISES AND COMMON AREAS.
A. Subject to the terms and provisions herein contained, Landlord hereby
leases to Tenant and Tenant hereby leases from Landlord the Premises, for the
sole and exclusive use of Tenant and it's employees, agents, and invitees.
B. Intentionally Omitted.
2. TERM. This Lease shall be effective as of the date hereof, but the term
of this Lease shall commence on the Commencement Date and shall continue until
the Termination Date, unless extended or sooner terminated in accordance with
the provisions of this Lease
3. POSSESSION.
a. If Landlord, for any reason whatsoever, cannot deliver possession of
the Premises to Tenant at the commencement of the term hereof, this Lease shall
not be void or voidable, nor shall Landlord be liable to Tenant for any loss or
damage resulting therefrom, nor shall the expiration date of the above term be
in anyway extended, but in that event, all rent shall be abated during the
period between commencement of said term and the time when the Landlord delivers
possession.
b. In the event Landlord shall permit Tenant to occupy the Premises
prior to the commencement date of the term, such occupancy shall be subject to
all the provisions of this Lease. Said early possession shall not advance the
termination date herein above provided.
4. RENT. Tenant agrees to pay to Landlord the Minimum Monthly Rent on or
before the first day of the first full calendar month of the term hereof and a
like sum on or before the first day of each and every successive calendar month
thereafter during the term hereof, except that the fourth month's rent shall be
paid upon the execution hereof. Rent for any period during the term hereof which
is for less than one (1) month shall be a prorated portion of the monthly
installation herein, based upon a thirty (30) day month. Rental shall be paid
to Landlord, without deduction of offset in lawful money of the United States of
America, which shall be legal tender at the time of payment to such person or
place as Landlord may from time to time designate in writing.
Any costs incurred by Landlord in providing auxiliary aids or services or
in undertaking barrier removal efforts as defined in and pursuant to the
Americans With Disabilities Act of 1990 and the regulations promulgated
thereunder, as the same may be amended or supplemented from time to time, or in
any similar federal, state, or local law or ordinance which are directly
attributable to or arise primarily from Tenant's use or occupancy of the
Premises shall be deemed additional rent, and shall be paid in full by Tenant
within 30 days after Landlord gives Tenant written notice that such cost has
been incurred by Landlord.
All charges and other costs and expenses which Tenant is required to pay
hereunder, together with all interest and penalties that may accrue thereon
in the event of Tenant's failure to pay such amounts (including interest and
late charges), and all damages, costs and expenses which Landlord may incur by
reason of any default of Tenant or failure on Tenant's part to comply with the
terms of this Lease, including Landlord's reasonable attorneys' fees, shall be
deemed to be additional rent and, in the event of nonpayment by Tenant, Landlord
shall have all rights and remedies with respect thereto as Landlord has for the
nonpayment of Minimum Monthly Rent.
This Lease is what is commonly called a "Net, Net, Net Lease", it being
understood that the Landlord shall receive the rent set forth in this
Paragraph 4, free and clear of any and all other impositions, taxes, liens,
charges or expenses of any nature whatsoever in connection with the
ownership, leasing and operation of the Premises. In addition to the rent
reserved by this paragraph, Tenant shall pay to the parties respectively
entitled thereto all impositions, insurance premiums, operating charges,
maintenance charges, construction costs and any other charges, costs and
expenses shall constitute additional rent, and upon the failure of Tenant to
pay any of such costs, charges or expenses, Landlord shall have the same
rights and remedies as otherwise provided in this Lease for the failure of
Tenant to pay rent.
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4(a). PERIODIC COST-OF-LIVING ADJUSTMENT. The Minimum Monthly Rent provided
for in section H, shall be subject to adjustment at the commencement of the
escond (2nd) year of the term and each year thereafter ("the Adjustment Date")
as follows:
If the Index published nearest the Adjustment Date ("Extension Index")
has increased or decreased over the Beginning Index, the Minimum Monthly Rent
for the following year (until the next rent adjustment) shall be set by
multiplying the Minimum Monthly Rent set forth in the Basic Lease Provisions by
a fraction, the numerator of which is the Extension Index and the denominator of
which is the Beginning Index. In no case shall the Minimum Monthly Rent provided
be less than the Minimum Monthly Rent set forth in the Basic Lease Provisions.
On adjustment of the Minimum Rent provided in this Lease, the parties shall
immediately execute a letter stating the new Minimum Monthly Rent.
Notwithstanding the above, in no event shall the current rent be less than the
rent in the prior year.
If the Index is changed so that the base year differs from that used as
of two (2) months 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 had not been
discontinued or revised.
5. USE. Tenant shall use the Premises as described in the Basic Lease
Provisions and shall not use or allow the Premises to be used for any other
purpose without the prior written consent of Landlord, which consent shall not
be unreasonably withheld. Tenant shall not use or occupy the Premises in
violation of law or of the certificate of occupancy issued for the Building, and
shall, upon written notice from Landlord, discontinue any use of the Premises
which is declared by any governmental authority having jurisdiction to be a
violation of law or of said certificate of occupancy. Tenant, at its sole cost
and expense, except as may be provided elsewhere in this lease, , agrees to
comply with all laws, rules, regulations and directions of any governmental
authority having jurisdiction which shall, by reason of the nature of Tenant's
use or occupancy of the Premises, impose any duty upon Tenant or Landlord with
respect to the Premises or with respect to the use or occupation thereof. Tenant
shall not do or permit to be done anything which will invalidate or increase the
cost of any fire, extended coverage or any other insurance policy covering the
Building and shall comply with all rules, orders, regulations and requirements
of the Pacific Fire Rating Bureau or any other organization performing a similar
function. Tenant shall promptly, upon demand, reimburse Landlord for any
additional insurance premium charged by reason of Tenant's failure to comply
with the provisions of this Article. Tenant shall not allow the Premises to be
used for any improper, immoral, unlawful or objectionable purpose, nor shall
Tenant cause, maintain or permit any nuisance in, on or about the Premises.
Tenant shall not commit or suffer to be committed any waste in or upon the
Premises.
6. SURRENDER OF PREMISES. On expiration or termination of the term of the
Lease, Tenant shall surrender to Landlord the Premises and all Tenant's
improvements and alterations in good condition (except for ordinary wear and
tear occurring after the last necessary maintenance made by Tenant and
destruction to the Premises as covered by section 15), except for alterations
made necessary by the removal of any alterations or Tenant's personal property
within the time periods stated in this section.
Landlord can elect to retain or dispose of in any manner any alterations
or Tenant's personal property that Tenant does not remove from the Premises upon
vacating the Premises, by giving at least 15 days' notice to Tenant. Title to
any such alterations or Tenant's personal property that Landlord elects to
retain or dispose of on expiration of the 15 day period shall vest in Landlord.
Tenant waives all claims against Landlord for any damage to Tenant resulting
from Landlord's retention or disposition of any such alterations or Tenant's
personal property. Tenant shall be liable to Landlord for Landlord's cost of
storing, removing, and disposing of any alterations or Tenant's personal
property.
If Tenant fails to surrender the Premises to Landlord on expiration of
the term as required by this section, Tenant shall pay Landlord as rent during
any such holdover period one and one-half times the rent due under this Lease,
and Tenant shall agree to indemnify and hold Landlord harmless from all damages
resulting from Tenant's failure to surrender the Premises, including, without
limitation, claims made by a succeeding Tenant or from Landlord from Tenant's
failure to surrender the Premises.
7. CONSTRUCTION. REPAIRS AND MAINTENANCE. Subject to Paragraph 18 herein
regarding damage and destruction, the parties responsible for construction,
repairs and maintenance are as follows:
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A. TENANT'S OBLIGATIONS.
(1) Tenant shall be entitled to construct such initial leasehold
improvements to the Premises, at the outset of this Lease, as Tenant may
reasonably require in order that the Premises may be used for the purpose herein
specified (herein referred to as "Tenant's Work"). Tenant's Work shall be
performed by a reputable contractor or contractors, who shall be subject to
Landlord's approval, and in accordance with detailed plans and specifications
which shall be prepared by Tenant and submitted to Landlord in advance of the
commencement of Tenant's Work for Landlord's approval. Landlord's approval under
this paragraph shall not be unreasonably withheld.
(2) Tenant shall be responsible for all repairs and alterations in
and to the Premises, Building and the facilities and systems thereof, the need
for which arises out of (i) Tenant's use or occupancy of the Premises; (ii) the
installation, removal, use or operation of Tenant's property in the Premises;
(iii) the moving of Tenant's property into or out of the Building; or (iv) the
act, omission, misuse or negligence of Tenant, its agents, contractors,
employees or invitees.
(3) If Tenant fails to maintain the Premises in good order,
condition and repair, then Landlord shall give Tenant written notice to perform
such work to maintain the premises in good order, condition and repair within
thirty (30) days of receipt of said notice. If Tenant has not performed such
work at the termination of the thirty (30) days from when Tenant received notice
to perform such work the Landlord shall have the right (but not the obligation)
to do such acts and expend such funds, at the expense of Tenant, as are
reasonably required to perform such work. Any amount so expended by Landlord
shall be paid by Tenant as Additional Rent promptly after demand with interest
at the maximum rate then allowed by law. Landlord shall have no liability to
Tenant for any damage, inconvenience or interference with the use of the
Premises by Tenant's as a result of performing any such work.
(4) Tenant shall do all acts required to comply with all applicable
laws, ordinances and rules of any public authority relating to its maintenance
obligations as set forth herein.
(5) Except as otherwise expressly provided in this Lease, Landlord
shall have no liability to Tenant, nor shall Tenant's obligations under this
Lease be reduced or abated in any manner whatsoever, by reason of any
inconvenience, annoyance, interruption or injury to business arising from
Landlord's making any reasonable repairs or changes which Landlord is required
by law to make in or to any portion of the Building or the Premises.
(6) Tenant shall give Landlord prompt notice of any damage to or
defective condition in any part or appurtenance of the Building's mechanical,
electrical, plumbing, HVAC or other systems serving, located in, or passing
through the Premises.
(7) Upon the expiration or earlier termination of this Lease, Tenant
shall return the Premises to Landlord clean and in the same condition as of the
date Tenant took possession, except for normal wear and tear and for any
previously improved reconfiguration. Any damage to the Premises, including any
structural damage, resulting from Tenant's use or from the removal of Tenant's
trade fixtures, furnishings and equipment shall be repaired by Tenant at
Tenant's expense.
B. LANDLORD'S OBLIGATIONS. Subject to Paragraph R of the basic lease
provisions, tenant agrees to accept possession of the Premises As Is and neither
Landlord shall be obligated to construct any other Tenant improvements.
8. ALTERATIONS AND ADDITIONS.
A. Except as provided in Article 7, Tenant shall not, without the prior
written consent of Landlord, make any alterations, decorations, additions or
improvements in or to the Premises.
B. Tenant covenants and agrees that all work done by Tenant shall be
performed in full compliance with all laws, rules, orders, ordinances,
directions, regulations and requirements of all governmental agencies, offices
and departments having jurisdiction. Tenant further covenants and agrees that
any mechanic's lien filed against the Premises or the Building for work claimed
to have been done for, or materials claimed to have been furnished to Tenant,
will be discharged by Tenant, by bond or otherwise, within thirty (30) days
after the filing thereof, at the cost and expense of Tenant. All alterations,
decorations, additions or improvements upon the Premises, made by Tenant shall,
unless
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Tenant elects otherwise, become the property of Landlord, and shall remain upon,
and be surrendered with the Premises, as a part thereof, at the end of the Term.
C. All articles of personal property and all business and trade fixtures,
machinery and equipment, furniture and movable partitions owned by Tenant or
installed by Tenant at its expense in the Premises (collectively, "Tenant's
Property") shall be and remain the property of Tenant and may be removed by
Tenant prior to Tenant's vacating the Premises, and provided further that Tenant
shall repair any damage caused by such removal. If Tenant shall fail to remove
all of Tenant's Property from the Premises upon termination of this Lease for
any cause whatsoever, Landlord may, at its option, remove the same in any manner
that Landlord shall choose, and store said effects without liability to Tenant
for loss thereof, and Tenant agrees to pay Landlord, as appropriate, upon demand
any and all expenses incurred in such removal, including court costs and
attorneys' fees and storage charges for any length of time that Tenant's
Property shall be in Landlord's or Landlord's possession, or Landlord may, at
its option, without notice, sell Tenant's Property, or any of the same, at
private sale and without legal process, for such price as Landlord may obtain
and apply the proceeds of such sale upon any amounts due Landlord.
9. CONDITION OF PREMISES. Tenant's taking possession of the Premises shall
conclusively establish that the Premises and the Building were at such time in
good and sanitary order, condition and repair.
10. ENTRY BY LANDLORD. Landlord and its authorized representatives shall at any
and all times have the right to enter the Premises, inspect the same, supply
janitorial service and any other service to be provided by Landlord to Tenant
hereunder, to show said Premises to prospective brokers, agents, buyers, tenants
or persons interested in an exchange, to post any notices required or allowed
under the provisions of this Lease, and alter, improve or repair the Premises
and any portion of the Building that Landlord may deem necessary or desirable,
without abatement of rent and may for that purpose erect scaffolding and other
necessary structures where reasonably required by the character of the work to
be performed, always providing that the entrance to the Premises shall not be
blocked thereby, and further providing that the business of Tenant shall not be
interfered with unreasonably. Subject to the foregoing, Tenant hereby waives any
claim for damages or for any injury or inconvenience to or interference with
Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and
any other loss occasioned thereby. For each of the aforesaid purposes, Landlord
shall at all times have and retain a key with which to unlock all of the doors
in, upon and about the Premises, excluding Tenant's vaults, safes and files, and
Landlord shall have the right to use any and all means which Landlord may deem
proper to open said doors in an emergency, in order to obtain entry to the
Premises without liability to Tenant except for any failure to exercise due care
of Tenant's property. Any entry to the Premises obtained by Landlord by any of
said means, shall not under any circumstances be construed or deemed to be a
forcible or unlawful entry into, or a detainer of, the Premises, or an eviction
of Tenant from the Premises or any portion thereof.
11. UTILITIES AND SERVICES. Utilities and services shall be furnished to the
Premises as provided by the Basic Lease Provisions. Landlord shall not be liable
for damages or otherwise for any failure or interruption of any utility services
or other service furnished to the Premises other than for any interruption which
may result from the negligent or intentional acts of Landlord, their agents,
servants or employees. No such failure or interruption shall entitle Tenant to
terminate this Lease or withhold or abate payment of Rent or other sums due
hereunder.
12. PERSONAL PROPERTY TAXES. Tenant shall pay, or cause to be paid before
delinquency, any and all taxes levied or assessed and which become payable
during the term hereof upon all Tenant's leasehold improvements, equipment,
furniture, fixtures and personal property located in the Premises: except that
which has been paid for by Landlord, or is the standard of the Building. In the
event any or all of the Tenant's leasehold improvements, equipment, furniture,
fixtures and personal property shall be assessed and taxed with the Building,
Tenant shall pay to Landlord its share of such taxes within ten (10) days after
delivery to Tenant by Landlord of a statement in writing setting forth the
amount of such taxes applicable to Tenant's property.
13. REAL PROPERTY TAXES. Upon written notice from Landlord, Tenant shall pay
Landlord the real property tax, as defined herein, applicable to the Premises
during the term of this Lease. As used herein, the term "real property tax"
shall include any form of real estate tax or assessment, general, special,
ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal
income or estate taxes) imposed on the Premises by any authority having the
direct or indirect power to tax, including any city, state or federal
government, or any school,
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agricultural, sanitary, fire, street, drainage or other improvement district
thereof, as against any legal or equitable interest of Landlord in the Premises
or in the real property of which the Premises are a part, as against Landlord's
right to rent or other income therefrom, and as against Landlord's business of
leasing the Premises.
If the Premises are not separately assessable, Tenant's liability shall be an
equitable portion of the real property taxes for all of the land and
improvements included within the tax parcel assessed, such proportion to be
determined by Landlord from the respective valuations assigned in the assessor's
work sheets or such other information as may be reasonably available. Landlord's
reasonable determination thereof, in good faith, shall be conclusive.
If Tenant believes the assessed value of the Premises is greater than the
actual market value, Tenant, with Landlord's prior written consent, which
consent will not be unreasonably withheld, may pursue a reassessment at it's
expense. Landlord shall cooperate with Tenant with such efforts. Tenant assumes
all risk and expenses and liabilities if the request is denied, or in the event
the assessed value is increased as a result of Tenant's request for
reassessment.
14. INDEMNIFICATION. Tenant hereby agrees to indemnify and hold harmless
Landlord against and from any and all claims arising from Tenant's use of the
Premises or the conduct of its business or from any activity, work, or thing
done, permitted or suffered by Tenant in or about the Premises, and further
agrees to indemnify and hold harmless Landlord against and from any and all
claims arising from any breach or default in the performance of any obligation
on Tenant's part to be performed under the terms of this Lease, or arising from
any act, neglect, fault or omission of Tenant, or of its agents or employees,
and from and against all costs, attorneys' fees, expenses and liabilities
incurred in or about such claim or any action or proceeding brought thereon. In
the event any action or proceeding is brought against Landlord by reason of any
such claim, Tenant upon notice from Landlord shall defend the same at Tenant's
expense by counsel approved in writing by Landlord as appropriate, which
approval will not be unreasonably withheld. Tenant, as a material part of the
consideration to Landlord, hereby assumes all risk as between Landlord and
Tenant only of damage to property or injury to persons in, upon or about the
Premises from any cause whatsoever, except that which is caused by the failure
of Landlord to observe any of the terms and conditions of this Lease or the
negligence or intentional act of Landlord, its agents, servants or employees.
15. DAMAGE TO TENANT'S PROPERTY. Landlord shall not be liable for any damage to
property entrusted to Landlord or any of its agents, servants or employees, for
loss of or damage to any property by theft or otherwise, for any injury or
damage to persons or property resulting from fire, explosion, falling plaster,
steam, gas, electricity, water or rain which may leak from any part of the
Building or from the pipes, appliances or plumbing works therein or from the
roof, street, or subsurface or from any other place or resulting from dampness
or any other cause whatsoever, except as may be proximately caused by negligence
or intentional act of Landlord, their agents, servants or employees. Tenant
shall give prompt notice to Landlord in case of fire or accidents in the
Premises or in the Building or of defects therein.
16. SUBROGATION. As long as their respective insurers so permit, Landlord and
Tenant hereby mutually waive their respective rights of recovery against each
other for any loss insured by fire, extended coverage and other property
insurance policies existing for the benefit of the respective parties. Each
party shall obtain any special endorsements, if required by their insurer to
evidence compliance with the aforementioned waiver.
17. INSURANCE. Tenant shall, at Tenant's expense, obtain and keep in force
during the term of this Lease a $1,000,000 Standard Commercial General Liability
policy insuring against all liability of Tenant and its authorized
representatives arising out of and in connection of Tenant's use or occupancy of
the Premises and all areas appurtenant thereto.
All public liability insurance and property damage insurance shall insure
performance by Tenant of the indemnity provisions of Section 14, and Landlord
shall be named as additional insured by the policy.
The limit of said insurance shall not, however, limit the liability of the
Tenant hereunder. Tenant may carry said insurance under a blanket policy,
providing, however, said insurance by Tenant shall have a Landlord's protective
liability endorsement attached thereto. If tenant shall fail to procure and
maintain said insurance, Landlord may, but shall not be required to, procure and
maintain same, but at the expense of Tenant. Insurance required hereunder, shall
be in companies rated AVI or better in "Best's Insurance
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Guide". Tenant shall deliver to Landlord prior to occupancy of the Premises
copies of polices of liability insurance required herein or certificates
evidencing the existence and amounts of such insurance with loss payable clauses
reasonably satisfactory to Landlord. No policy shall be cancelable or subject to
reduction of coverage except after ten (10) days' prior written notice to
Landlord.
Notwithstanding any other provision of this Lease to the contrary, Tenant
shall not be entitled to possession of the Premises unless and until
certificate(s) evidencing the existence of said insurance and evidence of
payment of premiums are delivered to Landlord no later than one full business
day prior to commencement of this Lease.
18. DAMAGE OR DESTRUCTION.
A. In the event the Building is damaged by fire or other perils then Tenant
shall give written notice to Landlord of such event.
B. Upon any termination of this Lease under this Article, the parties shall
be released thereby without further obligation to the other from the date
possession of the Premises is surrendered to Landlord except for the items which
have therefore accrued and are then unpaid.
C. Damage - Insured. If, during the term of this Lease, the premises and/or
the building and other improvements in which the premises are located are
totally or partially destroyed, rendering the premises totally or partially
inaccessible or unusable, and such damage or destruction was caused by a
casualty covered under an insurance policy required to be maintained hereunder,
Landlord shall restore the premises and/or the building and other improvements
in which the premises are located into substantially the same conditions as they
were immediately before such damage or destruction; provided that the
restoration can be made under the existing laws and can be completed within one
hundred twenty (120) working days after the date of such destruction or damage.
Such destruction or damage shall not terminate this Lease.
If the restoration cannot be made in said 120-day period, then within fifteen
(15) days after the parties hereto determine that the restoration cannot be made
in the time stated in this paragraph. Tenant may terminate this Lease
immediately by giving notice to Landlord and the Lease will be deemed canceled
as of this date of such damage or destruction. If Tenant fails to terminate this
Lease and the restoration is permitted under the existing laws, Landlord, at its
option, may terminate this Lease or restore the premises and/or the building and
other improvements in which the premises are located within a reasonable time
and this Lease shall continue in full force and effect. If the existing laws do
not permit the restoration, either party can terminate this Lease immediately by
giving notice to the other party.
Notwithstanding the above, if the Tenant is the insuring party and if the
insurance proceeds received by Landlord are not sufficient to effect such
repair, Landlord shall give notice to Tenant of the amount required in addition
to the insurance proceeds to effect such repair. Tenant may, at Tenant's option,
contribute the required amount, but upon failure to do so within thirty (30)
days following such notice, Landlord's sole remedy shall be, at Landlord's
option and with no liability to Tenant, to cancel and terminate this Lease. If
Tenant shall contribute such amount to Landlord within said 30-day period,
Landlord shall make such repairs as soon as reasonably possible and this Lease
shall continue in full force and effect. Tenant shall in no event have any right
to reimbursement for any amount so contributed.
D. Damage - Uninsured. In the event that the premises are damaged or destroyed
by a casualty which is not covered by the fire and extended coverage insurance
which is required to be carried under Paragraph 17, then Landlord shall restore
the same; provided that if the damage or destruction is to an extent greater
than ten percent (10%) of the replacement cost of the premises (exclusive of
Tenant's trade fixtures and equipment), then Landlord may elect not to restore
and to terminate this Lease. Landlord must give to Tenant written notice of its
intention not to restore within thirty (30) days from the date of such damage or
destruction, and if not given, Landlord shall be deemed to have elected to
restore and in such event shall repair any damage as soon as reasonably
possible. In the event that Landlord elects to give such notice of Landlord's
intention to cancel and terminate this Lease, then Tenant shall have the right,
within ten (10) days after receipt of such notice, to give written notice to
Landlord to Tenant's intention to repair such damage at Tenant's expense,
without reimbursement from Landlord, in which event the Lease shall continue in
full force and effect and Tenant shall proceed to make such repairs as soon as
reasonably possible. If the Tenant does not give such notice written such 10-day
period, this Lease shall be canceled and be deemed terminated as of the date of
the occurrence of such damage or destruction.
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E. Damage Near the End of the Term. If the premises are totally or partially
destroyed or damaged during the last twelve (12) months of the term of this
Lease, Landlord may, at Landlord's option, cancel and terminate this Lease as of
the date of the occurrence of such damage or destruction by giving written
notice to Tenant of Landlord's election to do so within thirty (30) days after
the date of the occurrence of such damage; provided, however, that if the damage
or destruction occurs within the last twelve (12) months of the term and if,
within fifteen (15) days after the date of such damage or destruction, Tenant
exercises any option to extend the term provided herein, then Landlord shall
restore the premises if obligated to do so as provided in Subparagraph 18(C) or
(D) above.
F. Abatement of Rent. If the premises are partially or totally destroyed or
damaged and Landlord or Tenant repairs or restores them pursuant to the
provisions of this Paragraph 10, then the rent payable hereunder for the period
during which such damage, destruction, repair or restoration continues shall be
abated in proportion to the degree to which Tenant's reasonable use of the
premises is impaired. Except for the abatement of rent. If any, Tenant shall
have no claim against Landlord for any damage suffered by reason of any such
damage, destruction, repair or restoration.
G. Trade Fixtures and Equipment. If Landlord is required or elects to restore
the premises as provided in this Paragraph 10, Landlord shall not be required to
restore Tenant's improvements, trade fixtures, equipment or alternations made by
Tenant, such excluded items being the sole responsibility of Tenant to restore
hereunder.
19. EMINENT DOMAIN.
a. If any portion of the Premises is taken by condemnation this Lease
shall remain in effect, except that Tenant can elect to terminate this Lease if
Tenant is materially unable to conduct its business in the Premises .
If Tenant elects to terminate this Lease, Tenant must exercise its right
to terminate pursuant to this section by giving notice to Landlord within 30
days after the nature and the extent of the taking have been finally determined.
If Tenant elects to terminate this Lease as provided in this section, Tenant
also shall notify Landlord of the date of termination, which date shall not be
earlier than 30 days nor later than 90 days after Tenant has notified Landlord
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
as designated by Tenant. If Tenant does not terminate this Lease within the 30
day period, this Lease shall continue in full force and effect, except that
Minimum Monthly Rent shall be equitably reduced.
b. If a party elects to terminate this Lease, it must terminate the Lease
pursuant to this section by giving notice to the other party within 30 days
after the nature and the 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 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 30 day
period, it shall continue in full force and effect.
20. DEFAULTS AND REMEDIES.
a. TENANT'S DEFAULT: The occurrence of any of the following shall
constitute a default by Tenant:
(1) Failure to pay rent when due, if the failure continues for five (5)
days after notice has been given to Tenant.
(2) Abandonment of the Premises (failure to occupy and operate the
Premises for ten (10) consecutive days shall be deemed an abandonment).
(3) Failure to perform any other provision of this Lease if the failure
to perform is not cured within thirty (30) days after notice has been given to
Tenant. If the default cannot reasonably be cured within thirty (30) days,
Tenant shall not be in default of this Lease if Tenant commences to cure the
default within the thirty (30) day period and diligently and in good faith
continues to cure the default.
(4) If any petition shall be filed against Tenant in any Court, whether
or not pursuant to any statute of the United States of America or of any state,
in any bankruptcy, reorganization, composition,
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extension, arrangement or insolvency proceedings, and Tenant shall thereafter be
adjudicated bankrupt, or if said proceedings shall not be dismissed within
ninety (90) days after the institution of the same, or if any such petition
shall be filed by Tenant or liquidators; or
(5) If, in any third party creditor proceedings, a receiver, receiver
and manager, trustee or liquidator shall be appointed for all or a substantial
portion of the Premises, and such receiver, receiver and manager, trustee or
liquidator shall not be discharged within ninety (90) days after the appointment
of such receiver, receiver and manager, trustee or liquidator; or
(6) If Tenant makes an assignment for the benefit of creditors.
Notice given under this section shall specify the alleged default and the
applicable Lease provisions, and shall demand that Tenant perform the
provision of this Lease or pay the rent that is in arrears, as the case may
be, within the applicable period of time, or quit the Premises. No such
notice shall be deemed a forfeiture or a termination of this Lease unless
Landlord so elects in the notice.
b. LANDLORD'S REMEDIES. Landlord shall have the following remedies if
Tenant commits a default. These remedies are not exclusive; they are cumulative
in addition to any remedies now or later allowed by law.
(1) Landlord can continue this Lease in full force and effect, and the
Lease will continue in effect as long as Landlord does not terminate Tenant's
right to possession, and Landlord shall have the right to collect rent when
due. During the period Tenant is in default, Landlord can enter the Premises
and relet them, or any part of them, to third parties for Tenant's account.
Tenant shall be liable immediately to Landlord for all costs Landlord incurs
in re-leasing the Premises, including, without limitation, broker's commissions,
expenses of remodeling the Premises required by the re-leasing, and like costs.
Re-leasing can be for a period shorter or longer than the remaining term of this
Lease. Tenant shall pay to Landlord the rent due under this Lease on the dates
the rent is due, less the rent Landlord receives from any re-leasing. No act by
Landlord allowed by this section shall terminate this Lease unless Landlord
notifies Tenant that Landlord elects to terminate this Lease. After Tenant's
default and for as long as Landlord does not terminate Tenant's right of
possession of the Premises, if Tenant obtains Landlord's consent Tenant shall
have the right to assign or sublet its interest in this Lease, but Tenant shall
not be released from liability.
(2) Landlord can terminate Tenant's right to possession of the Premises
at anytime.
No act by Landlord other than notice to Tenant shall terminate this
Lease. Acts of maintenance, efforts to relet the Premises, or the appointment of
a receiver on Landlord's initiative to protect Landlord's interest under this
Lease shall not constitute a termination of Tenant's right to possession. On
termination, Landlord has the right to recover from Tenant:
(i). The worth, at the time of the award, of the unpaid rent that
had been earned at the time of termination of this Lease;
(ii). The worth, at the time of the award, of the amount by which
the unpaid rent that would have been earned after the date of
termination of this Lease until the time of the award exceeds the
amount of the loss of rent that Tenant proves could have been
reasonably avoided;
(iii). The worth, at the time of the award, of the amount by which
the unpaid rent for the balance of the term after the time of award
exceeds the amount of the loses of rent that Tenant proves could be
reasonably avoided; and
(iv). Any other amount, and court costs, necessary to compensate
Landlord for all detriment proximately caused by Tenant's default.
"The worth, at the time of the award," as used in (i) and (ii) of this
section, is to be computed by allowing interest at the rate of 10% per annum.
"The worth, at the time of the award," as referred to iniii of this section, is
to be computed by discounting the amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of the award, plus 1%.
10
<PAGE>
21. ASSIGNMENT AND SUBLETTING. Except as a part of an acquisition or merger
(providing surviving entity has a net worth equal or greater to Tenant, and the
use of the Premises has not changed),Tenant shall not either voluntarily or by
operation of law, assign, transfer, mortgage, pledge, hypothecate or encumber
this Lease or any interest therein, and shall not Lease the said Premises or any
part thereof, or any right or privilege appurtenant thereto, or suffer any other
person (the employees, agents, servants and invitees of Tenant excepted) to
occupy or use the Premises, or any portion thereof, without the written consent
of Landlord first had and obtained, which consent shall not be unreasonably
withheld, and a consent to one assignment, subleasing, occupation or use by any
other person shall not be deemed to be a consent to any subsequent assignment,
subleasing, occupation or use by another person. Any such assignment or
subleasing without such consent shall be voidable and shall at the option of the
Landlord, constitute a default under this Lease.
Any such assignment shall be subject to the following provisions:
(a) Intentionally omitted.
(a) EXCESS RENT. Further, if for any proposed assignment or sublease
Tenant receives rent or other consideration either initially or over the
term of the assignment orsublease, in excess of the rent called for
hereunder, or in the case of the sublease of a portion of the Premises
in excess of such rent fairly allocable to such portion, after
appropriate adjustments to assure that all other payments called for
hereunder are taken into account, Tenant shall pay to Landlord as
additional rent hereunder fifty percent (50%) of the excess of each
such payment of rent or other consideration received by Tenant promptly
after its receipt.
(b) FINANCIAL INFORMATION. Notwithstanding the foregoing, before entering
into any assignment of this Lease or into a sublease of all or a part of
the Premises, Tenant shall give written notice to Landlord identifying the
intended assignee or subtenant by name and address, specifying the terms
of the intended assignment or Lease and providing Landlord with the
intended assignee's or subtenant's credit application, income tax returns,
financial statements and other financial information requested by
Landlord.
(c) ATTORNEY FEES FOR REVIEW. In connection with any proposed assignment
or sublease, if Landlord retains the services of an attorney to review the
transaction, Tenant shall pay to Landlord all reasonable attorneys' fees
incurred by Landlord in connection therewith, not to exceed $ 1,000.00.
Tenant shall pay such attorneys' fees to Landlord within thirty (30) days
after its receipt of written request therefor from Landlord.
(d) INVOLUNTARY ASSIGNMENT. No interest of Tenant in this Lease shall be
assignable by operation of law (including, without limitation, the
transfer of this Lease by testacy or intestacy). Each of the following
acts shall be considered an involuntary assignment: (a) if Tenant is or
becomes bankrupt or insolvent, makes an assignment for the benefit of
creditors, or institutes a proceeding under the Bankruptcy Act in which
Tenant is the bankrupt; or if Tenant is a partnership or consists of
more than one person or entity, if any partner of the partnership or other
such person or entity is or becomes bankrupt or insolvent, or makes an
assignment for the benefit of creditors; (b) if a writ of attachment of
execution is levied on this Lease; and (c) if, in any proceeding or action
to which Tenant is a party, a receiver is appointed with authority to take
possession of the Premises. An involuntary assignment shall constitute a
default by Tenant and Landlord shall have the right to elect to terminate
this Lease, in which case this Lease shall not be treated as an asset of
Tenant.
22. ESTOPPEL CERTIFICATE. Within twenty (20) days following any written
request which Landlord or Tenant may make from time to time, the other party
shall execute and deliver to the requesting party a statement certifying: (i)
the date of commencement of this Lease; (ii) the fact that this Lease is
unmodified and in full force and effect (or, if there have been modifications
hereto, that this Lease is in full force and effect, as modified, and stating
the date and nature of such modifications); (iii) the date to which the rental
and other sums payable under this Lease have been paid; and (iv) the fact that
there are no current defaults under this Lease by either Landlord or Tenant
except as specified in such statement. Landlord's or Tenant's failure to
deliver such statement within such time shall be conclusive upon such party
that this Lease is in full force and effect, without modification, that there
are no uncured defaults in performance by the requesting party, and that not
more than one (1) month's rental has been paid in advance.
11
<PAGE>
23. CHOICE OF LAW. This Lease shall be governed by the laws of the State in
which the Premises are located.
24. SUCCESSORS AND ASSIGNS. The covenants and conditions herein contained,
subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators and assigns of the parties hereto.
25. ATTORNEYS' FEES. If any action shall be instituted by either of the parties
hereto for the enforcement or interpretation of any of its rights or remedies
under this Lease, the prevailing party shall be entitled to recover from the
losing party all costs incurred by the prevailing party in said action and any
appeal therefrom, including reasonable attorneys' fees to be fixed by the court
therein. Said costs and attorneys' fees shall be included as part of the
judgment in any such action.
THIRD PARTY ACTIONS: If either party becomes a party to any litigation
concerning this Lease or the Premises, or any business or activity conducted
thereon by reason of any act or omission of the other party or its
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 representatives, the
party that causes the other party to become involved in the litigation shall be
liable to the other party for reasonable attorneys' fees and costs incurred by
it in the litigation.
26. LATE CHARGES. Tenant hereby acknowledges that late payment by Tenant to
Landlord of rent or other sums due hereunder will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Landlord by
terms of any mortgage or trust deed covering the Premises. Accordingly, if any
installment of rent or of a sum due from Tenant shall not be received by
Landlord or Landlord's designee within (10) days after written notice that said
amount is past due, then Tenant shall pay to Landlord a late charge equal to(5%)
percent of such overdue amount. The parties hereby agree such late charges
represent a fair and reasonable estimate of the cost that Landlord will incur by
reason of the late payment by Tenant. Acceptance of such late charges by the
Landlord shall in no event constitute a waiver of Tenant's default with respect
to such overdue amount, nor prevent Landlord from exercising any of the other
rights and remedies granted hereunder.
27. INTEREST ON TENANT'S OBLIGATIONS. Tenant agrees that any payment of Minimum
Monthly Rent or any other amount due from Tenant to Landlord under this Lease
which is not paid when due shall bear interest from the due date to the date of
payment at a rate of interest equal to the lesser of four percent (4%) above the
prime lending rate of Wells Fargo Bank, N.A. or any comparable bank or lending
institution selected by Landlord, or the maximum non-usurious rate permitted by
law. Landlord's acceptance of any interest shall not constitute a waiver of
Tenant's default with respect to the overdue amount or prevent Landlord from
exercising any of the other rights and remedies available to Landlord under this
Lease or any law now or hereafter in effect.
28. WAIVER. The waiver by Landlord of any breach of any term, covenant or
condition herein contained shall not be deemed to be a waiver of any subsequent
breach of the same or any other term, covenant or condition herein contained,
nor shall any custom or practice which may grow up between the parties in the
administration of the terms hereof be deemed a waiver of, or in any way effect,
the right of Landlord to insist upon the performance by Tenant in strict
accordance with said terms. The subsequent acceptance of Rent hereunder by
Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of
any term, covenant or condition of this Lease, other than the failure of Tenant
to pay the particular Rent so accepted, regardless of Landlord's knowledge of
such preceding breach at the time of acceptance of such rent.
29. TIME. Time is of the essence with respect to the performance of every
provision of this Lease in which time or performance is a factor.
30. NOTICES. Whenever Landlord, Landlord or Tenant shall desire to give or serve
upon the other any notice, demand, request or other communication with respect
to this Lease or with respect to the Premises, each such notice, demand, request
or other communication shall be in writing and shall not be effective for any
purpose unless the same shall be given or served by personal delivery or by
mailing the same to such party or parties by certified or registered mail,
postage prepaid, return receipt requested, at the addresses as defined in the
Basic Lease Provisions or at such other address or addresses as Landlord or
Tenant may from time to time designate by notice to the other party given in the
manner aforesaid.
12
<PAGE>
Every notice, demand, request or communication hereunder sent by mail shall be
deemed to have been given or served as of the third business day following the
date of such mailing.
31. PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all of the agreements of
the parties hereto with respect to any matter covered or mentioned in this
Lease, and no prior agreement or understanding pertaining to any such matter
shall be effective for any other purpose. No provision of this Lease may be
amended or added to except by an agreement in writing signed by the parties
hereto or their respective successors in interest.
32. SEVERABILITY. Any provision of this Lease which shall prove to be invalid,
void or illegal in no way affects, impairs or invalidates any other provision
hereof, and such other provisions shall remain in full force and effect.
33. ACCORD AND SATISFACTION. No payment by Tenant or receipt by Landlord of a
lesser amount than the rent payment herein stipulated shall be deemed to be
other than on account of the Rent, nor shall any endorsement or statement on any
check or any letter accompanying any check or payment as rent be deemed an
accord and satisfaction, and Landlord may accept such check or payment without
prejudice to Landlord's right to recover the balance of such rent or pursue any
other remedy provided in this Lease.
34. Intentionally omitted.
35. PARKING. Tenant shall be entitled to park cars and "sign" the parking lot to
regulate parking, pursuant to the rules and regulations Tenant may impose,
subject to the provisions elsewhere in this lease regarding compliance with
applicable laws.
36. LIMITATION ON LIABILITY. Notwithstanding anything to the contrary in this
Lease, Tenant agrees that in the event of default by Landlord hereunder, there
shall be absolutely no personal liability of any person, firm or entity who or
which constitutes or comprises Landlord, and Tenant shall, subject to the rights
of Landlord's mortgagees, look solely to the interest of Landlord in the
Premises and any portion of the real property owned by Landlord in which the
Premises are located for the satisfaction of each and every remedy of Tenant
therefor. In this regard, neither Landlord nor any of its partners, officers,
employees, or agents shall be personally liable for any such default or for any
deficiency. The provisions of this section are not intended to limit the
Tenant's rights to seek injunctive relief or specific performance, or Tenant's
rights with respect to the proceeds of insurance, if any, specifically
maintained by Landlord for Tenant's benefit. The foregoing limitations shall
also apply to any successor to Landlord's interest in the Premises.
In the event of any sale by Landlord of its fee interest in the Premises,
Landlord shall be and is hereby entirely freed and relieved of all liability
under any and all of its covenants and unaccrued obligations contained in or
derived from this Lease arising out of any act, occurrence or omission occurring
after the consummation of such sale; provided that the purchaser, at such sale
or any subsequent sale of the Premises, shall in writing covenant with Tenant to
carry out any and all of the covenants and obligations of Landlord under this
Lease.
37. CORPORATE AUTHORITY. If Tenant is a corporation, each individual executing
this Lease on behalf of said corporation represents and warrants that he is duly
authorized to execute and deliver this Lease on behalf of said corporation, in
accordance with a duly adopted resolution of the board of directors of said
corporation or in accordance with the by-laws of said corporation, and that this
lease is binding upon said corporation in accordance with its terms.
38. JOINT OBLIGATION. If there be more than one Tenant, the obligations
hereunder imposed upon Tenants shall be joint and several.
39. MARGINAL HEADINGS. The marginal headings and section titles are not a part
of this Lease and shall have no effect upon the construction or interpretation
of any part hereof.
40. SUCCESSORS AND ASSIGNS. The covenants and conditions herein contained,
subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators and assigns of the parties hereto.
41. RECORDATION. Tenant shall not record this Lease or a short form memorandum
hereof without the prior written consent of the Landlord.
13
<PAGE>
42. QUIET POSSESSION. Upon Tenant paying the rent reserved hereunder and
observing and performing all the covenants, conditions and provisions on
Tenant's part to be observed and performed hereunder, Tenant shall have quiet
possession of the Premises for the entire term hereof, subject to all the
provisions of this Lease.
43. INABILITY TO PERFORM. This Lease and the obligations of Tenant hereunder
shall not be affected or impaired because Landlord is unable to fulfill any of
its obligations hereunder or is delayed in doing so, if such inability or delay
is caused by reason of strike, labor troubles, acts of God, or any other cause
beyond the reasonable control of Landlord.
44. SUBORDINATION. ATTORNMENT. Upon request of Landlord, Tenant will in writing
subordinate its right hereunder to the lien of any first mortgage, or first deed
of trust to any bank, insurance company or other lending institution, now or
hereafter in force against the land and Building, and to all advances made or
hereafter to be made upon the security thereof.
In the event any proceedings are brought for foreclosure, or in the
event of the exercise of the power of sale under any mortgage or deed of
trust made by the Landlord covering the Premises, Tenant shall attorn to the
purchaser upon any such foreclosure or sale and recognize such purchaser as
Landlord under this Lease.
The provisions of this Paragraph 14 to the contrary notwithstanding, and
so long as Tenant is not in default hereunder, this Lease shall remain in
full force and effect for the full term hereof.
45. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, whenever possible, be cumulative with all other remedies at
law or in equity.
46. SIGNS AND AUCTIONS. Tenant shall not place any sign upon the outside of the
Building or conduct any auction not within the normal course of Tenant's
business, without Landlord's prior written consent, which consent shall not be
unreasonably withheld. Tenant will have the monument sign as it stands with no
modifications, unless required by the City of Temecula. Should a change to the
sign be requested, approval of the change to the monument would require approval
of Tenant. Tenant is responsible for all governmental approvals and permits for
new building signage.
47. OPTIONS TO EXTEND. Landlord hereby grants Tenant two (2) options to extend
the Term of this Lease beyond the initial Term. Each option shall be for five
(5) year each. Each extension of the Term of this Lease for the Option Period
shall be upon the same terms and conditions as those herein specified as
applicable to the initial Term of this Lease except that Minimum Monthly Rent
shall be at the then fair market value.
If Tenant elects to exercise the Option, Tenant must do so by giving Landlord
written notice of such election not more than eighteen (18) months and not less
than six (6) months prior to the expiration of the then Term of this Lease. A
condition precedent to the effective exercise of each Option to extend the Term
shall be that Tenant shall not be in material default hereunder (or would be in
default but for the passage of time or the giving of notice, or both) either at
the time of giving notice of Tenant's election to exercise an Option or on the
effective date of the beginning of the applicable Option Period or at any time
between such dates. If Tenant properly gives notice of exercise of an Option
hereunder and the conditions thereto are satisfied, then the Term of this Lease
shall be extended for the additional Option Period covered by the Option which
is exercised. The Options granted herein are personal to the original Tenant
named herein and may not be transferred or assigned, whether separate from or as
an incident to an assignment or other transfer of Tenant's interest under this
Lease. Any attempted assignment or transfer of any Option shall cause the Option
in question to automatically cease and terminate and, in such event, this Lease
shall terminate upon the expiration of the then applicable Term. This limitation
on transfer of the option does not apply, however, to an assignment of the
lease, with option, to a successor entity to Tenant following acquisition or
merger. (as per paragraph 21).
(a) As used in this Section, the term "fair market rental rate" means the
annual amount per rentable square foot, projected during the relevant period,
that a willing, comparable, non-equity tenant (excluding sublease and assignment
transactions) would pay, and a willing, comparable landlord of a comparable
building in the area in which the Premises are located would accept, at arm's
length for an office of comparable size, quality and floor height and area as
the leased Premises taking into account the age, quality and layout of the
existing improvements in the leased area at issue and the condition of the
14
<PAGE>
building and taking into account items that professional real estate brokers
customarily consider, including, but not limited to, rental rates, space
availability, condition of existing improvements, tenant size, tenant
improvement allowances, operating expenses and allowances, reduced rent, free
rent, area demographics, traffic and any other lease concessions, if any, then
being charged or granted by Landlord or the lessors of such similar office
buildings. The fair market rental rate will be an effective rate, not
specifically including, but accounting for, the appropriate economic concessions
described above.
(b) Landlord will provide written notice of Landlord's determination of the
fair market rental rate ("FMRR") and the new rent rate not later than thirty
(30) days after the date upon which Tenant timely exercises its Option. Tenant
will have thirty (30) days ("Tenant's Review Period") after receipt of
Landlord's notice of the FMRR within which to accept such FMRR or to reasonably
object thereto in writing. Tenant's failure to object to the FMRR submitted by
Landlord in writing within Tenant's Review Period will conclusively be deemed
Tenant's approval and acceptance thereof. If Tenant reasonably objects to the
FMRR submitted by Landlord within Tenant's Review Period, Landlord and Tenant
will attempt in good faith to agree upon such FMRR using their best good faith
efforts. If Landlord and Tenant fail to reach agreement on such FMRR within
fifteen (15) days following the expiration of Tenant's Review Period (the
"Outside Agreement Date"), then each party's determination will be submitted to
appraisal in accordance with the provisions below.
(c) (i) Landlord and Tenant will each appoint one independent
appraiser who by profession must be a real estate broker who has been active
over the five (5) year period ending on the date of such appointment in the
leasing of offices located in area in which the Premises are located. Each
such appraiser will be appointed within fifteen (15) days after the Outside
Agreement Date.
(ii) The two appraisers selected shall agree upon the FMRR and if the
two appraised rental rates are within 10% of one another, the FMRR shall be the
average of the two rates established by the appraisers. If the two selected
appraisers cannot agree on the FMRR within 10%, the two appraisers will within
fifteen (15) days agree upon and appoint a third appraiser who shall be
qualified under the same criteria set forth herein above for qualification of
the initial two appraisers and the FMRR shall be determined within sixty (60)
days by the average of the three appraised rental rates established by the three
appraisers.
(iii) If either Landlord or Tenant fails to appoint an appraiser
within the time period specified in Subsection (c)(i) herein above, the
appraiser appointed by one of them will, within thirty (30) days following the
date on which the party failing to appoint an appraiser could have last
appointed such appraiser, establish the FMRR and notify Landlord and Tenant
thereof, and such appraiser's decision will be binding upon Landlord and Tenant.
(iv) The cost of appraisal (and, if necessary, arbitration) will be
shared by Landlord and Tenant equally.
(v) If the process described in Subsection (b) above and this
Subsection (c) has not resulted in a determination of the fair market rental
rate by the commencement of the applicable lease term, then the fair market
rental rate estimated by Landlord will be used until the appraiser(s) reach a
decision, with an appropriate rental credit and other adjustments for any
overpayments of Minimum Monthly Rent or other amounts based on the final
determination of the fair market rental rate.
48. ASBESTOS SURVEY. Landlord has surveyed the Building for asbestos containing
materials the results of which are attached hereto as exhibit D. Tenant
acknowledges the receipt of this information by the execution of this Lease.
49. BROKERS. Tenant warrants that it has had no dealings with any real estate
broker or agents in connection with the negotiation of this Lease other than
Broker(s) listed in section Q, and it knows of no other real estate broker or
agent who is entitled to commission in connection with this Lease. Landlord
shall pay the broker commission as agreed by agreement to the Brokers upon the
execution of the Lease.
50. RULES AND REGULATIONS. The rules and regulations attached to this Lease as
Exhibit B are made a part of this Lease and Tenant shall comply with them.
Landlord shall have the right from time to time to promulgate reasonable
amendments and reasonable additional rules and regulations for the safety, care,
and cleanliness of the Premises, including the Building, or for the preservation
of good order. On delivery of a copy of such amendments and additional rules and
regulations to Tenant, Tenant shall
15
<PAGE>
comply with the rules and regulations, and a violation of any of them shall
constitute a default by Tenant under this Lease.
51. Intentionally omitted.
52. PRIOR AGREEMENTS. This Lease contains all of the agreements of the parties
hereto with respect to any matter covered or mentioned in this Lease, and no
prior agreements or understanding pertaining to any such matters shall be
effective for any purpose. No provision of this Lease may be amended or added to
except by an agreement in writing signed by the parties hereto. This Lease shall
not be effective or binding on any party until fully executed by both parties
hereto.
Attached hereto and made a part hereof, are exhibits A, B, C and D.
IN WITNESS WHEREOF, the parties have executed this Lease the day and year first
above written.
LANDLORD:
HOME SAVINGS OF AMERICA, FSB
By: /s/ [ILLEGIBLE] Title: Assistant Vice President
--------------------------------- -------------------------
TENANT:
FALLBROOK NATIONAL BANK
By: /s/ Gary Youmans Title: Executive Vice President
---------------------------------- -------------------------
Gary Youmans
By: Title:
---------------------------------- -------------------------
16
<PAGE>
EXHIBIT A
LEASED PREMISES
[SITE PLAN]
<PAGE>
Exhibit B
Rules and Regulations
1. No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside
of the Building, without first obtaining the written consent of Landlord,
which consent will not be unreasonably withheld Landlord shall have the right
to remove any such sign, placard, picture, advertisement, name or notice (if
installed without Landlord's prior written approval), without notice to and
at the expense of Tenant.
Tenant shall not place anything or allow anything to be placed near the
glass of any window, door, partition or wall which may appear unsightly from
outside the Premises; provided, however, that Landlord may furnish and install a
Building standard window covering at all exterior windows. Tenant shall not
without prior written consent of Landlord cause or otherwise sunscreen any
window.
2. Intentionally omitted.
3. Intentionally omitted.
4. The toilet room, urinals, wash bowls and other apparatus shall not be used
for any purpose other than that of which they were constructed and 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 Tenant who, or whose employees or invitees shall have caused it.
5. Tenant shall not overload the floor of the Premises or in any way deface
the Premises or any part thereof.
6. Landlord shall have the right to prescribe the weight, size and position
of all safes and other heavy equipment brought into the Building and also the
times and manner of moving the same in and out of the Building. Safes or
other heavy objects shall, if considered necessary by Landlord, stand on
supports of such thickness as is necessary to properly distribute the weight.
Landlord will not be responsible for loss of or damage to any such safe or
property from any cause and all damage done to the Building by moving or
maintaining any such safe or other property shall be repaired at the expense
of Tenant.
7. Tenant shall not use, keep or permit to be used or kept any foul noxious
gas or substance in or on the Premises, except those used in a normal office
environment, or permit or suffer the Premises to be occupied or used in a
offensive or objectionable manner.
8. No cooking shall be done or permitted by any Tenant on the Premises,
(except in a typical business environment), nor shall the Premises be used
for storage of merchandise, for washing clothes, for lodging, or for any
improper, objectionable or immoral purposes.
9. Tenant shall not use or keep in the Premises or the Building any kerosene,
gasoline or inflammable or combustible fluid or material, or any toxic material,
or use any method of heating or air conditioning other than that supplied by
Landlord.
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<PAGE>
10. Landlord will direct electricians as to where and how telephone and
telegraph wires are to be introduced. No boring or cutting for wires will be
allowed without the consent of the Landlord. The location of telephones, call
boxes and other office equipment affixed to the Premises shall be subject to
the approval of Landlord. Tenant shall use only contractors designated by
Landlord for all phone work done in the building's main phone terminal room.
All approvals hereunder shall not be unreasonably withheld.
11. Intentionally omitted.
12. Landlord reserves the right to exclude or expel from the Building any
person who, in the judgment of Landlord, is intoxicated or under the
influence of liquor or drugs, or who shall in any manner do any act in
violation of any of the rules and regulations of the Building.
13. Intentionally omitted.
14. Landlord shall have the right, exercizable without notice and without
liability to Tenant, to change the name and street address of the Building of
which the Premises are a part.
15. Intentionally omitted.
16. Intentionally omitted.
17. Intentionally omitted.
18. All entrance doors in the Premises shall be left locked when the Premises
are not in use, and all doors opening to public corridors shall be kept closed
except for normal ingress and egress from the Premises.
19. Intentionally omitted
20. Intentionally omitted.
21. Users of the parking area will obey all posted signs and park only in
the areas designated for vehicles parking.
22. Unless otherwise instructed, every person using the parking area is
required to park and lock his own vehicle. Landlord will not be responsible
for any damages to vehicles, injury to persons or loss of property, all of
which risks are assumed by the party using the parking area.
23. Intentionally omitted.
24. Tenant shall be responsible for seeing that all of its employees,
subtenants, agents, or invitees comply with the applicable parking rules,
regulations, laws and agreements.
25. Landlord reserves the right to modify these rules and/or adopt such other
reasonable and nondiscriminatory rules and regulations consistent with the scope
of the rules herein, as it may deem necessary for the proper operation of the
parking area.
26. Such parking use as is herein provided is intended merely as license only
and no bailment is intended or shall be created hereby.
19
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Exhibit C
(Furniture list)
20
<PAGE>
Exhibit D
(Asbestos Survey)
[LOGO]
HOME SAVINGS
OF AMERICA (FSB)
Property Management - Dept. 2780 - 2500 Pellissier Place - Whittier -
California 90601-1505
Area Code (310) 908-2775 - FAX (310) 908-2774
Manager December 18, 1995
27541 Ynez Road
Temecula, California
ANNUAL ASBESTOS NOTIFICATION
At the request of Home Savings of America, Environmental Risk Department, The
Earth Technology Corporation conducted a survey for asbestos-containing
materials in the building located at 27541 Ynez Road, Temecula, California , on
March 19, 1993. The survey included visual observation of accessible areas,
construction material sampling and laboratory analysis. The Earth Technology
Corporation conducted the survey and laboratory analysis using procedures which
meet or exceed applicable state and federal government agency regulations. . An
Asbestos Survey Report was delivered to Home Savings of America confirming the
presence of asbestos-containing materials (ACM) in the facility. The report
contents include report conclusions, sampling and laboratory procedures, sample
logs, and specific sample locations. Employees may review the report during
normal business hours at the office of the branch manager.
Construction material sampled and found to contain asbestos were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
ASBESTOS CONTAINING MATERIALS LOCATION
- -----------------------------------------------------------------------------------------------
<S> <C>
12"x12" Vinyl Floor Tile & Mastic, Safe/Storage Room, Storage Room #2 & 3, Janitorial
Roof Tar Patch, Gray Room, Kitchen Roof/Penetrations & Devices
- -----------------------------------------------------------------------------------------------
</TABLE>
Asbestos is a chemical known to cause cancer and other serious diseases.
Asbestos-containing materials (ACM) generally do not pose a health threat
unless the asbestos fibers are disturbed, become airborne and are inhaled.
However, most people with asbestos related lung diseases were exposed to high
levels while working directly with asbestos products. Although job functions
of most employees do not require contact with ACM, it is important to follow
proper work practice to minimize potential for disturbing ACM and remember
the following rules:
1. Do not touch or handle any ACM,
2. Do not drill, cut or damage any ACM,
3. Immediately report any damaged ACM to your appropriate supervisor and
building manager.
An Operations and Maintenance (O&M) Program has been developed for the safe
management of ACM in the building. Procedures and specialized asbestos training
is provided for employees whose work may involve contact with ACM.
This notice is provided to you in compliance with California Health and Safety
Code #25915 et seq. YOU SHOULD BE AWARE THAT YOU ARE REQUIRED TO PROVIDE THIS
INFORMATION TO YOUR EMPLOYEES WITHIN 15 DAYS OF RECEIPT OF THIS NOTICE (NEW
EMPLOYEES MUST BE NOTIFIED WITHIN 15 DAYS OF START DATE).
For more information regarding potential health risks and general procedures and
handling restrictions for asbestos, contact your local, state or federal public
health agencies. For specific information regarding ACM in this facility, you
may call Home Savings Environmental Risk Management Department at
(818) 814-7987.
Sincerely,
Property Management Department
HOME SAVINGS OF AMERICA, F.S.B.
21
<PAGE>
FALLBROOK NATIONAL BANK
DIRECTOR'S INDEXED FEE CONTINUATION PROGRAM
I. DEFINITIONS
A. EFFECTIVE DATE:
The Effective Date of the Fallbrook National Bank Director's Indexed
Fee Continuation Program (the Plan) shall be September 24, 1996.
B. PLAN YEAR:
Any reference to "the Plan Year" shall mean a calendar year from
January 1 to December 31. In the year of implementation, the term
"the Plan Year" shall mean the period from the effective date to
December 31 of the year of the Effective Date.
C. RETIREMENT DATE:
Retirement Date shall mean retirement from service with the Bank
which becomes effective on the first day of the calendar month
following the month in which the Director reaches age sixty-five
(65) or such later date as the Director may actually retire.
D. TERMINATION OF SERVICE:
Termination of Service shall mean voluntary resignation by the
Director from service on the Board or failure of re-election to the
Board, prior to the Retirement Date.
E. PRE-RETIREMENT ACCOUNT:
A Pre-Retirement Account shall be established as a liability reserve
account on the books of the Bank for the benefit of each director in
the Plan. Prior to termination of service or a director's
retirement, such liability reserve account shall be increased or
decreased each Plan Year (including the Plan Year in which the
Directors ceases to serve on the Board) by an amount equal to the
annual earnings or loss for that Plan
<PAGE>
Year determined by the Index [described in subparagraph I (G)
hereinafter], less the Cost of Funds Expense for that Plan Year
[described in subparagraph I (H) hereinafter], divided by the number
of directors in the Plan [as defined in subparagraph I (I)
hereinafter] during that Plan Year.
F. INDEX RETIREMENT BENEFIT:
The Index Retirement Benefit for each director in the Plan shall be
equal to the annual earnings or loss determined by the Index
[subparagraph I (G)] less the Cost of Funds Expense [subparagraph I
(H)], divided by the number of directors in the Plan [subparagraph I
(I)], for each Plan Year in which the Index Retirement Benefit is
due.
G. INDEX:
The Index for any Plan Year shall be the aggregate annual after-tax
income from the life insurance contracts described in the attached
Exhibit "A" on the lives of the participating directors [described
in subparagraph I (I)], as defined by FASB Technical Bulletin 85-4.
This Index shall be applied as if such insurance contracts were
purchased on the effective date of the Plan.
If such contracts of life insurance are actually purchased by the
Bank then the actual policies as of the dates they were actually
purchased shall be used in calculations under this Agreement. If
such contracts of life insurance are not purchased or are
subsequently surrendered or lapsed, then the Bank shall receive
annual policy illustrations from the above named insurance
company(ies) on the increase in value from such policy(ies) as if
they had actually been in force which will be used to calculate the
amount of the Index.
In either case, references to the life insurance contract are merely
for purposes of calculating a benefit. The Bank has no obligation to
purchase such life insurance and, if purchased, the Director and his
beneficiaries shall have no ownership interest in such policy and
shall always have no greater interest in the benefits under this
Agreement than that of an unsecured creditor of Bank.
H. COST OF FUNDS EXPENSE:
The Cost of Funds Expense for any Plan Year shall be calculated by
taking the sum of the amount of premiums set forth in the Indexed
policies described above (Exhibit "A") plus the amount of any
after-tax benefits paid to any director pursuant to the Plan
(Paragraph II hereinafter) plus the
2
<PAGE>
amount of all previous years after-tax Costs of Funds Expense, and
multiplying that sum by the average after-tax cost of funds of the
Bank's One Year Treasury Instrument as filed with the Federal
Reserve or other primary Federal Regulator.
I. NUMBER OF PARTICIPATING DIRECTORS:
The Number of Participating Directors for any Plan Year shall be the
number of directors (including those in retirement status)
participating in the Plan as of December 31 of the previous year.
Participating directors are those directors listed on the attached
Exhibit B less any of those directors who have died. The policy of a
director who is no longer a participating director shall not be
considered when computing the Index [subparagraph I (G)] in any Plan
Year.
J. CHANGE OF CONTROL:
Change of Control shall be deemed to be the cumulative transfer of
more than fifty percent (50%) of the voting stock of the Bank
holding company from the Effective Date of this Agreement. For the
purposes of this Agreement, transfers on account of deaths or gifts,
transfers between family members or transfers to a qualified
retirement plan maintained by the Bank shall not be considered in
determining whether there has been a change in control.
K. NORMAL RETIREMENT AGE:
Normal Retirement Age shall mean the date on which the Director
attains age sixty-five (65).
II. INDEX BENEFITS
A. RETIREMENT BENEFITS:
Subject to subparagraph II (C) hereinafter, a director who remains
on the Board of the Bank until his Retirement Date defined in
subparagraph I (C), shall be entitled to receive the balance in his
Pre-Retirement Account in ten (10) equal annual installments
commencing thirty days following the Director's Normal Retirement
Date. In addition to these payments, commencing with the Plan Year
in which the Director attains his Retirement Date, the Index
Retirement Benefit (as defined in subparagraph I (F) above] for each
Plan Year shall be paid to the Director until his death.
3
<PAGE>
B. DEATH:
Should the Director die prior to having received the Pre-Retirement
Account, the unpaid balance of the Pre-Retirement Account shall be
paid to the beneficiary selected by the Director and filed with the
Bank. In the absence of or a failure to designate a beneficiary, the
unpaid balance shall be paid in a lump sum to the personal
representative of the Director's estate.
C. TERMINATION OF SERVICE:
Should a Director suffer a Termination of Service [subparagraph I
(D)], he shall be entitled to receive the vested percent from the
table below based on the Directors total years of service on the
Board, times the balance in the Pre-Retirement Account paid over ten
(10) years in equal installments commencing at the Director's Normal
Retirement Age [subparagraph I (K)]. In addition to these payments,
commencing in the Plan Year the Director reaches his Normal
Retirement age [subparagraph I (K)], the vested percent from the
table below based on the Directors total years of service on the
Board, times the Index Retirement Benefit for each year shall be
paid to the Director until his death.
<TABLE>
Total Number of
Full Years of Service
on the Board Vested Percent
------------ --------------
<S> <C>
less than 6 00%
6 20%
7 40%
8 60%
9 80%
10 or more 100%
</TABLE>
In addition, the Director shall receive one hundred percent (100%)
of his Deferred Compensation Account (as defined in Paragraph III)
immediately after a Termination of Service.
D. DISCHARGE FOR CAUSE:
Should the Director be discharged for cause at any time prior to his
Retirement Date, all Index Benefits under this Agreement
[subparagraphs II (A), (B) or (C)] shall be forfeited. The term
"for cause" shall mean gross negligence or gross neglect or the
commission of a felony or gross-
4
<PAGE>
misdemeanor involving moral turpitude, fraud, dishonesty or willful
violation of any law that results in any adverse effect on the bank.
If a dispute arises as to discharge "for cause", such dispute shall
be resolved by arbitration as set forth in this Agreement. However,
deferral benefits under Paragraph III shall continue to be due and
payable under the terms of this Agreement. Notwithstanding the
above, the bank may in it's sole discretion pay the Directors
Deferred Compensation Account to the Director in a lump sum upon
his discharge for cause. In such case this Agreement shall
terminate.
E. DEATH BENEFIT:
Except as set forth above, there is no death benefit provided under
this Agreement.
F. MINIMUM BENEFITS:
The minimum amount of the benefits described in Paragraph II,
hereof, shall be eight thousand dollars ($8,000) in each of the
first three year following the Director's retirement.
III. DEFERRAL BENEFITS
Any director wishing to defer any portion or all of his director fees may
elect to defer up to one hundred percent (100%) each year. However, the
aggregate fees deferred under this agreement may not exceed one hundred
thousand ($100,000) dollars. This limit applies to deferred fees only and
shall not include any interest credited on those deferred fees. The Bank
shall establish a Deferred Compensation Account in the name of the
Director, and credit that account with the deferrals. The Bank shall also
credit interest to the Deferred Compensation Account balance monthly. The
interest rate credited shall be the Bank's average portfolio yield for the
prior month, less two hundred (200) basis points.
The Director will make his election to defer by filing with the Bank a
written statement setting forth the amount and timing of the deferrals.
This statement must be filed prior to having earned the deferred income.
Upon the Director's Retirement Date or Termination of Service from the
Board [subparagraph I (C) and (D) herein above], the balance of the
Director's Deferred Compensation Account shall be payable to the Director
in equal annual
5
<PAGE>
installments of principle and interest at the rate of eight percent (8%)
per annum. Director may elect to have such payments made according to any
of the following options: lump sum, three years, five years, or ten years.
The Director shall make such payment election no later that one year prior
to Retirement Date. In the absence of an election, the benefit shall be
payable in three equal annual installments.
Should the Director die while there is a balance in his Deferred
Compensation Account, such balance shall be paid pursuant to subparagraph
II (C) herein above.
IV. RESTRICTIONS UPON FUNDING
The Bank shall have no obligation to set aside, earmark or entrust any
fund or money with which to pay its obligations under this Agreement. The
directors, their beneficiaries or any successor in interest shall be and
remain simply a general creditor of the Bank in the same manner as any
other creditor having a general claim for matured and unpaid compensation.
The Bank reserves the absolute right at its sole discretion to either fund
the obligations undertaken by this Agreement or to refrain from funding
the same and to determine the extent, nature and method of such funding.
Should the Bank elect to fund this Agreement, in whole or in part,
through the purchase of life insurance, mutual funds, disability policies
or annuities, the Bank reserves the absolute right, in its sole
discretion, to terminate such funding at any time, in whole or in part. At
no time shall any director be deemed to have any lien nor right, title or
interest in or to any specific funding investment or to any assets of the
Bank.
If the Bank elects to invest in a life insurance, disability or annuity
policy upon the life of the Director, then the Director shall assist the
Bank by freely submitting to a physical exam and supplying such additional
information necessary to obtain such insurance or annuities.
V. CHANGE OF CONTROL
Upon a Change of Control [as defined in subparagraph I (J) herein], if the
Director is subsequently terminated then he shall receive the benefits
promised in this Agreement upon attaining Normal Retirement Age, as if he
had been continuously
6
<PAGE>
serving the Bank until his Normal Retirement Age. The Director will also
remain eligible for all promised death benefits in this Agreement. In
addition, no sale, merger or consolidation of the Bank shall take place
unless the new or surviving entity expressly acknowledges the obligations
under this Agreement and agrees to abide by its terms.
This Director's Indexed Retirement Program adopted this 24th day of September,
1996.
FALLBROOK NATIONAL BANK
/s/ E. Steve LeFevre
-------------------------
Chairman of the Board
7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT A
<S> <C>
1. Assumed Insured: Merril J. Crow
Insurance Company: First Penn-Pacific Life Insurance Company
Policy Form: Flexible Premium Adjustable Life
Policy Name: Premier
Insured's Age: 76
Riders: None
Ratings: According to the health of the insured
Option: One
Face Amount: $260,000.00
Premiums Paid: $225,000.00
Number of Premium Payments: One
Assumed Purchase Date: July 27, 1996
2. Assumed Insured: Roy B. Hiscock
Insurance Company: First Penn-Pacific Life Insurance Company
Policy Form: Flexible Premium Adjustable Life
Policy Name: Premier
Insured's Age: 75
Riders: None
Ratings: According to the health of the insured
Option: One
Face Amount: $290,000.00
Premiums Paid: $228,013.86
Number of Premium Payments: One
Assumed Purchase Date: November 5, 1996
3. Assumed Insured: E. Steve LeFevre
Insurance Company: Alexander Hamilton Life Insurance
Policy Form: Flexible Premium Adjustable Life
Policy Name: Executive Security Plan III
Insured's Age: 63
Riders: None
Ratings: According to the health of the insured
Option: A
Face Amount: $180,000.00
Premiums Paid: $84,580.00
Number of Premium Payments: One
Assumed Purchase Date: October 29, 1996
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT A (CONTINUED)
<S> <C>
4. Assumed Insured: E. Steve LeFevre
Insurance Company: Alexander Hamilton Life Insurance
Policy Form: Flexible Premium Adjustable Life
Policy Name: Executive Security Plan III
Insured's Age: 62
Riders: None
Ratings: According to the health of the insured
Option: A
Face Amount: $200,000.00
Premiums Paid: $115,420.10
Number of Premium Payments: One
Assumed Purchase Date: June 28, 1995
5. Assumed Insured: Gordon T. Tucker
Insurance Company: Alexander Hamilton Life Insurance
Policy Form: Flexible Premium Adjustable Life
Policy Name: Executive Security Plan III
Insured's Age: 57
Riders: None
Ratings: According to the health of the insured
Option: One
Face Amount: $495,000.00
Premiums Paid: $200,000.00
Number of Premium Payments: One
Assumed Purchase Date: September 20, 1996
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT B
<S> <C>
Director Name: Merril J. Crow
Address: 2448 Gird Road, Fallbrook, California 92028
Date of Birth: July 28, 1919
Social Security Number: ###-##-####
Director Name: Roy B. Hiscock
Address: Box 1629, Fallbrook, California 92088
Date of Birth: November 18, 1920
Social Security Number: ###-##-####
Director Name: E. Steve LeFevre
Address: 1479 Los Amigos, Fallbrook, California 92028
Date of Birth: April 22, 1933
Social Security Number: ###-##-####
Director Name: Gordon T. Tucker
Address: 2561 Havencrest Drive, Fallbrook, California 92028
Date of Birth: February 4, 1939
Social Security Number: ###-##-####
</TABLE>
10
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement is made and is effective as of January 1, 1998, by and
between Fallbrook National Bank ("Bank") and Thomas E. Swanson ("Executive").
WHEREAS, Executive is currently employed by the Bank in the capacity as
President and Chief Executive Officer, and Executive's background, expertise and
efforts have contributed to the success and financial strength of the Bank; and
WHEREAS, the Bank wishes to assure itself of the continued opportunity to
benefit from Executive's services for the period provided in this Agreement, and
Executive wishes to serve in the employ of the Bank on a full-time basis solely
in accordance with the terms hereof for such purposes; and
WHEREAS, the Board of Directors of the Bank ("Board") has determined that
the best interests of the Bank would be served by Executive's continued
employment with the Bank under the terms of this Agreement;
NOW, THEREFORE, in order to effect the foregoing, the parties hereto wish
to enter into an employment agreement on the terms and conditions set forth
below. Accordingly, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. DEFINITIONS.
(a) "AGREEMENT" means this employment agreement and any amendments
hereto complying with Section 14(a) hereof.
(b) "BOARD" means the Board of Directors of the Bank unless the context
otherwise requires.
(c) "CAUSE" means:
(i) Executive's personal dishonesty, incompetence or willful
misconduct;
(ii) Executive's breach of fiduciary duty involving personal
profit;
1
<PAGE>
(iii) Executive's intentional failure to perform Executive's
duties for the Bank after a written demand for performance is given to
Executive by the Board which demand specifically identifies the manner
in which the Board believes that Executive has not performed his
duties;
(iv) Executive's willful violation of any law, rule,
regulation or final cease and desist order (other than traffic
violations or similar minor offenses) to the extent detrimental to the
Bank's business or reputation; or
(v) Executive's material breach of any provision of this
Agreement.
(d) "CHANGE IN CONTROL" means a change of control of the Bank of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A (or in response to any similar item on any
similar schedule or form) promulgated under the Securities Exchange Act, whether
or not the Bank is then subject to such reporting requirement; provided,
however, that without limitation, a Change in Control shall be deemed to have
occurred if:
(i) there is a transfer, voluntarily or by hostile takeover,
by proxy contest (or similar action), operation of law, or otherwise,
of Control of the Bank;
(ii) any Person is or becomes the "beneficial owner" (as
defined in Rules 13d-3 and l3d-5 under the Securities Exchange Act or
any successor provisions thereof), directly or indirectly, of
securities of the Bank representing 20% or more of the combined voting
power of the Bank's then outstanding securities;
(iii) the individuals who were members of the Board
immediately prior to a meeting of the shareholders of the Bank, which
meeting involves a contest for the election of directors, do not
constitute a majority of the Board following such meeting or election;
(iv) a merger, consolidation or sale of all or substantially
all of the assets of the Bank; or
(v) there is a change, during any period of two consecutive
years, of a majority of the Board as constituted as of the beginning of
such period, unless the election of each director who is not a director
at the beginning of such period was approved by a vote of at least
two-thirds of the directors then in office who were directors at the
beginning of such period.
2
<PAGE>
(e) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(f) "CONTROL" means the possession, direct or indirect, by any Person
or "group" (as defined in Section 13(d) of the Securities Exchange Act) of the
power to direct or cause the direction of the management policies of the Bank,
whether through ownership of voting securities, by contract or otherwise, and
in any case means the ability to determine the election of a majority of the
directors of the Bank.
(g) "DISABILITY" means physical or mental illness resulting in
Executive's absence on a full-time basis from Executive's duties with the Bank
for 180 calendar days, subject to the procedure described in Section 7(a).
(h) "EXPIRATION" means the termination of this Agreement (including
Executive's employment hereunder) and of any further obligations of the parties
(except as specified in this Agreement) upon completion of the Term.
(i) "PERSON" means an individual, a group acting in concert, a
corporation, a partnership, an association, a joint stock company, a trust, any
unincorporated organization, a government or political subdivision thereof, or
any other entity whatsoever.
(j) "RESIGN FOR GOOD REASON" OR "RESIGNATION FOR GOOD REASON" has the
meaning found in Section 7(e).
(k) "TERM" means the initial term of this Agreement and any extensions
hereof, as provided in Section 4, whether prior to or following a Change in
Control.
(l) "TERMINATION" OR "TERMINATE(D)" means the termination of
Executive's employment hereunder for any of the following reasons unless the
context indicates otherwise:
(i) Retirement by Executive;
(ii) Death of Executive;
(iii) Disability;
(iv) Expiration;
(v) Resignation for Good Reason;
(vi) Resignation other than Resignation for Good Reason;
3
<PAGE>
(vii) Termination Without Cause; and
(viii) Termination for Cause.
(m) "TERMINATION WITHOUT CAUSE" OR "TERMINATE(D) WITHOUT CAUSE" means
the cessation of Executive's employment hereunder for any reason except:
(i) A resignation by Executive;
(ii) Termination for Cause;
(iii) Retirement;
(iv) Disability;
(v) Death; or
(vi) Expiration.
2. EMPLOYMENT. The Bank hereby agrees to continue to employ the
Executive, and the Executive hereby agrees to continue to serve the Bank, for
the period stated in Section 4 hereof and upon the terms and conditions set
forth herein.
3. POSITION AND RESPONSIBILITIES. The Executive shall serve as President
and Chief Executive Officer of the Bank and, subject to the provisions of
Section 5 below, shall have such responsibilities, duties and authority as are
generally associated with such positions and as may from time to time be
assigned to the Executive by the Board that are consistent with such
responsibilities, duties and authority. During the Term of this Agreement, the
Executive shall devote all his time, attention, skill and efforts during normal
business hours to the business and affairs of the Bank.
4. TERM OF AGREEMENT. Subject to the terms and provisions of this
Agreement, this Agreement and the period of Executive's employment shall be
deemed to have commenced as of January 1, 1998, and shall continue for an
initial term of three (3) calendar years thereafter and any extensions
thereafter. The initial term shall automatically be extended for an
additional one (1) full calendar year without further action by the parties
on January 1, 1999, and on each succeeding January 1 thereafter, such that as
of each such January 1, this Agreement shall have a remaining term of three
(3 ) calendar years. Each party may stop an automatic calendar year
extension, however, by serving written notice ("Notice of Non-Renewal") upon
the other within 90 calendar days prior to January 1, 2001, or within 90
calendar days prior to January 1 of any succeeding year, as the case may be,
of such party's intention that this Agreement shall expire at the end of such
Term. In the
4
<PAGE>
event the Bank retains Executive as an employee following the expiration of the
Term, such employment, absent a written agreement to the contrary, will be on an
at-will basis with such compensation and upon such terms as the parties may then
agree, subject to termination at any time with or without cause, and without
liability. If the Bank does not retain Executive as an employee after the
Expiration of the Term, Executive's employment shall cease without further
liability of the parties to each other. Executive's employment shall also
terminate, and the Term of this Agreement will expire, upon Executive's
resignation (unless resignation is for Good Reason after a Change in Control),
retirement, death or Disability, or upon Executive's Termination for Cause.
5. DUTIES.
(a) The Bank and Executive hereby agree that, subject to the provisions
of this Agreement, the Bank shall employ Executive, and Executive shall serve
the Bank as an executive officer for the Term of this Agreement. The specific
executive position(s) in which Executive will serve will be designated from time
to time by the Board.
(b) During the Term hereof, Executive shall devote substantially all of
his or her business time, attention, skill and efforts to the faithful
performance of the business of the Bank to the fullest extent necessary to
properly discharge his or her duties and responsibilities hereunder. Executive's
position and duties with the Bank shall be as identified from time to time by
the Board of Directors of the Bank. Further, with the approval of the Board,
from time to time, Executive may serve, or continue to serve, on the boards of
directors of, and hold any other offices or positions in, companies or
charitable, political or civic organizations, which, in such Board's judgment,
will not present any material conflict of interest with the Bank and will not
unfavorably affect the performance of Executive's duties pursuant to this
Agreement.
(c) In addition, to the extent permitted by the National Bank Act and
consistent with the oversight responsibilities of the Board of Directors,
Executive shall have the full authority and support of the Board of Directors to
hire and fire all officers and employees of the Bank from time to time.
(d) Further, Executive shall have the full authority of the Bank and
the Board of Directors to execute contracts, leases and other related documents
for the purchase of capital equipment and improvements, provided such
expenditures and obligations are contained in and within the Annual Budget for
the Bank, which has been adopted or approved by the Board of Directors.
5
<PAGE>
6. SALARY, BONUS PAYMENTS AND RELATED MATTERS.
(a) SALARY. During the period of the Executive's employment hereunder,
the Bank shall pay to the Executive a base salary of One Hundred Fifty Thousand
Dollars ($150,000.00)) per year, payable at regular intervals in accordance with
the Bank's normal payroll practices now or hereafter in effect. Executive's
salary shall be reviewed at least annually by the Board or a committee
designated by the Board and shall be adjusted based upon Executive's job
performance and the Bank's financial condition and performance; provided,
however, that in no event shall Executive's monthly salary be lower than the
initial amount set forth above unless, in the good faith judgment of the Board,
the financial condition of the Bank requires a general decrease in the salaries
of executive officers of the Bank. The first such salary review shall be
undertaken no later than January 1, 1998 and completed no later than June 30,
1998. Notwithstanding the foregoing, if there is a Change in Control,
Executive's salary shall not be less than Executive's annual salary for the year
immediately preceding the Change in Control.
(b) INCENTIVE/BONUS PAYMENTS. During the period of the Executive's
employment hereunder, the Executive may receive such discretionary bonuses as
may be granted to him from time to time by the Board. In addition, Executive
shall be eligible to receive such bonuses, if any, as shall be awarded Executive
pursuant to Executive's Employee Incentive Plan.
(c) EXPENSES. During the period of the Executive's employment
hereunder, the Executive shall be entitled to receive prompt reimbursement for
all reasonable and customary expenses incurred by the Executive in performing
services hereunder in accordance with the general policies and procedures
established by the Bank.
(d) EMPLOYEE BENEFITS AND PERKS. During the period of the Executive's
employment hereunder, the Executive shall be entitled to participate in all
employee benefits plans or arrangements of the Bank on the same basis as other
employees of the Bank including, without limitation, plans or arrangements
providing medical insurance, dental insurance, life insurance, disability
insurance, sick leave, vacation or retirement. Executive shall also be entitled
to (i) the continuation of an automobile allowance in the amount of $750.00 per
month, (ii) use of the Bank provided credit card(s), car telephone(s), pager(s)
and such other perks (if such is (are) being so provided) upon the terms and
conditions previously in effect.
7. TERMINATION.
(a) RESIGNATION, RETIREMENT, DEATH OR DISABILITY. Executive's
employment hereunder shall cease at any time by Executive's resignation (other
than a resignation for Good Reason as provided in Section 7(e)), or by
Executive's retirement, death or Disability. Disability shall be deemed to have
occurred only after the following procedure has been satisfied: If within 30
days after a written notice of proposed Termination for Disability is given to
Executive by the Bank,
6
<PAGE>
Executive has not returned to the full-time performance of his duties, the Bank
may end Executive's employment by giving written notice of Termination for
Disability. Such notice may be given by the Bank following Executive's absence
from Executive's duties by reason of physical or mental disability for one
hundred and fifty (150) consecutive calendar days.
(b) TERMINATION FOR CAUSE. Executive's employment shall cease upon a
good faith finding of Cause by the Board; provided, however, that Executive
shall be given written notice of the Board's finding of conduct by Executive
amounting to Cause for such termination. Said notice shall be accompanied by a
copy of a resolution duly adopted by the affirmative vote of not less than a
majority of a quorum of the Board at a duly-noticed meeting of the Board,
finding that in the good faith opinion of the Board, Executive was guilty of
conduct amounting to Cause and specifying the particulars thereof; provided,
however, that after a Change in Control, such resolution may be adopted only by
the affirmative vote of not less than a majority of a committee composed of at
least three (3) disinterested outside directors of the Bank. In the absence of
at least three (3) disinterested outside directors, a determination of Cause
shall be submitted to and made by an arbitrator(s) pursuant to Section 13
hereof.
(c) TERMINATION WITHOUT CAUSE. Executive's employment may be terminated
Without Cause upon 30 days' notice for any reason, subject to the payment of all
amounts required by Section 8 hereof.
(d) EXPIRATION. Executive's employment shall cease, or shall continue
on an at-will basis as provided in Section 4 hereof, upon the expiration of the
Term of this Agreement as provided in Section 4 hereof.
(e) RESIGNATION FOR GOOD REASON. Following a Change in Control during
the Term hereof, Executive may, under the following circumstances, regard
Executive's employment as being constructively terminated by the Bank (and in
such case Executive's employment shall terminate) and may, therefore, Resign for
Good Reason within 90 days of Executive's discovery of the occurrence of one or
more of the following events, any of which shall constitute "Good Reason" for
such Resignation for Good Reason:
(i) Without Executive's express written consent, the
assignment to Executive of any duties materially inconsistent with
Executive's position, duties, responsibilities and status with the Bank
immediately prior to the Change in Control, or any subsequent removal
of Executive from or any failure to re-elect him to any such position;
(ii) Without Executive's express written consent, the
termination and/or material reduction in Executive's facilities
(including office space and general location) and staff reporting and
available to Executive immediately prior to the
7
<PAGE>
Change in Control;
(iii) A material reduction (ten percent or greater) by the
Bank of Executive's base salary or of any bonus compensation applicable
to him as in effect immediately prior to the Change in Control;
(iv) A failure by the Bank to maintain any of the employee
benefits and perks to which Executive was entitled immediately prior to
the Change in Control at a level substantially equal to or greater than
the value of those employee benefits and perks in effect immediately
prior to the Change in Control; or the taking of any action by the Bank
which would materially affect Executive's participation in or reduce
Executive's benefits under any such benefits or 'perks' plans, programs
or policies, or deprive Executive of any material fringe benefits
enjoyed by him immediately prior to the Change in Control;
(v) The Bank requiring Executive to be based anywhere other
than in the county in which the Bank's principal business location is
currently situated, except for required travel on the Bank's behalf to
an extent substantially consistent with Executive's present business
travel obligations;
(vi) Any purported Termination of Executive's employment by
the Bank other than those effected in good faith pursuant to Sections
7(a) and 7(b);
(vii) The failure of the Bank to obtain the assumption of this
Agreement by any successor; or
(viii) Receipt by Executive of a Notice of Non-Renewal.
(f) SUPERVISORY SUSPENSION. If the Executive is suspended and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Sections 8(e) or (g) of the Federal Deposit Insurance
Act or similar statute, rule or regulation, the Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
shall, (i) pay the Executive all or part of the compensation withheld while its
obligations under this Agreement were suspended and (ii) reinstate (in whole or
in part) any of its obligations which were suspended.
(g) REGULATORY REMOVAL. If the Executive is removed and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Sections 8(e) or (g) of the Federal Deposit Insurance Act or
similar statute, rule or regulation, all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order.
8
<PAGE>
8. PAYMENTS TO EXECUTIVE UPON TERMINATION.
(a) DEATH, DISABILITY OR RETIREMENT. In the event of Termination of
this Agreement due to Executive's death, Disability or retirement, Executive or
Executive's spouse and/or estate shall be entitled to all benefits generally
available to Bank employees, or their spouses and/or estates, as of the date of
such death, Disability or retirement, without reduction.
(b) RESIGNATION WITHOUT GOOD REASON OR EXPIRATION. In the event of
Executive's resignation (other than a Resignation for Good Reason), or upon
Expiration, the Bank shall have no further obligations to Executive under this
Agreement or otherwise, except as may be expressly required by law.
(c) TERMINATION FOR CAUSE. In the event Executive is Terminated for
Cause, the Bank shall have no further obligations to Executive under this
Agreement or otherwise, except as may be expressly required by law.
(d) TERMINATION WITHOUT CAUSE PRIOR TO A CHANGE IN CONTROL. Upon the
occurrence of a Termination Without Cause prior to a Change in Control, as
damages for breach of this Agreement, the Bank shall continue to provide
Executive his base salary then in effect, upon such terms and at such times as
described herein, for a period of 12 months following such Termination.
(e) TERMINATION WITHOUT CAUSE OR RESIGNATION FOR GOOD REASON, AFTER A
CHANGE IN CONTROL. If in the 24 month period following a Change in Control,
Executive (i) Resigns for Good Reason or (ii) is otherwise Terminated Without
Cause, the Bank shall pay to Executive a lump sum payment equal to 24 months
base salary then in effect. Such lump sum shall be paid not later than the tenth
(10th) day following the date of Termination Without Cause or a Resignation for
Good Reason.
(f) SOURCE OF PAYMENTS. All payments provided in Section 8 shall be
paid in cash from the general funds of the Bank, and no special or separate fund
need be established and no other segregation of assets need be made to assure
payment.
(g) CONSISTENT RETURNS. The Bank and Executive agree that the payments
being made under this Agreement represent reasonable compensation for services
and that neither the Bank nor Executive will file any returns or reports which
take a contrary position.
(h) REDUCTION OF PAYMENT. Notwithstanding anything in the foregoing to
the contrary, if the payments made to Executive following a Termination Without
Cause or Resignation
9
<PAGE>
For Good Reason or any of the other payments provided for in this Agreement,
together with any other payments which Executive has the right to receive from
the Bank would constitute a "parachute payment" (as defined in Section 280G of
the Code), the payments pursuant to this Agreement shall be reduced to the
largest amount as will result in no portion of such payments being subject to
the excise tax imposed by Section 4999 of the Code; provided, however, that the
determination as to whether any reduction in the payments under this Agreement
pursuant to this proviso is necessary shall be made in good faith by the Bank's
independent auditors or if such firm is no longer providing tax services to Bank
to such other tax advisor as shall be mutually acceptable to Bank and Executive,
and such determination shall be conclusive and binding on the Bank and Executive
with respect to the treatment of the payment for tax reporting purposes.
(i) SOLE REMEDY, The receipt of the amounts described in this Section
8, and attorneys' fees as set forth in Section 13, if any, shall constitute
Executive's sole remedy for breach of this Agreement against the Bank and its
officers, directors, employees and agents.
9. UNAUTHORIZED DISCLOSURE. During the period of his employment
hereunder and for a period of two years following the cessation of such
employment (irrespective of the reason therefor), Executive shall not, except as
required by any court, supervisory authority or administrative agency, without
the written consent of the Board or a person authorized thereby, disclose to any
person, other than an employee of the Bank or a person to whom disclosure is
reasonably necessary or appropriate in connection with the performance by the
Executive of his duties as an employee of the Bank, any confidential information
obtained by him while in the employ of the Bank; provided, however, that
confidential information shall not include any information known generally to
the public (other than as a result of an unauthorized disclosure by the
Executive).
10. AGREEMENT NOT TO COMPETE. To the extent permitted by law, unless
otherwise approved in writing by the Bank, and except for a Termination Without
Cause Prior to a Change in Control, for a period of one (1) year from the date
of his cessation of employment by the Bank, Executive shall not directly or
indirectly enter into or in any manner take part in any business, profession or
endeavor which shall be competitive with the business of the Bank in any city
where the Bank has a full service branch office as an employee, officer, agent,
independent contractor, 10% or more owner of an entity, director or other
business representative; in addition, Executive agrees that for the one (1) year
period described herein, Executive shall not solicit any customer with whom the
Bank has done business during the preceding five years.
11. WAIVERS NOT TO BE CONTINUED. Any waiver by a party of any breach of
this Agreement by the other party shall not be construed as a continuing waiver
or as a consent to any subsequent breach by the other party.
12. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed, certified
10
<PAGE>
or registered mail, return receipt requested, with postage prepaid, to the
following addresses or to such other address as either party may designate by
like notice.
A. If to the Bank, to:
Fallbrook National Bank
130 West Fallbrook Street
Fallbrook, California 92028
Attn: Chairman of the Board
B. If to Executive, to:
Thomas E. Swanson
c/o Fallbrook National Bank
130 West Fallbrook Street
Fallbrook, California 92028
and to such other or additional person or persons as either party shall have
designated to the other party in writing by like notice.
13. ARBITRATION. Any dispute or controversy arising or in connection
with this Agreement shall, upon written request of one party to the other, be
submitted to and settled exclusively by arbitration in the State of California
and be governed by the California Arbitration Act as set forth in the California
Code of Civil Procedure. Notwithstanding the pendency of any such dispute or
controversy, the Bank shall continue to pay Executive's full compensation in
effect when the notice giving rise to the dispute was given and continue
Executive as a participant in all compensation, employee benefits and executive
benefits in which Executive was participating when the notice giving rise to the
dispute was given, until the dispute is finally resolved, except that no such
continuation of compensation or benefits shall apply if Executive is terminated
for Cause under Section 7(b) hereof. Judgment may be entered on the arbitrator's
award in any court of competent jurisdiction. The cost of such arbitration,
including reasonable attorney's fees, shall be borne by the losing party or in
such proportions as the arbitrator(s) shall decide. Arbitration shall be the
exclusive remedy of Executive and the Company and the award of the
arbitrator(s) shall be final and binding upon the parties. All reasonable costs,
including reasonable attorney's fees, incurred in enforcing an arbitration award
in court, or of seeking a court order to compel arbitration, shall be borne by
the losing party in such proceedings.
14. GENERAL PROVISIONS.
(a) ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement by the
11
<PAGE>
parties with respect to the subject matter hereof, and supersedes and replaces
all prior agreements among or between the parties, unless otherwise provided
herein. No amendment, waiver or termination of any of the provisions hereof
shall be effective unless in writing and signed by the party against whom it is
sought to be enforced. Any written amendment, waiver, or termination hereof
executed by the Bank and Executive shall be binding upon them and upon all other
Persons, without the necessity of securing the consent of any other Person, and
no Person shall be deemed to be a third-party beneficiary under this Agreement.
(b) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same Agreement.
(c) NO WAIVER. Except as otherwise expressly set forth herein, no
failure on the part of any party hereto to exercise and no delay in exercising
any right, power or remedy hereunder shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power or remedy hereunder
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy.
(d) HEADINGS. The headings of the Sections of this Agreement have been
inserted for convenience of reference only and shall in no way restrict or
modify any of the terms or provisions hereof.
(e) SEVERABILITY. If for any reason any provision of this Agreement is
held invalid or unenforceable, such invalidity or unenforceability shall not
affect the validity or enforceability of any other provision of this Agreement.
If any provision of this Agreement shall be held invalid or unenforceable in
part, such invalidity or unenforceability shall in no way effect the rest of
such provision not held so invalid, and the rest of such provision, together
with all other provisions of this Agreement, shall to the full extent consistent
with law continue in full force and effect.
(f) GOVERNING LAW. This Agreement shall be governed and construed and
the legal relationships of the parties determined in accordance with the laws
the United States and to the extent not inconsistent therewith the laws of the
State of California applicable to contracts executed and to be performed solely
in the State of California.
(g) ASSUMPTION. The Bank shall require any successor in interest
(whether direct or indirect or as a result of purchase, merger, consolidation,
Change in Control or otherwise) to all or substantially all of the business
and/or assets of the Bank to expressly assume and agree to perform the
obligations under this Agreement in the same manner and to the same extent that
the Bank would be required to perform it if no such succession had taken place.
(h) ADVICE OF COUNSEL. Executive acknowledges that he has been
encouraged to
12
<PAGE>
consult with legal counsel of his choosing concerning the terms of this
Agreement prior to executing this Agreement. Any failure by Executive to consult
with competent counsel prior to executing this Agreement shall not be a basis
for rescinding or otherwise avoiding the binding effect of this Agreement. The
parties acknowledge that they are entering into this Agreement freely and
voluntarily, with full understanding of the terms of this Agreement.
Interpretation of the terms and provisions of this Agreement shall not be
construed for or against either party on the basis of the identity of the party
who drafted the terms or provisions in question.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
ATTEST: FALLBROOK NATIONAL BANK
/s/ Peter M. Estrada By: /s/ Granger Haugh
- -------------------------- ---------------------------
Its: Chairman of Bd.
---------------------------
print name: Granger Haugh
-------------------
THE EXECUTIVE
/s/ L. Bruce Mills, Jr. /s/ Thomas E. Swanson
- ----------------------------------- ------------------------------
Witness Thomas E. Swanson
13
<PAGE>
EXECUTIVE INCENTIVE AGREEMENT
Fallbrook National Bank (FNB) and Thomas Swanson, President, enter into this
Executive Incentive Agreement for Thomas Swanson, to be effective January 1,
1998:
I. Tom will be eligible for an incentive bonus equaling 50% of his annual
salary of $150,000 if he achieves 100% of the goals established by the
Board of Directors. This bonus will be paid out as follows:
a. 1/2 of Tom's incentive bonus will be paid as a cash incentive
totaling $37,500. This portion of Tom's incentive would be subject to
all applicable federal and state tax deductions.
b. 1/2 of Tom's incentive bonus will be paid in stock options utilizing
the Black-Scholes methodology to determine the number of shares to be
granted. The shares will be granted at the fair market value of said
shares on the date of grant in accordance e with the plan.
EXAMPLE: 50% OF INCENTIVE = $37,500 WHICH WILL EQUAL 12,669 SHARES
VESTED USING THE BLACK-SCHOLES VALUATION OF $2.96 PER SHARE.
- See attachment
c. Tom's incentive compensation will be paid based on the percent to
which he meets or exceeds his overall goals, up to a maximum of 200%:
- If 85% of the established goals are satisfied, Tom will be eligible
to receive 85% of the established incentive.
- If 100% of the established goals are satisfied, Tom will be eligible
for the entire incentive outlined in item I a & b..
- If the established goals are exceeded by greater than 100% up to
200%, Tom will be eligible to receive more than 100% of the incentive
up to 200%. The incentive will be pro-rated based on the amount the
goals have been exceeded. For example, if Tom exceeds the established
goals by 25% (or reached 125% of goal), he will be eligible for 125% of
his incentive.
This constitutes our entire agreement relating to Tom's Incentive Agreement.
This supersedes any other promises, representations or understandings, and it
cannot be modified except in writing signed as below. In the event that any
provision of this plan or any part hereof is found invalid, the remainder of
this plan will be binding upon the parties and will be construed as if the
invalid provision or part thereof had been deleted from this plan.
/s/ Thomas Swanson 9/9/98
- ------------------------------ -------------------
Thomas Swanson, President Date
/s/ Granger Haugh 9-24-98
- ------------------------------ -------------------
Granger Haugh, Chairman Date
<PAGE>
<TABLE>
<CAPTION>
INPUT VARIABLES fbrk, 1997
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Stock Price 46.50 8.65 9.25
- -----------------------------------------------------------------------------------------------------
Exercise Price 50.00 8.65 9.25
- -----------------------------------------------------------------------------------------------------
Term 1.00 5 2.5
- -----------------------------------------------------------------------------------------------------
Volatility 30.000% 0.001% 50.00%
- -----------------------------------------------------------------------------------------------------
Annual Rate of Qtrly Dividends 0.000% 3.700% 2.16%
- -----------------------------------------------------------------------------------------------------
Discount Rate - Bond Equiv. Yield 8.504% 7.200% 0.0575
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
INTERMEDIATE COMPUTATIONS
- -----------------------------------------------------------------------------------------------------
PV of Stock Ex-Ddividend 46.50 7.20 8.76
- -----------------------------------------------------------------------------------------------------
PV of Exercise Price 46.00 6.07 8.03
- -----------------------------------------------------------------------------------------------------
Cumulative Volatility 30.00% 0.00% 79.06%
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
CALL OPTION
- -----------------------------------------------------------------------------------------------------
Proportion of stock PV 57.37% 100.00% 69.37%
- -----------------------------------------------------------------------------------------------------
Proportion of exercise price PV -45.45% -100.00% -38.81%
- -----------------------------------------------------------------------------------------------------
Call Option Value 5.77 1.12 2.96
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
PUT OPTION
- -----------------------------------------------------------------------------------------------------
Proportion of stock PV -42.63% 0.00% -30.63%
- -----------------------------------------------------------------------------------------------------
Proportion of exercise price PV 54.55% 0.00% 61.19%
- -----------------------------------------------------------------------------------------------------
Put Option Value 5.27 0.00 2.23
- -----------------------------------------------------------------------------------------------------
call option value $ 2.96
- -----------------------------------------------------------------------------------------------------
times # options 3,000
- -----------------------------------------------------------------------------------------------------
$ 8,892.57
- -----------------------------------------------------------------------------------------------------
times tax rate or 41.3% $ 3,672.63
- -----------------------------------------------------------------------------------------------------
divided by term 10
- -----------------------------------------------------------------------------------------------------
equals compensation expense 367.26
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement is made and is effective as of January 1, 1998, by and
between Fallbrook National Bank ("Bank") and Gary M. Youmans ("Executive").
WHEREAS, Executive is currently employed by the Bank in the capacity as
Executive Vice President and Chief Operating Officer, and Executive's
background, expertise and efforts have contributed to the success and financial
strength of the Bank; and
WHEREAS, the Bank wishes to assure itself of the continued opportunity to
benefit from Executive's services for the period provided in this Agreement, and
Executive wishes to serve in the employ of the Bank on a full-time basis solely
in accordance with the terms hereof for such purposes; and
WHEREAS, the Board of Directors of the Bank ("Board") has determined that
the best interests of the Bank would be served by Executive's continued
employment with the Bank under the terms of this Agreement;
NOW, THEREFORE, in order to effect the foregoing, the parties hereto wish
to enter into an employment agreement on the terms and conditions set forth
below. Accordingly, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties hereto agree as follows:
I. DEFINITIONS.
(a) "AGREEMENT" means this employment agreement and any amendments
hereto complying with Section 14(a) hereof.
(b) "BOARD" means the Board of Directors of the Bank unless the context
otherwise requires.
(c) "CAUSE" means:
(i) Executive's personal dishonesty, incompetence or willful
misconduct;
(ii) Executive's breach of fiduciary duty involving personal
profit
1
<PAGE>
(iii) Executive's intentional failure to perform Executive's
duties for the Bank after a written demand for performance is given to
Executive by the Board which demand specifically identifies the manner
in which the Board believes that Executive has not performed his
duties;
(iv) Executive's willful violation of any law, rule,
regulation or final cease and desist order (other than traffic
violations or similar minor offenses) to the extent detrimental to the
Bank's business or reputation; or
(v) Executive's material breach of any provision of this
Agreement.
(d) "CHANGE IN CONTROL" means a change of control of the Bank of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A (or in response to any similar item on any
similar schedule or form) promulgated under the Securities Exchange Act, whether
or not the Bank is then subject to such reporting requirement; provided,
however, that without limitation, a Change in Control shall be deemed to have
occurred if:
(i) there is a transfer, voluntarily or by hostile takeover,
by proxy contest (or similar action), operation of law, or otherwise,
of Control of the Bank;
(ii) any Person is or becomes the "beneficial owner" (as
defined in Rules l3d-3 and 13d-5 under the Securities Exchange Act or
any successor provisions thereof), directly or indirectly, of
securities of the Bank representing 20% or more of the combined voting
power of the Bank's then outstanding securities;
(iii) the individuals who were members of the Board
immediately prior to a meeting of the shareholders of the Bank, which
meeting involves a contest for the election of directors, do not
constitute a majority of the Board following such meeting or election;
(iv) a merger, consolidation or sale of all or substantially
all of the assets of the Bank; or
(v) there is a change, during any period of two consecutive
years, of a majority of the Board as constituted as of the beginning of
such period, unless the election of each director who is not a director
at the beginning of such period was approved by a vote of at least
two-thirds of the directors then in office who were directors at the
beginning of such period.
(e) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
2
<PAGE>
(f) "CONTROL" means the possession, direct or indirect, by any Person
or "group" (as defined in Section 13(d) of the Securities Exchange Act) of the
power to direct or cause the direction of the management policies of the Bank,
whether through ownership of voting securities, by contract or otherwise, and in
any case means the ability to determine the election of a majority of the
directors of the Bank.
(g) "DISABILITY" means physical or mental illness resulting in
Executive's absence on a full-time basis from Executive's duties with the Bank
for 180 calendar days, subject to the procedure described in Section 7(a).
(h) "EXPIRATION" means the termination of this Agreement (including
Executive's employment hereunder) and of any further obligations of the parties
(except as specified in this Agreement) upon completion of the Term.
(i) "Person" means an individual, a group acting in concert, a
corporation, a partnership, an association, a joint stock company, a trust, any
unincorporated organization, a government or political subdivision thereof, or
any other entity whatsoever.
(j) "RESIGN FOR GOOD REASON" OR "RESIGNATION FOR GOOD REASON" has the
meaning found in Section 7(e)
(k) "TERM" means the initial term of this Agreement and any extensions
hereof, as provided in Section 4, whether prior to or following a Change in
Control.
(l) "TERMINATION" OR "TERMINATE(D)" means the termination of
Executive's employment hereunder for any of the following reasons unless the
context indicates otherwise:
(i) Retirement by Executive;
(ii) Death of Executive;
(iii) Disability;
(iv) Expiration;
(v) Resignation for Good Reason;
(vi) Resignation other than Resignation for Good Reason;
(vii) Termination Without Cause; and
3
<PAGE>
(viii) Termination for Cause.
(m) "TERMINATION WITHOUT CAUSE" OR "TERMINATE(d) WITHOUT CAUSE" means
the cessation of Executive's employment hereunder for any reason except:
(i) A resignation by Executive;
(ii) Termination for Cause;
(iii) Retirement;
(iv) Disability;
(v) Death; or
(vi) Expiration.
2. EMPLOYMENT. The Bank hereby agrees to continue to employ the Executive,
and the Executive hereby agrees to continue to serve the Bank, for the period
stated in Section 4 hereof and upon the terms and conditions set forth herein.
3. POSITION AND RESPONSIBILITIES. The Executive shall serve as Executive
Vice President and Chief Operating Officer of the Bank and, subject to the
provisions of Section 5 below, shall have such responsibilities, duties and
authority as are generally associated with such positions and as may from time
to time be assigned to the Executive by the Board that are consistent with such
responsibilities, duties and authority. During the Term of this Agreement, the
Executive shall devote all his time, attention, skill and efforts during normal
business hours to the business and affairs of the Bank.
4. TERM OF AGREEMENT. Subject to the terms and provisions of this
Agreement, this Agreement and the period of Executive's employment shall be
deemed to have commenced as of January 1, 1998, and shall continue for an
initial term of three (3) calendar years thereafter and any extensions
thereafter. The initial term shall automatically be extended for an additional
one (1) fall calendar year without further action by the parties on January 1,
1999, and on each succeeding January 1 thereafter, such that as of each such
January 1, this Agreement shall have a remaining term of three (3) calendar
years. Each party may stop an automatic calendar year extension, however, by
serving written notice ("Notice of Non-Renewal") upon the other within 90
calendar days prior to January 1, 2001 or within 90 calendar days prior to
January 1 of any succeeding year, as the case may be, of such party's intention
that this Agreement shall expire at the end of such Tenn. In the event the Bank
retains Executive as an employee following the expiration of the Term, such
employment, absent a written agreement to the contrary, will be on an at-will
basis with such compensation and
4
<PAGE>
upon such terms as the parties may then agree, subject to termination at any
time with or without cause, and without liability. If the Bank does not retain
Executive as an employee after the Expiration of the Term, Executive's
employment shall cease without further liability of the parties to each other.
Executive's employment shall also terminate, and the Term of this Agreement will
expire, upon Executive's resignation (unless resignation is for Good Reason
after a Change in Control), retirement, death or Disability, or upon Executive's
Termination for Cause.
5. DUTIES.
(a) The Bank and Executive hereby agree that, subject to the provisions
of this Agreement, the Bank shall employ Executive, and Executive shall serve
the Bank as an executive officer for the Term of this Agreement. The specific
executive position(s) in which Executive will serve will be designated from time
to time by the Board.
(b) During the Term hereof, Executive shall devote substantially all of
his or her business time, attention, skill and efforts to the faithful
performance of the business of the Bank to the fullest extent necessary to
properly discharge his or her duties and responsibilities hereunder. Executive's
position and duties with the Bank shall be as identified from time to time by
the Board of Directors of the Bank. Further, with the approval of the Board,
from time to time, Executive may serve, or continue to serve, on the boards of
directors of, and hold any other offices or positions in, companies or
charitable, political or civic organizations, which, in such Board's judgment,
will not present any material conflict of interest with the Bank and will not
unfavorably affect the performance of Executive's duties pursuant to this
Agreement.
6. SALARY, BONUS PAYMENTS AND RELATED MATTERS.
(a) SALARY. During the period of the Executive's employment hereunder,
the Bank shall pay to the Executive a base salary of One Hundred Thousand
Dollars ($100,000.00) per year, payable at regular intervals in accordance with
the Bank's normal payroll practices now or hereafter in effect. Executive's
salary shall be reviewed at least annually by the Board or a committee
designated by the Board and shall be adjusted based upon Executive's job
performance and the Bank's financial condition and performance; provided,
however, that in no event shall Executive's monthly salary be lower than the
initial amount set forth above unless, in the good faith judgment of the Board,
the financial condition of the Bank requires a general decrease in the salaries
of executive officers of the Bank. The first such salary review shall be
undertaken no later than January 1, 1998 and completed no later than June 30,
1998. Notwithstanding the foregoing, if there is a Change in Control,
Executive's salary shall not be less than Executive's annual salary for the year
immediately preceding the Change in Control.
(b) INCENTIVE/BONUS PAYMENTS. During the period of the Executive's
employment hereunder, the Executive may receive such discretionary bonuses as
may be granted to him from time
5
<PAGE>
to time by the Board. In addition, Executive shall be eligible to receive such
bonuses, if any, as shall be awarded Executive pursuant to Executive's Employee
Incentive Plan, attached.
(c) EXPENSES. During the period of the Executive's employment
hereunder, the Executive shall be entitled to receive prompt reimbursement for
all reasonable and customary expenses incurred by the Executive in performing
services hereunder in accordance with the general policies and procedures
established by the Bank.
(d) EMPLOYEE BENEFITS AND PERKS. During the period of the Executive's
employment hereunder, the Executive shall be entitled to participate in all
employee benefits plans or arrangements of the Bank on the same basis as other
employees of the Bank including, without limitation, plans or arrangements
providing medical insurance, dental insurance, life insurance, disability
insurance, sick leave, vacation or retirement. Executive shall also be entitled
to (i) the continuation of an automobile allowance in the amount of $750.00 per
month, (ii) use of the Bank provided credit card(s), car telephone(s), pager(s)
and such other perks (if such is (are) being so provided) upon the terms and
conditions previously in effect.
7. TERMINATION.
(a) RESIGNATION, RETIREMENT, DEATH OR DISABILITY. Executive's
employment hereunder shall cease at any time by Executive's resignation (other
than a resignation for Good Reason as provided in Section 7(e)), or by
Executive's retirement, death or Disability. Disability shall be deemed to have
occurred only after the following procedure has been satisfied: If within 30
days after a written notice of proposed Termination for Disability is given to
Executive by the Bank, Executive has not returned to the full-time performance
of his duties, the Bank may end Executive's employment by giving written notice
of Termination for Disability. Such notice may be given by the Bank following
Executive's absence from Executive's duties by reason of physical or mental
disability for one hundred and fifty (150) consecutive calendar days.
(b) TERMINATION FOR CAUSE. Executive's employment shall cease upon a
good faith finding of Cause by the Board; provided, however, that Executive
shall be given written notice of the Board's finding of conduct by Executive
amounting to Cause for such termination. Said notice shall be accompanied by a
copy of a resolution duly adopted by the affirmative vote of not less than a
majority of a quorum of the Board at a duly-noticed meeting of the Board,
finding that in the good faith opinion of the Board, Executive was guilty of
conduct amounting to Cause and specifying the particulars thereof; provided,
however, that after a Change in Control, such resolution may be adopted only by
the affirmative vote of not less than a majority of a committee composed of at
least three (3) disinterested outside directors of the Bank. In the absence of
at least three (3) disinterested outside directors, a determination of Cause
shall be submitted to and made by an arbitrator(s) pursuant to Section 13
hereof.
6
<PAGE>
(c) TERMINATION WITHOUT CAUSE. Executive's employment may be terminated
Without Cause upon 30 days' notice for any reason, subject to the payment of all
amounts required by Section 8 hereof.
(d) EXPIRATION. Executive's employment shall cease, or shall continue
on an at-will basis as provided in Section 4 hereof, upon the expiration of the
Term of this Agreement as provided in Section 4 hereof.
(e) RESIGNATION FOR GOOD REASON. Following a Change in Control during
the Term hereof, Executive may, under the following circumstances, regard
Executive's employment as being constructively terminated by the Bank (and in
such case Executive's employment shall terminate) and may, therefore, Resign for
Good Reason within 90 days of Executive's discovery of the occurrence of one or
more of the following events, any of which shall constitute "Good Reason" for
such Resignation for Good Reason:
(i) Without Executive's express written consent, the
assignment to Executive of any duties materially inconsistent with
Executive's position, duties, responsibilities and status with the Bank
immediately prior to the Change in Control, or any subsequent removal
of Executive from or any failure to re-elect him to any such position;
(ii) Without Executive's express written consent, the
termination and/or material reduction in Executive's facilities
(including office space and general location) and staff reporting and
available to Executive immediately prior to the Change in Control;
(iii) A material reduction (ten percent or greater) by the
Bank of Executive's base salary or of any bonus compensation applicable
to him as in effect immediately prior to the Change in Control;
(iv) A failure by the Bank to maintain any of the employee
benefits and perks to which Executive was entitled immediately prior to
the Change in Control at a level substantially equal to or greater than
the value of those employee benefits and perks in effect immediately
prior to the Change in Control; or the taking of any action by the Bank
which would materially affect Executive's participation in or reduce
Executive's benefits under any such benefits' or perks' plans, programs
or policies, or deprive Executive of any material fringe benefits
enjoyed by him immediately prior to the Change in Control;
(v) The Bank requiring Executive to be based anywhere other
than in the county in which the Bank's principal business location is
currently situated, except
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for required travel on the Bank's behalf to an extent substantially
consistent with Executive's present business travel obligations;
(vi) Any purported Termination of Executive's employment by
the Bank other than those effected in good faith pursuant to Sections
7(a) and 7(b);
(vii) The failure of the Bank to obtain the assumption of
this Agreement by any successor; or
(viii) Receipt by Executive of a Notice of Non-Renewal.
(f) SUPERVISORY SUSPENSION. If the Executive is suspended and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Sections 8(e) or (g) of the Federal Deposit Insurance
Act or similar statute, rule or regulation, the Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
shall, (i) pay the Executive all or part of the compensation withheld while its
obligations under this Agreement were suspended and (ii) reinstate (in whole or
in part) any of its obligations which were suspended.
(g) REGULATORY REMOVAL. If the Executive is removed and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Sections 8(e) or (g) of the Federal Deposit Insurance Act or
similar statute, rule or regulation, all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order.
8. PAYMENTS TO EXECUTIVE UPON TERMINATION.
(a) DEATH, DISABILITY OR RETIREMENT. In the event of Termination of
this Agreement due to Executive's death, Disability or retirement, Executive or
Executive's spouse and/or estate shall be entitled to all benefits generally
available to Bank employees, or their spouses and/or estates, as of the date of
such death, Disability or retirement, without reduction.
(b) RESIGNATION WITHOUT GOOD REASON OR EXPIRATION. In the event of
Executive's resignation (other than a Resignation for Good Reason), or upon
Expiration, the Bank shall have no further obligations to Executive under this
Agreement or otherwise, except as may be expressly required by law.
(c) TERMINATION FOR CAUSE. In the event Executive is Terminated for
Cause, the Bank shall have no further obligations to Executive under this
Agreement or otherwise, except as may be expressly required by law.
(d) TERMINATION WITHOUT CAUSE PRIOR TO A CHANGE IN CONTROL. Upon the
occurrence
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of a Termination Without Cause prior to a Change in Control, as damages for
breach of this Agreement, the Bank shall continue to provide Executive his base
salary then in effect, upon such terms and at such times as described herein,
for a period of nine (9) months following such Termination.
(e) TERMINATION WITHOUT CAUSE OR RESIGNATION FOR GOOD REASON, AFTER A
CHANGE IN CONTROL. If in the twenty-four (24) month period following a Change in
Control, Executive (i) Resigns for Good Reason or (ii) is otherwise Terminated
Without Cause, the Bank shall pay to Executive a lump sum payment equal to
eighteen (18) months base salary then in effect. Such lump sum shall be paid not
later than the tenth (10th) day following the date of Termination Without Cause
or a Resignation for Good Reason.
(f) SOURCE OF PAYMENTS. All payments provided in Section 8 shall be
paid in cash from the general funds of the Bank, and no special or separate fund
need be established and no other segregation of assets need be made to assure
payment.
(g) CONSISTENT RETURNS. The Bank and Executive agree that the payments
being made under this Agreement represent reasonable compensation for services
and that neither the Bank nor Executive will file any returns or reports which
take a contrary position.
(h) REDUCTION OF PAYMENT. Notwithstanding anything in the foregoing to
the contrary, if the payments made to Executive following a Termination Without
Cause or Resignation For Good Reason or any of the other payments provided for
in this Agreement, together with any other payments which Executive has the
right to receive from the Bank would constitute a "parachute payment" (as
defined in Section 280G of the Code), the payments pursuant to this Agreement
shall be reduced to the largest amount as will result in no portion of such
payments being subject to the excise tax imposed by Section 4999 of the Code;
provided, however, that the determination as to whether any reduction in the
payments under this Agreement pursuant to this proviso is necessary shall be
made in good faith by the Bank's independent auditors or if such firm is no
longer providing tax services to Bank to such other tax advisor as shall be
mutually acceptable to Bank and Executive, and such determination shall be
conclusive and binding on the Bank and Executive with respect to the treatment
of the payment for tax reporting purposes.
(i) SOLE REMEDY. The receipt of the amounts described in this Section
8, and attorneys' fees as set forth in Section 13, if any, shall constitute
Executive's sole remedy for breach of this Agreement against the Bank and its
officers, directors, employees and agents.
9. UNAUTHORIZED DISCLOSURE. During the period of his employment hereunder
and for a period of two years following the cessation of such employment
(irrespective of the reason therefor), Executive shall not, except as required
by any court, supervisory authority or administrative agency,
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without the written consent of the Board or a person authorized thereby,
disclose to any person, other than an employee of the Bank or a person to whom
disclosure is reasonably necessary or appropriate in connection with the
performance by the Executive of his duties as an employee of the Bank, any
confidential information obtained by him while in the employ of the Bank;
provided, however, that confidential information shall not include any
information known generally to the public (other than as a result of an
unauthorized disclosure by the Executive).
10. AGREEMENT NOT TO COMPETE. To the extent permitted by law, unless
otherwise approved in writing by the Bank, and except for a Termination Without
Cause Prior to a Change in Control, for a period of one (1) year from the date
of his cessation of employment by the Bank, Executive shall not directly or
indirectly enter into or in any manner take part in any business, profession or
endeavor which shall be competitive with the business of the Bank in any city
where the Bank has a full service branch office as an employee, officer, agent,
independent contractor, 10% or more owner of an entity, director or other
business representative; in addition, Executive agrees that for the one (1) year
period described herein, Executive shall not solicit any customer with whom the
Bank has done business during the preceding five years.
11. WAIVERS NOT TO BE CONTINUED. Any waiver by a party of any breach of
this Agreement by the other party shall not be construed as a continuing waiver
or as a consent to any subsequent breach by the other party.
12. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed, certified or registered mail, return receipt
requested, with postage prepaid, to the following addresses or to such other
address as either party may designate by like notice.
A. If to the Bank, to:
Fallbrook National Bank
130 West Fallbrook Street
Fallbrook, California 92028
Attn: Chairman of the Board
B. If to Executive, to:
Gary M. Youmans
c/o Fallbrook National Bank
130 West Fallbrook Street
Fallbrook, California 92028
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and to such other or additional person or persons as either party shall have
designated to the other party in writing by like notice.
13. ARBITRATION. Any dispute or controversy arising or in connection with
this Agreement shall, upon written request of one party to the other, be
submitted to and settled exclusively by arbitration in the State of California
and be governed by the California Arbitration Act as set forth in the California
Code of Civil Procedure. Notwithstanding the pendency of any such dispute or
controversy, the Bank shall continue to pay Executive's full compensation in
effect when the notice giving rise to the dispute was given and continue
Executive as a participant in all compensation, employee benefits and executive
benefits in which Executive was participating when the notice giving rise to the
dispute was given, until the dispute is finally resolved, except that no such
continuation of compensation or benefits shall apply if Executive is terminated
for Cause under Section 7(b) hereof. Judgment may be entered on the arbitrator's
award in any court of competent jurisdiction. The cost of such arbitration,
including reasonable attorney's fees, shall be borne by the losing party or in
such proportions as the arbitrator(s) shall decide. Arbitration shall be the
exclusive remedy of Executive and the Company and the award of the arbitrator(s)
shall be final and binding upon the parties. All reasonable costs, including
reasonable attorney's fees, incurred in enforcing an arbitration award in court,
or of seeking a court order to compel arbitration, shall be borne by the losing
party in such proceedings.
14. GENERAL PROVISIONS.
(a) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
by the parties with respect to the subject matter hereof, and supersedes and
replaces all prior agreements among or between the parties, unless otherwise
provided herein. No amendment, waiver or termination of any of the provisions
hereof shall be effective unless in writing and signed by the party against whom
it is sought to be enforced. Any written amendment, waiver, or termination
hereof executed by the Bank and Executive shall be binding upon them and upon
all other Persons, without the necessity of securing the consent of any other
Person, and no Person shall be deemed to be a third-party beneficiary under this
Agreement.
(b) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same Agreement.
(c) NO WAIVER. Except as otherwise expressly set forth herein, no
failure on the part of any party hereto to exercise and no delay in exercising
any right, power or remedy hereunder shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power or remedy hereunder
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy.
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(d) HEADINGS. The headings of the Sections of this Agreement have been
inserted for convenience of reference only and shall in no way restrict or
modify any of the terms or provisions hereof.
(e) SEVERABILITY. If for any reason any provision of this Agreement is
held invalid or unenforceable, such invalidity or unenforceability shall not
affect the validity or enforceability of any other provision of this Agreement.
If any provision of this Agreement shall be held invalid or unenforceable in
part, such invalidity or unenforceability shall in no way effect the rest of
such provision not held so invalid, and the rest of such provision, together
with all other provisions of this Agreement, shall to the full extent consistent
with law continue in full force and effect.
(f) GOVERNING LAW. This Agreement shall be governed and construed and
the legal relationships of the parties determined in accordance with the laws
the United States and to the extent not inconsistent therewith the laws of the
State of California applicable to contracts executed and to be performed solely
in the State of California.
(g) ASSUMPTION. The Bank shall require any successor in interest
(whether direct or indirect or as a result of purchase, merger, consolidation,
Change in Control or otherwise) to all or substantially all of the business
and/or assets of the Bank to expressly assume and agree to perform the
obligations under this Agreement in the same manner and to the same extent that
the Bank would be required to perform it if no such succession had taken place.
(h) ADVICE OF COUNSEL. Executive acknowledges that he has been
encouraged to consult with legal counsel of his choosing concerning the terms of
this Agreement prior to executing this Agreement. Any failure by Executive to
consult with competent counsel prior to executing this Agreement shall not be a
basis for rescinding or otherwise avoiding the binding effect of this Agreement.
The parties acknowledge that they are entering into this Agreement freely and
voluntarily, with full understanding of the terms of this Agreement.
Interpretation of the terms and provisions of this Agreement shall not be
construed for or against either party on the basis of the identity of the party
who drafted the terms or provisions in question.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
ATTEST: FALLBROOK NATIONAL BANK
/s/ Peter M. Estrada By: /s/ Thomas E. Swanson
- ------------------------- -----------------------------
Its:
----------------------------
print name:
---------------------
THE EXECUTIVE
/s/ L. Bruce Mills, Jr. /s/ Gary M. Youmans
- ------------------------- --------------------------------
Witness Gary M. Youmans
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EXECUTIVE INCENTIVE COMPENSATION AGREEMENT
Fallbrook National Bank (FNB) and Gary Youmans, as Executive Vice President,
Chief Operating Officer, enter into this Executive Incentive Compensation
Agreement for Gary Youmans, to be effective JANUARY 1, 1998. The Executive
Incentive Compensation Plan is designed to provide financial incentive to Gary
and is not intended as a contract of employment. This document is intended as an
outline of the incentive plan that has been agreed upon by both parties. Any
representations or promises made and not reflected in this plan or in Gary's
employment agreement, effective January 1, 1998, are void. All sections of this
plan are subject to modification but can only be altered in writing by the
President of Fallbrook National Bank.
INCENTIVE COMPENSATION PLAN
A. CONDITIONS
Gary will be entitled to receive incentive compensation, payable
ANNUALLY, according to the following incentive plan:
I. SBA SALES INCENTIVE:
YOU WILL BE ELIGIBLE TO RECEIVE 30BP ON TOTAL SBA ASSET SALES
GAINS LESS SALES INCENTIVES PAID.
EXAMPLE: TOTAL ANNUAL ASSET SALES GAINS = $ 2,300,000
(+) OTHER INCOME & FEES $ 33,200
(-) ANNUAL SALES INCENTIVES PAID = ($ 207,000)
-------------
ANNUAL TOTAL = $ 2,126,200
$2,093,000 X 30 BP (.03) = $ 63,786
II. MORTGAGE LOANS INCENTIVES:
YOU WILL BE ELIGIBLE TO RECEIVE 30BP ON TOTAL MORTGAGE INCOME &
FEES LESS SALES INCENTIVE PAID.
EXAMPLE: TOTAL ANNUAL INCOME & FEES = $888,000
(-) SALES INCENTIVES PAID = ($285,000)
--------
ANNUAL TOTAL = $603,000
$603,000 X 30 BP (.03) = $ 18,090
TOTAL ANNUAL INCENTIVE = $63,786 + $18,090 = $ 81,876
PARTICIPATION IN THE ABOVE INCENTIVE EXEMPTS GARY FROM THE BANK'S SENIOR
MANAGEMENT BONUS PROGRAM.
Notwithstanding any of the above, no Bonuses shall vest until the date the Bonus
is paid.
Any and all compensation paid to Gary is subject to normal payroll deductions
and are payable through normal payroll cycles. To be eligible for any bonus
compensation, you must be employed by the Bank at the time the bonus is to be
paid. Any bonus awarded will be paid in full and no prorated portion of any
bonus will be awarded. The goal associated with each bonus must be achieved and
approved by the PRESIDENT prior to any bonus award.
Notwithstanding any timeframes specified above, nothing in this Executive
Incentive Compensation Agreement modifies the rights of either Gary or FNB to
terminate employment at any time, for any reason.
<PAGE>
This constitutes our entire agreement as to the matters addressed in this
Executive Incentive Compensation Agreement. It fully supersedes any other
promises, representations or understandings, and it cannot be modified except in
writing signed as below. In the event that any provision of this plan or any
part hereof is found invalid, the remainder of this plan will be binding upon
the parties and will be construed as if the invalid provision or part thereof
had been deleted from this plan.
/s/ Gary Youmans 9-8-98
- ---------------------------- --------
Gary Youmans Date
/s/ Thomas Swanson 9-9-98
- ---------------------------- --------
Thomas Swanson, President Date
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement is made and is effective as of July 1, 1998, by and
between Fallbrook National Bank ("Bank") and L. Bruce Mills, Jr.
("Executive").
WHEREAS, Executive is currently employed by the Bank in the capacity as
Senior Vice President and Chief Financial Officer, and Executive's
background, expertise and efforts are believed to be important to the
continued success and financial strength of the Bank; and
WHEREAS, the Bank wishes to assure itself of the continued opportunity
to benefit from Executive's services for the period provided in this
Agreement, and Executive wishes to serve in the employ of the Bank on a
full-time basis solely in accordance with the terms hereof for such purposes;
and
WHEREAS, the Board of Directors of the Bank ("Board") has determined
that the best interests of the Bank would be served by Executive's continued
employment with the Bank under the terms of this Agreement;
NOW, THEREFORE, in order to effect the foregoing, the parties hereto
wish to enter into an employment agreement on the terms and conditions set
forth below. Accordingly, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. DEFINITIONS.
(a) "AGREEMENT" means this employment agreement and any amendments
hereto complying with Section 14(a) hereof.
(b) "BOARD" means the Board of Directors of the Bank unless the
context otherwise requires.
(c) "CAUSE" means:
(i) Executive's personal dishonesty, incompetence or willful
misconduct;
(ii) Executive's breach of fiduciary duty involving personal
profit;
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(iii) Executive's intentional failure to perform Executive's
duties for the Bank after a written demand for performance is given to
Executive by the Board which demand specifically identifies the manner
in which the Board believes that Executive has not performed his
duties;
(iv) Executive's willful violation of any law, rule,
regulation or final cease and desist order (other than traffic
violations or similar minor offenses) to the extent detrimental to the
Bank's business or reputation; or
(v) Executive's material breach of any provision of this
Agreement.
(d) "CHANGE IN CONTROL" means a change of control of the Bank of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A (or in response to any similar item on any
similar schedule or form) promulgated under the Securities Exchange Act,
whether or not the Bank is then subject to such reporting requirement;
provided, however, that without limitation, a Change in Control shall be
deemed to have occurred if:
(i) there is a transfer, voluntarily or by hostile takeover,
by proxy contest (or similar action), operation of law, or otherwise,
of Control of the Bank;
(ii) any Person is or becomes the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act or
any successor provisions thereof), directly or indirectly, of
securities of the Bank representing 20% or more of the combined voting
power of the Bank's then outstanding securities;
(iii) the individuals who were members of the Board
immediately prior to a meeting of the shareholders of the Bank, which
meeting involves a contest for the election of directors, do not
constitute a majority of the Board following such meeting or election;
(iv) a merger, consolidation or sale of all or substantially
all of the assets of the Bank; or
(v) there is a change, during any period of two consecutive
years, of a majority of the Board as constituted as of the beginning of
such period, unless the election of each director who is not a director
at the beginning of such period was approved by a vote of at least
two-thirds of the directors then in office who were directors at the
beginning of such period.
(e) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
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(f) "CONTROL" means the possession, direct or indirect, by any
Person or "group" (as defined in Section 13(d) of the Securities Exchange
Act) of the power to direct or cause the direction of the management policies
of the Bank, whether through ownership of voting securities, by contract or
otherwise, and in any case means the ability to determine the election of a
majority of the directors of the Bank.
(g) "DISABILITY" means physical or mental illness resulting in
Executive's absence on a full-time basis from Executive's duties with the
Bank for 180 calendar days, subject to the procedure described in Section
7(a).
(h) "EXPIRATION" means the termination of this Agreement (including
Executive's employment hereunder) and of any further obligations of the
parties (except as specified in this Agreement) upon completion of the Term.
(i) "PERSON" means an individual, a group acting in concert, a
corporation, a partnership, an association, a joint stock company, a trust,
any unincorporated organization, a government or political subdivision
thereof, or any other entity whatsoever.
(j) "RESIGN FOR GOOD REASON" OR "RESIGNATION FOR GOOD REASON" has the
meaning found in Section 7(e).
(k) "TERM" means the initial term of this Agreement and any
extensions hereof, as provided in Section 4, whether prior to or following a
Change in Control.
(l) "TERMINATION" OR "TERMINATE(D)" means the termination of
Executive's employment hereunder for any of the following reasons unless the
context indicates otherwise:
(i) Retirement by Executive;
(ii) Death of Executive;
(iii) Disability;
(iv) Expiration;
(v) Resignation for Good Reason;
(vi) Resignation other than Resignation for Good Reason;
(vii) Termination Without Cause; and
(viii) Termination for Cause.
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(m) "TERMINATION WITHOUT CAUSE" OR "TERMINATE(D) WITHOUT CAUSE" means
the cessation of Executive's employment hereunder for any reason except:
(i) A resignation by Executive;
(ii) Termination for Cause;
(iii) Retirement;
(iv) Disability;
(v) Death; or
(vi) Expiration.
2. EMPLOYMENT. The Bank hereby agrees to continue to employ the
Executive, and the Executive hereby agrees to continue to serve the Bank, for
the period stated in Section 4 hereof and upon the terms and conditions set
forth herein.
3. POSITION AND RESPONSIBILITIES. The Executive shall serve as Senior
Vice President and Chief Financial Officer of the Bank and, subject to the
provisions of Section 5 below, shall have such responsibilities, duties and
authority as are generally associated with such positions and as may from
time to time be assigned to the Executive by the Board that are consistent
with such responsibilities, duties and authority. During the Term of this
Agreement, the Executive shall devote all his time, attention, skill and
efforts during normal business hours to the business and affairs of the Bank;
provided, however, until August 31, 1998, Executive will be permitted to
provide services to his former employer as requested from time to time so
long as such activity does not materially interfere with Executive's duties
and responsibilities hereunder.
4. TERM OF AGREEMENT. Subject to the terms and provisions of this
Agreement, this Agreement and the period of Executive's employment shall be
deemed to have commenced as of July 1, 1998, and shall continue for an
initial term of two and one-half years (2-1/2) calendar years thereafter and
any extensions thereafter. The initial term shall automatically be extended
for an additional one (1) full calendar year without further action by the
parties on January 1, 1999, and on each succeeding, January 1 thereafter,
such that as of each such January 1, this Agreement shall have a remaining
term of three (3) calendar years. Each party may stop an automatic calendar
year extension, however, by serving written notice ("Notice of Non-Renewal")
upon the other within 90 calendar days prior to January 1, 2001, or within 90
calendar days prior to January 1 of any succeeding year, as the case may be,
of such party's intention that this Agreement shall expire at the end of such
Term. In the event the Bank retains Executive as an employee following the
expiration of the Term, such employment, absent a written agreement to the
contrary, will be on an at-will basis with such compensation and upon such
terms as the parties may then agree, subject to termination
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<PAGE>
at any time with or without cause, and without liability. If the Bank does
not retain Executive as an employee after the Expiration of the Term,
Executive's employment shall cease without further liability of the parties
to each other. Executive's employment shall also terminate, and the Term of
this Agreement will expire, upon Executive's resignation (unless resignation
is for Good Reason after a Change in Control), retirement, death or
Disability, or upon Executive's Termination for Cause.
5. DUTIES.
(a) The Bank and Executive hereby agree that, subject to the
provisions of this Agreement, the Bank shall employ Executive, and Executive
shall serve the Bank as an executive officer for the Term of this Agreement.
The specific executive position(s) in which Executive will serve will be
designated from time to time by the Board.
(b) During the Term hereof, Executive shall devote substantially all
of his or her business time, attention, skill and efforts to the faithful
performance of the business of the Bank to the fullest extent necessary to
properly discharge his or her duties and responsibilities hereunder.
Executive's position and duties with the Bank shall be as identified from
time to time by the Board of Directors of the Bank. Further, with the
approval of the Board, from time to time, Executive may serve, or continue to
serve, on the boards of directors of, and hold any other offices or positions
in, companies or charitable, political or civic organizations, which, in such
Board's judgment, will not present any material conflict of interest with the
Bank and will not unfavorably affect the performance of Executive's duties
pursuant to this Agreement.
6. SALARY, BONUS PAYMENTS AND RELATED MATTERS.
(a) SALARY. During the period of the Executive's employment
hereunder, the Bank shall pay to the Executive a base salary of One Hundred
Fifteen Thousand Dollars ($115,000.00) per year, payable at regular intervals
in accordance with the Bank's normal payroll practices now or hereafter in
effect. Executive's salary shall be reviewed at least annually by the Board
or a committee designated by the Board and shall be adjusted based upon
Executive's job performance and the Bank's financial condition and
performance; provided, however, that in no event shall Executive's monthly
salary be lower than the initial amount set forth above unless, in the good
faith judgment of the Board, the financial condition of the Bank requires a
general decrease in the salaries of executive officers of the Bank. The first
such salary review shall be undertaken no later than January 1, 1998 and
completed no later than June 30, 1998. Notwithstanding the foregoing, if
there is a Change in Control, Executive's salary shall not be less than
Executive's annual salary for the year immediately preceding the Change in
Control.
(b) INCENTIVE/BONUS PAYMENTS. During the period of the Executive's
employment hereunder, the Executive may receive such discretionary bonuses as
may be granted to him from time to time by the Board. In addition, Executive
shall be eligible to receive such bonuses, if any, as shall be awarded
Executive pursuant to Executive's Employee Incentive Plan, attached.
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<PAGE>
(c) EXPENSES. During the period of the Executive's employment
hereunder, the Executive shall be entitled to receive prompt reimbursement
for all reasonable and customary expenses incurred by the Executive in
performing services hereunder in accordance with the general policies and
procedures established by the Bank.
(d) EMPLOYEE BENEFITS AND PERKS. During the period of the
Executive's employment hereunder, the Executive shall be entitled to
participate in all employee benefits plans or arrangements of the Bank on the
same basis as other employees of the Bank including, without limitation,
plans or arrangements providing medical insurance, dental insurance, life
insurance, disability insurance, sick leave, vacation or retirement.
Executive shall also be entitled to (i) the continuation of an automobile
allowance in the amount of $500.00 per month, (ii) use of the Bank provided
credit card(s), car telephone(s), pager(s) and such other perks (if such is
(are) being so provided) upon the terms and conditions previously in effect.
7. TERMINATION.
(a) RESIGNATION, RETIREMENT, DEATH OR DISABILITY. Executive's
employment hereunder shall cease at any time by Executive's resignation
(other than a resignation for Good Reason as provided in Section 7(e)), or by
Executive's retirement, death or Disability. Disability shall be deemed to
have occurred only after the following procedure has been satisfied: If
within 30 days after a written notice of proposed Termination for Disability
is given to Executive by the Bank, Executive has not returned to the
full-time performance of his duties, the Bank may end Executive's employment
by giving written notice of Termination for Disability. Such notice may be
given by the Bank following Executive's absence from Executive's duties by
reason of physical or mental disability for one hundred and fifty (150)
consecutive calendar days.
(b) TERMINATION FOR CAUSE. Executive's employment shall cease upon a
good faith finding of Cause by the Board; provided, however, that Executive
shall be given written notice of the Board's finding of conduct by Executive
amounting to Cause for such termination. Said notice shall be accompanied by
a copy of a resolution duly adopted by the affirmative vote of not less than
a majority of a quorum of the Board at a duly-noticed meeting of the Board,
finding that in the good faith opinion of the Board, Executive was guilty of
conduct amounting to Cause and specifying the particulars thereof; provided,
however, that after a Change in Control, such resolution may be adopted only
by the affirmative vote of not less than a majority of a committee composed
of at least three (3) disinterested outside directors of the Bank. In the
absence of at least three (3) disinterested outside directors, a
determination of Cause shall be submitted to and made by an arbitrator(s)
pursuant to Section 13 hereof.
(c) TERMINATION WITHOUT CAUSE. Executive's employment may be
terminated Without Cause upon 30 days' notice for any reason, subject to the
payment of all amounts required by Section 8 hereof.
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(d) EXPIRATION. Executive's employment shall cease, or shall continue
on an at-will basis as provided in Section 4 hereof, upon the expiration of the
Term of this Agreement as provided in Section 4 hereof.
(e) RESIGNATION FOR GOOD REASON. Following a Change in Control during
the Term hereof, Executive may, under the following circumstances, regard
Executive's employment as being constructively terminated by the Bank (and in
such case Executive's employment shall terminate) and may, therefore, Resign for
Good Reason within 90 days of Executive's discovery of the occurrence of one or
more of the following events, any of which shall constitute "Good Reason" for
such Resignation for Good Reason:
(i) Without Executive's express written consent, the
assignment to Executive of any duties materially inconsistent with
Executive's position, duties, responsibilities and status with the Bank
immediately prior to the Change in Control, or any subsequent removal
of Executive from or any failure to re-elect him to any such position;
(ii) Without Executive's express written consent, the
termination and/or material reduction in Executive's facilities
(including office space and general location) and staff reporting and
available to Executive immediately prior to the Change in Control;
(iii) A material reduction (ten percent or greater) by the
Bank of Executive's base salary or of any bonus compensation applicable
to him as in effect immediately prior to the Change in Control;
(iv) A failure by the Bank to maintain any of the employee
benefits and perks to which Executive was entitled immediately prior to
the Change in Control at a level substantially equal to or greater than
the value of those employee benefits and perks in effect immediately
prior to the Change in Control; or the taking of any action by the Bank
which would materially affect Executive's participation in or reduce
Executive's benefits under any such benefits' or perks' plans, programs
or policies, or deprive Executive of any material fringe benefits
enjoyed by him immediately prior to the Change in Control;
(v) The Bank requiring Executive to be based anywhere other
than in the county in which the Bank's principal business location is
currently situated, except for required travel on the Bank's behalf to
an extent substantially consistent with Executive's present business
travel obligations;
(vi) Any purported Termination of Executive's employment by
the Bank other than those effected in good faith pursuant to Sections
7(a) and 7(b);
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(vii) The failure of the Bank to obtain the assumption of this
Agreement by any successor; or
(viii) Receipt by Executive of a Notice of Non-Renewal.
(f) SUPERVISORY SUSPENSION. If the Executive is suspended and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Sections 8(e) or (g) of the Federal Deposit Insurance
Act or similar statute, rule or regulation, the Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
shall, (i) pay the Executive all or part of the compensation withheld while its
obligations under this Agreement were suspended and (ii) reinstate (in whole or
in part) any of its obligations which were suspended.
(g) REGULATORY REMOVAL. If the Executive is removed and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Sections 8(e) or (g) of the Federal Deposit Insurance Act or
similar statute, rule or regulation, all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order.
8. PAYMENTS TO EXECUTIVE UPON TERMINATION.
(a) DEATH, DISABILITY OR RETIREMENT. In the event of Termination of
this Agreement due to Executive's death, Disability or retirement, Executive or
Executive's spouse and/or estate shall be entitled to all benefits generally
available to Bank employees, or their spouses and/or estates, as of the date of
such death, Disability or retirement, without reduction.
(b) RESIGNATION WITHOUT GOOD REASON OR EXPIRATION. In the event of
Executive's resignation (other than a Resignation for Good Reason), or upon
Expiration, the Bank shall have no further obligations to Executive under this
Agreement or otherwise, except as may be expressly required by law.
(c) TERMINATION FOR CAUSE. In the event Executive is Terminated for
Cause, the Bank shall have no further obligations to Executive under this
Agreement or otherwise, except as may be expressly required by law.
(d) TERMINATION WITHOUT CAUSE PRIOR TO A CHANGE IN CONTROL. Upon the
occurrence of a Termination Without Cause prior to a Change in Control, as
damages for breach of this Agreement, the Bank shall continue to provide
Executive his base salary then in effect, upon such terms and at such times as
described herein, for a period of nine (9) months following such Termination.
(e) TERMINATION WITHOUT CAUSE OR RESIGNATION FOR GOOD REASON, AFTER A
CHANGE IN CONTROL. If in the twenty-four (24) month period following a Change in
Control, Executive (i)
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Resigns for Good Reason or (ii) is otherwise Terminated Without Cause, the Bank
shall pay to Executive a lump sum payment equal to eighteen (18) months base
salary then in effect. Such lump sum shall be paid not later than the tenth
(10th) day following the date of Termination Without Cause or a Resignation for
Good Reason.
(f) SOURCE OF PAYMENTS. All payments provided in Section 8 shall be
paid in cash from the general funds of the Bank, and no special or separate fund
need be established and no other segregation of assets need be made to assure
payment.
(g) CONSISTENT RETURNS. The Bank and Executive agree that the payments
being made under this Agreement represent reasonable compensation for services
and that neither the Bank nor Executive will file any returns or reports which
take a contrary position.
(h) REDUCTION OF PAYMENT. Notwithstanding anything in the foregoing
to the contrary, if the payments made to Executive following a Termination
Without Cause or Resignation For Good Reason or any of the other payments
provided for in this Agreement, together with any other payments which
Executive has the right to receive from the Bank would constitute a
"parachute payment" (as defined in Section 280G of the Code), the payments
pursuant to this Agreement shall be reduced to the largest amount as will
result in no portion of such payments being subject to the excise tax imposed
by Section 4999 of the Code; provided, however, that the determination as to
whether any reduction in the payments under this Agreement pursuant to this
proviso is necessary shall be made in good faith by the Bank's independent
auditors or if such firm is no longer providing tax services to Bank to such
other tax advisor as shall be mutually acceptable to Bank and Executive, and
such determination shall be conclusive and binding on the Bank and Executive
with respect to the treatment of the payment for tax reporting purposes.
(i) SOLE REMEDY. The receipt of the amounts described in this Section
8, and attorneys' fees as set forth in Section 13, if any, shall constitute
Executive's sole remedy for breach of this Agreement against the Bank and its
officers, directors, employees and agents.
9. UNAUTHORIZED DISCLOSURE. During the period of his employment hereunder
and for a period of two years following the cessation of such employment
(irrespective of the reason therefor), Executive shall not, except as required
by any court, supervisory authority or administrative agency, without the
written consent of the Board or a person authorized thereby, disclose to any
person, other than an employee of the Bank or a person to whom disclosure is
reasonably necessary or appropriate in connection with the performance by the
Executive of his duties as an employee of the Bank any confidential information
obtained by him while in the employ of the Bank; provided, however, that
confidential information shall not include any information known generally to
the public (other than as a result of an unauthorized disclosure by the
Executive).
10. AGREEMENT NOT TO COMPETE. To the extent permitted by law, unless
otherwise approved in writing by the Bank, and except for a Termination Without
Cause Prior to a Change Control,
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for a period of one (1) year from the date of his cessation of employment by the
Bank, Executive shall not directly or indirectly enter into or in any manner
take part in any business, profession or endeavor which shall be competitive
with the business of the Bank in any city where the Bank has a full service
branch office as an employee, officer, agent, independent contractor, 10% or
more owner of an entity, director or other business representative; in addition,
Executive agrees that for the one (1) year period described herein, Executive
shall not solicit any customer with whom the Bank has done business during the
preceding five years.
11. WAIVERS NOT TO BE CONTINUED. Any waiver by a party of any breach of
this Agreement by the other party shall not be construed as a continuing waiver
or as a consent to any subsequent breach by the other party.
12. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed, certified or registered mail, return receipt
requested, with postage prepaid, to the following addresses or to such other
address as either party may designate by like notice.
A. If to the Bank, to:
Fallbrook National Bank
130 West Fallbrook Street
Fallbrook, California 92028
Attn: Chairman of the Board
B. If to Executive, to:
L. Bruce Mills, Jr.
c/o Fallbrook National Bank
130 West Fallbrook Street
Fallbrook, California 92028
and to such other or additional person or persons as either party shall have
designated to the other party in writing by like notice.
13. ARBITRATION. Any dispute or controversy arising or in connection with
this Agreement shall, upon written request of one party to the other, be
submitted to and settled exclusively by arbitration in the State of California
and be governed by the California Arbitration Act as set forth in the California
Code of Civil Procedure. Notwithstanding the pendency of any such dispute or
controversy, the Bank shall continue to pay Executive's full compensation in
effect when the notice giving rise to the dispute was given and continue
Executive as a participant in all compensation, employee benefits and executive
benefits in which Executive was participating when the notice giving rise to the
dispute was given, until the dispute is finally resolved, except that no such
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continuation of compensation or benefits shall apply if Executive is terminated
for Cause under Section 7(b) hereof. Judgment may be entered on the arbitrator's
award in any court of competent jurisdiction. The cost of such arbitration,
including reasonable attorney's fees, shall be borne by the losing party or in
such proportions as the arbitrator(s) shall decide. Arbitration shall be the
exclusive remedy of Executive and the Company and the award of the arbitrator(s)
shall be final and binding upon the parties. All reasonable costs, including
reasonable attorney's fees, incurred in enforcing an arbitration award in court,
or of seeking a court order to compel arbitration, shall be borne by the
losing party in such proceedings.
14. GENERAL PROVISIONS.
(a) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
by the parties with respect to the subject matter hereof, and supersedes and
replaces all prior agreements among or between the parties, unless otherwise
provided herein. No amendment, waiver or termination of any of the provisions
hereof shall be effective unless in writing and signed by the party against whom
it is sought to be enforced. Any written amendment, waiver, or termination
hereof executed by the Bank and Executive shall be binding upon them and upon
all other Persons, without the necessity of securing the consent of any other
Person, and no Person shall be deemed to be a third-party beneficiary under this
Agreement.
(b) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same Agreement.
(c) NO WAIVER. Except as otherwise expressly set forth herein, no
failure on the part of any party hereto to exercise and no delay in exercising
any right, power or remedy hereunder shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power or remedy hereunder
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy.
(d) HEADINGS. The headings of the Sections of this Agreement have been
inserted for convenience of reference only and shall in no way restrict or
modify any of the terms or provisions hereof.
(e) SEVERABILITY. If for any reason any provision of this Agreement is
held invalid or unenforceable such invalidity or unenforceability shall not
affect the validity or enforceability of any other provision of this Agreement.
If any provision of this Agreement shall be held invalid or unenforceable in
part, such invalidity or unenforceability shall in no way effect the rest of
such provision not held so invalid, and the rest of such provision, together
with all other provisions of this Agreement shall to the full extent consistent
with law continue in full force and effect.
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(f) GOVERNING LAW. This Agreement shall be governed and construed and
the legal relationships of the parties determined in accordance with the laws
the United States and to the extent not inconsistent therewith the laws of the
State of California applicable to contracts executed and to be performed solely
in the State of California.
(g) ASSUMPTION. The Bank shall require any successor in interest
(whether direct or indirect or as a result of purchase, merger, consolidation,
Chance in Control or otherwise) to all or substantially all of the business
and/or assets of the Bank to expressly assume and agree to perform the
obligations under this Agreement in the same manner and to the same extent that
the Bank would be required to perform it if no such succession had taken place.
(h) ADVICE OF COUNSEL. Executive acknowledges that he has been
encouraged to consult with legal counsel of his choosing concerning the terms of
this Agreement prior to executing this Agreement. Any failure by Executive to
consult with competent counsel prior to executing this Agreement shall not be a
basis for rescinding or otherwise avoiding the binding effect of this Agreement.
The parties acknowledge that they are entering into this Agreement freely and
voluntarily, with full understanding of the terms of this Agreement.
Interpretation of the terms and provisions of this Agreement shall not be
construed for or against either party on the basis of the identity of the party
who drafted the terms or provisions in question.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
ATTEST: FALLBROOK NATIONAL BANK
/s/ Peter M. Estrada BY: /s/ [ILLEGIBLE]
- ---------------------------------- ----------------------------------
Its:
---------------------------------
print name:
--------------------------
THE EXECUTIVE
/s/ Gary Youmans /s/ L. Bruce Mills, Jr.
- ---------------------------------- -------------------------------------
Witness L. Bruce Mills, Jr.
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EMPLOYMENT AGREEMENT
This Agreement is made and is effective as of January 1, 1998, by and
between Fallbrook National Bank ("Bank") and Donald W. Murray ("Executive").
WHEREAS, Executive is currently employed by the Bank in the capacity as
Senior Vice President and Senior Credit Officer, and Executive's background,
expertise and efforts have contributed to the success and financial strength of
the Bank; and
WHEREAS, the Bank wishes to assure itself of the continued opportunity to
benefit from Executive's services for the period provided in this Agreement, and
Executive wishes to serve in the employ of the Bank on a full-time basis solely
in accordance with the terms hereof for such purposes; and
WHEREAS, the Board of Directors of the Bank ("Board") has determined that
the best interests of the Bank would be served by Executive's continued
employment with the Bank under the terms of this Agreement;
NOW, THEREFORE, in order to effect the foregoing, the parties hereto wish
to enter into an employment agreement on the terms and conditions set forth
below. Accordingly, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. DEFINITIONS.
(a) "AGREEMENT" means this employment agreement and any amendments
hereto complying with Section 14(a) hereof.
(b) "BOARD" means the Board of Directors of the Bank unless the context
otherwise requires.
(c) "CAUSE" means:
(i) Executive's personal dishonesty, incompetence or willful
misconduct;
(ii) Executive's breach of fiduciary duty involving personal
profit;
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(iii) Executive's intentional failure to perform Executive's
duties for the Bank after a written demand for performance is given to
Executive by the Board which demand specifically identifies the manner
in which the Board believes that Executive has not performed his
duties;
(iv) Executive's willful violation of any law, rule,
regulation or final cease and desist order (other than traffic
violations or similar minor offenses) to the extent detrimental to the
Bank's business or reputation; or
(v) Executive's material breach of any provision of this
Agreement.
(d) "CHANGE IN CONTROL" means a change of control of the Bank of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A (or in response to any similar item on any
similar schedule or form) promulgated under the Securities Exchange Act, whether
or not the Bank is then subject to such reporting requirement; provided,
however, that without limitation, a Change in Control shall be deemed to have
occurred if:
(i) there is a transfer, voluntarily or by hostile takeover,
by proxy contest (or similar action), operation of law, or otherwise,
of Control of the Bank;
(ii) any Person is or becomes the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act or
any successor provisions thereof), directly or indirectly, of
securities of the Bank representing 20% or more of the combined voting
power of the Bank's then outstanding securities;
(iii) the individuals who were members of the Board
immediately prior to a meeting of the shareholders of the Bank, which
meeting involves a contest for the election of directors, do not
constitute a majority of the Board following such meeting or election;
(iv) a merger, consolidation or sale of all or substantially
all of the assets of the Bank; or
(v) there is a change, during any period of two consecutive
years, of a majority of the Board as constituted as of the beginning
of such period, unless the election of each director who is not a
director at the beginning of such period was approved by a vote of at
least two-thirds of the directors then in office who were directors at
the beginning of such period.
(e) "CODE" shall mean the Internal Revenue Code of 1986, as
amended.
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(f) "CONTROL" means the possession, direct or indirect, by any Person
or "group" (as defined in Section 13(d) of the Securities Exchange Act) of the
power to direct or cause the direction of the management policies of the Bank,
whether through ownership of voting securities, by contract or otherwise, and in
any case means the ability to determine the election of a majority of the
directors of the Bank.
(g) "DISABILITY" means physical or mental illness resulting in
Executive's absence on a full-time basis from Executive's duties with the Bank
for 180 calendar days, subject to the procedure described in Section 7(a).
(h) "EXPIRATION" means the termination of this Agreement (including
Executive's employment hereunder) and of any further obligations of the parties
(except as specified in this Agreement) upon completion of the Term.
(i) "PERSON" means an individual, a group acting in concert, a
corporation, a partnership, an association, a joint stock company, a trust, any
unincorporated organization, a government or political subdivision thereof, or
any other entity whatsoever.
(j) "RESIGN FOR GOOD REASON" OR "RESIGNATION FOR GOOD REASON" has the
meaning found in Section 6(e).
(k) "TERM" means the initial term of this Agreement and any extensions
hereof, as provided in Section 4, whether prior to or following a Change in
Control.
(l) "TERMINATION" OR "TERMINATE(D)" means the termination of
Executive's employment hereunder for any of the following reasons unless the
context indicates otherwise:
(i) Retirement by Executive;
(ii) Death of Executive;
(iii) Disability;
(iv) Expiration;
(v) Resignation for Good Reason;
(vi) Resignation other than Resignation for Good Reason;
(vii) Termination Without Cause; and
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(viii) Termination for Cause.
(m) "TERMINATION WITHOUT CAUSE" OR "TERMINATE(D) WITHOUT CAUSE" means
the cessation of Executive's employment hereunder for any reason except:
(i) A resignation by Executive;
(ii) Termination for Cause;
(iii) Retirement;
(iv) Disability;
(v) Death; or
(vi) Expiration.
2. EMPLOYMENT. The Bank hereby agrees to continue to employ the
Executive, and the Executive hereby agrees to continue to serve the Bank, for
the period stated in Section 4 hereof and upon the terms and conditions set
forth herein.
3. POSITION AND RESPONSIBILITIES. The Executive shall serve as
Senior Vice President and Senior Credit Officer of the Bank and, subject to
the provisions of Section 5 below, shall have such responsibilities, duties
and authority as are generally associated with such positions and as may from
time to time be assigned to the Executive by the Board that are consistent
with such responsibilities, duties and authority. During the Term of this
Agreement, the Executive shall devote all his time, attention, skill and
efforts during normal business hours to the business and affairs of the Bank.
4. TERM OF AGREEMENT. Subject to the terms and provisions of this
Agreement, this Agreement and the period of Executive's employment shall be
deemed to have commenced as of January 1, 1998, and shall continue for an
initial term of three (3) calendar years thereafter and any extensions
thereafter. The initial term shall automatically be extended for an
additional one (1) full calendar year without further action by the parties
on January 1, 1999, and on each succeeding January 1 thereafter, such that as
of each such January 1, this Agreement shall have a remaining term of three
(3) calendar years. Each party may stop an automatic calendar year extension,
however, by serving written notice ("Notice of Non-Renewal") upon the other
within 90 calendar days prior to January 1, 2001 or within 90 calendar days
prior to January 1 of any succeeding year, as the case may be, of such
party's intention that this Agreement shall expire at the end of such Term.
In the event the Bank retains Executive as an employee following the
expiration of the Term, such employment, absent a written agreement to the
contrary, will be on an at-will basis with such compensation and
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upon such terms as the parties may then agree, subject to termination at any
time with or without cause, and without liability. If the Bank does not
retain Executive as an employee after the Expiration of the Term, Executive's
employment shall cease without further liability of the parties to each
other. Executive's employment shall also terminate, and the Term of this
Agreement will expire, upon Executive's resignation (unless resignation is
for Good Reason after a Change in Control), retirement, death or Disability,
or upon Executive's Termination for Cause.
5. DUTIES.
(a) The Bank and Executive hereby agree that, subject to the
provisions of this Agreement, the Bank shall employ Executive, and Executive
shall serve the Bank as an executive officer for the Term of this Agreement.
The specific executive position(s) in which Executive will serve will be
designated from time to time by the Board.
(b) During the Term hereof, Executive shall devote
substantially all of his or her business time, attention, skill and efforts
to the faithful performance of the business of the Bank to the fullest extent
necessary to properly discharge his or her duties and responsibilities
hereunder. Executive's position and duties with the Bank shall be as
identified from time to time by the Board of Directors of the Bank. Further,
with the approval of the Board, from time to time, Executive may serve, or
continue to serve, on the boards of directors of, and hold any other offices
or positions in, companies or charitable, political or civic organizations,
which, in such Board's judgment, will not present any material conflict of
interest with the Bank and will not unfavorably affect the performance of
Executive's duties pursuant to this Agreement.
6. SALARY, BONUS PAYMENTS AND RELATED MATTERS.
(a) SALARY. During the period of the Executive's employment
hereunder, the Bank shall pay to the Executive a base salary of One Hundred
Thousand Dollars ($ 100,000.00) per year, payable at regular intervals in
accordance with the Bank's normal payroll practices now or hereafter in
effect. Executive's salary shall be reviewed at least annually by the Board
or a committee designated by the Board and shall be adjusted based upon
Executive's job performance and the Bank's financial condition and
performance; provided, however, that in no event shall Executive's monthly
salary be lower than the initial amount set forth above unless, in the good
faith judgment of the Board, the financial condition of the Bank requires a
general decrease in the salaries of executive officers of the Bank. The first
such salary review shall be undertaken no later than January 1, 1998 and
completed no later than June 30, 1998. Notwithstanding the foregoing, if
there is a Change in Control, Executive's salary shall not be less than
Executive's annual salary for the year immediately preceding the Change in
Control.
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(b) INCENTIVE/BONUS PAYMENTS. During the period of the Executive's
employment hereunder, the Executive may receive such discretionary bonuses as
may be granted to him from time to time by the Board. In addition, Executive
shall be eligible to receive such bonuses, if any, as shall be awarded Executive
pursuant to Executive's Employee Incentive Plan, attached.
(c) EXPENSES. During the period of the Executive's employment
hereunder, the Executive shall be entitled to receive prompt reimbursement for
all reasonable and customary expenses incurred by the Executive in performing
services hereunder in accordance with the general policies and procedures
established by the Bank.
(d) EMPLOYEE BENEFITS AND PERKS. During the period of the Executive's
employment hereunder, the Executive shall be entitled to participate in all
employee benefits plans or arrangements of the Bank on the same basis as other
employees of the Bank including, without limitation, plans or arrangements
providing medical insurance, dental insurance, life insurance, disability
insurance, sick leave, vacation or retirement. Executive shall also be entitled
to (i) the continuation of an automobile allowance in the amount of $500.00 per
month, (ii) use of the Bank provided credit card(s), car telephone(s), pager(s)
and such other perks (if such is (are) being so provided) upon the terms and
conditions previously in effect.
7. TERMINATION.
(a) RESIGNATION, RETIREMENT, DEATH OR DISABILITY. Executive's
employment hereunder shall cease at any time by Executive's resignation (other
than a resignation for Good Reason as provided in Section 7(e)), or by
Executive's retirement, death or Disability. Disability shall be deemed to have
occurred only after the following procedure has been satisfied: If within 30
days after a written notice of proposed Termination for Disability is given to
Executive by the Bank, Executive has not returned to the full-time performance
of his duties, the Bank may end Executive's employment by giving written notice
of Termination for Disability. Such notice may be given by the Bank following
Executive's absence from Executive's duties by reason of physical or mental
disability for one hundred and fifty (150) consecutive calendar days.
(b) TERMINATION FOR CAUSE. Executive's employment shall cease upon a
good faith finding of Cause by the Board; provided, however, that Executive
shall be given written notice of the Board's finding of conduct by Executive
amounting to Cause for such termination. Said notice shall be accompanied by a
copy of a resolution duly adopted by the affirmative vote of not less than a
majority of a quorum of the Board at a duly-noticed meeting of the Board,
finding that in the good faith opinion of the Board, Executive was guilty of
conduct amounting to Cause and specifying the particulars thereof; provided,
however, that after a Change in Control, such resolution may be adopted only by
the affirmative vote of not less than a majority of a committee composed of at
least three (3) disinterested outside directors of the Bank. In the absence of
at least three (3) disinterested outside directors, a determination of Cause
shall be submitted to and made by an arbitrator(s)
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pursuant to Section 13 hereof.
(c) TERMINATION WITHOUT CAUSE. Executive's employment may be terminated
Without Cause upon 30 days' notice for any reason, subject to the payment of all
amounts required by Section 8 hereof.
(d) EXPIRATION. Executive's employment shall cease, or shall continue
on an at-will basis as provided in Section 4 hereof, upon the expiration of the
Term of this Agreement as provided in Section 4 hereof.
(e) RESIGNATION FOR GOOD REASON. Following a Change in Control during
the Term hereof, Executive may, under the following circumstances, regard
Executive's employment as being constructively terminated by the Bank (and in
such case Executive's employment shall terminate) and may, therefore, Resign for
Good Reason within 90 days of Executive's discovery of the occurrence of one or
more of the following events, any of which shall constitute "Good Reason" for
such Resignation for Good Reason:
(i) Without Executive's express written consent, the
assignment to Executive of any duties materially inconsistent with
Executive's position, duties, responsibilities and status with the Bank
immediately prior to the Change in Control, or any subsequent removal
of Executive from or any failure to re-elect him to any such position;
(ii) Without Executive's express written consent, the
termination and/or material reduction in Executive's facilities
(including office space and general location) and staff reporting and
available to Executive immediately prior to the Change in Control;
(iii) A material reduction (ten percent or greater) by the
Bank of Executive's base salary or of any bonus compensation applicable
to him as in effect immediately prior to the Change in Control;
(iv) A failure by the Bank to maintain any of the employee
benefits and perks to which Executive was entitled immediately prior to
the Change in Control at a level substantially equal to or greater than
the value of those employee benefits and perks in effect immediately
prior to the Change in Control; or the taking of any action by the Bank
which would materially affect Executive's participation in or reduce
Executive's benefits under any such benefits' or perks' plans, programs
or policies, or deprive Executive of any material fringe benefits
enjoyed by him immediately prior to the Change in Control;
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(v) The Bank requiring Executive to be based anywhere other
than in the county in which the Bank's principal business location is
currently situated, except for required travel on the Bank's behalf to
an extent substantially consistent with Executive's present business
travel obligations;
(vi) Any purported Termination of Executive's employment by
the Bank other than those effected in good faith pursuant to Sections
7(a) and 7(b);
(vii) The failure of the Bank to obtain the assumption of this
Agreement by any successor; or
(viii) Receipt by Executive of a Notice of Non-Renewal.
(f) SUPERVISORY SUSPENSION. If the Executive is suspended and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Sections 8(e) or (g) of the Federal Deposit Insurance
Act or similar statute, rule or regulation, the Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
may, in its discretion, (i) pay the Executive all or part of the compensation
withheld while its obligations under this Agreement were suspended and (ii)
reinstate (in whole or in part) any of its obligations which were suspended.
(g) REGULATORY REMOVAL. If the Executive is removed and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Sections 8(e) or (g) of the Federal Deposit Insurance Act or
similar statute, rule or regulation, all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order.
8. PAYMENTS TO EXECUTIVE UPON TERMINATION.
(a) DEATH, DISABILITY OR RETIREMENT. In the event of Termination of
this Agreement due to Executive's death, Disability or retirement, Executive or
Executive's spouse and/or estate shall be entitled to all benefits generally
available to Bank employees, or their spouses and/or estates, as of the date of
such death, Disability or retirement, without reduction.
(b) RESIGNATION WITHOUT GOOD REASON OR EXPIRATION. In the event of
Executive's resignation (other than a Resignation for Good Reason), or upon
Expiration, the Bank shall have no further obligations to Executive under this
Agreement or otherwise, except as may be expressly required by law.
(c) TERMINATION FOR CAUSE. In the event Executive is Terminated for
Cause, the Bank shall have no further obligations to Executive under this
Agreement or otherwise, except as may be expressly required by law.
8
<PAGE>
(d) TERMINATION WITHOUT CAUSE PRIOR TO A CHANGE IN CONTROL. Upon the
occurrence of a Termination Without Cause prior to a Change in Control, as
damages for breach of this Agreement, the Bank shall continue to provide
Executive his base salary then in effect, upon such terms and at such times as
described herein, for a period of nine (9) months following such Termination.
(e), TERMINATION WITHOUT CAUSE OR RESIGNATION FOR GOOD REASON, AFTER A
CHANGE IN CONTROL. If in the twenty-four (24) month period following a Change in
Control, Executive (i) Resigns for Good Reason or (ii) is otherwise Terminated
Without Cause, the Bank shall pay to Executive a lump sum payment equal to
eighteen (18) months base salary then in effect. Such lump sum shall be paid not
later than the tenth (10th) day following the date of Termination Without Cause
or a Resignation for Good Reason.
(f) SOURCE OF PAYMENTS. All payments provided in Section 8 shall be
paid in cash from the general funds of the Bank, and no special or separate fund
need be established and no other segregation of assets need be made to assure
payment.
(g) CONSISTENT RETURNS. The Bank and Executive agree that the payments
being made under this Agreement represent reasonable compensation for services
and that neither the Bank nor Executive will file any returns or reports which
take a contrary position.
(h) REDUCTION OF PAYMENT. Notwithstanding anything in the foregoing to
the contrary, if the payments made to Executive following a Termination Without
Cause or Resignation For Good Reason or any of the other payments provided for
in this Agreement, together with any other payments which Executive has the
right to receive from the Bank would constitute a "parachute payment" (as
defined in Section 280G of the Code), the payments pursuant to this Agreement
shall be reduced to the largest amount as will result in no portion of such
payments being subject to the excise tax imposed by Section 4999 of the Code;
provided, however, that the determination as to whether any reduction in the
payments under this Agreement pursuant to this proviso is necessary shall be
made in good faith by the Bank's independent auditors or if such firm is no
longer providing tax services to Bank to such other tax advisor as shall be
mutually acceptable to Bank and Executive, and such determination shall be
conclusive and binding on the Bank and Executive with respect to the treatment
of the payment for tax reporting purposes.
(i) SOLE REMEDY. The receipt of the amounts described in this Section
8, and attorneys' fees as set forth in Section 13, if any, shall constitute
Executive's sole remedy for breach of this Agreement against the Bank and its
officers, directors, employees and agents.
9. UNAUTHORIZED DISCLOSURE. During the period of his employment hereunder
and for a period of two years following the cessation of such employment
(irrespective of the reason therefor), Executive shall not, except as required
by any court, supervisory authority or administrative agency, without the
written consent of the Board or a person authorized thereby, disclose to any
person, other
9
<PAGE>
than an employee of the Bank or a person to whom disclosure is reasonably
necessary or appropriate in connection with the performance by the Executive of
his duties as an employee of the Bank, any confidential information obtained by
him while in the employ of the Bank; provided, however, that confidential
information shall not include any information known generally to the public
(other than as a result of an unauthorized disclosure by the Executive).
10. AGREEMENT NOT TO COMPETE. To the extent permitted by law, unless
otherwise approved in writing by the Bank, and except for a Termination Without
Cause Prior to a Change in Control, for a period of one (1) year from the date
of his cessation of employment by the Bank, Executive shall not directly or
indirectly enter into or in any manner take part in any business, profession or
endeavor which shall be competitive with the business of the Bank in any city
where the Bank has a full service branch office as an employee, officer, agent,
independent contractor, 10% or more owner of an entity, director or other
business representative; in addition, Executive agrees that for the one (1) year
period described herein, Executive shall not solicit any customer with whom the
Bank has done business during the preceding five years.
11. WAIVERS NOT TO BE CONTINUED. Any waiver by a party of any breach of
this Agreement by the other party shall not be construed as a continuing waiver
or as a consent to any subsequent breach by the other party.
12. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed, certified or registered mail, return receipt
requested, with postage prepaid, to the following addresses or to such other
address as either party may designate by like notice.
A. If to the Bank, to:
Fallbrook National Bank
130 West Fallbrook Street
Fallbrook, California 92028
Attn: Chairman of the Board
B. If to Executive, to:
Donald W. Murray
c/o Fallbrook National Bank
130 West Fallbrook Street
Fallbrook, California 92028
and to such other or additional person or persons as either party shall have
designated to the other party in writing by like notice.
10
<PAGE>
13. ARBITRATION. Any dispute or controversy arising or in connection with
this Agreement shall, upon written request of one party to the other, be
submitted to and settled exclusively by arbitration in the State of California
and be governed by the California Arbitration Act as set forth in the California
Code of Civil Procedure. Notwithstanding the pendency of any such dispute or
controversy, the Bank shall continue to pay Executive's full compensation in
effect when the notice giving rise to the dispute was given and continue
Executive as a participant in all compensation, employee benefits and executive
benefits in which Executive was participating when the notice giving rise to the
dispute was given, until the dispute is finally resolved, except that no such
continuation of compensation or benefits shall apply if Executive is terminated
for Cause under Section 7(b) hereof. Judgment may be entered on the arbitrator's
award in any court of competent jurisdiction. The cost of such arbitration,
including reasonable attorney's fees, shall be borne by the losing party or in
such proportions as the arbitrator(s) shall decide. Arbitration shall be the
exclusive remedy of Executive and the Company and the award of the arbitrator(s)
shall be final and binding upon the parties. All reasonable costs, including
reasonable attorney's fees, incurred in enforcing an arbitration award in court,
or of seeking a court order to compel arbitration, shall be borne by the losing
party in such proceedings.
14. GENERAL PROVISIONS.
(a) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
by the parties with respect to the subject matter hereof, and supersedes and
replaces all prior agreements among or between the parties, unless otherwise
provided herein. No amendment, waiver or termination of any of the provisions
hereof shall be effective unless in writing and signed by the party against whom
it is sought to be enforced. Any written amendment, waiver, or termination
hereof executed by the Bank and Executive shall be binding upon them and upon
all other Persons, without the necessity of securing the consent of any other
Person, and no Person shall be deemed to be a third-party beneficiary under this
Agreement.
(b) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same Agreement.
(c) NO WAIVER. Except as otherwise expressly set forth herein, no
failure on the part of any party hereto to exercise and no delay in exercising
any right, power or remedy hereunder shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power or remedy hereunder
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy.
(d) HEADINGS. The headings of the Sections of this Agreement have been
inserted for convenience of reference only and shall in no way restrict or
modify any of the terms or provisions hereof.
11
<PAGE>
(e) SEVERABILITY. If for any reason any provision of this Agreement is
held invalid or unenforceable, such invalidity or unenforceability shall not
affect the validity or enforceability of any other provision of this Agreement.
If any provision of this Agreement shall be held invalid or unenforceable in
part, such invalidity or unenforceability shall in no way effect the rest of
such provision not held so invalid, and the rest of such provision, together
with all other provisions of this Agreement, shall to the full extent consistent
with law continue in full force and effect.
(f) GOVERNING LAW. This Agreement shall be governed and construed and
the legal relationships of the parties determined in accordance with the laws
the United States and to the extent not inconsistent therewith the laws of the
State of California applicable to contracts executed and to be performed solely
in the State of California.
(g) ASSUMPTION. The Bank shall require any successor in interest
(whether direct or indirect or as a result of purchase, merger, consolidation,
Change in Control or otherwise) to all or substantially all of the business
and/or assets of the Bank to expressly assume and agree to perform the
obligations under this Agreement in the same manner and to the same extent that
the Bank would be required to perform it if no such succession had taken place.
(h) ADVICE OF COUNSEL. Executive acknowledges that he has been
encouraged to consult with legal counsel of his choosing concerning the terms of
this Agreement prior to executing this Agreement. Any failure by Executive to
consult with competent counsel prior to executing this Agreement shall not be a
basis for rescinding or otherwise avoiding the binding effect of this Agreement.
The parties acknowledge that they are entering into this Agreement freely and
voluntarily, with full understanding of the terms of this Agreement.
Interpretation of the terms and provisions of this Agreement shall not be
construed for or against either party on the basis of the identity of the party
who drafted the terms or provisions in question.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
ATTEST: FALLBROOK NATIONAL BANK
/s/ Peter M. Estrada By: /s/ [ILLEGIBLE]
- --------------------------------- ----------------------------
Its:
---------------------------
print name:
--------------------
THE EXECUTIVE
/s/ Gary Youmans /s/ Donald W. Murray
- --------------------------------- -------------------------------
Witness Donald W. Murray
13
<PAGE>
EXECUTIVE INCENTIVE AGREEMENT
Fallbrook National Bank (FNB) and Donald W. Murray (Don), Senior Vice President,
enter into this Executive Incentive Agreement for Donald W. Murray, to be
effective January 1, 1998:
I. Don will be eligible for an incentive bonus equaling 30% of his annual
salary of $100,000 if he achieves 100% of the goals established by the
President. This bonus will be paid out as follows:
a. 1/2 of Don's incentive bonus will be paid as a cash incentive
totaling $15,000. This portion of Don's incentive would be subject to all
applicable federal and state tax deductions.
b. 1/2 of Don's incentive bonus will be paid in stock options utilizing
the Black-Scholes methodology to determine the number of shares to be granted.
- See attachment
c. Don's incentive compensation will be paid based on the percent to
which he meets or exceeds his overall goals, up to a maximum of 200%:
- If 85% of the established goals are satisfied, Don will be eligible
to receive 85% of the established incentive.
- If 100% of the established goals are satisfied, Don will be eligible
for the entire incentive outlined in item I a & b..
- If the established goals are exceeded by greater than 100% up to
200%, Don will be eligible to receive more than 100% of the incentive
up to 200%. The incentive will be pro-rated based on the amount the
goals have been exceeded. For example, if Don exceeds the established
goals by 25% (or reached 125% of goal), he will be eligible for 125% of
his incentive.
This constitutes our entire agreement relating to Don's Incentive Agreement.
This supersedes any other promises, representations or understandings, and it
cannot be modified except in writing signed as below. In the event that any
provision of this plan or any part hereof is found invalid, the remainder of
this plan will be binding upon the parties and will be construed as if the
invalid provision or part thereof had been deleted from this plan.
/s/ Donald W. Murray 9/14/98
- -------------------------------- ------------------
Donald W. Murray Date
Senior Vice President
/s/ Thomas E. Swanson 9/14/98
- -------------------------------- ------------------
Thomas E. Swanson Date
President
<PAGE>
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
INPUT VARIABLES fbrk, 1997
- ----------------------------------------------------------------------------------------------------
Stock Price 46.50 8.65 9.25
- ----------------------------------------------------------------------------------------------------
Exercise Price 50.00 8.65 9.25
- ----------------------------------------------------------------------------------------------------
Term 1.00 5 2.5
- ----------------------------------------------------------------------------------------------------
Volatility 30.000% 0.001% 50.00%
- ----------------------------------------------------------------------------------------------------
Annual Rate of Qtrly Dividends 0.000% 3.700% 2.16%
- ----------------------------------------------------------------------------------------------------
Discount Rate - Bond Equiv. Yield 8.504% 7.200% 0.0575
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
INTERMEDIATE COMPUTATIONS
- ----------------------------------------------------------------------------------------------------
PV of Stock Ex-Ddividend 46.50 7.20 8.76
- ----------------------------------------------------------------------------------------------------
PV of Exercise Price 46.00 6.07 8.03
- ----------------------------------------------------------------------------------------------------
Cumulative Volatility 30.00% 0.00% 79.06%
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
CALL OPTION
- ----------------------------------------------------------------------------------------------------
Proportion of stock PV 57.37% 100.00% 69.37%
- ----------------------------------------------------------------------------------------------------
Proportion of exercise price PV -45.45% -100.00% -38.81%
- ----------------------------------------------------------------------------------------------------
Call Option Value 5.77 1.12 2.96
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
PUT OPTION
- ----------------------------------------------------------------------------------------------------
Proportion of stock PV -42.63% 0.00% -30.63%
- ----------------------------------------------------------------------------------------------------
Proportion of exercise price PV 54.55% 0.00% 61.19%
- ----------------------------------------------------------------------------------------------------
Put Option Value 5.27 0.00 2.23
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
call option value $ 2.96
- ----------------------------------------------------------------------------------------------------
times # options 3,000
- ----------------------------------------------------------------------------------------------------
$ 8,892.57
- ----------------------------------------------------------------------------------------------------
times tax rate or 41.3% $ 3,672.63
- ----------------------------------------------------------------------------------------------------
divided by term 10
- ----------------------------------------------------------------------------------------------------
equals compensation expense $ 367.26
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement is made and is effective as of November 30, 1998, by and
between Fallbrook National Bank ("Bank") and Barbara Ernst ("Executive").
WHEREAS, Executive is currently employed by the Bank in the capacity as
Senior Vice President/Marketing, and Executive's background, expertise and
efforts have contributed to the success and financial strength of the Bank; and
WHEREAS, the Bank wishes to assure itself of the continued opportunity to
benefit from Executive's services for the period provided in this Agreement, and
Executive wishes to serve in the employ of the Bank on a full-time basis solely
in accordance with the terms hereof for such purposes; and
WHEREAS, the Board of Directors of the Bank ("Board") has determined that
the best interests of the Bank would be served by Executive's continued
employment with the Bank under the terms of this Agreement;
NOW, THEREFORE, in order to effect the foregoing, the parties hereto wish
to enter into an employment agreement on the terms and conditions set forth
below. Accordingly, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties hereto agree as follows:
1. DEFINITIONS.
(a) "AGREEMENT" means this employment agreement and any amendments
hereto complying with Section 14(a) hereof.
(b) "BOARD" means the Board of Directors of the Bank unless the context
otherwise requires.
(c) "CAUSE" means:
(i) Executive's personal dishonesty, incompetence or willful
misconduct;
(ii) Executive's breach of fiduciary duty involving personal
profit
1
<PAGE>
(iii) Executive's intentional failure to perform Executive's
duties for the Bank after a written demand for performance is given to
Executive by the Board which demand specifically identifies the manner
in which the Board believes that Executive has not performed his
duties;
(iv) Executive's willful violation of any law, rule,
regulation or final cease and desist order (other than traffic
violations or similar minor offenses) to the extent detrimental to the
Bank's business or reputation; or
(v) Executive's material breach of any provision of this
Agreement.
(d) "CHANGE IN CONTROL" means a change of control of the Bank of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A (or in response to any similar item on any
similar schedule or form) promulgated under the Securities Exchange Act,
whether or not the Bank is then subject to such reporting requirement;
provided, however, that without limitation, a Change in Control shall be
deemed to have occurred if:
(i) there is a transfer, voluntarily or by hostile takeover,
by proxy contest (or similar action), operation of law, or otherwise,
of Control of the Bank;
(ii) any Person is or becomes the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act or
any successor provisions thereof), directly or indirectly, of
securities of the Bank representing 20% or more of the combined voting
power of the Bank's then outstanding securities;
(iii) the individuals who were members of the Board
immediately prior to a meeting of the shareholders of the Bank, which
meeting involves a contest for the election of directors, do not
constitute a majority of the Board following such meeting or election;
(iv) a merger, consolidation or sale of all or substantially
all of the assets of the Bank; or
(v) there is a change, during any period of two consecutive
years, of a majority of the Board as constituted as of the beginning of
such period, unless the election of each director who is not a director
at the beginning of such period was approved by a vote of at least
two-thirds of the directors then in office who were directors at the
beginning of such period.
(e) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
2
<PAGE>
(f) "CONTROL" means the possession, direct or indirect, by any Person
or "group" (as defined in Section 13(d) of the Securities Exchange Act) of the
power to direct or cause the direction of the management policies of the Bank,
whether through ownership of voting securities, by contract or otherwise, and in
any case means the ability to determine the election of a majority of the
directors of the Bank.
(g) "DISABILITY" means physical or mental illness resulting in
Executive's absence on a full-time basis from Executive's duties with the Bank
for 180 calendar days, subject to the procedure described in Section 7(a).
(h) "EXPIRATION" means the termination of this Agreement (including
Executive's employment hereunder) and of any further obligations of the parties
(except as specified in this Agreement) upon completion of the Tenn.
(i) "PERSON" means an individual, a group acting in concert, a
corporation, a partnership, an association, a joint stock company, a trust, any
unincorporated organization, a government or political subdivision thereof, or
any other entity whatsoever.
(j) "RESIGN FOR GOOD REASON" OR "RESIGNATION FOR GOOD REASON" has the
meaning found in Section 7(e).
(k) "TERM" means the initial term of this Agreement and any extensions
hereof, as provided in Section 4, whether prior to or following a Change in
Control.
(l) "TERMINATION" OR "TERMINATE(D)" means the termination of
Executive's employment hereunder for any of the following reasons unless the
context indicates otherwise:
(i) Retirement by Executive;
(ii) Death of Executive;
(iii) Disability;
(iv) Expiration,
(v) Resignation for Good Reason;
(vi) Resignation other than Resignation for Good Reason;
(vii) Termination Without Cause; and
3
<PAGE>
(viii) Termination for Cause.
(m) "TERMINATION WITHOUT CAUSE" OR "TERMINATE(D) WITHOUT CAUSE" means
the cessation of Executive's employment hereunder for any reason except:
(i) A resignation by Executive;
(ii) Termination for Cause;
(iii) Retirement;
(iv) Disability;
(v) Death; or
(vi) Expiration.
2. EMPLOYMENT. The Bank hereby agrees to continue to employ the Executive,
and the Executive hereby agrees to continue to serve the Bank, for the period
stated in Section 4 hereof and upon the terms and conditions set forth herein.
3. POSITION AND RESPONSIBILITIES. The Executive shall serve as Senior Vice
President/ Marketing of the Bank and, subject to the provisions of Section 5
below, shall have such responsibilities, duties and authority as are generally
associated with such positions and as may from time to time be assigned to the
Executive by the Board that are consistent with such responsibilities, duties
and authority. During the Term of this Agreement, the Executive shall devote all
his time, attention, skill and efforts during normal business hours to the
business and affairs of the Bank.
4. TERM OF AGREEMENT. Subject to the terms and provisions of this
Agreement, this Agreement and the period of Executive's employment shall be
deemed to have commenced as of November 30, 1998, and shall continue for an
initial term of two years and one month thereafter and any extensions
thereafter. The initial term shall automatically be extended for an additional
one (1) full calendar year without further action by the parties on January 1,
1999, and on each succeeding January 1 thereafter, such that as of each such
January 1, this Agreement shall have a remaining term of three (3) calendar
years. Each party may stop an automatic calendar year extension, however, by
serving written notice ("Notice of Non-Renewal") upon the other within 90
calendar days prior to January 1, 2001 or within 90 calendar days prior to
January 1 of any succeeding year, as the case may be, of such party's intention
that this Agreement shall expire at the end of such Term. In the event the Bank
retains Executive as an employee following the expiration of the Term, such
employment, absent a written agreement to the contrary, will be on an at-will
basis with such compensation and upon such terms as the parties may then agree,
subject to termination at any time with or without
4
<PAGE>
cause, and without liability. If the Bank does not retain Executive as an
employee after the Expiration of the Term, Executive's employment shall cease
without further liability of the parties to each other. Executive's employment
shall also terminate, and the Term of this Agreement will expire, upon
Executive's resignation (unless resignation is for Good Reason after a Change in
Control), retirement, death or Disability, or upon Executive's Termination for
Cause.
5. DUTIES.
(a) The Bank and Executive hereby agree that, subject to the provisions
of this Agreement, the Bank shall employ Executive, and Executive shall serve
the Bank as an executive officer for the Term of this Agreement. The specific
executive position(s) in which Executive will serve will be designated from time
to time by the Board.
(b) During the Term hereof, Executive shall devote substantially all of
his or her business time, attention, skill and efforts to the faithful
performance of the business of the Bank to the fullest extent necessary to
properly discharge his or her duties and responsibilities hereunder. Executive's
position and duties with the Bank shall be as identified from time to time by
the Board of Directors of the Bank. Further, with the approval of the Board,
from time to time, Executive may serve, or continue to serve, on the boards of
directors of, and hold any other offices or positions in, companies or
charitable, political or civic organizations, which, in such Board's judgment,
will not present any material conflict of interest with the Bank and will not
unfavorably affect the performance of Executive's duties pursuant to this
Agreement.
6. SALARY, BONUS PAYMENTS AND RELATED MATTERS.
(a) SALARY. During the period of the Executive's employment
hereunder, the Bank shall pay to the Executive a base salary of Seventy-Five
Thousand Dollars ($75,000.00) per year, payable at regular intervals in
accordance with the Bank's normal payroll practices now or hereafter in
effect. Executive's salary shall be reviewed at least annually by the Board
or a committee designated by the Board and shall be adjusted based upon
Executive's job performance and the Bank's financial condition and
performance; provided, however, that in no event shall Executive's monthly
salary be lower than the initial amount set forth above unless, in the good
faith judgment of the Board, the financial condition of the Bank requires a
general decrease in the salaries of executive officers of the Bank. The first
such salary review shall be undertaken no later than January 1, 2000, and
completed no later than March 31, 2000. Notwithstanding the foregoing, if there
is a Change in Control. Executive's salary shall not be less than
Executive's annual salary for the year immediately preceding the Change in
Control.
(b) INCENTIVE/BONUS PAYMENTS. During the period of the Executive's
employment hereunder, the Executive may receive such discretionary bonuses as
may be granted to him from time to time by the Board. In addition, Executive
shall be eligible to receive such bonuses up to thirty
5
<PAGE>
percent (30%) annual base salary, if any, as shall be awarded Executive pursuant
to Executive's Employee Incentive Plan, attached.
(c) EXPENSES. During the period of the Executive's employment
hereunder, the Executive shall be entitled to receive prompt reimbursement for
all reasonable and customary expenses incurred by the Executive in performing
services hereunder in accordance with the general policies and procedures
established by the Bank.
(d) EMPLOYEE BENEFITS AND PERKS. During the period of the Executive's
employment hereunder, the Executive shall be entitled to participate in all
employee benefits plans or arrangements of the Bank on the same basis as other
employees of the Bank including, without limitation, plans or arrangements
providing medical insurance, dental insurance, life insurance, disability
insurance, sick leave, vacation or retirement. Executive shall also be entitled
to (i) the continuation of an automobile allowance in the amount of $500.00 per
month, (ii) use of the Bank provided credit card(s), car telephone(s), pager(s)
and such other perks (if such is (are) being so provided) upon the terms and
conditions previously in effect.
7. TERMINATION.
(a) RESIGNATION, RETIREMENT, DEATH OR DISABILITY. Executive's
employment hereunder shall cease at any time by Executive's resignation (other
than a resignation for Good Reason as provided in Section 7(e)), or by
Executive's retirement, death or Disability. Disability shall be deemed to have
occurred only after the following procedure has been satisfied: If within 30
days after a written notice of proposed Termination for Disability is given to
Executive by the Bank, Executive has not returned to the full-time performance
of his duties, the Bank may end Executive's employment by giving written notice
of Termination for Disability. Such notice may be given by the Bank following
Executive's absence from Executive's duties by reason of physical or mental
disability for one hundred and fifty (150) consecutive calendar days.
(b) TERMINATION FOR CAUSE. Executive's employment shall cease upon a
good faith finding of Cause by the Board; provided, however, that Executive
shall be given written notice of the Board's finding of conduct by Executive
amounting to Cause for such termination. Said notice shall be accompanied by a
copy of a resolution duly adopted by the affirmative vote of not less than a
majority of a quorum of the Board at a duly-noticed meeting of the Board,
finding that in the good faith opinion of the Board, Executive was guilty of
conduct amounting to Cause and specifying the particulars thereof; provided,
however, that after a Change in Control, such resolution may be adopted only by
the affirmative vote of not less than a majority of a committee composed of at
least three (3) disinterested outside directors of the Bank. In the absence of
at least three (3) disinterested outside directors, a determination of Cause
shall be submitted to and made by an arbitrator(s) pursuant to Section 13
hereof.
6
<PAGE>
(c) TERMINATION WITHOUT CAUSE. Executive's employment may be terminated
Without Cause upon 30 days' notice for any reason, subject to the payment of
all amounts required by Section 8 hereof.
(d) EXPIRATION. Executive's employment shall cease, or shall continue
on an at-will basis as provided in Section 4 hereof, upon the expiration of the
Term of this Agreement as provided in Section 4 hereof.
(e) RESIGNATION FOR GOOD REASON. Following a Change in Control during
the Term hereof, Executive may, under the following circumstances, regard
Executive's employment as being constructively terminated by the Bank (and in
such case Executive's employment shall terminate) and may, therefore, Resign for
Good Reason within 90 days of Executive's discovery of the occurrence of one or
more of the following events, any of which shall constitute "Good Reason" for
such Resignation for Good Reason:
(i) Without Executive's express written consent, the
assignment to Executive of any duties materially inconsistent with
Executive's position, duties, responsibilities and status with the
Bank immediately prior to the Change in Control, or any subsequent
removal of Executive from or any failure to re-elect him to any such
position;
(ii) Without Executive's express written consent, the
termination and/or material reduction in Executive's facilities
(including office space and general location) and staff reporting and
available to Executive immediately prior to the Change in Control;
(iii) A material reduction (ten percent or greater) by the
Bank of Executive's base salary or of any bonus compensation applicable
to him as in effect immediately prior to the Change in Control;
(iv) A failure by the Bank to maintain any of the employee
benefits and perks to which Executive was entitled immediately prior to
the Change in Control at a level substantially equal to or greater than
the value of those employee benefits and perks in effect immediately
prior to the Change in Control; or the taking of any action by the Bank
which would materially affect Executive's participation in or reduce
Executive's benefits under any such benefits' or perks' plans, programs
or policies, or deprive Executive of any material fringe benefits
enjoyed by him immediately prior to the Change in Control;
(v) The Bank requiring Executive to be based anywhere other
than in the county in which the Bank's principal business location is
currently situated, except for required travel on the Bank's behalf to
an extent substantially consistent with Executive's present business
travel obligations;
7
<PAGE>
(vi) Any purported Termination of Executive's employment by
the Bank other than those effected in good faith pursuant to Sections
7(a) and 7(b);
(vii) The failure of the Bank to obtain the assumption of this
Agreement by any successor; or
(viii) Receipt by Executive of a Notice of Non-Renewal.
(f) SUPERVISORY SUSPENSION. If the Executive is suspended and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Sections 8(e) or (g) of the Federal Deposit Insurance
Act or similar statute, rule or regulation, the Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
shall, (i) pay the Executive all or part of the compensation withheld while its
obligations under this Agreement were suspended and (ii) reinstate (in whole or
in part) any of its obligations which were suspended.
(g) REGULATORY REMOVAL. If the Executive is removed and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Sections 8(e) or (g) of the Federal Deposit Insurance Act or
similar statute, rule or regulation, all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order.
8. PAYMENTS TO EXECUTIVE UPON TERMINATION.
(a) DEATH, DISABILITY OR RETIREMENT. In the event of Termination of
this Agreement due to Executive's death, Disability or retirement, Executive or
Executive's spouse and/or estate shall be entitled to all benefits generally
available to Bank employees, or their spouses and/or estates, as of the date of
such death, Disability or retirement, without reduction.
(b) RESIGNATION WITHOUT GOOD REASON OR EXPIRATION. In the event of
Executive's resignation (other than a Resignation for Good Reason), or upon
Expiration, the Bank shall have no further obligations to Executive under this
Agreement or otherwise, except as may be expressly required by law.
(c) TERMINATION FOR CAUSE. In the event Executive is Terminated for
Cause, the Bank shall have no further obligations to Executive under this
Agreement or otherwise, except as may be expressly required by law.
(d) TERMINATION WITHOUT CAUSE PRIOR TO A CHANGE IN CONTROL. Upon the
occurrence of a Termination Without Cause prior to a Change in Control, as
damages for breach of this Agreement, the Bank shall continue to provide
Executive his base salary then in effect, upon such
8
<PAGE>
terms and at such times as described herein, for a period of nine (9) months
following such Termination.
(e) TERMINATION WITHOUT CAUSE OR RESIGNATION FOR GOOD REASON, AFTER A
CHANGE IN CONTROL. If in the twenty-four (24) month period following a Change in
Control, Executive (i) Resigns for Good Reason or (ii) is otherwise Terminated
Without Cause, the Bank shall pay to Executive a lump sum payment equal to
eighteen (18) months base salary then in effect. Such lump sum shall be paid not
later than the tenth (10th) day following the date of Termination Without Cause
or a Resignation for Good Reason.
(f) SOURCE OF PAYMENTS. All payments provided in Section 8 shall be
paid in cash from the general funds of the Bank, and no special or separate
fund need be established and no other segregation of assets need be made to
assure payment.
(g) CONSISTENT RETURNS. The Bank and Executive agree that the payments
being made under this Agreement represent reasonable compensation for services
and that neither the Bank nor Executive will file any returns or reports which
take a contrary position.
(h) REDUCTION OF PAYMENT. Notwithstanding anything in the foregoing to
the contrary, if the payments made to Executive following a Termination Without
Cause or Resignation For Good Reason or any of the other payments provided for
in this Agreement, together with any other payments which Executive has the
right to receive from the Bank would constitute a "parachute payment" (as
defined in Section 280G of the Code), the payments pursuant to this Agreement
shall be reduced to the largest amount as will result in no portion of such
payments being subject to the excise tax imposed by Section 4999 of the Code;
provided, however, that the determination as to whether any reduction in the
payments under this Agreement pursuant to this proviso is necessary shall be
made in good faith by the Bank's independent auditors or if such firm is no
longer providing tax services to Bank to such other tax advisor as shall be
mutually acceptable to Bank and Executive, and such determination shall be
conclusive and binding on the Bank and Executive with respect to the treatment
of the payment for tax reporting purposes.
(i) SOLE REMEDY. The receipt of the amounts described in this Section
8, and attorneys' fees as set forth in Section 13, if any, shall constitute
Executive's sole remedy for breach of this Agreement against the Bank and its
officers, directors, employees and agents.
9. UNAUTHORIZED DISCLOSURE. During the period of his employment hereunder
and for a period of two years following the cessation of such employment
(irrespective of the reason therefor), Executive shall not, except as required
by any court, supervisory authority or administrative agency, without the
written consent of the Board or a person authorized thereby, disclose to any
person, other than an employee of the Bank or a person to whom disclosure is
reasonably necessary or appropriate
9
<PAGE>
in connection with the performance by the Executive of his duties as an employee
of the Bank, any confidential information obtained by him while in the employ of
the Bank; provided, however, that confidential information shall not include any
information known generally to the public (other than as a result of an
unauthorized disclosure by the Executive).
10. AGREEMENT NOT TO COMPETE. To the extent permitted by law, unless
otherwise approved in writing by the Bank, and except for a Termination Without
Cause Prior to a Change in Control, for a period of one (1) year from the date
of his cessation of employment by the Bank, Executive shall not directly or
indirectly enter into or in any manner take part in any business, profession or
endeavor which shall be competitive with the business of the Bank in any city
where the Bank has a full service branch office as an employee, officer, agent,
independent contractor, 10% or more owner of an entity, director or other
business representative; in addition, Executive agrees that for the one (1) year
period described herein, Executive shall not solicit any customer with whom the
Bank has done business during the preceding five years.
11. WAIVERS NOT TO BE CONTINUED. Any waiver by a party of any breach of
this Agreement by the other party shall not be construed as a continuing waiver
or as a consent to any subsequent breach by the other party.
12. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed, certified or registered mail, return receipt
requested, with postage prepaid, to the following addresses or to such other
address as either party may designate by like notice.
A. If to the Bank, to:
Fallbrook National Bank
130 West Fallbrook Street
Fallbrook, California 92028
Attn: Chairman of the Board
with a copy to:
Barnet Reitner, Esq.
REITNER & STUART
1319 Marsh Street
San Luis Obispo, California 93401
Facsimile: 805/545-8599
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<PAGE>
B. If to Executive, to:
Barbara Ernst
c/o Fallbrook National Bank
130 West Fallbrook Street
Fallbrook, California 92028
and to such other or additional person or persons as either party shall have
designated to the other party in writing by like notice.
13. ARBITRATION. Any dispute or controversy arising or in connection with
this Agreement shall, upon written request of one party to the other, be
submitted to and settled exclusively by arbitration in the State of California
and be governed by the California Arbitration Act as set forth in the California
Code of Civil Procedure. Notwithstanding the pendency of any such dispute or
controversy, the Bank shall continue to pay Executive's full compensation in
effect when the notice giving rise to the dispute was given and continue
Executive as a participant in all compensation, employee benefits and executive
benefits in which Executive was participating when the notice giving rise to the
dispute was given, until the dispute is finally resolved, except that no such
continuation of compensation or benefits shall apply if Executive is terminated
for Cause under Section 7(b) hereof. Judgment may be entered on the arbitrator's
award in any court of competent jurisdiction. The cost of such arbitration,
including reasonable attorney's fees, shall be borne by the losing party or in
such proportions as the arbitrator(s) shall decide. Arbitration shall be the
exclusive remedy of Executive and the Company and the award of the arbitrator(s)
shall be final and binding upon the parties. All reasonable costs, including
reasonable attorney's fees, incurred in enforcing an arbitration award in court,
or of seeking a court order to compel arbitration, shall be borne by the losing
party in such proceedings.
14. GENERAL PROVISIONS.
(a) ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement by the parties with respect to the subject matter hereof, and
supersedes and replaces all prior agreements among or between the parties,
unless otherwise provided herein. No amendment, waiver or termination of any
of the provisions hereof shall be effective unless in writing and signed by
the party against whom it is sought to be enforced. Any written amendment,
waiver, or termination hereof executed by the Bank and Executive shall be
binding upon them and upon all other Persons, without the necessity of
securing the consent of any other Person, and no Person shall be deemed to be
a third-party beneficiary under this Agreement.
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<PAGE>
(b) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same Agreement.
(c) NO WAIVER. Except as otherwise expressly set forth herein, no
failure on the part of any party hereto to exercise and no delay in exercising
any right, power or remedy hereunder shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power or remedy hereunder
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy.
(d) HEADINGS. The headings of the Sections of this Agreement have been
inserted for convenience of reference only and shall in no way restrict or
modify any of the terms or provisions hereof.
(e) SEVERABILITY. If for any reason any provision of this Agreement is
held invalid or unenforceable, such invalidity or enforceability shall not
affect the validity or enforceability of any other provision of this Agreement.
If any provision of this Agreement shall be held invalid or unenforceable in
part, such invalidity or unenforceability shall in no way effect the rest of
such provision not held so invalid, and the rest of such provision, together
with all other provisions of this Agreement, shall to the full extent consistent
with law continue in full force and effect.
(f) GOVERNING LAW. This Agreement shall be governed and construed
and the legal relationships of the parties determined in accordance with the
laws the United States and to the extent not inconsistent therewith the laws
of the State of California applicable to contracts executed and to be
performed solely in the State of California.
(g) ASSUMPTION. The Bank shall require any successor in interest
(whether direct or indirect or as a result of purchase, merger, consolidation,
Change in Control or otherwise) to all or substantially all of the business
and/or assets of the Bank to expressly assume and agree to perform the
obligations under this Agreement in the same manner and to the same extent that
the Bank would be required to perform it if no such succession had taken place.
(h) ADVICE OF COUNSEL. Executive acknowledges that he has been
encouraged to consult with legal counsel of his choosing concerning the terms of
this Agreement prior to executing this Agreement. Any failure by Executive to
consult with competent counsel prior to executing this Agreement shall not be a
basis for rescinding or otherwise avoiding the binding effect of this Agreement.
The parties acknowledge that they are entering into this Agreement freely and
voluntarily, with full understanding of the terms of this Agreement.
Interpretation of the terms and provisions of this Agreement shall not be
construed for or against either party on the basis of the identity of the party
who drafted the terms or provisions in question.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
ATTEST: FALLBROOK NATIONAL BANK
By: /s/ Thomas E. Swanson
- --------------------------------- ----------------------------
Its:
---------------------------
print name:
--------------------
THE EXECUTIVE
/s/ [ILLEGIBLE] /s/ Barbara C. Ernst
- --------------------------------- -------------------------------
Witness
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<PAGE>
FALLBROOK NATIONAL BANK
EMPLOYEE STOCK
OWNERSHIP PLAN
Effective January 1, 1997
<PAGE>
FALLBROOK NATIONAL BANK
EMPLOYEE STOCK OWNERSHIP PLAN
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Article I - PURPOSE...........................................................1
1.1 Exclusive Benefit..............................................1
1.2 No Rights of Employment Granted................................1
Article II - DEFINITIONS......................................................1
2.1 Accrued Benefit................................................1
2.2 Administrative Committee.......................................2
2.3 Affiliated Employer............................................2
2.4 Beneficiary....................................................2
2.5 Cash-Out.......................................................2
2.6 Code...........................................................2
2.7 Compensation...................................................3
2.8 Employee ......................................................3
2.9 Employer.......................................................3
2.10 Employer Account...............................................3
2.11 ERISA..........................................................3
2.12 Exempt Loan....................................................3
2.13 Fair Market Value..............................................3
2.14 Family Member..................................................4
2.15 Forfeiture.....................................................4
2.16 Highly Compensated Employee....................................4
2.17 Hours of Service...............................................5
2.18 Leave of Absence...............................................6
2.19 Net Profits....................................................6
2.20 Normal Retirement Age..........................................7
2.21 One Year Break in Service......................................7
2.22 Participant....................................................7
2.23 Plan...........................................................7
2.24 Plan Administrator.............................................7
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2.25 Plan Year.....................................................7
2.26 Qualified Election Period.....................................8
2.27 Qualified Participant.........................................8
2.28 Qualifying Employer Security..................................8
2.29 Retirement....................................................8
2.30 Service.......................................................8
2.31 Termination Date..............................................9
2.32 Total and Permanent Disability................................9
2.33 Total Service for Vesting.....................................9
2.34 Trust.........................................................9
2.35 Trust Fund....................................................9
2.36 Unallocated Stock Account.....................................10
2.37 Year of Service for Accrual of Benefits.......................10
2.38 Year of Service for Participation.............................10
2.39 Year of Service for Vesting...................................10
Article III - ELIGIBILITY TO PARTICIPATE......................................10
3.1 Initial Entry..................................................10
3.2 Resumption of Participation....................................11
Article IV - CONTRIBUTIONS TO THE TRUST......................................11
4.1 Amount of Contributions to Participants........................11
4.2 Manner of Allocation...........................................11
4.3 Permissible Types of Employer Contributions....................12
4.4 Interim Allocation to Unallocated Stock Account................12
4.5 General Accounting.............................................12
4.6 Additional Provisions..........................................12
Article V - ADMINISTRATION OF ACCOUNTS.......................................13
5.1 Investments....................................................13
5.2 Invest in Single Fund and Reasonable Rules.....................13
5.3 Valuation of Assets and Allocation of Changes..................13
5.4 Limitations on Allocations to Each Participant.................14
(a) Defined Contribution Plan Limitations.....................14
(b) Defined Benefit Plan Limitations..........................15
(c) Social Security Retirement Age Limitations................15
(d) Combination Defined Benefit and Defined Contribution
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Plan Limitations..........................................16
5.5 Designation of Beneficiary.....................................17
5.6 Participant Voting and Exercise of Stock Rights................17
Article VI - VESTING..........................................................18
6.1 Employer Account Vesting on Death, Retirement, or
Total Permanent Disability.....................................18
6.2 Employer Account Vesting on Termination........................18
6.3 Restoration of Forfeitures.....................................19
Article VII - DISTRIBUTION OF BENEFITS........................................20
7.1 Method of Distribution of Participant and Employer Accounts....20
7.2 Time of Distribution...........................................20
7.3 Segregation if Installment Distribution........................21
7.4 Non-segregation if Installment Distribution....................22
7.5 Distribution After Death of Participant........................22
7.6 Distribution After Death of Beneficiary........................22
7.7 Rollover Contributions and Distributions.......................22
7.8 Suspense Account for Terminated Participants...................23
7.9 Unable to Locate Participant or Beneficiary....................24
7.10 Repayment of Cash-Out..........................................25
7.11 Distribution of Dividends......................................25
7.12 Diversification of Investments.................................25
7.13 Qualified Domestic Relations Orders............................26
Article VIII - DUTIES AND AUTHORITY OF TRUSTEE................................26
8.1 Receive Payments...............................................26
8.2 Evaluate Assets................................................27
8.3 Segregation of Accounts........................................27
8.4 Tax Returns and Reports........................................27
8.5 Powers.........................................................27
8.6 Expenses.......................................................29
8.7 Litigation.....................................................29
8.8 Written Instructions...........................................29
8.9 Appointment of Investment Manager..............................30
8.10 Removal and Resignation of the Trustee.........................30
8.11 Loans from Disqualified Persons................................30
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Article IX - DUTIES AND AUTHORITY OF ADMINISTRATIVE COMMITTEE.................31
9.1 Appointment....................................................31
9.2 No Discrimination..............................................32
9.3 Majority Action................................................32
9.4 Powers.........................................................32
9.5 Filing Reports.................................................33
9.6 Records and Information........................................33
9.7 Information to Participants....................................33
9.8 Compensation of Members........................................33
9.9 Review of Participant's Claims.................................33
9.10 Exercise of Stock Rights.......................................33
Article X - MODIFICATIONS FOR TOP HEAVY PLANS.................................34
10.1 Application of Article.........................................34
10.2 Definitions....................................................34
(a) Top Heavy Plans...........................................34
(b) Toy Heavy Group...........................................34
(c) Key Employee..............................................35
(d) Amounts Included for Computation Purposes.................35
(e) Non-Key Employee..........................................36
(f) Top Heavy Accrual.........................................36
10.3 Accelerated Vesting............................................36
10.4 Minimum Contributions..........................................37
10.5 Limitation on Compensation Taken into Account Under Plan.......38
10.6 Modification of Defined Benefit and Defined Contribution
Plan Fraction..................................................38
Article XI - AMENDMENT AND TERMINATION........................................38
11.1 Rights to Suspend or Terminate Plan............................38
11.2 Successor Corporation..........................................38
11.3 Amendment......................................................39
11.4 One Hundred Percent (100%) Vesting on Termination of Plan......39
11.5 Plan Merger or Consolidation...................................39
Article XII - MISCELLANEOUS...................................................39
12.1 Laws of California to Apply....................................39
12.2 Participant Cannot Transfer or Assign Benefits.................40
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12.3 Right to Perform Alternative Acts..............................40
12.4 Reversion of Contributions Under Certain Circumstances.........40
12.5 Plan Administrator Agent for Service of Process................41
12.6 Filing Tax Returns and Reports.................................41
12.7 Indemnification................................................41
12.8 Number and Gender..............................................41
Article XIII - EXEMPT LOANS...................................................42
13.1 Use of Proceeds................................................42
13.2 Interest Rate..................................................42
13.3 Non-recourse...................................................42
13.4 Limitations on Payments........................................42
13.5 Forfeiture of Qualifying Employer Securities...................43
13.6 Limitation on Future Obligation................................43
</TABLE>
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<PAGE>
FALLBROOK NATIONAL BANK
EMPLOYEE STOCK OWNERSHIP PLAN
This Stock Bonus Employee Stock Ownership Plan and Trust Agreement (Plan) is
made by and between Fallbrook National Bank, a corporation of the State of
California, having its principal place of business at 130 West Fallbrook,
Fallbrook, California, herein called "Employer" and Thomas E. Swanson and
Granger Haugh, herein called "Trustees".
Whereas, Employer desires to establish and maintain an employee stock ownership
plan for the benefit of its Employees who shall qualify as participants
(Participants) hereunder;
Therefore, effective January 1, 1997, Employer hereby establishes an employee
stock ownership plan and creates this Trust for the purpose of carrying out such
Plan and Trust on the following terms:
Article I
PURPOSE
1.1 EXCLUSIVE BENEFIT.
This Plan has been executed for the exclusive benefit of the Participants
hereunder and their Beneficiaries. This Plan shall be interpreted in a
manner consistent with this intent and with the intention of the Employer
that this Plan satisfy Internal Revenue Code (Code) Section 401 and Code
Section 501. This Plan is created for the sole purpose of enabling
employees of the Employer to share in its growth. Under no circumstances
shall the Trust Fund ever revert to or be used or enjoyed by the
Employer, except as provided in Reversion of Contributions Under Certain
Circumstances section below.
1.2 NO RIGHTS OF EMPLOYMENT GRANTED.
The establishment of this Plan shall not be considered as giving any
employee the right to be retained in the service of the Employer.
Article II
DEFINITIONS
The following capitalized words and phrases as used in this Plan and Trust
Document shall have the meanings set forth below.
2.1 ACCRUED BENEFIT.
The "Accrued Benefit" is the amount credited to the Employer Account of a
Participant.
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2.2 ADMINISTRATIVE COMMITTEE.
The "Administrative Committee" or "Committee" shall refer to the
Administrative Committee, as defined in the Duties and Authority of
Administrative Committee Article, below.
2.3 AFFILIATED EMPLOYER.
"Affiliated Employer" shall mean the Employer and any corporation which
is a member of a controlled group of corporations (as defined in Code
Section 414(b)) which includes the Employer; any trade or business
(whether or not incorporated) which is under common control (as
defined in Code Section 414(c)) with the Employer; an organization
(whether or not incorporated) which is a member of an affiliated service
group (as defined in Code Section 414(m)) which includes the Employer;
and any other entity required to be aggregated with the Employer pursuant
to regulations under Code Section 414(o).
2.4 BENEFICIARY.
A "Beneficiary" is any person, estate or trust who by operation of law,
or under the terms of the Plan, or otherwise, is entitled to receive any
Accrued Benefit of a Participant under the Plan. A "Designated
Beneficiary" is any individual designated or determined in accordance
with the Designation of Beneficiary section below, except that it shall
not include any person who becomes a Beneficiary by virtue of the laws of
inheritance or intestate succession.
2.5 CASH-OUT.
A "Cash-Out" may be involuntary or voluntary.
An involuntary Cash-Out is a distribution of Accrued Benefit to a former
Participant which meets the following requirements: (i) the former
Participant's entire non-forfeitable Accrued Benefit is distributed to
him; (ii) the present value of the non-forfeitable Accrued Benefit of the
Participant has never exceeded three thousand five hundred dollars
($3,500), and (iii) the distribution is made on account of the Employee's
termination of participation in the Plan.
A voluntary Cash-Out is a distribution of Accrued Benefits to a former
Participant which meets the following requirements: (i) the former
Participant has voluntarily elected to receive the distribution; and (ii)
the distribution is made on account of the Employee's termination of
participation in the Plan.
2.6 CODE.
"Code" refers to the Internal Revenue Code of 1986, as amended.
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2.7 COMPENSATION.
"Compensation" refers to all Compensation paid during the Plan Year under
consideration as W-2 income by the Employer to an Employee, excluding
director's fees and including amounts deferred pursuant to Code Section
401(k)(2), or Code Section 403(b), or contributed to any welfare benefit
plans maintained by the Employer through a reduction in the Employee's
compensation which, pursuant to Code Section 125, are not included in
the gross income of the Employee for the taxable year in which such
amounts are contributed. It excludes all contributions by the Employer to
the Plan and to any other retirement or deferred compensation plan
maintained by the Employer (except amounts deferred pursuant to Code
Section 401(k)(2) or Section 403(b) or contributed pursuant to Code
Section 125) and excludes amounts in excess of one hundred fifty thousand
dollars ($150,000) for the Plan Year or such other amount as may be
prescribed by law.
2.8 EMPLOYEE.
An "Employee" is an individual who is employed by the Employer or who is
on a Leave of Absence, and shall include leased Employees within the
meaning of Code Section 414(n)(2). Directors acting solely in that
capacity and independent contractors shall not be Employees.
2.9 EMPLOYER.
The "Employer" shall mean Fallbrook National Bank and any Affiliated
Employer.
2.10 EMPLOYER ACCOUNT.
The "Employer Account" is the separate account maintained for each
Participant to which all Employer contributions shall be allocated and to
which forfeitures shall be reallocated.
2.11 ERISA.
"ERISA" refers to the Employee Retirement Income Security Act of 1974, as
amended.
2.12 EXEMPT LOAN.
"Exempt Loan" shall mean a loan to the Plan by a disqualified person (as
defined in Code Section 4975(e)(2)) or a loan to the Plan which is
guaranteed by a disqualified person. Such loan includes a direct loan of
cash, a purchase-money transaction, and an assumption of the obligation
by the Plan. The Exempt Loan must satisfy the provisions of Treasury
Regulation Section 54.4975-7(b).
2.13 FAIR MARKET VALUE.
"Fair Market Value" shall mean the closing price (or, if there is no
closing price, then the closing bid price) of Qualifying Employer
Securities as reported on the Composite Tape, or if not reported thereon,
then such price as reported in the trading reports of the
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principal securities exchange in the United States on which such
Qualifying Employer Securities are listed, or if the Qualifying Employer
Securities are not listed on a securities exchange in the United States,
the mean between the dealer closing "bid" and "ask" prices on the
over-the-counter market as reported by the National Association of
Securities Dealers Automated Quotation System (NASDAQ), or NASDAQ's
successor, or if not reported on NASDAQ, the Fair Market Value of the
Qualifying Employer Securities as determined by a qualified independent
appraiser meeting requirements similar to those contained in Treasury
regulations under Code Section 170(a)(1) and Department of Labor
Regulations under ERISA Section 3(18).
2.14 FAMILY MEMBER.
A "FAMILY MEMBER" includes the spouse, lineal ascendants and descendants
of the Employee or former Employee and the spouses of such lineal
ascendants and descendants.
2.15 FORFEITURE.
"Forfeiture" refers to the amount of non-vested Accrued Benefits in a
Participant's Employer Account which are reallocated to the Employer
Accounts of other Participants.
2.16 HIGHLY COMPENSATED EMPLOYEE.
A "Highly Compensated Employee" means a highly compensated active
Employee and a highly compensated former Employee.
A highly compensated active Employee for a determination 1 year includes
any Employee who performs service for the Employer during the
determination year and who: (i) was a five percent (5%) owner (as defined
in Code Section 416(i)(1)) of the Employer at any time during the
determination year or the look-back year, or (ii) for the look-back year
had compensation from the Employer in excess of eighty thousand dollars
($80,000.00) (as adjusted pursuant to Code Section 415(d)) and, if the
Employer elects for such look-back year, was in the top-paid group of
Employees for the look-back year.
An Employee is in the top-paid group of Employees for any year if such
Employee is in the group consisting of the top twenty percent (20%) of
the Employees when ranked on the basis of compensation (as defined in
Code Section 414(q)(4)) paid during such year. For purposes of
determining the number of Employees in the top-paid group the following
Employees shall be excluded: (i) Employees who have not completed six (6)
months of service; (ii) Employees who normally work less than seventeen
and one-half (17.5) hours per week; (iii) Employees who normally work
during not more than six (6) months during any year; (iv) Employees who
have not attained age twenty-one (21); and (v) except to the extent
provided in Treasury Regulations, Employees who are included in a unit of
Employees covered by an agreement which the Secretary of Labor finds to
be a collective bargaining agreement between employee representatives
and the Employer.
For this purpose, the determination year shall be the Plan Year unless
the Employer elects a calendar year. The look-back year shall be the
twelve (12) month period immediately preceding the determination year,
or, if elected by the Employer, the calendar year ending with or within
the applicable determination year (or, in the case of
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<PAGE>
a determination year that is shorter than twelve (12) months, the
calendar year ending with or within the twelve (12) month period ending
with the end of the applicable determination year), or, if elected, the
calendar year immediately preceding the calendar year determination year.
A highly compensated former Employee for a Plan Year includes any
Employee who separated from service (or was deemed to have separated)
prior to such Plan Year, performs no services for the Employer during
such Plan Year, and was a highly compensated active Employee for either
the Plan Year during which the separation occurred (or was deemed to have
occurred) or any Plan Year ending on or after the Employee's fifty-fifth
(55th) birthday.
The determination of who is a Highly Compensated Employee, including the
determinations of the number and identity of Employees in the top-paid
group and the compensation that is considered, will be made in accordance
with Code Section 414(q) and the regulations promulgated thereunder.
2.17 HOUR OF SERVICE.
"Hour of Service" means:
(a) Each hour for which an Employee is directly or indirectly
compensated or entitled to Compensation from the Employer for the
performance of duties during the applicable computation period;
(b) Each hour for which an Employee is directly or indirectly
compensated or entitled to Compensation from the Employer
(irrespective of whether the employment relationship has
terminated) for reasons other than performance of duties (such as
vacation, holidays, sickness, disability, lay-off, military duty
or leave of absence) during the applicable computation period; and
(c) Each hour for which back pay is awarded or agreed to by the
Employer, without regard to mitigation of damages.
Hours of Service will be credited for employment with other members of an
affiliated service group (under Code Section 414(m)), a controlled group
of corporations (under Code Section 414(b)), or a group of trades or
businesses under common control (under Code Section 414(c)) of which the
Employer is a member or any other entity required to be aggregated with
the Employer pursuant to regulations under Code Section 414(o).
Hours of Service will also be credited for any individual considered an
Employee for purposes of this Plan under Code Section 414(n).
Notwithstanding subparagraph (b) above, no more than five hundred one
(501) Hours of Service are required to be credited to an Employee on
account of any single continuous period during which the Employee
performs no duties (whether or not such period occurs in a single
computation period), and an hour for which an Employee is directly or
indirectly paid, or entitled to payment, on account of a period during
which no duties are performed is not required to be credited to the
Employee if such payment is made or due
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under a Plan maintained by the Employer solely for the purpose of
complying with applicable worker's compensation, unemployment
compensation or disability insurance laws. In addition, Hours of Service
are not required to be credited hereunder for a payment which solely
reimburses an Employee for medical or medically related expenses incurred
by the Employee. The provisions of Sections 2530.200b-2(b) and (c) of the
Department of Labor Regulations are incorporated herein by reference.
For purposes of this Hour of Service section, a payment shall be deemed
to be made by or due from the Employer regardless of whether such payment
is made by or due from the Employer directly or indirectly through a
trust, fund or insurer to which the Employer contributes or pays
premiums.
2.18 LEAVE OF ABSENCE.
A "Leave of Absence" shall refer to that period during which the
Participant is absent without Compensation and for which the
Administrative Committee, in its sole discretion, has determined him to
be on a "Leave of Absence" instead of having terminated his employment.
(However, such discretion of the Administrative Committee shall be
exercised in a nondiscriminatory manner.) In all events, a Leave of
Absence by reason of service in the armed forces of the United States
shall end no later than the time at which a participant's re-employment
rights as a member of the armed forces cease to be protected by law and a
Leave of Absence for any other reason shall end after six (6) months,
except that if the Participant resumes employment with the Employer
prior thereto, the Leave of Absence shall end on such date of resumption
of employment. The date that the Leave of Absence ends shall be deemed
the Termination Date if the Participant does not resume employment with
the Employer. In determining a Year of Service for Accrual of Benefits,
all such Leaves of Absence shall be considered to be periods when the
Employee is a Participant.
2.19 NET PROFITS.
The "Net Profits" mean the Employer's Net Profits for the taxable year of
the Employer (coinciding with or within which the plan year ends) as
calculated at the end of the taxable year, in accordance with the
Employer's regular accounting practices, before state and federal income
taxes and without reduction by reason of the Employer's contributions
under the Plan and any other Plan maintained by the Employer and
described in Code Section 401(a) and Section 403(a).
The "Net Profits" shall also mean the Employer's accumulated Net Profits
for all years prior to the taxable year of the Employer, described in the
preceding paragraph of this section. Such accumulated Net Profits shall
be calculated in accordance with the Employer's regular accounting
practices, before state and federal income taxes which would be refunded
(as a result of contributions to the Plan), without reduction by reason
of the Employer's contributions, made for the current Plan Year, under
the Plan and any other Plan maintained by the Employer and described in
Code Section 401(a) or Section 403(a).
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2.20 NORMAL RETIREMENT AGE
The 'Normal Retirement Age" shall be sixty-five (65) years of age or, if
later, the fifth anniversary of the date of which an individual commenced
participation in the Plan.
2-21 ONE YEAR BREAK IN SERVICE
A "One Year Break in Service" means a Plan Year in which the Participant
has not completed more than five hundred (500) Hours of Service.
However, in determining a One Year Break in Service for a Plan Year in
which, or following which, a maternity or paternity absence (as defined
below) occurs, the following shall apply: the Hours of Service which
normally would have been credited but for the maternity or paternity
absence (or eight (8) Hours of Service per day if the Administrative
Committee is unable to determine the Hours of Service which normally
would have been credited) shall be credited to the Plan Year in which
such absence begins, if the Employee would incur a One Year Break in
Service if the hours were not so credited; in all other cases the Hours
of Service shall be credited to the following Plan Year. The total Hours
of Service credited under a maternity or paternity absence shall not
exceed five hundred one (501) hours. A "maternity or paternity absence"
is one in which the Employee is absent from work because of (i) the
pregnancy of the Employee, (ii) the birth of a child of the Employee,
(iii) the placement of a child with the employee in connection with the
adoption of such child by the Employee, or (iv) the caring for such child
immediately following such birth or placement. As a condition of an
Employee being credited with Hours of Service pursuant to this paragraph,
the Administrative Committee can require that the Employee timely furnish
such information as is reasonably necessary to establish that the absence
from work was for a cause stated in subparagraphs (i)-(iv) and the
number of days attributable to such cause.
2.22 PARTICIPANT.
A "Participant" shall refer to every Employee or former Employee who has
met the applicable participation requirements of Article III.
2.23 PLAN.
" Plan" refers to this Stock Bonus Employee Stock Ownership Plan and
Trust Agreement.
2.24 PLAN ADMINISTRATOR.
The "Plan Administrator" shall be the Administrative Committee designated
in a resolution adopted by the board of directors of the Employer,
pursuant to Article IX, who shall accept the designation in writing.
2.25 PLAN YEAR.
A "Plan Year" is the period from the first day of January to the last day
of December, annually.
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2.26 QUALIFIED ELECTION PERIOD.
"Qualified Election Period" shall mean the period of six (6) Plan Years
beginning with the later of (i) the Plan Year after the Plan Year in
which the Participant attains age fifty-five (55); or, (ii) the Plan Year
after the Plan Year in which the Participant first becomes a Qualified
Participant.
2.27 QUALIFIED PARTICIPANT.
"Qualified Participant" shall mean a Participant who has attained age
fifty-five (55) and who has completed at least ten (10) years of
participation in the Plan.
2.28 QUALIFYING EMPLOYER SECURITY.
"Qualifying Employer Security" shall mean Common Stock of the Employer
which meets the requirements of Code Section 409(l).
2.29 RETIREMENT.
"Retirement" refers to the termination of employment of an Employee who
has attained at least the Normal Retirement Age. The Employee may work
beyond Normal Retirement Age, in which case Employer contributions and
Forfeitures shall continue to be allocated to the Employer Account of the
Employee.
2.30 SERVICE.
"Service" means:
(a) The period (measured in years and days) for which an Employee is
directly or indirectly compensated or entitled to Compensation
from the Employer for the performance of duties during the
applicable computation period;
(b) The period for which an Employee is directly or indirectly
compensated or entitled to Compensation from the Employer
(irrespective of whether the employment relationship has
terminated) for reasons other than performance of duties (such as
vacation, holidays, sickness, disability, lay-off, military duty
or leave of absence) during the applicable computation period; and
(c) Each period prior to or after the effective date of this Plan for
which an Employee was directly or indirectly paid or entitled to
be paid by the Predecessor Employer.
Service will be credited for employment with other members of an
affiliated service group (under Code Section 414(m)), a controlled
group of corporations (under Code Section 414(b)), or a group of trades
or businesses under common control (under Code Section 414(c)) of
which the Employer is a member or any other entity required to be
aggregated with the Employer pursuant to regulations under Code Section
414(o) for the period of such affiliation or common control.
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Notwithstanding subparagraph (b), above, no more than five hundred one
(501) Hours of Service is required to be credited to an Employee on
account of any single continuous period during which the Employee
performs no duties (whether or not such period occurs in a single
computation period), and for which an Employee is directly or indirectly
paid, or entitled to payment, if such payment is made or due under a plan
maintained by the Employer solely for the purpose of complying with
applicable worker's compensation, unemployment compensation or disability
insurance laws. The provisions of Sections 2530.200b-2(b) and (c) of the
Department of Labor Regulations are incorporated herein by reference.
2.31 TERMINATION DATE.
The "Termination Date" shall be the date on which the earliest of the
following events occurs: (a) a Participant's Retirement, (b) a
Participant's termination of employment as a result of total and
permanent disability; (c) a Participant's death, or (d) a Participant's
termination of employment for any other reason.
2.32 TOTAL AND PERMANENT DISABILITY.
"Total and Permanent Disability" shall refer to the Participant suffering
from a physical or mental condition which in the sole discretion of the
Administrative Committee, based upon appropriate medical reports and
examinations, may be expected to result in death or be of long and
indefinite duration and which renders the Participant incapable of
performing any substantial gainful activity and which qualifies as Total
and Permanent Disability under the federal Social Security Act.
2.33 TOTAL SERVICE FOR VESTING.
"Total Service for Vesting" shall mean the sum of each separate Year of
Service for Vesting credited to the Participant; however, if the
Participant incurs at least five (5) consecutive One Year Breaks in
Service, his Years of Service for Vesting rendered after such break in
service shall only be counted for purposes of determining his vested
benefits accruing after such break in service, not for determining his
Vested benefits accruing before such break.
2.34 TRUST.
"Trust" means the Trust created under this Employee Stock Ownership Plan
and Trust Agreement.
2.35 TRUST FUND.
The "Trust Fund" consists of the Employer and Participant contributions
held by the Plan and any income or appreciation thereon.
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2.36 UNALLOCATED STOCK ACCOUNT.
The Account used to hold Qualifying Employer Securities acquired with
loan proceeds pursuant to the "Loans from Disqualified Persons" section
below.
2.37 YEAR OF SERVICE FOR ACCRUAL OF BENEFITS.
A "Year of Service for Accrual of Benefits" means a Plan Year during
which the Employee had not less than one thousand (1,000) Hours of
Service as a Participant. If the Participant entered the Plan other than
on the first (1st) day of the Plan Year, all Hours of Service rendered by
the Participant during that Plan Year, whether or not rendered as a
Participant, shall be treated as if they were Hours of Service as a
Participant.
2.38 YEAR OF SERVICE FOR PARTICIPATION.
A "Year of Service for Participation" means the twelve (12)-consecutive
month period, the first (1st) day of which is the day the Employee was
first required to be credited with an Hour of Service, provided the
Employee was credited with not less than one thousand (1,000) Hours of
Service during such period. If the Employee does not have one thousand
(1,000) Hours of Service for such twelve (12)-consecutive month period, a
Year of Service for Participation shall be the earliest twelve
(12)-consecutive month period coinciding with the Plan Year (which begins
during the Employee's initial twelve (12)-consecutive months of
employment) in which the Employee is credited with one thousand (1,000)
Hours of Service.
In case the Employee completes at least one (1) Year of Service for
Participation and then has at least a One Year Break in Service, a Year
of Service for Participation following such break in service shall begin
on the first day following the One Year Break in Service on which his
employment resumes. If the Employee does not perform one thousand (1,000)
Hours of Service during such period, a Year of Service for Participation
shall be the earliest twelve (12)month period coinciding with the Plan
Year (which begins during the twelve (12)-month period in which the
Employee returns to work) in which the Employee has one thousand (1,000)
Hours of Service.
2.39 YEAR OF SERVICE FOR VESTING
A "Year of Service for Vesting" shall mean a Plan Year during which the
Employee had not less than one thousand (1,000) Hours of Service after
attaining age eighteen (18). An Employee will not be credited for Years
of Service prior to the effective date of this Plan.
Article III
ELIGIBILITY TO PARTICIPATE
3.1 INITIAL ENTRY.
Every Employee who has attained the age of twenty one (21) and completed
a Year of Service for Participation shall participate in the Plan on the
first (1) day of the Plan Year in which such eligibility requirements are
met. All Participants shall be required
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to furnish such information to the Administrative Committee as it may
reasonably request for the proper administration of the Plan.
3.2 RESUMPTION OF PARTICIPATION.
A Participant who is reemployed by the Employer without having incurred
a One Year Break in Service shall be a Participant as of the first (1st)
day of the month following the date of his reemployment. If an Employee
incurs at least a One Year Break in Service, his active participation in
the Plan shall be suspended until he completes a Year of Service for
Participation following such One Year Break in Service. Upon completing a
Year of Service for Participation after such One Year Break in Service,
measured from his re-employment commencement date, the Participant will
be readmitted to active participation in the Plan as of the first day of
the Plan Year in which the Participant completes such Year of Service for
Participation.
The Committee may adjust the above service requirement, as necessary, to
make the Plan available to a newly-acquired Employee group, provided that
the adjustment (1) is not more restrictive than the above requirement,
and (2) does not discriminate in favor of Highly Compensated Employees.
Article IV
CONTRIBUTIONS TO THE TRUST
4.1 AMOUNT OF CONTRIBUTIONS TO PARTICIPANTS.
Subject to the rights of the Employer under Article XI, the Employer may
make a contribution to the Trust from its Net Profits beginning with the
first Plan Year ending on or after the effective date of the Plan. The
amount of the contribution shall be discretionary with the Employer and
shall be paid to the Trustees on or before the time required by law for
filing the Employer's federal income tax return (including extensions)
for the year with respect to which the contribution is made. However, no
Employer contributions may be made in any Plan Year to the extent that
they would be directly allocated to the suspense account created pursuant
to the Limitation on Allocations to Each Participant section below.
4.2 MANNER OF ALLOCATION.
(a) All contributions by the Employer for any Plan Year, plus all
Forfeitures, if any, during such year, shall be allocated as of
the last day of such year to the Employer Account of each
individual Participant, who is an Employee on the last day of such
Plan Year, and who has a Year of Service for Accrual Benefits for
the Plan Year, in the same proportion that each such Participant's
Compensation for the Plan Year bears to the total Compensation of
all such Participants for the Plan Year. Employees who terminate
employment before the last day of the Plan Year on account of
death or Retirement shall receive an allocation regardless of
whether they have a Year of Service for Accrual of Benefits for
such Plan Year.
(b) If allocation of Employer contributions in accordance with Section
(a) above will result in an allocation of more than one-third
(1/3) of the total contributions for a
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Plan Year to the accounts of Highly Compensated Employees, then
allocation of such amounts shall be adjusted so that it will be
allocated to the Participants who are not Highly Compensated
Employees. Notwithstanding anything to the contrary contained in
this Manner of Allocation section, no Qualifying Employer
Securities may be allocated to the Employer Account of any
Participant who sold such Qualifying Employer Securities to the
Plan, any person who is a member of the family of such person
(within the meaning of Code Section 267(c)(4)), or any person
who owns more than twenty-five percent (23%) in value of any class
of outstanding Qualifying Employer Securities (after the
application of Code Section 318(a)).
4.3 PERMISSABLE TYPES OF EMPLOYER CONTRIBUTIONS
Payments on account of the contributions due from the Employer for any
year may be made in cash or in kind, specifically including Qualifying
Employer Securities; except that assets may not be contributed if such
contribution violates the prohibited transaction rules of Code Section
4973, or the corresponding rules under ERISA Section 406, if applicable.
4.4 INTERIM ALLOCATION TO UNALLOCATED STOCK ACCOUNT.
Qualifying Employer Securities purchased with an Exempt Loan when
initially acquired by the Trustees shall be credited to the Unallocated
Stock Account. The balance in the Unallocated Stock Account shall be
released in accordance with Section 8.11 and the Qualifying Employer
Securities so released shall be allocated as of the last day of each Plan
Year in accordance with Manner of Allocation section above.
4.5 GENERAL ACCOUNTING.
The Committee shall establish accounting procedures for the purpose of
making the allocations to Participant's Accounts provided for in this
Article IV. The Committee shall maintain adequate records of the
aggregate cost basis of Qualifying Employer Securities allocated to each
Participant's Employer Account. The Committee shall also keep separate
records of financed shares and discretionary contributions (and any
earning thereon) made for the purpose of enabling the Trust to repay any
Exempt Loan. From time to time, the Committee may modify the accounting
procedures for the purposes of achieving equitable and nondiscriminatory
allocations among the accounts of Participants in accordance with the
general concepts of the Plan, the provisions of this Article IV and the
requirements of the Code and ERISA.
4.6 ADDITIONAL PROVISIONS.
Employer contributions shall not be made for any Plan Year in amounts
which cannot be allocated to Participant's accounts by reason of the
allocation limitations described in Article V or in amounts which are not
deductible under Code Section 404(a). Any Employer Contributions which
are not deductible under Code Section 404(a) may be returned to the
Employer be the Trustees (upon the direction of the Employer) within one
(1) year after the disallowance of the deduction or after it is
determined that the deduction is not available. In the event that
Employer Contributions are paid to the Trust by reason of a mistake of
fact, such Employer Contributions may be returned to the
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Employer by the Trustees (upon the direction of the Employer) within one
(1) year after the payment to the Trust.
Article V
ADMINISTRATION OF ACCOUNTS
5.1 INVESTMENTS.
The amounts allocated to the Employer Accounts shall be invested by the
Trustees as directed in accordance with Article VIII, primarily in
Qualifying Employer Securities.
5.2 INVEST IN SINGLE FUND AND REASONABLE RULES
The Trustees may cause all contributions paid to it by the Employer and
the income therefrom, without distinction between principal and income,
to be held and administered as a single fund, and the Trustees shall not
be required to invest separately any share of any Participant except as
provided in the Non-segregation if Installment Distribution section
below. The Trustees may adopt reasonable rules for the administration of
such common fund and for the determination of the proportionate interest
of each Participant in the fund.
5.3 VALUATION OF ASSETS AND ALLOCATION OF CHANGES
The assets of the Trust Fund will be valued as of the close of the last
day of each Plan Year at their Fair Market Value in accordance with
Section 2.13 and the Employer Account of each Participant (or Employer
Accounts if the Participant has Accrued Benefits for service incurred
both prior and subsequent to a One Year Break in Service), including any
Employer Account held in suspense, shall be adjusted for any net
appreciation or net depreciation in the assets of the Plan and any net
income or net loss of the Trust for such year with each account being
credited or charged in the ratio that the amount of the account (as of
the close of the last day of the Plan Year) bears to the total (as of
the close of the last day of the Plan Year) of all remaining
non-segregated accounts. For the purpose of such adjustment of accounts,
any contribution made by the Employer with respect to that Plan Year
shall be considered as having been made immediately after such evaluation
and adjustment. In making the adjustments required by this section the
value of any amounts segregated in accordance with the Non-segregation if
Installment Distribution section below, shall not be considered in
determining the amount of net appreciation, depreciation, gain or loss to
be allocated to such account. The amount of any net appreciation,
depreciation, gain or loss with respect to such cash value or segregated
account shall be allocated to the individual account with respect to
which arose. In addition to the evaluations required by the first
sentence of this section, the Trust Fund may be evaluated at such other
times during the Plan Year as the Administrative Committee deems
appropriate using the method set forth in Section 2.13.
For purposes of all computations required by this section, the accrual
method of accounting shall be used to value the Trust Fund and the assets
thereof at their fair market value as of each valuation date. Qualifying
Employer Securities shall be accounted for as provided in Treasury
Regulation Section 1.402(a)-1(b)(2)(ii), as amended, or any regulation or
statute of similar import.
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3.4 LIMITATIONS ON ALLOCATIONS TO EACH PARTICIPANT.
(a) DEFINED CONTRIBUTION PLAN LIMITATIONS.
Notwithstanding any other provision of this Plan the maximum
annual addition for any Plan Year which can be made to any
individual Participant's Employer and Participant accounts, taken
together, is the lesser of thirty thousand dollars (530,000) (or,
if greater, one-fourth (1/4) of the defined benefit dollar
limitation set forth in Code Section 415(b)(1) as in effect for
the Plan Year) or twenty-five percent (25%) of the Participant's
Compensation. In addition the increased limitations provided in
Code Section 415(c)(6) shall apply if appropriate. For purposes of
Subsections 5.4(a), (b), and (c) the annual addition is the sum of
the following amounts allocated to the accounts of the individual
Participant for the Plan Year of the Trust (which shall be the
limitation year for purposes of Code Section 415) under this and
all other defined contribution type plans maintained by the
Employer.
(i) Employer contributions;
(ii) Forfeitures (if applicable);
(iii) Participant contributions;
(iv) Amounts allocated to an individual medical account (as
defined in Code Section 413(l)(2)) that is part of a
defined benefit plan maintained by the Employer; and
(v) Amounts derived from contributions paid or accrued after
December 31, 1985, in taxable years ending after such date,
that are attributable to post-retirement medical benefits
allocated to the separate account of a Key Employee (as
defined in Code Section 419A(d)(3)) under a welfare benefit
fund (as defined in Code Section 419(e)) maintained by the
Employer.
If Subsections 5.4(a), (b), and (c) limit the amount which can be
allocated to the Employer Account of any Participant for a Plan
Year, the excess amount which cannot be allocated for the Plan
Year shall be held in the suspense account to be allocated on the
last day of each succeeding Plan Year until the funds in the
suspense account have been completely reallocated. No further
Employer contributions may be made to the Plan until the suspense
account has been completely reallocated. Any Participant
contributions which exceed the limitations of Subsections 5.4(a),
(b), and (c) shall be returned to the Participant. No investment
gains and losses or other income shall be allocated to the
suspense account.
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(b) DEFINED BENEFIT PLAN LIMITATIONS.
As to any defined benefit plan maintained by the Employer for any
Plan Year the annual benefit cannot exceed the lesser of:
(i) Ninety thousand dollars ($90,000) (or such other figure as
determined in accordance with the cost of living adjustment
procedure of Code Section 415(d), but only for the year in
which such adjustment is effective), or
(ii) One hundred percent (100 %) of the Participant's average
annual compensation for the Participant's three highest
paid consecutive Plan Years; however, benefits of up to ten
thousand dollars ($10,000) during a Plan Year can be paid
without regard to the one hundred percent (100%) limitation
if the total retirement benefits payable to an Employee
under all defined benefit plans (as defined in Code Section
414(j)) maintained by the Employer for the present and any
prior Plan Year do not exceed ten thousand dollars
($10,000) and the Employer has not at any time maintained a
defined contribution plan (as defined in Code Section
414(i)) in which the Employee was a Participant.
If the Participant has less than ten (10) years of participation
in the Plan (as defined in Code Section 415(b)(5)), the applicable
limitation in Paragraph (b)(i) of this Section shall be reduced by
multiplying such limitation by a fraction. The numerator of such
fraction shall be the number of years, or part thereof, of
participation in the defined benefit plan maintained by the
Employer; the denominator shall be ten (10) years.
For purposes of this Subsection 5.4(b), the "annual benefit" means
a benefit payable annually in the form of a straight life annuity
with no ancillary or incidental benefits and with no Employee or
Rollover Contributions. To the extent that ancillary benefits are
provided, the limits set forth in Subparagraphs (a) and (b) of the
first paragraph of this Section will be reduced actuarially, using
an interest rate assumption equal to the greater of five percent
(5%) or the interest rate specified in the Plan to reflect such
ancillary benefits.
(c) SOCIAL SECURITY RETIREMENT AGE LIMITATIONS.
"Social Security Retirement Age" means the age used as the
Retirement age under Section 216(l) of the Social Security Act,
which is presently age Sixty-five (65) for a person born before
1939, age sixty-six (66) for a person born between 1939 and 1954
and age sixty-seven (67) for a person born after 1954
If distribution of retirement benefits begins before the Social
Security Retirement Age, the ninety thousand dollar (590,000)
limitation as described in Subsection 5.4(b) shall be reduced
acturially on the following basis:
(i) If the Social Security Retirement Age is sixty-five (63)
and distribution of benefits begins after the Participant
has attainedage sixty-two (62) 206
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but before the Social Security Retirement Age, the
reduction shall be five-ninths (5/9) of one percent (1%)
per month for each month by which the first distribution
precedes the Social Security Retirement Age;
(ii) If the Social Security Retirement Age exceeds sixty-five
(65) and the distribution of benefits begins after the
Participant has attained age sixty-two (62), the reduction
shall be the sum of (A) and (B), where
(A) Is five-ninths (5/9) of one percent (1%) per
month for each of the first thirty-six (36) months;
and
(B) Is five-twelfths (5/12) of one percent (1%) per
month for each additional month (up to twenty-four
(24) months) by which benefits commence before the
month of the Participant's Social Security
Retirement Age;
(iii) If the distribution of benefits begins before the
Participant has attained age sixty-two (62), the limitation
will be the actuarial equivalent of what it would have been
if the first distribution had been made when the
Participant had attained age sixty-two (62); the assumed
interest rate for such calculation shall be five percent
(5%).
For purposes of this Subsection 5.4(b) the "average annual
Compensation for a Participant's three (3) highest paid
consecutive years" shall mean the Participant's greatest aggregate
Compensation during the period of three (3) consecutive Plan Years
in which the individual was an active Participant in the Plan.
(d) COMBINATION DEFINED BENEFIT AND DEFINED CONTRIBUTION PLAN
LIMITATIONS.
If the Employer maintains one (1) or more defined benefit plans in
addition to this Plan (and any other defined contribution plans)
the limitation of this Subsection 5.4(c) shall apply in addition
to those of Subsections 5.4(a) and 5.4(b). The limitation of this
Subsection 5.4(c) is that the sum of the defined benefit plan
fraction and the defined contribution plan fraction for any Plan
Year may not exceed 1.0.
The "defined benefit plan fraction" is a fraction:
(i) The numerator of which is the projected annual benefit of
the Participant under the Plan, (determined as of the
close of the Plan Year); and
(ii) The denominator of which (determined as of the close of the
Plan Year) is the lesser of (A) the maximum dollar
limitation, for such year as stated in Paragraph
5.4(b)(i), multiplied by 1.25, or (B) the percentage of
compensation limitation which may be taken into account
pursuant to Paragraph 5.4(b)(ii) multiplied by 1.4.
The "defined contribution plan fraction" for any year is a
fraction:
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(i) The numerator of which is the sum of the annual additions
(as defined in Code Section 415(c)(2)) to the Participant's
account as of the close of the Plan Year; and
(ii) The denominator of which is the sum, for all years of an
Employee's service with the Employer, of the lesser for
each year of (A) the maximum dollar limitation as stated in
the first paragraph of Subsection 5.4(a) for such year
multiplied by 1.25 or (B) the percentage of Compensation
amount in effect as stated in the first paragraph of
Subsection 5.4(a) for such year multiplied by 1.40.
With respect to each Participant, for Years of Service ending
prior to January 1, 1983, the amount taken into account in the
denominator of the defined contribution plan fraction, as set
forth above, may, at the election of the Plan Administrator, be an
amount equal to the denominator of the defined contribution plan
fraction for the Plan Year ending in 1982, as determined under the
law immediately prior to the enactment of the Tax Equity and
Fiscal Responsibility Act of 1982, multiplied by the transition
fraction described in Code Section 415(e)(6).
5.5 DESIGNATION OF BENEFICIARY.
Each Participant may designate from time to time in writing one or more
Beneficiaries, who will receive the Participant's vested Accrued Benefit
in the event of the Participant's death. If the Participant dies without
having made a Beneficiary designation, the Trustees shall distribute such
benefits in the following order of priority to the deceased
Participant's: (a) spouse, (b) lineal descendants, (c) parents, or (d)
estate.
However, in the event of the death of a married Participant, the
surviving spouse must be the sole Beneficiary unless the surviving spouse
has consented in writing to a different election, has acknowledged the
effect of such election, and the consent and acknowledgment are witnessed
by a member of the Administrative Committee or a notary public. The
consent of spouse shall not be necessary if it is established to the
satisfaction of the Adminstrative Committee that there is no spouse, the
spouse cannot reasonably be located, or for such other reasons as the
regulations may prescribe. The consent of a spouse as reason for not
requiring such consent shall be applicable only to that spouse. If the
spouse of a Participant becomes locatable or if a Participant remarries,
it shall be the duty of the Participant to bring that fact to the
attention of the Administrative Committee. If the Participant so notifies
the Administrative Committee, the Administrative Committee shall then, if
applicable, proceed to make available to such spouse the consent of
spouse procedures described in this Section.
5.6 PARTICIPANT VOTING AND EXERCISE OF STOCK RIGHTS.
(a) Each Participant shall be entitled to direct the Trustees as to
the manner in which any Qualifying Employer Securities which are a
registration-type class of securities (as defined in Code Section
409(e)(4)) which are allocated to the Employer Account of the
Participant are to be voted and as to the manner in which other
rights with respect to such Qualifying Employer Securities are to
be
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exercised. With respect to any class of Qualifying Employer
Securities which is not a registration-type class of securities
(as defined in Code Section 409(e)(4)), a Participant shall be
entitled to direct the Trustees as to the manner in which voting
rights will be exercised with respect to any corporate matter
which involves the voting of such shares allocated to the
Participant's account with respect to the approval or disapproval
of any corporate merger or consolidation, recapitalization,
reclassification, liquidation, dissolution, sale of substantially
all assets of a trade or business, or such similar transactions as
may be prescribed in Treasury regulations.
(b) The Trustees shall notify Participants at least thirty (30) days
(or a lesser period if thirty (30) days if impossible or
impractical) prior to the voting or other exercise of rights
referred to in Section 5.6(a). The notice shall include all proxy
solicitations and other materials distributed to other
shareholders holding any of the shares of stock described in this
Plan as Qualifying Employer Securities.
(c) The Trustees shall vote any shares and exercise any other rights
with respect to applicable Qualifying Employer Securities in the
manner instructed by the Participant. The Trustees shall vote any
shares and exercise any other rights with respect to Qualifying
Employer Securities as to which it receives no such instructions
(either because the Participant does not timely give such
instructions, or because the shares have not yet been allocated to
the Employer Accounts, or if because the Trustees are not required
to be directed) as the Trustees in their sole discretion, but
acting in a fiduciary capacity, deems in the best interests of the
Participants and their Beneficiaries.
Article VI
VESTING
6.1 EMPLOYER ACCOUNT VESTING ON DEATH, RETIREMENT, OR TOTAL PERMANENT
DISABILITY.
If a Participant's employment is terminated for death, on or after Normal
Retirement Age, or for Total and Permanent Disability, one hundred
percent (100%) of the Accrued Benefit in his Employer Account, shall vest
in the Participant (or in his Beneficiary, as the case may be) and shall
be distributed or set aside in accordance with the provisions of Article
VII.
6.2 EMPLOYER ACCOUNT VESTING ON TERMINATION.
If a Participant's employment is terminated except for death, Total and
Permanent Disability, or on or after Normal Retirement Age the following
percentages of the Accrued Benefit in the Employer Account of the
Participant shall vest in the Participant and shall be distributed to or
set aside for him in accordance with the provisions of Article VII:
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<TABLE>
<CAPTION>
=======================================
YEARS OF VESTED
SERVICE PERCENTAGE
=======================================
<S> <C>
Less than 3 0%
=======================================
3 20%
=======================================
4 40%
=======================================
5 60%
=======================================
6 80%
=======================================
7 or more 100%
=======================================
</TABLE>
The Accrued Benefit of a Participant which is not vested as above
provided shall be retained by the Trustees for allocation as a
Forfeiture, in accordance with the provisions of Manner of Allocation
section above, Suspense Account for Terminated Participants and Unable to
Locate Participant or Beneficiary sections below.
6.3 RESTORATION OF FORFEITURES.
If a Participant is less than one hundred percent (100%) vested and he
receives a distribution from the Plan and forfeits part of his Accrued
Benefit, and then, if the Participant resumes employment with the
Employer before the occurrence of five (5) consecutive One Year Breaks in
Service, until such time as there is a fifth (5th) consecutive One Year
Break in Service, the Participant's vested portion of the balance in his
account at any time shall be equal to an amount ("X") determined by the
formula X = P(AB + D) - D, where "P" is the vested percentage of the
Participant at such time, "AB" is the balance in the Participant's
account at such time and "D" is the amount distributed as a severance of
employment benefit and not previously repaid by the Participant.
Notwithstanding the preceding paragraph, if the Participant returns to
employment prior to the time he incurs five (5) consecutive One Year
Breaks in Service, he shall have the right to repay to the Plan the full
amount of the benefits previously distributed to him, provided that such
repayment is made prior to the earlier of (i) five (5) years after the
first date on which the Participant is reemployed, or (ii) the date the
Participant incurs five (5) consecutive One Year Breaks in Service
following the date of the previous distribution. If an Employee is deemed
to receive a distribution pursuant to the Time of Distribution section
below), and the Participant resumes employment covered under the Plan
before the date the Employee incurs five (5) consecutive One Year Breaks
in Service, upon the reemployment of such Employee, the balance of the
Employer Account of the Employee will be restored to the amount on the
date of such deemed distribution.
If the Participant's forfeited accrued benefit is restored pursuant to
this Section 6.3, the restoration shall be made first out of Forfeitures,
if any, and then by additional Employer contributions.
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Article VII
DISTRIBUTION OF BENEFITS
7.1 METHOD OF DISTRIBUTION OF PARTICIPANT AND EMPLOYER ACCOUNTS.
The Participant shall elect to receive his distribution in one of the
following forms: (a) a voluntary Cash-Out or (b) an installment
distribution consisting of approximately equal annual installments
(subject to the limitations of Time of Distribution section) over a term
certain. If a Participant's vested Accrued Benefit at the Termination
Date has never exceeded three thousand five hundred dollars ($53,500),
the entire amount of such vested Accrued Benefit shall be distributed
in the form of an involuntary Cash-out.
The Administrative Committee shall distribute benefits in the form of
Qualifying Employer Securities except to the extent that the
Participant's Employer Account consists of cash or fractional shares of
Qualifying Employer Securities or other assets, the Fair Market Value of
which shall be distributed in cash.
7.2 TIME OF DISTRIBUTION.
(a) After the Participant has attained the Normal Retirement Age, has
died, or has terminated his employment due to Total and Permanent
Disability, then the first installment or Cash-Out, as the case
may be, will be made as soon as administratively feasible after
the end of the Plan Year in which the Participant completes a One
Year Break in Service. If the Participant is zero percent (0%)
vested in his Accrued Benefit, his account balance will be deemed
to have been distributed to him in the form of a Cash-Out.
However, in all events such distributions shall begin no later
than sixty (60) days after the end of the Plan Year in which
occurs the latest of the following:
(i) The date on which the Participant attains the earlier of
age sixty-five (65) or the Normal Retirement Age;
(ii) The tenth (10th) anniversary of the year in which the
Participant commenced participation in the Plan;
(iii) The Termination Date.
(b) Distribution to a Participant who terminates other than due to
death, Retirement or Disability, shall commence as soon as
administratively feasible after the end of the Plan Year in which
the Participant completes a One Year Break in Service.
(c) Distributions shall commence no later than April 1 of the calendar
year following the calendar year in which the Participant attains
age seventy and one-half (70-1/2).
(d) If distributions are made in installments rather than a Cash-Out,
then (i) the installments must be over a period of ten (10) years
or less or (ii) the amount of the installment to be distributed
each year must be at least an amount equal to the
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quotient obtained by dividing the Participant's entire interest by
the life expectancy of the Participant or the joint and last
survivor expectancy of the Participant and his designated
Beneficiary. Life expectancy and joint and last survivor
expectancy are computed by the use of the return multiples
contained in Treasury Regulations section 1.72-9, or, in the case
of payments under a contract issued by an insurance company, by
use of the life expectancy tables of the insurance company. For
purposes of this computation, a Participant's life expectancy may
be recalculated no more frequently than annually, but the life
expectancy of a nonspouse Beneficiary may not be recalculated. If
the Participant's spouse is not the designated Beneficiary, the
method of distribution selected must assure that at least fifty
percent (50%) of the present value of the amount available for
distribution is paid within the life expectancy of the
Participant.
(e) If the Participant dies after distributions to him have begun but
before his entire Accrued Benefit has been distributed to him, the
remaining portion of his Accrued Benefit shall be distributed from
the Plan at least as rapidly as under the method of distribution
previously established for him, if such method is irrevocable at
the time of his death.
(f) If the Participant dies before distribution of his interest
commences, then distributions of the Participant's remaining
Accrued Benefit must be completed by the end of the fifth (5th)
calendar year following the year of his death. However,
installment distributions to a designated Beneficiary which begin
not later than the end of the calendar year following the death
of the Participant shall be treated as complying with this five
(5) year distribution requirement (even though the installment
payments are not completed within five (5) years of the
Participant's death) if the distributions are made at a rate which
is not longer than that calculated (in the manner described in
paragraph (c) of this Section) to provide payment of all the
Participant's Accrued Benefit during the anticipated life
expectancy of the designated Beneficiary. Provided that if the
designated Beneficiary is the surviving spouse of the deceased
Participant, the distributions can begin as long after the
Participant's death as the date on which the deceased Participant
would have attained the age of seventy and one-half (70-1/2); if
the surviving spouse dies before distributions to the surviving
spouse have begun, the Plan may make distributions at such times
as described in this Section as it would have if the surviving
spouse had been a deceased Participant
(g) For purposes of this section, any amount paid to a child of a
Participant will be treated as if it had been paid to the
surviving spouse of the Participant if such remaining amount
becomes payable to the surviving spouse when the child reaches the
age of majority.
7.3 SEGREGATION IF INSTALLMENT DISTRIBUTION.
The Administrative Committee may determine that the Employer Account of a
Participant who is no longer an Employee shall be segregated and set
aside, in which event the Administrative Committee shall direct the
Trustees to segregate the vested portion (as defined in Article VI) of
the entire balance of the Participant's Employer
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<PAGE>
Account and to deposit such portion in a separate interest bearing
account at a bank or savings and loan association, and said account shall
cease to participate in the income or net loss or appreciation or
depreciation of the Trust Fund, as of the beginning of the Plan Year in
which such segregation occurs, and instead will be credited with the full
amount of interest earned thereon.
7.4 NON-SEGREGATION IF INSTALLMENT DISTRIBUTION.
In the event the Administrative Committee does not segregate (as provided
in Section Segregation if Installment Distribution above) the Employer
Account of a Participant, said account shall continue to be treated,
without interruption, in the same manner as when the Participant was an
Employee, in which case the installment distributions shall be adjusted
upward or downward to reflect appreciation or depreciation, or income or
loss in the account balance.
7.5 DISTRIBUTION AFTER DEATH OF PARTICIPANT.
In the event of the death of a Participant after installment payments
have begun, but prior to completion of such payments, the full amount of
such unpaid benefits shall continue to be paid in the form of the
previously established installments except that the Beneficiary may
request that the remaining Accrued Benefit be paid in a lump sum.
In the event of the death of the Participant prior to the start of any
payments of his Accrued Benefit, distributions shall be made in the form
and at the time or times selected by the Beneficiary pursuant to Sections
7.1 and 7.2.
7.6 DISTRIBUTION AFTER DEATH OF BENEFICIARY.
In the event of the death of a Beneficiary (or a contingent Beneficiary,
if applicable) prior to the completion of payment of benefits due the
Beneficiary from the Plan, the full amount of such unpaid benefits shall
at once vest in and become the property of the estate of said
Beneficiary. In determining the amount of such unpaid benefits, no
adjustment shall be made by reason of any net income, or net loss, of the
Trust, or any net appreciation or net depreciation by the Trust's assets
subsequent to the beginning of the Plan Year in which such final
distribution occurs.
7.7 ROLLOVER CONTRIBUTIONS AND DISTRIBUTIONS.
Rollovers from other qualified plans into the Plan will not be permitted.
The Administrative Committee may, in its sole discretion, but only with
the prior written consent of the Participant, transfer part or all of the
funds credited to his Employer and Participant Deferral Accounts to a
retirement plan, as described in Code Section 401(a) or Section 403(a) as
to which the individual is a Participant at the time of such
distribution.
The Committee shall provide to each Participant, Beneficiary or Alternate
Payee who receives an eligible rollover distribution (as defined in Code
Section 402(f), at the time such distribution is made, a written
explanation of the: (a) provisions under which the
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distribution will not be subject to tax if timely transferred to an
eligible retirement plan; and, if applicable, (b) provisions regarding
the availability of capital gains and ten-year averaging or five-year
averaging tax treatment of the distribution.
For distributions made on or after January 1, 1993, notwithstanding any
provisions of the Plan to the contrary that would otherwise limit a
distributee's election under this Subsection, a distributee may elect, at
the time and in the manner prescribed by the Committee, to have any
portion of an eligible rollover distribution paid directly to an eligible
retirement plan specified by the distributee in a direct rollover.
(a) An eligible rollover distribution is any distribution of all or
any portion of the balance to the credit of the distributee,
except that an eligible rollover distribution does not include any
distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the
life (or life expectancy) of the distributee and the distributee's
designated Beneficiary, or for a specified period of ten (10)
years or more; any distribution to the extent such distribution is
required under Code Section 401(a)(9); and the portion of any
distribution that is not includible in gross income (determined
without regard to the exclusion for net unrealized appreciation
with respect to Qualifying Employer Securities).
(b) An eligible retirement plan is an individual retirement account
described in Code Section 408(a), an individual retirement annuity
described in Code Section 408(b), an annuity plan described in
Code Section 403(a), or a qualified trust described in Code
Section 401(a), that accepts the distributee's eligible rollover
distribution. However, in the case of an eligible rollover
distribution to the surviving spouse, an eligible retirement plan
is an individual retirement account or individual retirement
annuity.
(c) A distributee includes a Participant or former Participant. In
addition, the Participant's surviving spouse, and the
Participant's or former Participant's spouse or former spouse who
is an Alternate Payee under a Qualified Domestic Relations Order,
as defined in Code Section 414(p), are distributees with regard to
the interest of the spouse or former spouse.
(d) A direct rollover is a payment by the Plan to the eligible
retirement plan specified by the distributee.
7.8 SUSPENSE ACCOUNT FOR TERMINATED PARTICIPANTS.
If a Participant has terminated his employment but his Employer Account
is not one hundred percent (100%) vested and he has not had five (5)
consecutive One Year Breaks in Service subsequent to his termination, all
funds in his Employer Account shall be held in suspense until the
happening of the soonest of the following: (i) the Participant returning
to employment with the Employer, or (ii) the occurrence of five (5)
consecutive One Year Breaks in Service with respect to the Participant,
or (iii) the Participant attaining Normal Retirement Age. At such time
the Participant's Employer Account shall cease to be held in suspense. If
a Participant has returned to employment prior to incurring five (5)
consecutive One Year Breaks in Service, his Employer Account which
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has been held in suspense shall be restored to his credit, less any
Cash-Out which is not repaid in accordance with Section 7.10. If five (5)
consecutive One Year Breaks in Service occur, the non-vested portion of
the Employer Account held in suspense will be forfeited and reallocated
in accordance with the Manner of Allocation section above for the Plan
Year in which such Forfeiture occurs; the vested portion shall be
distributed in accordance with the provisions of Article VII. In the case
of a Participant attaining Normal Retirement Age while his Employer
Account is being held in suspense, the entire vested amount will be
distributed and the non-vested portion shall be forfeited in accordance
with the provisions of this Article VII.
Such account shall share in any appreciation, depreciation, or net income
or loss as if it were not in suspense, except that an account which is in
suspense shall have no Forfeitures allocated to it for a Plan Year in
which the Employee does not have a Year of Service for Accrual of
Benefits.
Notwithstanding anything contained in this Suspense Account for
Terminated Participants section to the contrary, upon the payment of a
Participant's vested Accrued Benefit through a Cash-Out, the non-vested
portion of such Participant's Accrued Benefit shall be forfeited and
shall be reallocated for the Plan Year in which a One Year Break in
Service occurs in accordance with the Manner of Allocation section above.
7.9 UNABLE TO LOCATE PARTICIPANT OR BENEFICIARY.
If the Participant or Beneficiary to whom benefits are to be distributed
cannot be located, and reasonable efforts have been made to locate the
Participant or Beneficiary, including the sending of notification by
certified or registered mail to his last known address, the
Administrative Committee may direct the Trustees to take any of the
following actions:
(i) Distribute the benefits in question to an interest bearing savings
account established in the name of the Participant or
Beneficiary; or, if the benefits are payable to a Participant (as
reasonably determined by the Administrative Committee) the
Administrative Committee may instruct the Trustees to distribute
the funds to the Participant by placing them in a savings account
in the Participant's name or by purchasing U.S. Savings Bonds in
the Participant's name and holding them for the Participant;
(ii) If the Administrative Committee has taken the reasonable efforts,
as described in the preceding sentence, to locate the Participant,
the Administrative Committee may allocate the Participant's
Accrued Benefits to a segregated account in the manner described
in Section 7.3, as if an installment distribution were being made;
however, such funds shall be held in the segregated account for
distribution to the Participant when located;
(iii) The Participant's Accrued Benefits may be forfeited and
reallocated pursuant to the Manner of Allocation section above; if
the Participant subsequently returns, such Forfeiture shall be
restored pursuant to Section 6.5 and the restoration shall be made
first out of Forfeitures, if any, and then by additional Employer
contributions.
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7.10 REPAYMENT OF CASH-OUT.
If a Participant receives a Cash-Out distribution from the Plan as a
result of ceasing to be an Employee, and is less than one hundred percent
(100%) vested in his Accrued Benefit at such time, Participant shall have
the right to repay to the Plan the Cash-Out distribution received from
the Plan, prior to the sooner of (i) five (5) years from the individual
again becoming an Employee, or the completion of five (5) consecutive
One Year Breaks in Service following the date of distribution of the
Cash-Out to the Participant. If the Participant makes such payment within
the time specified in the preceding sentence, any non-vested portion of
his Cash-Out distribution which was forfeited pursuant to Section 7.8
will be restored to his credit. The permissable sources of restoration of
the forfeited portion of a Cash-Out distribution are: income or gains
from Plan investments, Forfeitures and Employer contribution. However,
except with respect to the forfeited portion of a Cash-Out distribution,
only amounts held in suspense pursuant to Section 7.8 shall be used to
satisfy such restoration.
7.11 DISTRIBUTION OF DIVIDENDS.
On or before the thirtieth (30th) day after the close of each Plan Year
the Administrative Committee shall direct the Trustees as to whether any
or all of the cash dividends received on any Qualifying Employer
Securities, if any, owned by the Plan shall be: (i) retained by the Plan
and allocated pursuant to Section 5.3; (ii) distributed to each
Participant; or (iii) used to make payments on an Exempt Loan. In the
event the Administrative Committee elects to cause the cash dividends to
be distributed to Participants, each Participant shall receive, no later
than ninety (90) days after the close of the Plan Year in which the
dividend is paid, the pro rata share, computed in accordance with the
provisions of Section 5.3, of such cash dividend (excluding earnings
thereon).
7.12 DIVERSIFICATION OF INVESTMENTS.
(a) Notwithstanding Sections 5.01 and Article VIII, each Qualified
Participant shall be permitted to direct the Plan as to the
investment of twenty-five percent (25%) of the value of the
Participant's account balance attributable to Qualifying
Employer Securities which were acquired by the Plan after December
31, 1986, within ninety (90) days after the last day of each Plan
Year during the Participant's Qualified Election Period. Within
ninety (90) days after the close of the last Plan Year in the
Participant's Qualified Election Period, a Qualified Participant
may direct the Plan as to the investment of fifty percent (50%) of
the value of such account balance.
(b) The Participant's direction shall be provided to the
Administrative Committee in writing; shall be effective no later
than one hundred eighty (180) days after the close of the Plan
Year to which the direction applies; and shall specify which, if
any, of the options set forth in Section 7.12(c) the Participant
selects.
(c) At the election of the Qualified Participant, the Plan shall
distribute in cash or stock the portion of the Participant's
account that is covered by the election within ninety (90) days
after the last day of the period during which the
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election can be made. This Section shall apply notwithstanding any
other provision of the Plan other than such provisions as
require the consent of the Participant and the Participant's
spouse.
(d) In lieu of distribution under this Section, the Qualified
Participant who has the right to receive a distribution may direct
the Plan to transfer the portion of the Participant's account that
is covered by the election to another qualified plan of the
Employer which accepts such transfers, provided that such Plan
permits Employee-directed investment and does not invest in
Qualifying Employer Securities to a substantial degree. Such
transfer shall be made no later than ninety (90) days after the
last day of the period during which the election can be made.
7.13 QUALIFIED DOMESTIC RELATIONS ORDERS.
Notwithstanding any other provisions of Article VII, any Accrued Benefit
of a Participant may be apportioned between the Participant and the
alternate payee (as defined in Code Section 414(p)(8)) either through
separate accounts or by providing the alternate payee a percentage of the
Participant's account. The Committee may direct distributions to an
alternate payee pursuant to a Qualified Domestic Relations Order as
defined in Code Section 414(p)(1)(A) prior to the date on which the
Participant attains the earliest Retirement Age, provided that the
Committee has properly notified the affected Participant and each
alternate payee of the order and has determined that the order is a
Qualified Domestic Relations Order as defined in Code Section
414(p)(1)(A). The alternate payee shall be paid a separate account or a
percentage of the Participant's account, computed as of the valuation
date described in Section 5.3, in a lump sum payment notwithstanding the
value of such lump sum payment unless the domestic relations order
specifies a different manner of payment permitted by the Plan. The
alternate payee shall not be required to consent to such lump sum
payment. The Committee shall adopt reasonable procedures to determine the
qualified status of Qualified Domestic Relations Orders and to administer
the distributions thereunder. In no event will a Qualified Domestic
Relations Order which provides that a former spouse is to be treated as
the current spouse of a Participant be considered a Qualified Domestic
Relations Order under this Plan, notwithstanding that such Qualified
Domestic Relations Order is a Qualified Domestic Relations Order as
defined in Code Section 414(p)(1)(A).
Article VIII
DUTIES AND AUTHORITY OF TRUSTEE
8.1 RECEIVE PAYMENTS.
The Trustees shall receive from the Employer the payments made by it on
account of its contributions under the Plan but the Trustees shall have
no duty to compute any amount due from the Employer or to collect the
same.
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8.2 EVALUATE ASSETS.
The Trustees shall evaluate the assets of the Trust Fund as of the close
of the last day of each Plan Year at their Fair Market Value and the
Administrative Committee or its agent will allocate the sums contributed
by the Employer plus the net income or minus the net loss of the Trust
Fund and plus the net appreciation or minus the net depreciation in the
Trust assets to separate bookkeeping accounts in the names of the
respective Participants under the Plan in accordance with the provisions
of Sections 2.13 and 5.3.
8.3 SEGREGATION OF ACCOUNTS.
When directed in writing by the Administrative Committee, the Trustees
shall segregate the accounts of terminated Participants in accordance
with the provisions of Section 7.3, and make payments out of the Trust
Fund from time to time to the Participants or their Beneficiaries, such
payments to be made in the manner and in the amounts as may be specified
in the written instructions of the Administrative Committee.
8.4 TAX RETURNS AND REPORTS.
If the Trustees are a corporate fiduciary, then such Trustees shall
prepare or cause to have prepared and filed, all tax returns, reports,
and related documents, except as otherwise specifically provided in this
Plan or unless the Administrative Committee, in writing, relieves the
Trustees of such obligation, in part or entirely, in which case the
Administrative Committee, or the person or persons it designates, shall
be responsible for filing the tax returns, reports, and related filings,
as provided by the Administrative Committee. The Trustees shall be
entitled to rely on the accuracy of any written statement from the
Administrative Committee or from an officer of the Employer as to those
matters provided in Article IX.
8.5 POWERS.
The Trustees are authorized and empowered to:
(a) Invest and reinvest the Trust Fund, without distinction between
principal and income, in Qualifying Employer Securities, bank
accounts, certificates of deposit, Common Stocks, preferred
stocks, bonds, notes, debentures, mortgages, U.S. retirement plan
bonds, and in other property, real or personal, so long as the
incidents of ownership of such property are within the
jurisdiction of the United States, and so long as such investments
do not violate applicable law;
(b) Purchase and hold Qualifying Employer Securities in a value up to
one hundred percent (100%) of the total value of the Trust Fund,
and borrow funds and pledge as collateral therefor the Qualifying
Employer Securities so acquired; the Trustees shall have the duty
to invest primarily in Qualifying Employer Securities;
(c) Purchase, sell, exchange, convey, transfer, or otherwise realize
the value of any property held by it, specifically including the
purchase and sale of Qualifying
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Employer Securities from or to the Employer or a disqualified
person (as defined in Code Section 4975(e)(2)) or a party in
interest (as defined in ERISA Section 3(14)) if such purchase or
sale is for adequate consideration and no commission is charged
with respect thereto;
(d) Convert any stocks, bonds, or other securities; to give general or
special proxies or powers of attorney with or without power of
substitution; to exercise any warrants, conversion privileges,
subscription rights, or other options and to make any payment
incidental thereto; to consent to or otherwise participate in
corporate reorganizations or other changes affecting corporate
securities and to delegate discretionary powers to pay any
assessments or charges in connection therewith; and generally to
exercise any of the powers of an owner with respect to stocks,
bonds, securities or other properties held in the Trust Fund;
(e) Make, execute, acknowledge, and deliver any and all documents of
transfer and conveyance and any other instruments that may be
necessary or appropriate to carry out the powers herein granted;
(f) Register any investments held in the Trust Fund in its own name or
in the name of a nominee or nominees and to hold any investment in
bearer form, but the books and records of the Trustees shall at
all times show that all such investments are part of the Trust
Fund;
(g) Invest all or a part of the Trust Fund in deposits which bear a
reasonable rate of interest in a bank or similar financial
institution, even though such institution is a Trustee or other
fiduciary, as defined in Code Section 4975(e)(3);
(h) Invest in a common or collective trust fund or pooled investment
fund maintained by a bank or trust company or a pooled investment
fund of an insurance company qualified to do business in a State
even though such bank, trust company or insurance company is a
disqualified person, as defined in Code Section 4975(e)(2);
(i) Take whatever actions are necessary to ensure that Qualifying
Employer Securities consisting of stock are distributed in the
manner prescribed in Section 7.1; such actions may include, but
are not limited to, purchasing or exchanging such stock from the
Trust, even though it has already been allocated to the Employer
Accounts of Participants and purchasing or exchanging such stock
as described in subparagraph (c) of this Section;
(j) Purchase Qualifying Employer Securities from persons, including
"disqualified persons" as that term is defined in Code Section
4975(e)(2), so long as the purchase price does not exceed the Fair
Market Value of such securities and so long as the terms of the
purchase are fair and reasonable;
(k) Perform all such acts, although not specifically mentioned herein,
as the Trustees may deem necessary to administer the Trust Fund
and to carry out the purpose of the Trust; and
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(l) Borrow, or loan, except as prohibited by Code Section 4975(c)
without reference to Code Section 4975(d), sums as the Trustees
deems desirable, and for that purpose, to mortgage or pledge all
or part of the Trust Fund; and borrow from "disqualified persons"
(as that term is defined in Code Section 4975(e)(2)) in such
amounts as permitted by Section 8.11, for the purpose of
purchasing Qualifying Employer Securities.
8.6 EXPENSES.
All brokerage costs, transfer taxes and similar expenses incurred in
connection with the investment and reinvestment of the Trust Fund and all
taxes of any kind whatsoever which may be levied or assessed under
existing or future laws upon or in respect of the Trust Fund, and any
interest which may be payable on money borrowed by the Trustees for the
purpose of the Trust (however, such funds may not be borrowed for the
purpose of purchasing Qualifying Employer Securities), shall be paid from
the Trust Fund, and, until paid, shall constitute a charge upon the Trust
Fund. All other administrative expenses incurred by the Trustees in the
performance of its duties, including such compensation to the Trustees as
may be agreed upon from time to time between the Employer and the
Trustees (in accordance with the Trustees' standard schedule of fees in
effect from time to time during the time it administers this Trust, if
applicable) and all proper charges and disbursements of the Trustees,
shall be paid by the Employer, but until paid shall constitute a charge
upon the Trust Fund. If the Employer advises the Trustees in writing of
its determination to make no further contribution to this Trust, the
expenses of the Trustees shall thereafter be charged against and paid out
of the Trust Fund and a lien for the payment thereof shall be impressed
upon the assets of the Trust to be charged proportionately against the
amount standing to the credit of each Participant. However, no person who
is a disqualified person (as defined in Code Section 4975(e)(2) ) and who
received full-time pay from the Employer, may receive compensation from
the Trust, except for reimbursement of expenses properly and actually
incurred.
The Trustees may inspect the records of the Employer whenever such
inspection may be reasonably necessary in order to determine any fact
pertinent to the performance of its duties as the Trustees. The Trustees,
however, shall not be required to make such inspection, but may, in good
faith, rely on any statement of the Employer or any of its officers.
8.7 LITIGATION.
The Trustees shall not be required to participate in any litigation
either for the collection of monies or other property due the Trust Fund,
or in defense of any claim against the Trust Fund unless the Trustees
shall have been indemnified to its satisfaction against all expenses and
liability to which the Trustees might become subject.
8.8 WRITTEN INSTRUCTIONS.
When any act of the Trustees is based upon instructions of the Employer
or the Administrative Committee, the Trustees may rely upon instructions
in writing, signed by an officer of the Employer, or upon written
instructions from the Administrative Committee, as appropriate.
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8.9 APPOINTMENT OF INVESTMENT MANAGER.
The Trustees, with the written concurrence of the Administrative
Committee, may appoint an Investment Manager (as defined in ERISA Section
3(38)), who shall have responsibility for investment of the Trust Fund.
The Investment Manager shall have the investment powers granted
the Trustees in Section 8.5 except to the extent the Investment Manager's
powers are specifically limited by an agreement between the Trustee and
Investment Manager.
8.10 REMOVAL AND RESIGNATION OF THE TRUSTEE.
The Employer may at any time remove any Trustee acting hereunder or
appoint a corporation and/or an individual or individuals to be successor
Trustee hereunder in the place of any removed or resigning Trustee. Any
Trustee may at any time resign by giving written notice to the Employer,
which resignation shall take effect on the date therein specified and
which shall not be less than thirty (30) days from the date of notice
unless the Employer shall agree to an earlier date.
8.11 LOANS FROM DISQUALIFIED PERSONS
The Trustees shall have the power to borrow funds either in the form of
cash, a purchase money transaction, or the assumption of an obligation,
from "disqualified persons" (as that term is defined in Code Section
4975(e)(2) ), or guaranteed by disqualified persons, for the purpose of
purchasing Qualifying Employer Securities or to repay amounts which were
borrowed for the purpose of purchasing such securities, only if the
following conditions are met:
(a) Such loan must provide for periodic payments over a definitely
ascertainable term;
(b) The only assets given as collateral for such loan may be, in the
case of a loan to purchase Qualifying Employer Securities, those
Qualifying Employer Securities purchased with the proceeds of the
loan, and in the case of a loan to refinance a prior loan used to
acquire Qualifying Employer Securities, the Qualifying Employer
Securities acquired with such prior loan;
(c) The only Plan assets available upon default to persons who loaned
funds or who are entitled to payments under a loan from a
disqualified person are: (i) Qualifying Employer Securities given
pursuant to paragraph (b) above; (ii) contributions made to the
Plan, other than contributions of Qualifying Employer Securities,
that are made for the purpose of meeting the Plan's obligations
under the loan; and (iii) earnings attributable to amounts
described in (i) and (ii) of this sentence;
(d) Amounts paid during a Plan Year in repayment of such loan may not
exceed amounts contributed (during the current and prior Plan
Years) to the Plan for the purpose of meeting the Plan's
obligations under the loan, less total prior payments on the loan;
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(e) Amounts contributed to the Plan for the purpose of meeting loan
obligations shall, prior to making payments under such loan, be
segregated from the other amounts held by the Plan and all
earnings thereon shall be allocated to such segregated account;
(f) Upon default, Plan assets shall be transferred to the lender, in
an amount which is necessary to make payments which are currently
due under the payment schedule of the loan, without acceleration
of future amounts due thereon;
(g) Interest charged under the loan must be reasonable after
considering all relevant factors such as the loan's amount and
duration, the amount of security provided the lender (including
any guarantee), the credit standing of the Plan and prevailing
interest rates;
(h) Qualifying Employer Securities which are pledged as collateral for
such loan must be released from encumbrance at the end of each
Plan Year in an amount equal to the number of currently encumbered
securities multiplied by a fraction, the numerator of which is the
total payment of principal and interest made during the Plan Year,
and the denominator of which is the total payment of principal and
interest made during the Plan Year plus the total payment of
principal and interest due under the loan for all future Plan
Years. (If the interest rate under the loan is variable the above
calculation must be made using the interest rate which is
applicable as of the end of the Plan Year in which such
calculation is made.) Securities of different classes must be
released from encumbrance in equal percentages;
(i) All Qualifying Employer Securities acquired with the proceeds of a
loan from a "disqualified person", whether they are pledged as
collateral for such loan or not, shall be held in suspense in the
Unallocated Stock Account and shall be removed from such account
and be allocated to the Employer Accounts of Participants at the
end of each Plan Year to the extent paragraph (h) of this Section
8.11 provides for the release of encumbered securities. Income
earned from securities held in suspense shall be deemed to be the
income of the Plan and shall not be held in suspense unless such
income has been pledged as collateral for the loan. Should a
portion of a Participant's Employer Account be forfeited,
Qualifying Employer Securities held in suspense for such
Participant pursuant to this paragraph may only be forfeited after
all other assets in the Participant's Employer Account are
forfeited.
Article IX
DUTIES AND AUTHORITY OF ADMINISTRATIVE COMMITTEE
9.1 APPOINTMENT.
This Plan shall be administered by the Administrative Committee as Plan
Administrator. The Board of Directors of the Employer shall appoint the
Administrative Committee, which shall consist of at least two (2) persons
who shall signify in writing their acceptance of such appointment. Any
member of the
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Administrative Committee may resign upon giving written notice to the
board of directors of the Employer. Each appointee shall hold office at
the pleasure of the Board of Directors. Vacancies arising in the
Administrative Committee from death, resignation, removal or otherwise,
shall be filled by the Board Of Directors, but the Administrative
Committee may act notwithstanding the existence of vacancies so long as
there is at least one member of the Administrative Committee who is a
director.
At any time the Board Of Directors of the Employer may adopt a resolution
abolishing the Administrative Committee and reserving all of the duties
of the Administrative Committee to the Board of Directors. Such
resolution shall be effective as soon as it is communicated in writing to
both the Administrative Committee and Trustees, or at any such subsequent
effective date as is provided in the resolution. Whenever such a
resolution is effective as to the Plan or in the event an Administrative
Committee is not appointed, the term Plan Administrator or Board of
Directors shall be deemed to replace the term "Administrative Committee."
Such a resolution may be rescinded by the board of directors and shall be
effective as soon as it is communicated in writing to the Trustees, or
shall be effective at such later date as is provided in the resolution.
9.2 NO DISCRIMINATION.
The Administrative Committee shall not take any action nor direct the
Trustees to take any action that would result in benefiting one
Participant or group of Participants at the expense of another, or
discriminating between Participants similarly situated, or applying
different rules to substantially similar sets of facts.
9.3 MAJORITY ACTION.
The Administrative Committee shall act by a majority (or by all members
if there be only one or two members) of the number of members
constituting the Administrative Committee at the time of such action, and
such action may be taken either by vote at a meeting or in writing
without a meeting.
9.4 POWERS.
Except as otherwise provided in the Plan, the Administrative Committee
shall have control of the administration of the Plan, with all powers
necessary to enable it to carry out its duties in that respect. Not in
limitation, but in amplification of the foregoing, the Administrative
Committee shall have power to interpret or construe the Plan and to
determine all questions that may arise hereunder as to the status and
rights of Participants and others hereunder. The Administrative Committee
may inspect the records of the Employer or Trustees whenever such
inspection may be reasonably necessary in order to determine any fact
pertinent to the performance of the duties of the Administrative
Committee. The Administrative Committee, however, shall not be required
to make such inspection, but may, in good faith, rely on any statement of
the Trustees or Employer or any of its officers or Employees.
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9.5 FILING REPORTS.
The Administrative Committee shall furnish, or shall see that the
Employer furnishes, a summary of this Plan to all Employees, as
required by applicable Federal law. The Administrative Committee shall
furnish to the Trustees the names of all Employees who become eligible as
Participants, and the Administrative Committee shall notify each Employee
of his eligibility.
9.6 RECORDS AND INFORMATION.
The Administrative Committee shall keep a complete record of all its
proceedings and all data necessary for the administration of the Plan.
9.7 INFORMATION TO PARTICIPANTS.
The Administrative Committee shall direct the maintenance of separate
accounts of the Participants. It shall give each Participant, at least
once every year, information as to the balance of his Employer Account.
9.8 COMPENSATION OF MEMBERS.
The members of the Administrative Committee shall serve without
compensation for their services as such, but shall be reimbursed by the
Employer for all necessary expenses incurred in the discharge of their
duties. If the Employer advises the Administrative Committee in writing
of its determination to make no further contributions to the Plan, the
expenses of the Administrative Committee shall thereafter be charged
against and paid out of the Trust Fund and a lien for the payment thereof
shall be impressed upon the assets of the Trust to be charged
proportionately against the amount standing to the credit of each
Participant.
9.9 REVIEW OF PARTICIPANT'S CLAIMS.
In case the claim of any Participant or Beneficiary for benefits under
the Plan is denied, the Administrative Committee shall provide adequate
notice in writing to such claimant, setting forth the specific reasons
for such denial. The notice shall be written in a manner calculated to be
understood by the claimant. The Administrative Committee shall afford a
Participant or Beneficiary, whose claim for benefits has been denied,
sixty (60) days from the date notice of such denial is delivered or
mailed in which to appeal the decision in writing to the Administrative
Committee. If the Participant or Beneficiary appeals the decision in
writing within sixty (60) days, the Administrative Committee shall review
the written comments and any submissions of the Participant or
Beneficiary and render its decision regarding the appeal, all within
sixty (60) days of such appeal.
9.10 EXERCISE OF STOCK RIGHTS.
In the event that Qualifying Employer Securities contributed by the
Employer to the Plan include voting stock, or stock or other securities
with any rights other than voting rights,
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the Administrative Committee shall name, as a Designated Fiduciary, one
of its members, or such other person as may consent thereto, to exercise
on behalf of Participants, voting or other stock or equity rights with
respect to the stock contributed to the Plan. The Designated Fiduciary
shall notify each Participant to whose account any Qualifying Employer
Security has been allocated at least thirty (30) days prior to any
occasion on which such voting or other rights may be exercised. Such
notification shall include all information distributed to shareholders or
holders of such other equities by the Employer regarding the exercise of
such voting or other rights. Such notification shall contain a procedure
under which each of such Participants shall be able to direct the
Designated Fiduciary in the exercise of the voting, or other rights. The
Designated Fiduciary shall be bound by the instructions of each
Participant; if a Participant gives no instructions to the Designated
Fiduciary, the Designated Fiduciary shall not vote such Participant's
stock or exercise such rights but shall so notify the trustees to vote
such stock or exercise such rights.
Article X
MODIFICATIONS FOR TOP HEAVY PLANS
10.1 APPLICATION OF ARTICLE.
The provisions in this Article X shall take precedence over any other
provisions in the Plan with which they conflict.
10.2 DEFINITIONS.
(a) TOP HEAVY PLANS.
This Plan shall constitute a Top Heavy Plan for a Plan Year if, as
of the last day of the preceding Plan Year (or in the case of the
Plan Year in which occurs the effective date of this Plan, the
last day of such Plan Year): (i) the aggregate of the Employer
Accounts of Key Employees exceeds sixty percent (60%) of the
aggregate of the Employer Accounts of all Employees under the Plan
all valued as of the last day of the preceding Plan Year (or in
the case of the Plan Year in which occurs the effective date of
this Plan, the last day of such Plan Year); or (ii) if the Plan is
part of a Top Heavy Group.
(b) TOP HEAVY GROUP.
This Plan shall be deemed to be a part of a Top Heavy Group if the
Plans which make up the group of which this Plan is considered a
part are such that, when aggregated, the sum of: (i) the present
value of the cumulative accrued benefits of Key Employees under
all defined benefit plans in the group; and (ii) the cumulative
accrued benefits in the Plan accounts of Key Employees under all
defined contribution plans in the group, exceeds sixty percent
(60%) of the sum of such amounts for all Employees who participate
in the Plans of such group. The group of Plans of which this Plan
shall be considered a part includes: (i) all Plans of the Employer
in which a Key Employee participates; (ii) all Plans which enable
a Plan in which a Key Employee participates to meet the
qualification requirements of Code Section 401(a)(4) or Code
Section 410; and (iii) all Plans
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which the Employer, in its discretion, decides to include,
provided that the inclusion of such Plan or Plans would not
prevent the group of Plans from meeting the qualification
requirements of Code Section 401(a)(4) and Code Section 410.
(c) KEY EMPLOYEE.
"Key Employee" means an Employee or former Employee (or his
Beneficiaries) who, at any time during the Plan Year or any of the
preceding four (4) Plan Years, is any of the following:
(i) An officer of the Employer if such individual's annual
Compensation exceeded fifty percent (50%) of the dollar
limitation under Code Section 415(b)(1)(A).
(ii) One of the ten (10) Employees owning (or considered as
owning within the meaning of Code Section 318) the largest
interests in the Employer if such individual's Compensation
exceeded one hundred percent (100%) of the dollar
limitation under Code Section 415(c)(1)(A).
(iii) A "five percent owner" (5%) of the Employer. "Five percent
owner" (5%) means any person who owns (or is considered as
owning within the meaning of Code Section 318) more than
five percent (5%) of the outstanding stock of the Employer
or stock possessing more than five percent (5%) of the
total combined voting power of all stock of the Employer.
(iv) A "one percent owner" (1%) of the Employer receiving annual
Compensation from the Employer of more than one hundred
fifty thousand dollars ($150,000). "One percent (1%) owner"
means any person who owns (or is considered as owning
within the meaning of Code Section 318) more than one
percent (1%) of the outstanding stock of the Employer or
stock possessing more than one percent (1%) of the total
combined voting power of all stock of the Employer.
In determining percentage ownership hereunder, Employers that
would otherwise be aggregated under Code Section 414(b), (c), (m)
and (o) shall be treated as separate Employers. However, in
determining whether an individual receives compensation of more
than one hundred fifty thousand dollars ($150,000) compensation
from each Employer required to be aggregated under Code Section
414(b), (c), (m) and (o) shall be taken into account.
(d) AMOUNTS INCLUDED FOR COMPUTATION PURPOSES.
In determining, for the purposes of this Section 10.2, the amount
of an Employee's accrued benefits and account balances, there
shall be included therein the present value of all distributions
made within a five (5) year period ending on the date such
determination is made, including distributions from terminated
Plans required to be considered pursuant to Section 10.2(b).
Furthermore, the accrued benefits and account balances of any
Employee who is not a Key Employee for the
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Plan Year in question, but was a Key Employee in any previous Plan
Year, shall not be taken into consideration in making any of the
computations required in this Section 10.2. The accrued benefit of
any individual who has not performed any service for the Employer
within the five year period ending on the date such determination
is made shall not be taken into account for purposes of Section
10.2. Except to the extent provided in regulations of the
Secretary of the Treasury, any rollover contributions (or similar
transfers) made to the Plan after December 31, 1983 shall not be
taken into consideration in making any of the computations
required by this Section 10.2.
(e) NON-KEY EMPLOYEE.
A "Non-Key Employee" shall mean any Employee who is not a Key
Employee.
(f) TOP HEAVY ACCRUAL.
Solely for the purpose of determining if the Plan, or any other
Plan included in a Top Heavy Group of which this Plan is a part,
is top-heavy, the accrued benefit of a Participant other than a
Key Employee shall be determined under (i) the method, if any,
that uniformly applies for accrual purposes under all Plans
maintained by the Employer or by other members of an affiliated
service group (under Code Section 414(m)), a controlled group of
corporations (under Code Section 414(b)), a group of trades or
businesses under common control (under Code Section 414(c)) of
which the Employer is a member and any other entity required to
be aggregated with the Employer pursuant to regulations under
Code Section 414(o), or (ii) if there is no such method, as if
such benefit accrued not more rapidly than the slowest accrual
rate permitted under the fractional accrual rate of Code Section
411(b)(1)(C).
10.3 ACCELERATED VESTING.
Unless the Plan provides for full and immediate vesting of Employer
Accounts upon participation, then for any Plan Year in which this Plan is
deemed to be a Top Heavy Plan, the vesting schedule contained in Section
6.3 shall be modified as follows:
<TABLE>
<CAPTION>
================================================
TOTAL YEARS FOR VESTING VESTED
(EXCLUDING YEARS OF SERVICE PERCENTAGE
PRIOR TO EFFECTIVE DATE OF
THIS PLAN)
================================================
<S> <C>
Less than 2 0%
================================================
2 20%
================================================
3 40%
================================================
4 60%
================================================
5 80%
================================================
6 or more 100%
================================================
</TABLE>
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Should this Plan not be deemed to be a Top Heavy Plan after previously
being so categorized, the vesting schedule contained in Section 6.2 shall
again be effective except that the vested percentage attained by
Participants shall not be reduced thereby and Participants with three (3)
or more Years of Service for Vesting shall have the right to select the
vesting schedule under which their vested Accrued Benefit will be
determined.
10.4 MINIMUM CONTRIBUTIONS.
For any Plan Year in which this Plan is determined to be a Top Heavy
Plan, either: (i) a minimum Employer contribution shall be made, pursuant
to this Plan or another defined contribution plan maintained by the
Employer, to the account of each non-Key Employee (except those who are
separated from service with the Employer at the end of the Plan Year); or
(ii) a minimum non-integrated benefit must be provided to each non-Key
Employee (except those who are separated from service with the Employer
at the end of the Plan Year), pursuant to a defined benefit plan
maintained by the Employer.
For the purposes of the first sentence of this Section 10.4, the minimum
Employer contribution provided to each non-Key Employee (except those who
are separated from service with the Employer at the end of the Plan Year)
shall be equal to three percent (3%) of such non-Key Employee's
Compensation. If, however, the Employer contribution, under this and any
other defined contribution plan required to be included in the Top-Heavy
Group and maintained by the Employer, for any Key Employee for such Plan
Year is less than three percent (3%) of such Key Employee's total
Compensation not in excess of Two Hundred Thousand Dollars ($200,000)
(for Plan Years beginning before 1989), then, the Employer contribution
to each Participant (except those who are separated from service with the
Employer at the end of the Plan Year) shall equal the amount which
results from multiplying such Participant's Compensation times the
highest contribution rate of any Key Employee covered by the Plan and
shall include amounts elected to be deferred by the Key Employee pursuant
to an Code Section 401(k) provision.
For the purposes of the first sentence of this Section 10.4, the minimum
non-integrated benefit provided by the Employer to each non-Key Employee
(except those who are separated from service with the Employer at the end
of the Plan Year) is an amount, which when expressed as an annual
retirement benefit, shall be no less than two percent (2%) of such
non-Key Employee's average annual Compensation for his five (5) highest
consecutive years of service, multiplied by the Employee's years of
service with the Employer, not to exceed ten (10) years. For the purposes
of the preceding sentence, years of service with the Employer shall not
include years of service completed during any Plan Year which begins
before January 1, 1984, or years of service completed during a Plan Year
for which the Plan is not a Top-Heavy Plan. For the purposes of this
Section 10.4, the minimum benefit provided above shall be computed in the
form of a single life annuity, with no ancillary benefits, beginning at
Normal Retirement Age.
For the purposes of this Article X, "Compensation" shall have the same
meaning as it does throughout the Plan; provided that it shall include
such additional compensation as is required to meet the requirements of
Code Section 415(c)(3).
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The minimum allocation required pursuant to this section shall be made
even though, under other Plan provisions, a participant would not
otherwise be entitled to receive an allocation, or would have received a
lesser allocation for the year because of such participant's failure to
complete a Year of Service.
10.5 LIMITATION ON COMPENSATION TAKEN INTO ACCOUNT UNDER PLAN.
For any Plan Year prior to Plan Years beginning before January 1, 1989,
in which this Plan is deemed to be a Top Heavy Plan the definition of
Compensation contained in Section 2.5 shall exclude amounts in excess of
one hundred fifty thousand dollars ($150,000).
10.6 MODIFICATION OF DEFINED BENEFIT AND DEFINED CONTRIBUTION PLAN FRACTION.
For any Plan Year in which the Plan is deemed to be a Top Heavy Plan, the
denominators of the defined benefit plan fraction and the defined
contribution plan fraction contained in Section 5.4(c) (if such Section
is included in this Plan) shall be deemed to be modified by substituting
1.0 for 1.25. Notwithstanding the above, if this Plan would not be deemed
to be a Top Heavy Plan if ninety percent (90%) were substituted for sixty
percent (60%) in Section 10.2 and if the Employer provides benefits
and/or makes contributions to the Employer Accounts of non-Key Employees
who participate in defined benefit and/or defined contribution plans
maintained by the Employer, in amounts at least equal to that which would
be required by Section 10.4 after substituting four percent (4%) for
three percent (3%) in the second paragraph thereof, and by substituting
three percent (3%) for two percent (2%) in the third paragraph thereof,
then the reduction in the defined benefit plan fraction and the defined
contribution plan fraction as set forth in the preceding sentence, shall
not be made.
Article XI
AMENDMENT AND TERMINATION
11.1 RIGHTS TO SUSPEND OR TERMINATE PLAN.
It is the present intention of the Employer to maintain this Plan
throughout its corporate existence. Nevertheless, the Employer
reserves the right, at any time, to discontinue or terminate the Plan,
to terminate the Employer's liability to make further contributions to
this Plan, to suspend contributions for a fixed or indeterminate period
of time. In any event, the liability of the Employer to make
contributions to this Plan shall automatically terminate upon its legal
dissolution or termination, upon its adjudication as a bankrupt, upon the
making of a general assignment for the benefit of creditors, or upon its
merger or consolidation with any other corporation or corporations.
11.2 SUCCESSOR CORPORATION.
In the event of the termination of the liability of the Employer to make
further contributions to this Plan, the Employer's liability may be
assumed by any other corporation or organization which employs a
substantial number of the Participants of this Plan. Such assumption of
liability shall be expressed in an agreement between such other
corporation or organization and the Trustees under which such other
corporation or
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organization assumes the liabilities of this Trust with respect to the
Participants employed by it.
11.3 AMENDMENT.
To provide for contingencies which may require the clarification,
modification, or amendment of this Plan, the Employer reserves the right
to amend this Plan at any time. The Employer, however, shall not have the
right to amend this Plan in any way which would deprive any Participant
of the right to receive his Accrued Benefits under the Plan, or which
would alter the basic purpose of the Plan, or which would give the
Employer any rights in the Trust Fund.
Each Participant having at least three Years of Service for Vesting at
the time of the adoption of any amendment changing any vesting schedule
under the Plan shall have the right to elect at any time, but no later
than 60 days after the later of: (a) the date the amendment is adopted;
(b) the date on which the amendment is effective; or (c) the date on
which the Participant is given written notice the amendment, to have his
vested percentage computed under the Plan without regard to such
amendment.
11.4 ONE HUNDRED PERCENT (100%) VESTING ON TERMINATION OF PLAN.
Upon termination or partial termination of the Plan and Trust by formal
action of the Employer or for any other reason, or if Employer
contributions to the Plan and Trust are permanently discontinued for any
reason, each Participant directly affected by such action shall be one
hundred percent (100%) vested in the amount allocated to the accounts of
each such Participant, and payment to such Participant shall be made in
cash as soon as practicable after liquidation of the assets of the Trust.
11.5 PLAN MERGER OR CONSOLIDATION.
In the case of any merger or consolidation with, or transfer of any
assets or liabilities to, any other Plan, each Participant in this plan
must be entitled to receive (if the surviving Plan is then terminated) a
benefit immediately after the merger, consolidation, or transfer which is
equal to or greater than the benefit he would have been entitled to
receive immediately before the merger, consolidation, or transfer (if
this Plan had terminated).
Article XII
MISCELLANEOUS
12.1 LAWS OF CALIFORNIA TO APPLY.
The Plan provisions of this document shall be construed according to the
laws of the State of California, to the extent Federal laws do not
control. The situs of the Trust will be in the State of California. Its
validity, construction, and all rights under the Plan and Trust shall be
governed by ERISA and, to the extent not preempted, by the laws of
California. If any provisions of the Agreement are invalid or
unenforceable, the remaining provisions thereof shall continue to be
fully effective.
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12.2 PARTICIPANT CANNOT TRANSFER OR ASSIGN BENEFITS.
None of the benefits, payments, proceeds, claims, or rights of any
Participant hereunder shall be subject to any claim of any creditor of
the Participant, nor shall any Participant have any right to transfer,
assign, encumber, or otherwise alienate, any of the benefits or proceeds
which a Participant may expect to receive, contingently or otherwise
under this Plan.
Notwithstanding any other provisions of this Section 12.2, the Trustees
may make distributions pursuant to a qualified domestic relations order
(as defined in Code Section 414(p)), provided that the plan administrator
has properly notified the Participant and any alternate payee of the
order and has determined that the order is a qualified domestic relations
order. The Plan Administrator shall adopt reasonable procedures to
determine the qualified status of such orders and to administer
distributions thereunder. Notwithstanding any restrictions on the time
of distribution which would otherwise apply under this Plan,
distributions with respect to a qualified domestic relations order may
be made at any time required by the order.
12.3 RIGHT TO PERFORM ALTERNATIVE ACTS.
In the event it becomes impossible for the Employer, the Administrative
Committee or the Trustees to perform any act required by this Plan, then
the Employer, the Administrative Committee or the Trustees may perform
such alternative act which most clearly carries out the intent and
purpose of this Plan.
12.4 REVERSION OF CONTRIBUTIONS UNDER CERTAIN CIRCUMSTANCES.
If this Plan is not initially approved and qualified by the Internal
Revenue Service as meeting the requirements of Code Section 401 and Code
Section 501, the Employer may, at its election, either: (a) cause the
Trustees to return to the Employer any amounts previously contributed by
the Employer to the Trust and the Participants, if any amounts have been
contributed by them, and immediately terminate the Plan; or (b) effect
such amendments to the Plan as are necessary to obtain the approval and
qualification of the Plan by the Internal Revenue Service.
All contributions made pursuant to Article IV are conditioned on
deductibility of such contributions under Code Section 404. To the extent
that the deduction under Code Section 404 for any year is disallowed, the
contribution shall be returned to the Employer within one (1) year after
disallowance of the deduction.
If a contribution is made by an Employer by a mistake of fact, the
contribution may be returned to the Employer within one (1) year after
the payment of the contribution.
Notwithstanding the above, earnings attributable to amounts described in
paragraphs two and three of this Section 12.4 shall not be returned to
the Employer; losses attributable to such amounts shall reduce the amount
returned.
-40-
<PAGE>
12.5 PLAN ADMINISTRATOR AGENT FOR SERVICE OF PROCESS.
The Plan Administrator is designated agent to receive service of legal
process on behalf of the Plan.
12.6 FILING TAX RETURNS AND REPORTS.
If the Trustees are not a corporate fiduciary, the Plan Administrator
shall prepare, or cause to have prepared, all tax returns, reports, and
related documents, except as otherwise specifically provided in this Plan
or unless the Administrative Committee provides to the contrary in the
manner prescribed in Section 8.4.
12.7 INDEMNIFICATION.
The Employer agrees to indemnify all Employees who serve as members of
the Administrative Committee or who serve as Trustee against all
liability arising in connection with their duties under the Plan, except
that this indemnification shall not include acts of embezzlement, or
diversion of Trust Funds by the Employee, nor shall it include acts of
gross negligence.
The Employer shall indemnify and hold harmless the Trustees, its
officers, Employees, agents, successors and assigns against all
liabilities, demands, claims, actions, losses, taxes, expenses (including
reasonable attorney's fees), both direct and indirect, arising out of
(1) acts or omissions to act with respect to the Plan by persons
unrelated to the Trustees ("unrelated persons"), (2) the Trustee's action
or inaction with respect to the Plan resulting from reliance on the
actions or inaction of unrelated persons, including directions to invest
or otherwise deal with Plan assets, or (3) any violation by an unrelated
persons of the provisions of ERISA or the regulations thereunder. The
foregoing indemnity shall not apply if the actions or omissions of the
Trustees result from the Trustees' willful misconduct or gross
negligence.
12.8 NUMBER AND GENDER.
When appropriate the singular as used in this Plan shall include the
plural and vice versa; and the masculine shall include the feminine.
12.9 MILITARY SERVICE.
Notwithstanding any provision of this Plan to the contrary,
contributions, benefits and Service credit with respect to qualified
military service will be provided in accordance with Section 414(u) of
the Internal Revenue Code.
-41-
<PAGE>
Article XIII
EXEMPT LOANS
13.1 USE OF PROCEEDS.
The proceeds of an Exempt Loan must be used within a reasonable time
after their receipt by the Plan only for any or all of the following
purposes:
(a) To acquire Qualifying Employer Securities;
(b) To repay such Exempt Loan;
(c) To repay a prior Exempt Loan.
If the proceeds of a loan are used to repay an Exempt Loan, the new loan
must constitute an Exempt Loan.
13.2 INTEREST RATE.
The interest rate of any loan to the Plan, including an Exempt Loan, must
not be in excess of a reasonable rate of interest. All other factors will
be considered in determining a reasonable rate of interest, including the
amount and duration of the loan, the security and guaranty (if any)
involved, the credit standing of the Plan and the guarantor (if any),
and the interest rate prevailing for comparable loans, including a
variable interest rate if reasonable.
13.3 NON-RECOURSE.
An Exempt Loan must be without recourse against the Plan. The only assets
of the Plan that may be given as collateral on an Exempt Loan are
Qualifying Employer Securities which were either: (i) acquired with the
proceeds of the Exempt Loan; or (ii) were used as Collateral on a prior
Exempt Loan repaid with the proceeds of the current Exempt Loan. No
person entitled to payment under the Exempt Loan shall have any right to
assets of the Plan other than:
(a) Collateral given for the Exempt Loan;
(b) Contributions (other than contributions of Qualifying Employer
Securities) that are made under the Plan to meet the obligations
of the Exempt Loan; and
(c) Earnings attributable to such collateral and the investment of
such contributions.
13.4 LIMITATIONS ON PAYMENTS.
Payments made with respect to an Exempt Loan by the Plan during a Plan
Year must not exceed an amount equal to the sum of such contributions and
earnings received during or prior to the Plan Year less such payments in
prior Plan Years. Such contributions and earnings shall be accounted for
separately by the Employer in the books of account of the Plan until the
Exempt Loan is repaid.
-42-
<PAGE>
13.5 FORFEITURE QUALIFYING EMPLOYER SECURITIES.
All Qualifying Employer Securities acquired with the proceeds of a loan
from a "disqualified person", whether they are pledged as collateral for
such loan or not, shall be held in a suspense account and shall be
removed from such account and be allocated to the Employer Accounts of
Participants at the end of each Plan Year to the extent paragraph (h) of
Section 8.11 provides for the release of encumbered securities. Income
earned from securities held in suspense shall be deemed to be the income
of the Plan and shall not be held in suspense unless such income has been
pledged as collateral for the loan. Should a portion of a Participant's
Employer Account be forfeited, Qualifying Employer Securities held in
suspense for such Participant pursuant to this paragraph may only be
forfeited after all other assets in the Participant's Employer Account
are forfeited. If interests in more than one class of Qualifying Employer
Securities have been allocated to the Participant's Employer Account, the
Participant must be treated as forfeiting the same proportion of each
such class of Qualifying Employer Securities.
13.6 LIMITATION ON FUTURE OBLIGATION.
The Plan shall not obligate itself to acquire Qualifying Employer
Securities from a particular security holder at an indefinite time
determined upon the happening of an event such as the death of the
security holder. However, this shall not prevent the Plan from providing
for the issuance of options in accordance with Treasury Regulation
Sections 54.4975-7(b)(10), (11), and (12).
In the event of default upon an Exempt Loan, the value of Plan assets
transferred in satisfaction of the Exempt Loan may not exceed the amount
of default. If the lender is a disqualified person (as defined in Code
Section 4975(e)(2)), the Exempt Loan must provide for a transfer of Plan
assets upon default only upon and to the extent of the failure of the
Plan to meet the payment schedule of the Exempt Loan. For purposes of
this Section 13.6, the making of a guaranty does not make a person a
lender.
IN WITNESS WHEREOF, the parties have executed this agreement this 29th day of
July, 1997.
WITNESS EMPLOYER
FALLBROOK NATIONAL BANK
/s/ [ILLEGIBLE] By /s/ Thomas E. Swanson
- ------------------------------- ---------------------------------
Thomas E. Swanson
President
-43-
<PAGE>
WITNESS TRUSTEE
/s/ [ILLEGIBLE] /s/ Thomas E. Swanson
- ------------------------------- ---------------------------------
Thomas E. Swanson
/s/ Lynda Hepier /s/ Granger Haugh
- ------------------------------- ---------------------------------
Granger Haugh
-44-
<PAGE>
EXHIBIT 23.1
Independent Auditors' Consent
The Board of Directors
Community Bancorp Inc.
We consent to incorporation by reference in the registration statements
(Nos. 333-88455, 333-88457, and 333-88473) on Form S-8 of Fallbrook National
Bank of our report dated January 13, 1999, relating to the consolidated
balance sheet of Community Bancorp Inc. and subsidiary (formerly Fallbrook
National Bank) as of December 31, 1998, and the related consolidated
statements of income and comprehensive income, shareholders' equity and cash
flows for each of the years in the two-year period ended December 31, 1998,
which report appears in the December 31, 1999, annual report on Form 10-KSB
of Community Bancorp Inc.
KPMG LLP
San Diego, California
March 29, 2000
<PAGE>
EXHIBIT 23.2
Independent Auditors' Consent
We consent to incorporation by reference in Registration Statement
Nos.333-88455, 333-88457, and 333-88473 of Community Bancorp Inc. on Form S-8
of our report dated March 6, 2000, appearing in the Annual Report on Form
10-KSB of Community Bancorp Inc., for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 29, 2000
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999
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