<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________
Commission File No.: 0-11113
SANTA BARBARA BANCORP
(Exact Name of Registrant as Specified in its Charter)
California 95-3673456
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1021 Anacapa Street, Santa Barbara, California 93101
(Address of principal executive offices) (Zip Code)
(805) 564-6300
(Registrant's telephone number, including area code)
Not Applicable
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Common Stock As of July 29, 1994, there were 5,110,897 shares of the
issuer's common stock outstanding.
<PAGE> 2
PART 1 FINANCIAL STATEMENTS
SANTA BARBARA BANCORP & SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands except per share amount)
<TABLE>
<CAPTION
June 30, December 31,
Assets: 1994 1993
<S> <C> <C>
Cash and due from banks $ 38,164 $ 50,946
Securities:
Held-to-maturity 288,215 194,474
Available-for-sale 210,008 189,044
Bankers' acceptances 0 63,614
Loans, net of allowance of $11,298 at
June 30, 1994 and $10,067 at
December 31, 1993 (Note 5) 453,557 454,163
Premises and equipment, net (Note 6) 7,118 6,657
Accrued interest receivable 8,553 7,228
Other assets (Note 7) 13,136 13,017
Total assets $1,018,751 $979,143
Liabilities:
Deposits:
Demand deposits $ 121,475 $114,557
NOW deposit accounts 119,182 127,296
Money Market deposit accounts 294,563 247,772
Savings deposits 135,469 148,719
Time deposits of $100,000 or more 70,262 83,380
Other time deposits 142,972 144,529
Total deposits 883,923 866,253
Securities sold under agreements
to repurchase and Federal funds purchased 28,034 20,155
Other borrowed funds 1,155 1,172
Accrued interest payable and other liabilitie 16,163 5,572
Total liabilities 929,275 893,152
Shareholders' equity (Notes 3 & 8):
Common stock (no par value; $1.00 per
share stated value; 20,000,000 authorized;
5,100,788 outstanding at June 30, 1994
and 5,064,517 at December 31, 1993) 5,101 5,065
Surplus 39,197 38,557
Unrealized gain (loss) on securities
available for sale (1,263) 683
Undivided profits 46,441 41,686
Total shareholders' equity 89,476 85,991
Total liabilities and shareholders' equity $1,018,751 $979,143
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE> 3
SANTA BARBARA BANCORP & SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
For the Six- For the Three-
Month Periods Month Periods
Ended June 30, Ended June 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 24,770 $22,397 $10,663 $10,779
Interest on taxable securities 9,432 8,561 5,219 4,293
Interest on tax-exempt securities 3,423 3,318 1,731 1,695
Interest on Federal funds sold 124 362 86 227
Interest on bankers' acceptances 287 116 12 0
Total interest income 38,036 34,754 17,711 16,994
Interest expense:
Interest on deposits:
NOW accounts 624 775 311 372
Money Market accounts 3,824 2,937 2,221 1,473
Savings deposits 1,629 2,003 800 955
Time deposits of
$100,000 or more 1,161 1,627 562 756
Other time deposits 3,374 3,675 1,711 1,830
Interest on securities sold
under agreements to repurchase
and Federal funds purchased 429 398 237 191
Interest on other borrowed funds 48 22 30 7
Total interest expense 11,089 11,437 5,872 5,584
Net interest income 26,947 23,317 11,839 11,410
Provision for loan losses 5,007 3,850 725 1,075
Net interest income after
provision for loan losses 21,940 19,467 11,114 10,335
Other income:
Service charges on deposits 1,470 1,403 746 702
Trust fees 3,291 3,201 1,510 1,484
Other service charges, 1,249 916
commissions and fees, net 2,041 1,738
Securities losses (Note 4) (613) (47) (613) 0
Other income 293 372 149 190
Total other income 6,482 6,667 3,041 3,292
Other expense:
Salaries and benefits 10,976 9,876 5,527 4,862
Net occupancy expense 1,643 1,380 855 686
Equipment expense 999 789 511 420
Net cost (gain) from operating
other real estate (580) 793 69 642
Other expense 6,238 5,461 3,144 2,749
Total other expense 19,276 18,299 10,106 9,359
Income before income taxes
and cumulative effect
of accounting change 9,146 7,835 4,049 4,268
Applicable income taxes 2,452 1,994 872 1,107
Net income before cumulative effect
of accounting change 6,694 5,841 3,177 3,161
Cumulative effect of
accounting change (Note 9) 0 619 0 0
Net income $ 6,694 $ 6,460 $ 3,177 $ 3,161
Earnings per share before
cumulative effect of
accounting change $ 1.32 $ 1.12 $ 0.62 $ 0.61
Cumulative effect of
accounting change (Note 9) 0 0.12 0 0
Earnings per share (Note 2 $ 1.32 $ 1.24 $ 0.62 $ 0.61
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE> 4
SANTA BARBARA BANCORP & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1994 1993
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 6,694 $ 6,460
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization 699 491
Provision for loan losses 5,007 3,850
Benefit for deferred income taxes (630) (583)
Net amortization of investment securities
discounts and premiums (2,107) (2,247)
Net change in deferred loan origination and
extension fees and costs 204 109
Decrease (increase) in accrued
interest receivable (1,325) 279
Increase (decrease) in accrued
interest payable 131 (65)
Increase in income receivable (617) (34)
Decrease in income taxes payable (406) (303)
Decrease (increase) in prepaid expenses 312 (1,504)
Increase (decrease) in accrued expenses 422 (523)
Other operating activities (118) (792)
Net cash provided by operating activities 8,266 5,138
Cash flows from investing activities:
Proceeds from sale of
securities and bankers' acceptances 45,912 19,882
Proceeds from call or maturity of
securities and bankers' acceptances 158,953 47,201
Purchase of securities (247,451) (31,282)
Net increase in loans made to customers (4,630) (14,694)
Disposition of property from defaulted loans 2,962 1,353
Purchase or investment in premises
and equipment (1,172) (1,178)
Net cash provided by (used in)
investing activities (45,426) 21,282
Cash flows from financing activities:
Net increase (decrease) in deposits 17,670 (14,369)
Net increase (decrease) in borrowings with
maturities of 90 days or less 7,862 (3,184)
Proceeds from issuance of common stock 676 441
Payments to retire common stock 0 (9)
Dividends paid (1,830) (1,662)
Net cash provided by (used in) 24,378 (18,783)
financing activities
Net increase (decrease) in cash and (12,782) 7,637
cash equivalents
Cash and cash equivalents at beginning of period 50,946 44,059
Cash and cash equivalents at end of period $ 38,164 $ 51,696
Supplemental disclosure:
Cash paid during the six months ended:
Interest $ 10,958 $ 11,502
Income taxes $ 3,706 $ 3,330
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE> 5
Santa Barbara Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1994
(Unaudited)
1. Principles of Consolidation
The consolidated financial statements include the parent holding
company, Santa Barbara Bancorp ("Company"), and its wholly owned
subsidiaries, Santa Barbara Bank & Trust ("Bank") and SBBT Service
Corporation ("Service Corp."). Material intercompany balances and
transactions have been eliminated.
2. Earnings Per Share
Net earnings per common and common equivalent share are computed based
on the weighted average number of shares outstanding during the period.
There are no common stock equivalents that cause dilution in earnings
per share in excess of 3 percent. The decrease in the weighted average
number of shares from the 1993 to the 1994 periods is due to the
retirement of shares disclosed in Note 8. For the six- and three-month
periods ended June 30, 1994 and 1993, the weighted average shares
outstanding were as follows:
<TABLE>
<CAPTION>
Six-Month Periods Three-Month Periods
Ended June 30 Ended June 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Weighted average
shares outstanding 5,079,544 5,194,862 5,093,471 5,199,475
</TABLE>
3. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in a condensed format, and therefore do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
Management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been
reflected in the financial statements. However, the results of
operations for the six months ended June 30, 1994, are not necessarily
indicative of the results to be expected for the full year. Certain
amounts reported for 1993 have been reclassified to be consistent with
the reporting for 1994.
For the purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks and Federal funds sold.
4. Securities
In May 1993, the Financial Accounting Standards Board ("FASB") issued a
pronouncement that changed the accounting for some of the securities
held by the Company. The pronouncement, Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities ("SFAS 115"), was implemented by the Company as of
December 31, 1993. Implementation of the pronouncement required that the
Company's securities be classified as either "held-to-maturity" or
"available-for-sale." Only those securities for which the Company has
the ability and positive intent to hold to maturity may be classified as
held-to-maturity. Securities which meet these criteria are accounted for
at amortized historical cost. This means that the security is carried at
its purchase price adjusted for the amortization of any premium or
discount irrespective of later changes in its market value prior to
maturity. Excluded from this category are securities which might be sold
for liquidity purposes, sold in response to interest rate changes, or
sold to restructure the maturities of the portfolio to better match
deposit maturities or complement the maturity characteristics of the
loan portfolio. Securities subject to sale for such reasons are
considered available-for-sale.
Classification as available-for-sale is required for many of the
Company's securities because they might be sold due to changes in
interest rates or liquidity needs. These securities are reported in the
financial statements at fair value rather than at amortized cost. The
after-tax effect of unrealized gains or losses is reported as a separate
component of shareholders' equity. In accordance with the provisions of
SFAS 115, changes in the unrealized gains or losses will be shown as
increases or decreases in this component of equity, but are not reported
as gains or losses in the statements of income of the Company.
SFAS 115 also provides that those securities which the purchaser hopes
later to be able to sell for a higher price be classified as "trading
securities." The Company does not purchase any securities for this
purpose.
Book and market values of securities are as follows:
(in thousands) Amor- Gross Un- Gross Un- Estimated
tized realized realized Market
Cost Gains Losses Value
June 30, 1994:
Held-to-maturity:
U.S. Treasury obligations $195,143 $ 661 $ (7,978) $187,826
U.S. Agency obligations 9,806 0 (603) 9,203
State and municipal
securities 83,266 12,571 (362) 95,475
288,215 13,232 (8,943) 292,504
Available-for-sale:
U.S. Treasury obligations 166,155 112 (777) 165,490
U.S. Agency obligations 46,014 0 (1,496) 44,518
212,169 112 (2,273) 210,008
$500,384 $13,344 $(11,216) $502,512
December 31, 1993:
Held-to-maturity:
U.S. Treasury obligations $106,491 $ 2,594 $ (512) $108,573
U.S. Agency obligations 9,786 0 (11) 9,775
State and municipal
securities 78,197 18,644 0 96,841
194,474 21,238 (523) 215,189
Available-for-sale:
U.S. Treasury obligations 181,865 1,182 (17) 183,030
U.S. Agency obligations 6,015 0 (1) 6,014
187,880 1,182 (18) 189,044
$382,354 $22,420 $ (541) $404,233
The Company does not expect to realize any significant amount of the
unrealized gains shown above for several reasons. First, the state and
municipal securities in the above table have irreplaceable tax-free
characteristics, which outweigh the benefit of selling them in order to
realize the gains that would result from their sale. Second, as
indicated above, the Company intends to hold to maturity the U. S.
Treasury securities that are classified as held-to-maturity. Third, the
Company's investment policy, in most instances, requires holding
securities that have unrealized gains because they are earning rates of
interest above what would be available from current investment
alternatives. The Company does not expect to realize any of the
unrealized losses related to the securities in the held-to-maturity
portfolio, because it is the Company's intent to hold them to maturity
at which time the par value will be received. Losses may be realized on
securities in the available-for-sale portfolio.
(in thousands)
Held-to- Available-
Maturity for-Sale Total
June 30, 1994:
Amortized cost:
In one year or less $ 7,805 $ 89,668 $ 97,473
After one year through five years 229,849 122,501 352,350
After five years through ten years 35,947 0 35,947
After ten years 14,614 0 14,614
$288,215 $212,169 $500,384
Estimated market value:
In one year or less $ 8,110 $ 89,673 $ 97,783
After one year through five years 226,863 120,335 347,198
After five years through ten years 42,499 0 42,499
After ten years 15,032 0 15,032
$292,504 $210,008 $502,512
December 31, 1993:
Amortized cost:
In one year or less $ 4,504 $144,965 $149,469
After one year through five years 137,139 41,886 179,025
After five years through ten years 36,463 1,029 37,492
After ten years 16,368 0 16,368
$194,474 $187,880 $382,354
Estimated market value:
In one year or less $ 4,694 $145,650 $150,344
After one year through five years 141,799 42,364 184,163
After five years through ten years 48,229 1,030 49,259
After ten years 20,467 0 20,467
$215,189 $189,044 $404,233
The book value and estimated market value of debt securities by
contractual maturity are shown above. Expected maturities may differ
from contractual maturities because certain issuers may have the right
to call or prepay obligations with or without call or prepayment
penalties.
5. Loans
The balances in the various loan categories are as follows:
(in thousands) June 30, 1994 December 31, 1993
Real estate:
Residential 77,274 54,395
Non-residential 125,749 123,534
Construction 34,142 41,030
Commercial loans 156,711 168,227
Home equity loans 33,263 36,219
Consumer loans 27,568 27,331
Municipal tax-exempt obligations 7,963 11,888
Other loans 2,185 1,606
Total loans 464,855 464,230
The loan balances at June 30, 1994 and December 31, 1993, are net of
approximately $1,506,000 and $1,301,000 respectively, in loan fees and
origination costs deferred under the provisions of Statement of
Financial Accounting Standards No. 91.
Statements of changes in allowance for loan losses (in thousands):
Periods Ended June 30, 1994
Six-Month Three-Month
Balance, beginning of period $ 10,067 $ 14,251
Provision for loan losses 5,007 725
Loan losses charged to allowance (3,984) (3,748)
Loan recoveries credited to allowance 208 70
Balance, June 30, 1994 $ 11,298 $ 11,298
Included in loan losses charged to the allowance and loan recoveries
credited to allowance are $3,030,000 and $8,000, respectively, that
relate to the Company's tax refund anticipation loan program. The losses
occur only in the second quarter.
6. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is charged to income over the estimated
useful lives of the assets, generally by the use of an accelerated
method in the early years, switching to the straight line method in
later years. Leasehold improvements are amortized over the terms of the
related lease or the estimated useful lives of the improvements,
whichever is shorter. Depreciation expense (in thousands) was $371 and
$272 for the three-month periods ended June 30, 1994 and 1993,
respectively, and $699 and $491 for the six-month periods ended June 30,
1994 and 1993, respectively. The table below shows the balances by major
category of fixed assets:
<TABLE>
<CAPTION>
(in thousands) June 30, 1994 December 31, 1993
Accumulated Net Book Accumulated Net Book
Cost Depreciation Value Cost Depreciation Value
<S> <C> <C> <C> <C> <C> <C>
Land and buildings 6,002 2,691 3,311 5,613 2,717 2,896
Leasehold improvements 4,415 3,307 1,108 4,383 3,203 1,180
Furniture and equipment 10,556 7,857 2,699 10,004 7,423 2,581
Total 20,973 13,885 7,118 20,000 13,343 6,657
</TABLE>
7. Property from Defaulted Loans Included in Other Assets
Property from defaulted loans is included within other assets on the
balance sheets. As of June 30, 1994, and December 31, 1993, the Company
had $1.6 million and $3.5 million, respectively, in property from
defaulted loans. Property from defaulted loans is carried at the lower
of the outstanding balance of the related loan or the estimate of the
market value of the assets less disposal costs.
8. Shareholders' Equity
On October 1, 1993, the Company made an Offer to Purchase for cash up to
250,000 shares of its common stock at $21.00 per share to its
shareholders. The offer expired November 19, 1993. Approximately 155,000
shares were tendered by shareholders and purchased by the Company at a
cost of $3.3 million.
9. Accounting Changes
As of the beginning of 1993, the Company implemented Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes
("SFAS 109"). This statement required a change in the method by which
the Company computes its income tax expense. With the adoption of this
new standard, a one time gain of $619,500 relating to prior years was
realized. This gain is shown as a cumulative effect of accounting change
in the consolidated statement of income for the six month periods ended
June 30, 1993.
The implementation of SFAS 115 is discussed in Note 4 above.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Summary
Net income for the second quarter of 1994 is higher than net income for
the same quarter of last year. The Company has grown 6.4% in average
total assets and 6.0% in average total deposits compared to the second
quarter of 1993. Net income for the second quarter of 1994 was lower
than for the first quarter of the year because of the income earned in
the first quarter from the tax refund anticipation loans. These loans,
which are discussed in the section below titled "Loans and Related
Interest Income," have introduced some significant seasonality to the
Company's earnings.
The first half of 1994 saw a reversal of the trend of declining interest
rates. Over the last several years the interest rates for most financial
instruments had been steadily declining. For the Company, this meant
that the proceeds from maturing investments were reinvested at lower
rates and term deposits renewed by customers were renewed at lower
rates. Since February the Federal Reserve Board ("the Fed") has raised
short term interest rates three times. With the exception of its impact
on the market value of the Company's securities, the effect of the
increased interest rates has not yet been significant. The Company did
not raise its base lending rate until after the second increase that
occurred in late March. The Company began to raise some of its deposit
rates during the second quarter of 1994. There is some indication that
rates will be raised again, possibly in August. Further increases are
likely to have more impact as pressure grows to increase deposit rates
further.
The Company is a bank holding company. While the Company has a few
operations of its own, these are not significant in comparison to those
of its major subsidiary, Santa Barbara Bank and Trust (the "Bank"). The
Bank is a state-chartered commercial bank. It offers a full range of
retail and commercial banking services. These include commercial, real
estate, and consumer loans, a wide variety of deposit products, and full
trust services. The Company's second subsidiary is SBBT Service
Corporation ("ServiceCorp"). ServiceCorp provides correspondent banking
services such as check processing, internal auditing, and courier
service to other financial institutions on the Central Coast of
California. All references to "the Company" below apply to the Company
and its subsidiaries.
Interest Rate Sensitivity
The Company functions as a financial intermediary; that is, it takes in
funds from depositors and then either loans the funds to borrowers or
invests the funds in securities and other instruments. Net interest
income is the difference between the interest income earned on loans and
investments and the interest expense paid on deposits and is expressed
in dollars. Net interest margin is the ratio of net interest income to
earning assets. The ratio is useful in allowing the Company to monitor
the spread between interest income and interest expense from month to
month and year to year irrespective of the growth of the Company's
assets. If the Company is able to maintain the same percentage spread
between interest income and interest expense as the Company grows, the
amount of net interest income will increase.
Because the Company must maintain its net interest margin to remain
profitable, the Company must be prepared to address the risks of adverse
effects or risks from changes in interest rates.
The primary risk is "market risk;" that is, the market value of loans,
investments, and deposits that have rates of interest fixed for some
term will increase or decrease with changes in market interest rates. If
the Company invests funds in a fixed-rate long-term security and
interest rates subsequently rise, the security is worth less than a
comparable security just issued because it pays less interest than the
newly issued security. If the security had to be sold, the Company would
have to recognize a loss. The opposite is true when interest rates
decline; that is, the market value of the older security is higher than
that of a newly issued comparable security. Fixed rate certificates of
deposit and other liabilities represent a less costly obligation
relative to the current market when interest rates rise and a more
costly obligation when interest rates decline. However, most interest-
bearing liabilities have a shorter maturity than interest-earning assets
and so there is less fluctuation in market value from changes in
interest rates. Therefore, the exposure to loss from market risk is
primarily from rising interest rates.
This exposure to "market risk" is managed by limiting the amount of
fixed rate assets (loans or securities that earn interest at a rate
fixed when the funds are lent or the security purchased) and by keeping
maturities short. The Company underwrites the largest proportion of its
loans with variable interest rates. It has generally maintained the
taxable portion of its securities portfolios heavily weighted towards
securities with maturities of less than three years. However, these
methods of avoiding market risk must be balanced against the
consideration that shorter term securities generally earn less interest
income than longer term instruments. Therefore, the Company makes some
fixed rate loans and purchases some longer-term securities, because if
it were to make only variable loans and only purchase securities with
very short maturities, its net interest margin would decline
significantly.
The Company is also exposed to "mismatch risk." This is the risk that
interest rate changes may not be equally reflected in the rates of
interest earned and paid because of differences in the contractual terms
of the assets and liabilities held. An obvious example of this kind of
difference is when a financial institution holds mostly longer-term
assets but has shorter-term deposits. Many savings and loan institutions
were hurt in the early 1980's by this kind of mismatch. They held large
portfolios of long-term fixed rate loans with rates of 5-9% that had
been made in the 1960's and 1970's when deposit rates were regulated at
4% or less. In the early 1980's, with deregulation of deposits and
inflation, deposit rates soared above 15%, causing them to have to pay
more on deposits than they earned on their assets.
The Company controls mismatch risk by attempting to roughly match the
maturities and repricing opportunities of assets and liabilities. When
this matching is properly carried out, if the interest rates for a
significantly large proportion of the Company's loans or securities
decrease, the Company should be able to reprice an approximately equal
amount of deposits or other liabilities to lower interest rates within a
short time. Similarly, if interest rates paid on deposits increase, the
Company should be able to protect its interest rate margin through
adjustments in the interest rates earned on loans or securities. This
matching is accomplished by managing the terms and conditions of the
products that are offered to depositors and borrowers and by purchasing
securities with the right maturity or repricing characteristics to fill
in mismatches.
One of the means by which the Company monitors the extent to which the
maturities or repricing opportunities of the major categories of assets
and liabilities are matched is an analysis such as that shown in Table
1. This analysis is sometimes called a "gap" report, because it shows
the gap between assets and liabilities repricing or maturing in each of
a number of periods. The gap is stated in both dollars and as a
percentage of total assets. As a percentage of assets, the Company's
target is to be no more than 10% plus or minus in either of the first
two periods.
Many of the categories of assets and liabilities on the balance sheet do
not have specific maturities. For the purposes of this table, the
Company assigns these pools of funds to a likely repricing period. The
assumptions underlying the assignment of the various classes of non-term
assets and liabilities are somewhat arbitrary, however, in that the
timing of the repricing is primarily a function of competitive
influences, i. e. whether other financial institutions are changing
their rates.
The first period shown in the gap report covers assets and liabilities
that mature or reprice within the next three months. This is the most
critical period because there would be little time to correct a mismatch
that is having an adverse impact on income. For example, if the Company
had a significant negative gap for the period-with liabilities maturing
or repricing within the next three months significantly exceeding assets
maturing or repricing in that period by a margin above the 10% target -
and interest rates rose suddenly, the Company would have to wait for
more than three months before an equal amount of assets could be
repriced to offset the higher interest expense on the liabilities. From
period to period, the gap for the first period varies between positive
and negative. As of June 30, 1994, the gap for this first period is
negative and, at 9.42% is just within the target range. At the end of
the last quarter, the gap was also negative at 2.82% of assets. It has
changed from the last quarter primarily because of a large increase
(about $44 million) in money market deposits that are tied to U. S.
Treasury bills and a decline in the amount of loans that could be
repriced within the next three months.
The impact of negative gap in the first period is mitigated by the
positive gap in the second period, "After three months but within six."
If there were a negative gap in the second period as well as the first,
then it would be even longer before sufficient assets could be repriced.
The larger negative gap for the third period, "After six months but
within one year" is caused by the large amounts of transaction deposit
accounts that the Company at present assumes will not be repriced sooner
than six months. If interest rates continue to rise, the rates paid on
these accounts may have to be repriced sooner than that. There would be
a negative impact on earnings from the repricing of these deposits. This
impact will be partially offset by the fact that, in an environment of
rising interest rates, short-term assets tend to reprice more often and
to a greater degree than the short-term liabilities.
The periods of over one year are the least critical because more steps
can be taken to mitigate the adverse effects of any interest rate
changes. The Company does attempt to loosely match its long-term
municipal portfolio with long-term IRA certificates of deposit, but many
of the other assets that have scheduled maturities in this period are
highly liquid Treasury Notes that would be sold if interest rates rise,
thereby achieving a repricing. These sales in a rising interest rate
environment would involve some losses, but they are minimized by the
Company's investment policy as explained below.
<TABLE>
Table 1 INTEREST RATE SENSITIVITY
<CAPTION>
Non-
After After After interest
three six one bearing
As of June 30, 1994 Within months months year but After or non-
(in thousands) three but within but within within five repricing
months six one year five years items Total
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans $291,642 $ 59,440 $ 35,213 $ 58,914 $ 18,857 $ 789 $ 464,855
Cash and due from banks 0 0 0 0 0 38,164 38,164
Securities:
Held-to-maturity 1,050 2,012 4,743 229,849 50,561 0 288,215
Available-for-sale 39,994 29,640 20,039 120,335 0 0 210,008
Other assets 0 0 0 0 0 17,509 17,509
Total assets 332,686 91,092 59,995 409,098 69,418 56,462 1,018,751
Liabilities and
shareholders' equity:
Borrowed funds:
Repurchase agreements and
Federal funds purchased 28,034 0 0 0 0 0 28,034
Other borrowings 1,155 0 0 0 0 0 1,155
Interest-bearing deposits:
Savings and interest-bearing
transaction accounts 318,672 0 230,542 0 0 0 549,214
Time deposits 80,747 42,774 28,677 60,362 674 0 213,234
Demand deposits 0 0 0 0 0 121,475 121,475
Other liabilities 0 0 0 0 0 16,163 16,163
Shareholders' equity 0 0 0 0 0 89,476 89,476
Total liabilities and
shareholders' equity 428,608 42,774 259,219 60,362 674 227,114 $1,018,751
Interest rate-
sensitivity gap $(95,922) $ 48,318 $(199,224) $348,736 $ 68,744 $(170,652)
Gap as a percentage of
total assets -9.42% 4.74% -19.56% 34.23% 6.75% -16.75%
Cumulative interest
rate-sensitivity gap $(95,922) $(47,604) $(246,828) $101,908 $170,652
Note: Net deferred loan fees, overdrafts, and the reserve for loan
loss are included in the above table as non-interest bearing or non-repricing items.
</TABLE>
As noted above, interest rates recently have been rising after a
prolonged decline. The most widely watched short-term interest rate is
probably the money center banks' prime lending rate. Publicly announced
changes for the money center banks and the Company for the last several
years are shown in the table below. As with a number of community banks,
the Company uses a "base lending rate" from which it sets the rates
charged to individual customers. This base lending rate is set by the
Company with reference to the local market conditions as well as the
money center banks' prime lending rate. Again like other community
banks, the Company trailed the decreases in the prime lending rate of
the money center banks. This departure from national prime is a
recognition that money center banks have access to different, less
costly, short-term funding sources which smaller banks cannot
efficiently utilize.
Table 2-LENDING RATES
Prime Lending Base Lending
Rate for Typical Rate for Santa
Money Center Bank Barbara Bancorp
January, 1990 10.00% 10.00%
January, 1991 9.50% 10.00%
February, 1991 9.00% 9.50%
May, 1991 8.50% 9.00%
September, 1991 8.00% 8.50%
November, 1991 7.50% 8.00%
December, 1991 6.50% 7.50%
July, 1992 6.00% 7.00%
March, 1994 6.25% 7.25%
April, 1994 6.75% 7.75%
May, 1994 7.25% 8.25%
Total Assets and Earning Assets
Because significant deposits are sometimes received at the end of a
quarter and are quickly withdrawn, especially at year-end, the overall
trend in the Company's growth is better shown by the use of average bal-
ances for the quarters. The chart below shows the growth in average
total assets and deposits since the last quarter of 1991. For the
Company, changes in assets are primarily related to changes in deposit
levels, so these have been included in the chart. Dollar amounts are in
millions. The chart exemplifies the normal pattern of asset and deposit
growth for the Company - relatively steady increases with first quarter
deposits sometimes less than the fourth quarter of the prior year.
(A chart is placed here in the printed copy of this filing. The chart is
a column graph with two columns for each quarter from the fourth quarter
of 1991 to the second quarter of 1994. One column is for the balance of
average total assets and the other for average deposits. The columns
show a steady upward trend with some variability as described in the
paragraph above.)
Earning assets consist of the various assets on which the Company earns
interest income. The Company was earning interest on 94.4% of its assets
during the first half of 1994. This compares with an average of 86.0%
for all FDIC-Insured Commercial Banks and 87.6% for the Company's
Southern California peers for the first quarter of 1994.[1] Having more of
its assets earning interest helps the Company to maintain its high level
of profitability. The Company has achieved this higher percentage by
several means: (1) loans are structured to have interest payable in
most cases each month so that large amounts of accrued interest
receivable (which are non-earning assets) are not built up; (2) the
Company avoids tying up funds that could be earning interest by leasing
most of its facilities under long-term contracts rather than owning
them; (3) the Company has aggressively disposed of real estate obtained
as the result of foreclosure; and (4) the Company has developed systems
for clearing checks faster than those used by most banks of comparable
size that allow it to put the cash to use more quickly. At the Company's
current size, these steps have resulted in about $84.0 million more
assets earning interest than would be the case if the Company's ratio
were similar to its peers. If these extra assets were earning at the
average rate earned on U. S. Treasury and Agency securities held by the
Company during the first half of 1994, they would add about $2.2 million
in additional pre-tax income for this period.
Deposits and Related Interest Expense
Table 3 presents the average balances for the major deposit categories
and the yields of interest-bearing deposit accounts for the last six
quarters (dollars in millions). As shown both in the preceding chart and
in Table 3, average deposits have continued to grow. Average total
deposits for the second quarter of 1994 increased 6.0% from average
deposits a year ago.
While occasionally there are slight decreases in average deposits from
one quarter to the next, the overall trend is one of growth. This
orderly growth has been planned by Management and can be sustained
because of the strong capital position and earnings record of the
Company. These factors have allowed the Company to increase its market
share of local deposits by maintaining competitive deposit rates. The
increases have come through the introduction of new deposit products and
successfully encouraging former customers of failed or merged financial
institutions to become customers of the Company.
The growth trends of the individual types of deposits are primarily
impacted by the relative rates of interest offered by the Company and
the customers' perceptions of the direction of future interest rate
changes. Compared with the second quarter of 1993, the growth in
deposits during the last four quarters came in the interest-bearing
transaction accounts. During 1993, as market interest rates were
declining, most banks, including the Company, did not lower interest
rates paid on their transaction accounts as much as they had on the
certificates of deposit. Therefore, with less of an interest rate
differential to encourage customers to purchase term certificates, and a
common view that it would be better to remain liquid in preparation for
what had been considered an inevitable rise in interest rates, customers
have generally placed their deposits in non-term accounts. The Company
offers a money market account, "Personal Money Master," the rate for
which is tied to the 3-month Treasury bill. With the recent increases in
short-term rates and a bonus rate offered during the second quarter for
customers bringing in new deposits from other financial institutions,
this product has become very popular. The monthly average balance of
these accounts has increased $53.3 million or 78% from December 1993 to
June 1994.
<TABLE>
Table--AVERAGE DEPOSITS AND RATES
<CAPTION>
1993 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW/MMDA 323.2 2.34% 340.0 2.18% 364.3 2.15% 377.3 2.10%
Savings 153.5 2.77 152.3 2.52 154.5 2.41 154.6 2.24
Time deposits 100+ 93.1 3.80 83.4 3.63 75.7 3.42 73.8 3.38
Other time 160.5 4.66 160.5 4.57 157.5 4.45 156.1 4.38
Total interest-bearing
deposits 730.3 3.13% 736.2 2.93% 752.0 2.81% 761.8 2.72%
Non-interest-bearing 96.4 99.0 99.6 106.4
Total deposits 826.7 835.2 851.6 868.2
1994
NOW/MMDA 371.2 2.09% 407.0 2.50%
Savings 149.4 2.25 142.9 2.25
Time deposits 100+ 72.3 3.35 63.2 3.57
Other time 155.1 4.35 153.7 4.47
Total interest-bearing
deposits 748.0 2.72% 766.8 2.95%
Non-interest-bearing 117.5 118.6
Total deposits 865.5 885.4
</TABLE>
As shown in Table 3, there has been some growth in non-interest bearing
demand accounts as well during the last year. Approximately $10.0
million of the increase in average balance for the first quarter relates
to outstanding checks from the tax refund anticipation loan program. But
this account was not significant in the second quarter of 1994, which
means that there was real growth of almost 20% in the average balance
for non-interest bearing demand deposits in the last year.
The Company does not solicit and does not intend in the future to
solicit any brokered deposits or out-of-territory deposits. Because
these types of accounts are highly volatile, they present major problems
in liquidity management unless the depository institution is prepared to
continue to offer very high interest rates to keep the deposits.
Therefore, the Company has taken specific steps to discourage even
unsolicited out-of-territory deposits in the $100,000 range and above.
Interest Rates Paid
The average rates that are paid on deposits generally trail behind
market rates. This is especially the case with time deposits because the
average rates are a blend of the rates paid on individual accounts which
do not change until maturity. Therefore, even though the Company raised
interest rates offered on some of the time deposit accounts in the first
quarter of 1994, the average rates paid in the first quarter were
virtually identical with the rates paid in the last quarter of 1993, and
lower than the rates paid a year before. With additional rate increases,
the average rates paid on the time deposits in the second quarter of
1994 are higher than for the first quarter, and almost up to the rates
paid a year ago.
The Company has not yet raised rates paid on its NOW and standard MMDA
accounts, but, as noted above, the rates on the Personal Money Master
have increased with the rates on the 3-month Treasury bill. The rate
paid increased from 3.06% at the beginning of the year to 4.23% by June
30, 1994. With an average balance of $107.9 million for the second
quarter, this increase has substantially impacted the average rate on
the combined total of interest-bearing transaction accounts (NOW/MMDA).
Generally, the Company offers higher rates on certificates of deposit in
amounts over $100,000 than for lesser amounts and one would expect that
the average rate paid on these large time deposits would be higher than
the average rate paid on time deposits with smaller balances. As may be
noted in Table 3, this has not been the case during the last six
quarters. There are three primary reasons for this.
First, as indicated in the next section of this discussion, there has
been a much lower demand for loans over the last two years because of
the sluggish economy. This factor, together with what are still
relatively low rates currently available from short-term securities, has
made the Company reluctant to encourage large deposits that are not the
result of stable customer relationships, because the spread between the
cost of these funds and the earnings on their uses are small. Second,
the time deposits of $100,000 and over generally have shorter maturities
than the smaller certificates. Therefore, they reprice more frequently.
In a declining interest rate environment, that means that their average
rate paid will decline faster, and in a rising rate environment they
will rise faster. While the average rate paid on the smaller time
deposits was greater than on the larger deposits in the second quarter,
the difference appears to be contracting. Third, there has been an
increase in the proportion of IRA accounts among the under $100,000 time
deposits. The Company pays a higher rate on these accounts and they tend
to have longer terms. Therefore, some accounts are still paying quite
high rates set several years ago. These factors have served to maintain
a higher average rate paid on the smaller time deposits relative to the
average rate paid on larger deposits.
Loans and Related Interest Income
Table 4 shows the changes in the end-of-period (EOP) and average loan
portfolio balances and taxable equivalent income and yields[2] over the
last six quarters (dollars in millions).
Table 4 LOAN BALANCES AND YIELDS
EOP Average Interest Average
Quarter Ended Outstanding Outstanding and Fees Yield
December 1992 $477.2 $474.9 $10.98 $9.19
March 1993 474.3 485.5 11.73 9.72
June 1993 472.1 477.6 10.91 9.12
September 1993 451.6 465.4 10.55 9.01
December 1993 464.2 457.7 10.36 9.00
March 1994 469.5 488.6 14.23 11.73
June 1994 464.9 465.6 10.76 9.24
Change in Average Loan Balances
Due to the slow-down in the economy, the loan portfolio balance began to
decline in the fourth quarter of 1990 and there were decreases in the
average balance for the majority of the subsequent quarters. The first
quarters of both 1993 and 1994 show the impact of the tax refund
anticipation loans ("RAL's") that the Company makes. These loans are
described below.
During 1993, for a larger amount of loans than would be expected based
on historical experience, the Company had to foreclose on some
collateral or recognize that the collateral was "in-substance"
foreclosed. In such cases the carrying amounts of the loans are adjusted
to the estimated market value of the collateral if that value is lower
than the outstanding amount of the loan. This lower of cost or market is
reported among other assets rather than in the loan portfolio, causing
some of the decrease in the balances in the preceding table for the
third quarter of 1993.
The Company sells almost all of its long-term, fixed rate, 1-4 family
residential loans when they are originated in order to manage market and
interest rate risks and liquidity. If interest rates continue to rise,
consumer demand for these loans may decline, especially if initial lower
"teaser" rates again become prevalent to entice borrowers to choose
adjustable rate notes.
The RAL's are extended to taxpayers who have filed their returns with
the IRS electronically and do not want to wait for the IRS to send them
their refund check. The Company earns a fixed fee per loan for advancing
the funds. Because of the April 15 tax filing date, almost all of the
loans are made in the first quarter of the year. In 1993, there was an
average of $5.3 million outstanding during the first quarter. The
average loan was for about $1,100 and was outstanding for 20 days before
the Company received payment from the IRS.
The Company significantly expanded the program for the 1994 tax season.
As of the end of the first quarter of 1994, the Company had lent $230
million to 150,000 taxpayers. The average loan was for $1,550 and was
outstanding about 12 days. The outstanding loans averaged $29.5 million
for the first quarter of 1994 and there were $13.9 million outstanding
at March 31, 1994. Eliminating these loans from the above table would
show average loans for the first quarter of 1994 of $459.1 million, just
slightly higher than for the fourth quarter of 1993. Only $5.4 million
of the average balance for the second quarter in the table above relates
to RAL's.
On September 29, 1993, the Company sold its portfolio of credit card
loans. Outstanding balances at the time of the sale were $7.7 million.
The Company continued to service the portfolio for the purchasing bank
until March 1994, but the outstanding balances were not shown as loans
of the Company, and the average balances of loans in the fourth quarter
of 1993 and subsequent quarters are lower because of the sale. The
Company will continue to issue credit cards, but it will not be
responsible for collections or losses from defaults and will not receive
interest earned on the outstanding balances.
Interest and Fees Earned and the Effect of Changing Interest Rates
A large proportion of the loan portfolio is made up of loans that have
variable rates that are tied to the Company's base lending rate or to
the Cost Of Funds Index for the 11th District of the Federal Home Loan
Bank. Approximately 90% of both the commercial loans and the real estate
construction loans are tied to the Company's base lending rate, and
approximately one quarter of the real estate mortgage loans are tied to
the 11th District Cost of Funds Index (COFI). The loans that are tied to
the Company's base lending rate adjust immediately to any change in that
rate while the loans tied to COFI usually adjust every six months or
less. The interest rates on the fixed rate loans do not change directly
with the base lending rate or any other index, but may be prepaid if the
current market rate for any specific type of loan declines sufficiently
below the contractual rate on the loan to warrant refinancing.
Therefore, it would be expected that average yields on the portfolio
would follow declines in market interest rates with some lag, and then
catch up if rates remain stable for a period of time.
The yields shown in Table 4 for the first quarters of 1993 and 1994 are
significantly affected by the income from the RAL program. Average
yields for the two quarters without the effect of RAL's were 9.04% and
8.67%, respectively.
Other Loan Information
In addition to the outstanding loans reported in the accompanying
financial statements, the Company has made certain commitments with
respect to the extension of credit to customers. Among these are credit
lines with unused balances of $119.7 million, undisbursed loans of $11.4
million, and other loan or letter of credit commitments of $39.9
million. The corresponding figures for June 30, 1993 were $146.5
million, $17.0 million, and $40.2 million, respectively. Most of the
decrease in the unused balances of credit lines is due to the sale of
the credit card portfolio mentioned above. The decrease in undisbursed
loans is due to the decline in real estate construction activity. The
majority of the commitments are for one year or less. The majority of
the credit lines and commitments may be withdrawn by the Company subject
to applicable legal requirements. With the exception of the undisbursed
loans, the Company does not anticipate that a majority of the above
commitments will be used by customers.
The Company defers and amortizes loan fees collected and origination
costs incurred over the lives of the related loans. For each category of
loans, the net amount of the unamortized fees and costs are reported as
a reduction or addition to the balance reported. Because the fees are
generally less than the costs for commercial and consumer loans, the
total net deferred or unamortized amounts for these categories are addi-
tions to the loan balances.
Allowance for Loan Losses and Credit Quality
The allowance for loan losses (sometimes called a "reserve") is provided
in recognition that not all loans will be fully paid according to their
contractual terms. The Company is required by regulation, generally
accepted accounting principles, and safe and sound banking practices to
maintain an allowance that is adequate to absorb losses that are
inherent in the loan portfolio, including those not yet identified. The
adequacy of the allowance is based on the size of the loan portfolio,
historical trends of charge-offs, and Management's estimates of future
charge-offs. These estimates are in turn based on the grading of
individual loans and Management's outlook for the local and national
economies and how they might affect borrowers.
The size of the loan portfolio has been declining over the last two
years due to a slower economy. There have been more charge-offs for the
same reason, and Management has not used the declining loan volume as a
reason for decreasing the allowance for loan losses.
From the beginning of 1988 through 1992, the Company's ratio of net
charge-offs to average total loans and leases averaged one quarter as
much as that of the average FDIC bank and one third that of its Southern
California peers. However, in 1993 the Company's ratio increased to
1.15% compared to 0.84% for all FDIC banks and 1.51% for its Southern
California peers. In 1993, the Company charged off a portion ($3.3
million) of one large loan to recognize the decline in value of its real
estate collateral before foreclosing on the property[3]. In addition, the
RAL program generated significant net charge-offs of about $588,000
(initial charge-offs at June 30, 1993 of $650,000 with subsequent
recoveries of $62,000). Because these RAL's are made to customers all
over the country who have no other relationship with the Company, the
loss rate was fairly high. The higher loss rate was nonetheless more
than covered by the fees charged by the program (about $1,048,000), and
the higher level of net charge-offs is considered to be part of the cost
of entering this line of business.
The Company followed the same process in 1994 as it did in 1993 by
charging-off all outstanding RAL's at June 30. The total was $3,023,000.
The Company expects to receive recoveries as it did in 1993. The initial
charge-off ratio in 1993 was 1.44%, with a final ratio after recoveries
of 1.31%. The amount charged off at June 30, 1994 represents 1.32% of
the total loans that had been made. Any recoveries will reduce this
ratio. The better position for 1994 reflects improvements in screening
preparers and borrowers for 1994. These losses plus the operating
expense are more than covered by the fees earned through quarter-end of
$4.8 million.
Management continues to closely monitor the condition of the remainder
of the loan portfolio. Table 5 shows the amounts of non-current loans
and non-performing assets for the Company at the end of the second
quarter of 1994, at the end of the prior two quarters and at the end of
the same quarter a year ago. Also shown is the coverage ratio of the
allowance to non-current loans, the ratio of non-current loans to total
loans, and the percentage of non-performing assets to average total
assets.
Included in the table in boldface is comparable data[4] regarding the
Company's Southern California peers for the three earlier quarters. The
Company's coverage ratio remains at two and a half times what its
average Southern California peer bank was at March 31, 1994.
While non-current loans are always a cause of concern, the amount of
these loans shown for the Company as of June 30, 1994, does not equate
directly with future charge-offs. Most of these loans are well secured
by collateral. Nonetheless, Management still considered it prudent to
increase the allowance for loan losses through generous quarterly
provisions (bad debt expense). The Company provided $4.3 million in the
first quarter of 1994, including $2.9 million for the RAL's, compared to
a total of $2.8 million for the comparable period of 1993. Another
$725,000 was added in the second quarter of 1994, including $132,000 for
the RAL's. After the charge-off of all of the outstanding RAL's at the
second quarter, this resulted in an allowance that is 2.43% of loans
outstanding. The average for all FDIC insured banks of comparable size
is 2.52%, and the average for the Company's Southern California peers is
3.47%.[5] Although the Company's ratio of allowance to total loans is less
than that of the average ratio for its Southern California peers,
Management believes that the lower ratio is justified because the
Company's coverage ratio of allowance to non-current loans is two and a
half times that of its peers. This is the case because the Company has a
much lower proportion of non-current loans than its peers (1.17% vs.
4.49%). Management expects that the Company's credit quality ratios
should continue to be substantially more favorable than those of the
average peer bank.
<TABLE>
Table 5 ASSET QUALITY
<CAPTION>
June 30, 1994 March 31, 1994 December 31, 1993 June 30, 1993
Company Company Company Company
<S> <C> <C> <C> <C>
Loans delinquent
90 days or more 1,064 348 862 722
Non-accrual loans 4,380 5,308 3,126 1,089
Total non-current loans 5,444 5,656 3,988 1,811
Foreclosed real estate 1,602 1,423 3,479 17,921
Total non-performing assets 7,046 7,079 7,467 19,732
<CAPTION>
So. Cal So. Cal So. Cal
Peer Peer Peer
Company Company Group CompanyGroup Company Group
<S> <C> <C> <C> <C> <C> <C> <C>
Coverage ratio of allowance
for loan losses to non-current
loans and leases 207% 252% 83% 252% 87% 470% 75%
Ratio of non-current loans
to total loans and leases 1.17% 1.20% 4.89% 0.86% 4.37% 0.38% 4.52%
Ratio of non-performing
assets to average total assets 0.70% 0.71% 3.81% 0.75% 3.71% 2.08% 3.95%
</TABLE>
The Company's ratio of non-performing assets to average total assets
substantially decreased during the fourth quarter of 1993 because of
sales of foreclosed properties (at a gain of $600,000). There were
additional sales in the first quarter of 1994 (at a net gain of
$907,000), but the effect of these sales on the ratio was partially
offset by additional loans that were placed in non-accrual status.
Securities and Related Interest Income
In 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities ("FASB 115"). This new
pronouncement requires that securities be classified in one of three
categories when they are purchased. The first category is that of "held-
to-maturity." The Company must have both the intent and the ability to
hold a security until its maturity date for it to be classified as such.
Securities classified as held-to-maturity are carried on the balance
sheet at their amortized historical cost. That is, they are carried at
their purchase price adjusted for the amortization of premium or
accretion of discount. If debt securities are purchased for later sale,
the securities are classified as "trading assets." Assets held in a
trading account are required to be carried on the balance sheet at their
current market value. Changes in the market value of the securities are
recognized in the income statement for each period in which they occur
as unrealized gain or loss. Securities that do not meet the criteria for
either of these categories, e. g. securities which might be sold to meet
liquidity requirements or to effect a better asset/liability maturity
matching, are classified as "available-for-sale." They are carried on
the balance sheet at market value like trading securities. However,
unlike trading securities, changes in their market value are not
recognized in the income statement for the period. Instead, the
unrealized gain or loss (net of tax effect) is reported as a separate
component of equity. Changes in the market value are reported as changes
to this component.
The Company has created two separate portfolios of securities. The first
portfolio is the "Earnings Portfolio." This portfolio includes all of
the tax-exempt municipal securities and most of the longer term taxable
securities. The second portfolio, the "Liquidity Portfolio," is be made
up almost entirely of the shorter term taxable securities. The Company
specifies the portfolio into which each security will be classified at
the time of purchase.
Securities purchased for the earnings portfolio will not be sold for
liquidity purposes or because their fair value has increased or
decreased because of interest rate changes. They could be sold if
concerns arise about the ability of the issuer to repay them or if tax
laws change in such a way that any tax-exempt characteristics are
reduced or eliminated. Under the provisions of FASB 115, contemplation
of sale for these reasons does not require classification as available-
for-sale. The accounting for these securities will therefore continue to
be based on amortized historical cost.
In general, the Company will purchase for the two portfolios according
to the following priorities. Taxable securities, usually U. S.
Government obligations with maturities of two years to five years, will
be purchased for the liquidity portfolio. The size of the liquidity
portfolio will vary based on loan demand, deposit growth, and the
scheduled maturities of other securities. To the extent that estimated
liquidity needs are met, tax-exempt municipals that meet credit quality
standards will be purchased for the earnings portfolio up to an amount
that does not trigger the Alternative Minimum Tax described below in
"Income Taxes." Lastly, taxable securities, generally U. S. Government
obligations with maturities of five years or longer, may be purchased
for the earnings portfolio.
The Effects of Interest Rates on the Composition of the Investment
Portfolio
Table 6 presents the combined securities portfolios, showing the average
outstanding balances (dollars in millions) and the yields for the last
six quarters. The yield on tax-exempt state and municipal securities has
been computed on a taxable equivalent basis. Computation using this
basis increases income for these securities in the table over the amount
accrued and reported in the accompanying financial statements. The tax-
exempt income is increased to that amount which, were it fully taxable,
would yield the same income after tax as the amount that is reported in
the financial statements. The computation assumes a combined Federal and
State tax rate of approximately 41%.
<TABLE>
Table 6--AVERAGE BALANCES OF SECURITIES AND INTEREST YIELD
<CAPTION>
1993 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury 297.0 5.83% 296.4 5.79% 293.1 5.68% 294.2 5.53%
U.S. Agency 0.0 0.00 1.1 3.62 5.5 3.80 15.1 4.34
Tax-Exempt 75.5 13.30 76.2 13.77 77.5 13.01 77.6 14.60
Total 372.5 7.34% 373.7 7.32% 376.1 7.21% 386.9 7.30%
1994
U.S. Treasury 305.4 5.28% 355.6 5.30%
U.S. Agency 20.8 4.61 45.9 4.55
Tax-Exempt 78.0 13.49 79.9 13.44
Total 404.2 6.83% 481.4 6.58%
</TABLE>
The Company's investment practice has been to shorten the average
maturity of its investments while interest rates are rising, and to
lengthen the average maturity as rates are declining. This practice is
expected to continue within the two portfolios. When interest rates are
rising, short maturity investments are preferred because principal is
better protected and average interest yields more closely follow market
rates since the Company is buying new securities more frequently to
replace maturing securities. When rates are declining, longer maturities
are preferable because their purchase tends to "lock-in" higher rates.
When there is no sustained movement up or down, the funds from maturing
securities are usually sold as Federal funds until a clear direction is
established. Generally, "longer maturities" has meant purchases of
securities with maturities of three or five years. The two-year
securities are generally purchased in $10 million increments, while the
three and five-year securities are purchased in $5 million and $2
million increments, respectively.
Because securities generally have a fixed rate of interest to maturity,
the average interest rate earned in the portfolio lags market rates in
the same way as rates paid on term deposits. The impact of the recent
increases in market rates is just beginning to be seen in the average
rates of taxable securities. The sustained general downward trend in
interest rates during the preceding several years resulted in the
Company having to reinvest maturing funds and new funds at progressively
lower rates. $50 million in U. S. Treasury securities matured in the
fourth quarter of 1993 and $70 million matured in the first quarter of
1994. The effect on the average yield of taxable securities is obvious
in Table 6 by comparing the average rates earned on the taxable
securities in the first and second quarters of 1994 with the rates for
the same quarters in 1993-the rates earned in the 1994 quarters are
significantly lower than the rates earned in the same quarters of 1993.
The alternative, selling the funds to other banks as Federal funds,
however, would have resulted in even lower income.
Investments in most tax-exempt securities became less advantageous after
1986 because of the effect of certain provisions of the Tax Reform Act
of 1986 ("TRA"). Those provisions did not affect securities purchased
before the passage of the act which make up the majority of the
Company's tax-exempt securities. There is still more than a sufficient
differential between the taxable equivalent yields on these securities
and yields on taxable securities to justify holding them to maturity.
The average maturity is approximately eight years.
Certain issues of municipal securities may still be purchased with the
tax advantages available before TRA. Such securities, because they can
only be issued in very limited amounts, are generally issued only by
small municipalities and require a careful credit evaluation of the
issuer. In reviewing securities for possible purchase, Management must
also ascertain that the securities have desirable maturity
characteristics, and that the amount of tax-exempt income they generate
will not be enough to trigger the Alternative Minimum Tax; otherwise the
tax advantage will be lost. Apart from a few small issues that have met
the Company's criteria for purchase, the increase in the average balance
of tax exempt securities is due to the accretion of discount (the
periodic recognition as interest income of the difference between the
purchase cost and the par value that will be paid upon maturity).
Losses on Securities Sales
When interest rates rise, the market value of a fixed rate security
declines; the market value increases when rates decline. The decline in
market value occurs because investors will pay less for a security that
earns interest at a rate less than that which is available on a newly
issued comparable security. Correspondingly, in a declining interest
rate environment, an investor will pay more for an older security that
pays interest at a higher rate than the latest issues of comparable
maturity.
Banks have found that they are reluctant to sell a security if the
increase in interest rates is such that the loss resulting from the sale
of the security would have a significantly negative impact on earnings.
In such cases, the holder of the security should no longer consider the
security to be available for liquidity, even if there may be an active
market for the security, because the earnings penalty upon sale is too
great. Instead, banks sell other securities that are not below the
current market. In periods of rising interest rates, this can cause an
institution to accumulate large unrealized losses in its portfolios.
This phenomenon was in large part the impetus for the FASB to develop
and regulators to support the classification of most non-trading
securities as available-for-sale with balance sheet reporting at market
value.
The Company's policy calls for it to sell those securities in its
liquidity portfolio which have more than a year remaining until maturity
or to call date if their market value has declined to a certain trigger
point. That point is reached when their yield to maturity based on their
current market value is 25 basis points (1/4 of 1%) more than the yield
to maturity based on their original purchase price. Limiting how much
decline in market value is allowed to occur before securities are sold
maintains the liquidity of the securities in the liquidity portfolio. It
also recognizes that the difference in market value between an older
security with a lower rate and a newer security with an interest rate at
or near market approximates the present value of the higher future
earnings that would be available if the Company were to sell the lower
yielding security and invest in the more recent issue. In other words,
when interest rates move higher and a security declines in value, the
holder can either recognize the loss immediately through sale and make
it up in higher future earnings, or the holder can refrain from
immediately recognizing the loss but earn less on its funds until the
maturity of the security. In addition, selling depreciated securities
generates an immediate tax loss while holding the depreciated security
delays the realization of the benefit of the loss for taxes.
Management occasionally makes exceptions to this provision, but the
policy expresses Management's preference for the former course of
action. Generally, exceptions are made when there are indications that
the decline in price may be temporary. One such indication might be very
light trading activity.
Market rates of Treasury securities have increased significantly since
the Fed began raising short-term rates in February. As market rates
rose, Management followed the policy of purchasing securities to follow
the market up. With continued rising rates, however, the value of a
number of these recent purchases fell below the trigger point and were
sold. This accounts for the losses in the second quarter of 1994.
Resolve to hold to this policy is always tested in periods of rising
market rates because of the losses that result from following this
policy, but the three reasons given above for it are important to
remember: it protects the liquidity of the portfolio, it allows the
Company to reinvest the funds at higher rates and have those rates
locked in when interest rates turn down, and it allows for the immediate
realization of the tax benefit.
There is always some variation in the market rates for Treasury
securities. Under the investment policy described above, short-term
reversals in a downward general trend can trigger sales of securities
recently purchased, and such sales accounted for the losses in the
quarters ended December of 1992 and March of 1993. Because the Company
follows the practice of holding securities that have a market value
above cost and selling securities when the value has declined to a
certain point, it is expected that there will seldom be gains from sales
of securities. Table 7 shows the net amounts of losses from the sale of
securities for the last seven quarters (dollars in thousands).
Table 7-LOSSES ON SECURITIES SALES
Quarter Ended Losses
December 1992 $(103)
March 1993 (47)
June 1993 0
September 1993 0
December 1993 0
March 1994 0
June 1994 (613)
Rates have continued to increase subsequent to June 30, 1994 and have
triggered some additional sales with consequent losses. As of the end of
July 1994, these losses have totaled $278,000.
Federal Funds Sold
Cash in excess of the amount needed to fund loans, invest in securities,
or cover deposit withdrawals, is sold to other institutions as Federal
funds. The sales are only overnight. Excess cash expected to be avail-
able for longer periods is generally invested in U. S. Treasury
securities or bankers' acceptances if the available returns are
acceptable. The amount of Federal funds sold during the quarter is
therefore an indication of Management's estimation during the quarter of
immediate cash needs and relative yields of alternative investment
vehicles.
Table 8 illustrates the average funds sold position of the Company and
the average yields over the last seven quarters (dollars in millions).
Table 8-AVERAGE BALANCE OF FUNDS SOLD AND YIELDS
Average Average
Quarter Ended Outstanding Yield
December 1992 $2.3 2.90%
March 1993 18.2 3.02
June 1993 31.3 2.91
September 1993 36.1 2.96
December 1993 21.8 2.97
March 1994 4.9 3.20
June 1994 8.7 3.95
When interest rates are rising, the Company can benefit by keeping
larger amounts in Federal funds because the excess funds earn interest
reprice daily. When rates are declining, the Company generally decreases
the amount of funds sold and instead purchases Treasury securities
and/or bankers' acceptances. When rates are stable, the balance of
Federal funds is determined more by available liquidity than by policy
concerns. In the third and fourth quarters of 1993, excess funds that
might otherwise have been sold as Federal funds were instead invested in
short-term U. S. Treasury securities and bankers' acceptances maturing
in the first quarter of 1994 to provide funding for the RAL program. In
the first quarter of 1994, virtually all available funds were used to
support the program, leaving few funds for sale, even though rates were
rising.
Bankers' Acceptances
The Company has used bankers' acceptances as an alternative to 6-month
U. S. Treasury securities when pledging requirements are otherwise met
and sufficient spreads to U. S. Treasury obligations exist. The
acceptances of only the highest quality institutions are utilized. Table
9 discloses the average balances and yields of bankers' acceptances for
the last seven quarters (dollars in millions).
Table 9-AVERAGE BALANCE OF BANKERS' ACCEPTANCES AND YIELDS
Average Average
Quarter Ended Outstanding Yield
December 1992 $14.3 3.53%
March 1993 13.4 3.52
June 1993 - -
September 1993 16.0 3.34
December 1993 60.8 3.32
March 1994 33.7 3.31
June 1994 1.4 3.35
About $35 million in bankers' acceptances were purchased in the fourth
quarter of 1992 to mature in the first quarter of 1993 to provide
funding for the Company's RAL program. When these matured, they were not
immediately replaced. However, the Company recognized the need to
provide a significant amount of funds in the first quarter of 1994 for
the planned expansion of the RAL program. With rates on acceptances
comparing favorably to shorter-term U. S. Treasury securities,
significant purchases were made beginning late in the third quarter of
1993. When they matured, the proceeds were used as planned to fund the
RAL program. As the RAL's were repaid, the funds were used to purchase
securities with longer maturities, thereby reducing the Company's
holdings to a single $5 million acceptance at March 31, 1994. Management
expects to purchase bankers' acceptances in the next several months to
mature in early 1995 to fund next year's RAL's, so average balances are
likely to increase in the latter half of 1994.
Other Borrowings and Related Interest Expense
Other borrowings consist of securities sold under agreements to
repurchase, Federal funds purchased (usually only from other local banks
as an accommodation to them), Treasury Tax and Loan demand notes, and
borrowings from the Federal Reserve Bank ("FRB"). Because the average
total short-term component represents a very small portion of the
Company's source of funds (less than 5%) and shows little variation in
total, all of the short-term items have been combined for the following
table. Interest rates on these short-term borrowings change over time,
generally in the same direction as interest rates on deposits.
Table 10 indicates the average balances that are outstanding (dollars in
millions) and the rates and the proportion of total assets funded by the
short-term component over the last seven quarters.
Table 10-OTHER BORROWINGS
Average Average Percentage of
Quarter Ended Outstanding Rate Average Total Assets
December 1992 $39.2 3.02% 4.1%
March 1993 30.7 2.94 3.3
June 1993 27.4 2.89 2.9
September 1993 23.0 2.83 2.4
December 1993 29.1 2.88 2.9
March 1994 28.8 2.97 2.9
June 1994 30.5 3.50 3.0
Other Operating Income
Trust fees are the largest component of other operating income.
Management fees on trust accounts are generally based on the market
value of assets under administration. As the number of customers and the
size of portfolios have grown, the fees have increased. Table 11 shows
trust income over the last seven quarters (in thousands).
Table 11-TRUST INCOME
Quarter Ended Trust Income
December 1992 $1,491
March 1993 1,717
June 1993 1,484
September 1993 1,682
December 1993 1,706
March 1994 1,781
June 1994 1,510
Trust customers are charged for the preparation of the fiduciary tax
returns. The preparation generally occurs in the first and/or second
quarter of the year. This accounts for approximately $179,000 and
$81,000 of the fees earned in the first and second quarters of 1994,
respectively, and $226,000 and $32,000 of the fees earned in the first
and second quarters of 1993, respectively. Other variation is caused by
the recognition of probate fees when the work is completed rather than
accrued as the work is done, because it is only upon the completion of
probate that the fee is established by the court. After adjustment for
these seasonal and non-recurring items and short-term fluctuations of
price levels in the stock and bond markets, there is a general
increasing trend in trust income. New customers bringing additional
trust assets to the Company and generally higher prices in the
securities markets have caused the market value of assets to increase
substantially over the last several years.
Other categories of non-interest income include various service charges,
fees, and miscellaneous income. Included within "Other Service Charges,
Commissions & Fees" in the following table are service fees arising from
credit card processing, escrow fees, and a number of other fees charged
for special services provided to customers. The quarterly amounts for
some of these fees tend to vary based on the local economy. For
instance, in 1993, a slower real estate market resulted in lower escrow
fees. Similarly, credit card spending had been down for several
quarters, so less fees were earned for processing. There was an
increased volume of drafts submitted during the third quarter of 1993,
accounting for about $70,000 of the increase over the prior quarter.
Categories of non-interest operating income other than trust fees are
shown in Table 12 for the last seven quarters (in thousands).
Table 12-OTHER INCOME Other Service
Service Charges Charges,
on Deposit Commissions Other
Quarter Ended Accounts & Fees Income
December 1992 $682 $929 $278
March 1993 701 822 182
June 1993 702 916 190
September 1993 709 1,043 236
December 1993 713 1,012 334
March 1994 724 791 145
June 1994 746 1,249 149
The amounts for the first quarter of 1994 are lower than for previous
quarters for several reasons. In addition to interest earned on
outstanding credit card balances, which up to the time of the sale of
the credit card portfolio at the end of the third quarter of 1993 was
reported with other interest income, there are also other fees related
to credit card processing. When a merchant deposits credit card charges
with a bank, the merchant is charged a fee. The bank with which a
merchant deposits credit card charges earns a portion of that fee, and
the bank that issued the card earns a portion of the fee. Prior to the
sale of the credit card portfolio, the Company earned fees for customer
use of their cards. Approximately $134,000 of the $1,043,000 in Charges,
Commissions & Fees for the third quarter of 1993 were fees of this type.
These fees have not been earned after the third quarter of 1993 because
of the sale of the credit card portfolio. By the terms of the sales
agreement with the purchaser of the portfolio, some fees will be earned
from the purchasing bank based on the number of cards outstanding and
purchases by these cardholders, but these fees are less than what was
earned when the Company owned the portfolio. These fees were
approximately $55,000 for the first quarter of 1994. The Company
continues to earn the portion of the fees related to the merchant,
because the merchant processing activity was not sold. An increase in
these fees accounts for much of the increase in fees for the second
quarter. Management anticipates that total other service charges,
commissions and fees will average around $1,050,000 per quarter over the
next few quarters.
Included in other income are gains or losses on sales of loans. When the
Company collects fees on loans that it originates, it must defer them
and recognize them as interest income over the term of the loan. If the
loan is sold before maturity, any unamortized fees are recognized as
gains on sale rather than interest income. In the fourth quarters of
1992 and 1993, the Company originated a significant number of fixed rate
mortgages, many of them refinancings, that it immediately sold to other
financial institutions or insurance companies. The larger-than-usual
balance of refinancings in the fourth quarter of 1993 appeared to be
related to consumers' fears that rates were starting to rise and that
this would be their last chance to "lock in" lower rates. The Company
did many fewer refinancings in the first and second quarters of 1994.
Gains attributable to the subsequent sale of these notes totaled
approximately $38,000 and $75,000 for the second and first quarters of
1994, respectively, compared with approximately $196,000 in the fourth
quarter of 1993. With rates at higher levels, it would be expected that
refinancing activity will remain less than in 1993.
Staff Expense
The Company has closely monitored staff size and in the last two years
has managed to limit the increase in the average number of employees to
about 7.2% (about 32 employees) while average assets of the Company
increased about 8.5% and the market value of trust assets under
administration increased substantially. Merit increases have averaged 5%
or less the last two years due to the relatively low inflation rate.
The amounts shown for Profit Sharing and Other Employee Benefits include
(1) the Company's contribution to profit sharing plans and retiree
health benefits, (2) the Company's portion of health insurance premiums
and payroll taxes, and (3) workers' compensation insurance. The
significant decrease in this expense from the third quarter of 1993 to
the fourth quarter of 1993 and the significant increase for the first
quarter of 1994 are due to several factors. The first factor relates to
the Company's contributions to the profit sharing and retiree health
plans. These contributions are determined by a formula that results in a
contribution equal to 10% of a base figure made up of income before tax
and before the contribution, adjusted to add back the provision for loan
loss and to subtract actual charge-offs. Because actual net charge-offs
were a higher percentage of the provision in 1993 (72%) than they had
been in prior years, the base was lower relative to net income than it
previously had been. The Company had been accruing for these
contributions during the first three quarters of 1993 at the 1992 rate
and therefore needed to adjust the accrual in the fourth quarter. For
the first two quarters of 1994, the Company accrued for these
contributions at a higher rate, with the belief that net charge-offs
will not be as great in 1994 as in 1993.
The second factor relates to payroll taxes. An estimated amount for
officer bonuses is accrued as salary expense during the year because the
bonuses are based on the financial performance for that year. However,
the Company is not liable for the payroll taxes until the bonuses are
paid in the first quarter of the following year. Therefore the payroll
taxes relating to the bonuses for the prior year are all charged as
expense in the first quarter of the current year, accounting for a
portion (approximately $76,000) of the increase from the fourth quarter
of 1993 to the first quarter of 1994. Moreover, payroll tax expense is
normally lower in the fourth quarter of each year because the salaries
of the higher paid employees have passed the payroll tax ceilings by the
fourth quarter. On just a slightly higher salary level, payroll taxes
were about $127,000 more in the first quarter of 1994 than the fourth
quarter of 1993.
Table 13 shows the amounts of staff expense incurred over the last seven
quarters (in thousands).
Table 13-STAFF EXPENSE
Salary and Profit Sharing and
Quarter Ended Other Compensation Other Employee Benefits
December 1992 $3,577 $1,110
March 1993 3,709 1,305
June 1993 3,785 1,077
September 1993 3,828 1,140
December 1993 4,010 787
March 1994 4,096 1,353
June 1994 4,281 1,246
As discussed above in "Loans and Related Interest Income," the
accounting standard relating to loan fees and origination costs requires
that salary expenditures related to originating loans not be immediately
recognized as expenses, but instead be deferred and then amortized over
the life of the loan as a reduction of interest and fee income for the
loan portfolio. Compensation actually paid to employees in each of the
above listed periods is thus higher than shown by an amount ranging from
$125,000 to $275,000, depending on the number of loans originated during
that quarter.
Other Operating Expenses
The Company has made a serious effort to contain non-interest expense.
One method of measuring its success is by computing an operating
efficiency ratio. This ratio is the amount of non-interest expense
(including salaries and benefits as well as the other operating expenses
discussed in this section) divided by the sum of net interest income and
non-interest income. The provision for loan loss and the effect of gains
or losses from sales of securities are omitted from the computation. The
Company's operating efficiency ratio for the year 1993 was 62.0%. This
means that it cost the Company sixty-two cents to earn a dollar of
income. This compares with a ratio of 65.5% for all FDIC banks of $100
million to $1 billion in asset size for 1993. For the year of 1993, the
Company's lower ratio meant $2.1 million less operating expense was
incurred than the FDIC peer ratio would indicate was incurred at the
average peer bank of comparable size. The Company's operating efficiency
ratio for the first half of 1994 is 56.6%, but that number is
significantly impacted by the large amount of RAL fees and the gains on
the sale of OREO that occurred during the first quarter of 1994. These
will not recur during the remainder of the year. The Company is working
to bring the ratio below 60.0% for the year 1994. The FDIC peer ratio
for the first quarter of 1994 was 60.9%.
Table 14 shows other operating expenses over the last seven quarters
(dollars in thousands).
Table 14-OTHER OPERATING EXPENSE
Occupancy Expense Furniture & Other
Quarter Ended Bank Premises Equipment Expense
December 1992 $728 $370 $3,018
March 1993 694 370 2,711
June 1993 686 420 2,749
September 1993 792 488 2,672
December 1993 817 539 3,459
March 1994 787 488 3,096
June 1994 855 511 3,144
The Company leases rather than owns most of its premises. Many of the
leases provide for annual rent adjustments. The Company leased
additional office space during 1993 to provide more efficient operating
areas. Equipment expense fluctuates over time as rental needs change,
maintenance is performed, and equipment is purchased. Much of the
additional expense in the last two quarters in this category relates to
upgrades of computer equipment as the Company looks to automation to
handle more tasks.
Included in other expense is the premium cost paid for FDIC insurance.
The FDIC has converted to a graduated rate for the premium based on the
soundness of the bank. The annual rate ranges from 23 cents to 30 cents per
hundred dollars of deposits. On the basis of its "well-capitalized"
position, the Company's rate is 23 cents per hundred. As deposits increase,
this expense increases proportionally.
Other expense was higher than usual in the fourth quarter of 1992 in
part because the Company made a $200,000 charitable contribution. This
contribution was made to a charitable corporation that distributes the
money to other charitable organizations at the Company's instruction.
This gift, which would have been made in any event over the next year,
was made in 1992 to reduce taxes.
Other expense for the fourth quarter of 1993 was higher than usual due
to the same type of year-end charitable donation as was made in 1992 and
due to extra marketing expense incurred for the Company's new
advertising program. Table 15 details the components of other expense in
the accompanying income statements (in thousands).
Table 15 OTHER EXPENSE
Six-Month Periods Three-Month Periods
Ended June 30 Ended June 30
1994 1993 1994 1993
FDIC and State assessments $1,040 $ 938 $ 520 $ 479
Insurance 130 136 66 62
Professional services 362 422 166 146
RAL processing fees 323 0 0 0
Supplies and sundries 300 288 152 141
Postage and freight 318 320 142 152
Marketing 489 352 353 117
Bankcard processing 799 827 381 444
Other 2,477 2,178 1,364 1,208
Total $6,238 $5,461 $3,144 $2,749
Marketing expense is higher for the second quarter of 1994 compared to
the same quarter of 1993 primarily because of a special promotion for
residential real estate loans. As part of its management of the interest
rate risk inherent in holding large amounts of fixed rate securities,
the Company is attempting to increase its portfolio of variable rate
residential loans.
The net cost of other real estate owned ("OREO") is not included in the
preceding table because it appears on a separate line in the statements
of income. When the Company forecloses on the real estate collateral
securing delinquent loans, it must record these assets at the lower of
their fair value (market value less estimated costs of disposal) or the
outstanding amount of the loan. If the fair value is less than the
outstanding amount of the loan, the difference is charged to the
allowance for loan loss at the time of foreclosure. Costs incurred to
maintain or operate the properties are charged to expense as they are
incurred. If the fair value of the property declines below the original
estimate, the carrying amount of the property is written-down to the new
estimate of fair value and the decrease is also charged to this expense
category. If the property is sold at an amount higher than the estimated
fair value, a gain is realized that is credited to this category.
The negative amount in the income statement for this expense category
for the first six months of 1994 reflects approximately $907,000 in net
gains arising out of sales less approximately $327,000 in operating
expenses and writedowns. The gains arose from the sale of the final four
units of a condominium project on which the Company foreclosed in 1993.
The Company had made a very conservative estimate of the market value of
these units at the time of foreclosure because of the slow pace of sales
of the units before foreclosure. With the local residential real estate
market showing increased strength, and with some initial sales to
demonstrate that the prices were not going to be reduced further, the
Company was able to sell the units at prices higher than the
conservative estimate. Some gains from sale were also recognized in the
final quarter of 1993.
As disclosed in Note 7 to the financial statements, the Company has $1.6
million in OREO as of June 30, 1994. This compares with $17.9 million as
of a year earlier. With a much smaller balance of OREO being held,
Management anticipates that this OREO operating expense will continue to
trend lower. However, the Company has liens on properties which are
collateral for (1) loans which are in non-accrual status, or (2) loans
that are currently performing but about which there is some question
that the borrower will be able to continue to service the debt according
to the terms of the note. These conditions may necessitate additional
foreclosures during the next several quarters, with a corresponding
increase in this expense.
Accounting Standard Changes
The provisions and impact of the adoption of FASB 115 as of the
beginning of the 1994 are discussed above in "Securities and Related
Interest Income."
Impaired Loans
As explained in "Allowance for Loan Losses," generally accepted
accounting principles require the Company to provide an allowance that
is adequate to absorb losses that are inherent in the loan portfolio.
Banks and other financial institutions have determined the adequacy of
this allowance based on the eventual collectibility of principal and
interest without regard to the timing of the payments. According to the
FASB, this determination does not recognize the economic loss that
results from a delay in payments even if all outstanding balances are
eventually collected.
To recognize this loss and to eliminate differences in the manner in
which various types of financial institutions account for troubled
loans, in May 1993, the FASB issued Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan
("SFAS 114"). This pronouncement, which must be implemented by the
Company in 1995, provides that a loan is "impaired when, based on
current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of
the loan agreement." The impairment is to be measured by the creditor
based on the present value of its best estimate of future cash flows
discounted at the loan's effective interest rate. Estimates are to be
based on reasonable and supportable assumptions and projections.
Alternatively, the creditor may measure impairment by means of an
observable market price. If foreclosure of the collateral is probable,
the statement requires that the Company measure impairment at the fair
value of the collateral. For any difference between the outstanding
balance of the loan and its fair value after recognition of the
impairment, a valuation allowance is to be established through a charge
to the provision for loan loss.
Each month, as part of its review of the adequacy of the allowance,
Management allocates portions of the allowance to individual loans that
have been identified as troubled. The allocation is based on its
estimates of losses that might be realized and to all other loans based
on historical trends, recent credit gradings, and estimates of the
impact of economic factors on borrowers in general. After this
allocation is completed, any remaining amount in the allowance would be
unallocated. The Company has followed the practice of maintaining an
unallocated allowance to provide for unforeseen circumstances. While the
Company has not taken the loss from delayed payments into account in
estimating the amount of the allowance that should be provided,
Management believes that, when the pronouncement is implemented, the
unallocated amount should be sufficient to absorb any additional losses
that need to be recognized with no need for significant additions to the
allowance.
Stock-based Compensation
Generally accepted accounting principles currently require that employee
compensation expense be recognized if stock options are granted to
employees that permit them to purchase stock at a price less than the
market price of the stock at the time of the grant. If the exercise
price is at or above the market price at the time of the grant, no
compensation expense is recognized because it has been regarded as
uncertain whether the employee would realize any benefit from the grant.
The Company has three stock option plans, the details of which are
described in the notes to the financial statements in the 1993 annual
report. The plans provide for options to be granted at the market price.
Under the SEC's proxy disclosure rules, all public registrants are
required to disclose in their proxy materials an estimate of the market
value of stock options granted to executive officers, but there is no
provision for recognition in the financial statements.
In June, 1993, the FASB issued an exposure draft for a new pronouncement
that would eventually require the Company to recognize employee
compensation expense for all stock options. The amount of expense would
be computed using a mathematical model that considers such factors as
the exercise price, the current market price, the length of the option
period, and the price volatility of the stock. The model is intended to
compute the probabilities for various amounts by which, during the term
of the option, the market price of the stock will exceed the exercise
price. The provisions of the exposure draft would require footnote
disclosure of the expense for the years 1995 through 1996, but not
recognition in the financial statements. Recognition in the financial
statements would begin in 1997.
The FASB received a large number of comment letters on the exposure
draft, and the reaction has been so strong that different bills have
been introduced in Congress which would, alternatively, require or
forbid recognition of compensation expense for the granting of stock
options by public registrants. The FASB has indicated that they are
considering the objections and suggestions that were made before issuing
a final statement.
Management has not attempted to estimate the eventual impact on net
income or earnings per share should this pronouncement be adopted as
proposed. Consultants were engaged to compute the fair value information
necessary for the proxy material. While a model similar to the one
suggested by the FASB is required by the SEC, it is not easy to estimate
the fair value of options granted to all officers from the fair value of
options granted to the executive officers. A critical component in the
computation of the fair value under these models is the term of the
option and the terms of the options granted to executive officers are
longer than for those granted to other employees. Because of the
complexity of the computation, Management does not consider it cost
effective to incur the expense of computing the possible effect of a
proposal the final provisions of which are still uncertain.
Should the proposal be adopted, and the expense prove to be significant,
the Board of Directors will decide whether to continue to grant options
under the plans.
Liquidity
Sufficient liquidity is necessary to handle fluctuations in deposit
levels, to provide for customers' credit needs, and to take advantage of
investment opportunities as they are presented. Sufficient liquidity is
a function of (1) having cash or cash equivalents on hand or on deposit
at a Federal Reserve Bank ("FRB") adequate to meet unexpected immediate
demands, and (2) balancing near-term and long-term cash inflows and
outflows to meet such demands over future periods.
Fed regulations require banks to maintain a certain amount of funds on
deposit ("deposit reserves") at the FRB for liquidity. Except in periods
of extended declines in interest rates when the investment policy calls
for additional purchases of investment securities, or in the first
quarter when all available funds are used to fund the RAL's, the Company
also maintains a balance of Federal funds sold which are available for
liquidity needs with one day's notice. Because the Company stays fairly
fully invested, occasionally during the year, and more frequently during
the first quarter of 1994, with the large liquidity needs associated
with the RAL program, the Company purchases Federal funds from other
banks or borrowed from the FRB. There are no significant problems with
this approach, and the Company always has an abundance of Treasury notes
in its liquidity portfolio that could be sold to provide immediate
liquidity if necessary.
The timing of inflows and outflows to provide for liquidity over longer
periods is achieved by making adjustments to the mix of assets and
liabilities so that maturities are matched. These adjustments are
accomplished through changes in terms and relative pricing of different
products. The timing of liquidity sources and demands is well matched
when there is approximately the same amount of short-term liquid assets
as volatile, large liabilities, and the maturities of the remaining
long-term assets are relatively spread out. Of those assets generally
held by the Company, the short-term liquid assets consist of Federal
funds sold and debt securities with a remaining maturity of less than
one year. Because of its investment policy of selling taxable securities
before any loss becomes too great to materially affect liquidity, and
because there is an active market for Treasury securities, the Company
considers its Treasury securities with a remaining maturity of under 2
years to be short-term liquid assets for this purpose. The volatile,
large liabilities are time deposits over $100,000, public time deposits,
Federal funds purchased, repurchase agreements, and other borrowed
funds. While balances held in demand and passbook accounts are
immediately available to depositors, they are generally the result of
stable business or customer relationships with inflows and outflows
usually in balance over relatively short periods of time. Therefore, for
the purposes of this analysis, they are not considered volatile.
A method used by bank regulators to compute liquidity using this concept
of matching maturities is to divide the difference between the short-
term, liquid assets and the volatile, large liabilities by the sum of
the loans and long-term investments, that is:
Short-term, Liquid Assets
- Volatile, Large Liabilities
--------------------------------- = Liquidity Ratio
Net Loans and Long-term Investments
As of June 30, 1994, the difference between short-term, liquid assets
and volatile, large liabilities, the "liquidity amount," was a positive
$98 million and the liquidity ratio was 12.97%, using the balances (in
thousands) in Table 16.
<TABLE>
Table 16--LIQUIDITY COMPUTATION COMPONENTS
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net Loans and Long-
Short-term, Liquid Assets Volatile, Large Liabilities term Investments
Fixed rate debt Time deposits 100+ $ 70,262 Net loans $453,557
with maturity Repurchase agreements Long-term
less than 1 year 97,478 and Federal funds securities 300,936
Treasury securities with purchased 28,034
1-2 year maturities 99,809 Other borrowed funds 1,155
Total $197,287 Total $ 99,451 Total $754,493
</TABLE>
The Company's liquidity ratio indicates that all of the Company's
volatile, large liabilities are matched against short-term liquid
assets, with an excess of liquid assets. Since the first quarter of
1993, the end-of-quarter ratio has been as high as 36.35%, at September
30, 1993. The current liquidity amount is above the range that the
Company is trying to maintain - from positive $75 million to negative
$25 million. Too high a liquidity amount or ratio results in reduced
earnings because the short-term, liquid assets generally have lower
interest rates. However, investing the excess in longer-term securities
would subject the Company to substantial market risk and limit its
ability to respond when loan demand increases as the economy recovers,
so no specific steps are being taken at present to reduce liquidity.
Securities from both the liquidity and earnings portfolios are included
in the balances for short-term liquid assets in Table 16. The inclusion
of securities from the earnings portfolio is not predicated on their
possible sale, but rather on the recognition that Management will be
including the proceeds that will be received at maturity in liquidity
planning. The amounts in Table 16 are also adjusted for $5 million in
taxable securities which had depreciated below the level at which they
would normally be sold, but which Management elected to hold until the
market showed more stability.
Capital Resources
Table 17 presents a comparison of several important amounts and ratios
for the second quarters of 1994 and 1993 (dollars in thousands).
Table 17--CAPITAL RATIOS
1994 1993 Change
Amounts:
Net Income $ 3,177 $ 3,161 $ 16
Average Total Assets 1,011,108 950,654 60,454
Average Equity 89,155 83,019 6,136
Ratios:
Equity Capital to
Total Assets (Period-end) 8.78% 8.83% -0.05%
Annualized Return
on Average Assets 1.26% 1.33% -0.07%
Annualized Return
on Average Equity 14.25% 15.23% -0.98%
Earnings are the largest source of capital for the Company. Management
expects that over the next few quarters operating earnings will continue
at about the same level as during the second quarter of 1994 on an
annualized basis. However, it is virtually certain that there will be
some variation quarter by quarter. Areas of uncertainty relate to asset
quality, loan demand, and the continued ability to respond to interest
rate changes.
A substantial increase in charge-offs would require the Company to
record a larger provision for loan loss to restore the allowance to an
adequate level, and this would negatively impact earnings. If loan
demand increases, the Company will be able to reinvest proceeds from
maturing investments at higher rates, which would positively impact
earnings. Since June 30, 1994, increasing interest rates have caused
some losses from sales of securities as explained in "Securities and
Related Interest Income" above. If interest rates on investments
continue to rise over the next few quarters, additional losses will need
to be taken in order to keep the securities in the liquidity portfolio
liquid and earning at close to the market rate. Most financial
institutions have not raised their deposit rates significantly. If
market rates continue to increase, deposit rate increases will be
necessary to hold market share.
The Fed sets minimum capital guidelines for U. S. banks and bank holding
companies based on the relative risk of the various types of assets. The
guidelines require banks to have capital equivalent to at least 8% of
risk adjusted assets. As of June 30, 1994, the Company's risk-based
capital ratio is 19.81%. The previous guidelines that required primary
capital to exceed 5.5% of total assets have been replaced with new
"Leverage Capital Requirements." According to these requirements, the
Company must maintain shareholders' equity of at least 4% to 5% of total
assets. As of June 30, 1994, shareholders' equity is 8.78% of total
assets, reflecting that the Company currently has ample capital to
support both the additional growth in deposits that is expected, and the
higher level of dividends (20 cents per share per quarter) declared by the
Board of Directors at the end of the quarter.
No significant commitments or reductions of capital are anticipated.
As explained in Note 4 to the financial statements, effective with the
adoption of FASB 115 in December 31, 1993the Company is reporting a new
component of capital in the balance sheet representing the after-tax
effect of the unrealized gains or losses on securities that are
available for sale. With the increase in interest rates during the first
quarter, the net unrealized gain at December 31, 1993 has become a net
unrealized loss. The $1,263,000 net unrealized loss is not a material
amount relative to the Company's total capital of over $90 million. With
the policy to set stop loss orders on the securities in its liquidity
portfolio, Management does not anticipate a situation in which this
account will represent a material reduction in capital.
Regulation
The Company is closely regulated by Federal and State agencies. The
Company and its subsidiaries may engage only in lines of business that
have been approved by their respective regulators, and cannot open or
close offices without their approval. Disclosure of the terms and condi-
tions of loans made to customers and deposits accepted from customers
are both heavily regulated as to content. The Company is required by the
provisions of the Community Reinvestment Act ("CRA") to make significant
efforts to ensure that access to banking services is available to the
whole community. The Bank's CRA compliance was examined by the FDIC in
the fourth quarter of 1992, and the Bank was given the highest rating of
"Outstanding." As a bank holding company, the Company is primarily
regulated by the FRB. The Bank is primarily regulated by the FDIC and
the California State Department of Banking. As a non-bank subsidiary of
the Company, ServiceCorp is regulated by the FRB. Each of the regulatory
agencies conducts periodic examinations of the Company and/or its
subsidiaries to ascertain their compliance with regulations.
The Fed may take action against bank holding companies and the FDIC
against banks should they fail to maintain adequate capital. This action
has usually taken the form of restrictions on the payment of dividends
to shareholders, requirements to obtain more capital from investors, and
restrictions on operations. The Company has received no indication that
either banking agency is in any way contemplating any such action with
respect to the Company or the Bank, and given the strong capital
position of both the Bank and the Company, Management expects no such
action.
FOOTNOTES
1 The Company primarily uses two published sources of information to
obtain performance ratios of its peers. The FDIC Quarterly Banking Profile,
First Quarter, 1994, published by the FDIC Division of Research and
Statistics, provides information about all FDIC insured banks and certain
subsets based on size and geographical location. Geographically, the
Company is included in a subset that includes 12 Western states plus the
Pacific Islands. To obtain information more specific to California, the
Company uses The Western Bank Monitor, published by Montgomery Securities.
This publication provides performance statistics for "leading independent
banks" in 13 Western states, and further distinguishes a Southern California
subset within which the Company is included. Both of these publications
are based on quarter-end information provided by banks. It takes about 1-2
months to process the information, so the published data is always one
quarter behind the Company's information. For this quarter, the peer
information is for the first quarter of 1994. All peer information in this
discussion and analysis is reported in or has been derived from information
reported in one of these two publications.
2 As required by applicable regulations, tax-exempt non-security obligations
of municipal governments are reported as part of the loan portfolio. These
totaled approximately $8.0 million as of June 30, 1994. The average yields
presented in Table 4 give effect to the tax-exempt status of the interest
received on these obligations by the use of a taxable equivalent yield
assuming a combined Federal and State tax rate of approximately 41% (while
not tax exempt for the State of California, the State taxes paid on this
Federal-exempt income is deductible for Federal tax purposes). If their
tax-exempt status were not taken into account, interest earned on loans for
the second quarter of 1994 would be $10.7 million as shown in the accompanying
financial statements and the average yield would be 9.18%. There would also
be corresponding reductions for the other quarters shown in the Table 4.
The computation of the taxable equivalent yield is explained in the section
below titled "Investment Securities and Related Interest Income."
3 Subsequent to this charge-off, the Company was able to realize gains on
the sales of the individual units of this property. These gains are included
as offsets to the net cost of operating other real estate on the income
statements of the Company for the year ended December 31, 1993 and the six
months ended June 30, 1994.
4 Reported in Western Bank Monitor, First Quarter, 1994.
5 Reported in or derived from information reported in The FDIC Quarterly
Banking Profile and the Western Bank Monitor, First Quarter 1994.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information:
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index:
Sequential
Exhibit Number Item Description Page Number
10 Material Contracts:
10.2 Leases:
10.2.1 Lease Agreement for
1021 Anacapa St. 35
11 Computation of Per 67
Share Earnings
(b) No reports were filed on Form 8-K
<PAGE> 35
STANDARD FORM LEASE
FREE STANDING COMMERCIAL BUILDING
THIS LEASE is between the Lessor and Lessee identified in the
following Basic Provisions. This lease consists of the Basic
Provisions together with the attachments and exhibits listed in
Paragraph N of the Basic Provisions.
BASIC PROVISIONS
A. LESSOR
(1) Name of Lessor(s): PUEBLO ASSOCIATES, a California
limited partnership
(2) Lessor's Trade Name:
B. LESSEE
(1) Name of Lessee(s): SANTA BARBARA BANK & TRUST, a
California corporation
(2) Lessee's Trade Name:
C. LEASED PREMISES (Section 1)
(1) Description of Premises (Section 1.1)
(a) That certain building known as SBBT Administrative
Offices and the land upon which it is situated located at
1021 Anacapa Street , in the City of Santa Barbara , County of
Santa Barbara, State of California (herein the "building"), which
consists of approximately 28,957 square feet of usable space.
(2) Preparation of Premises; Occupancy (Section 1.3)
[X] (a) No work shall be required by Lessor to prepare the
premises for occupancy by Lessee. But see Exhibit J regarding
seismic reinforcement work.
[ ] (b) The Anticipated Completion Date for any work to be
done by Lessor, as reflected on Exhibit B, is ([ ] the day
of , 19 ) ([ ] set forth in Exhibit B).
D. TERM OF LEASE (Section 2)
(1) Commencement Date. The Commencement Date of this lease
shall be:
[X] (a) The 1st day of May , 19 94 .
[ ] (b) Other (specify):
.
(2) Initial Term. A period of five ( 5 ) years and no
(-0-) full calendar months, measured from the first day of the
first full calendar month of the lease term; the last day of the
initial term of this lease shall be the last day of April, 1999.
(3) Renewal Option. Lessee ([X] shall) ([ ] shall not) have
option(s) to renew (complete and attach Exhibit G if Lessee has
renewal options).
E. TYPE OF LEASE
This lease is intended to be of the following type:
[ ] (1) Gross lease (omit Exhibits E and F)
[ ] (2) Absolute (triple) net lease (attach Exhibit E)
[X] (3) Modified triple net lease (attach Exhibits F and/or J, as
appropriate)
F. RENTAL (Section 3)
(1) Minimum Monthly Rent. The sum of $ 39,960.66 to be paid
in advance on or before the first day of each month
(Section 3.1).
(2) Adjustment to Minimum Monthly Rent (Section 3.1)
[ ] (a) Not applicable.
[X] (b) Other (specify): To be increased annually effective
as of the first day of May each year to the amount set forth in the
Supplemental Conditions attached as Exhibit J.
G. REAL PROPERTY TAXES (Section 5)
[ ] (1) Included in Minimum Monthly Rent.
[ ] (2) To be paid directly by Lessee to the Tax Collector
[X] (3) To be reimbursed by Lessee to Lessor as provided:
[ ] (a) In Exhibit E: Lessor's Operating Costs (triple net
lease).
[ ] (b) In Exhibit F: Building & Common Area Costs.
[X] (c) In Exhibit J: Supplemental Terms and Conditions.
H. USE BY LESSEE (Section 6)
(1) Lessee shall use and occupy the leased premises only for
general office and business uses, including any uses permitted by
local zoning ordinances .
(2) Lessee may operate a business in the leased premises
under a tradename different than the tradename, if any, specified
in paragraph B, above ([X] without) ([ ] only with) Lessor's prior
written consent.
I. UTILITIES (Section 8)
[ ] (1) All utilities shall be included in Minimum Monthly Rent.
[ ] (2) Lessor shall provide all customary utilities in
reasonable quantities at its sole cost and expense, except that
Lessee shall provide and pay for .
[X] (3) Lessor shall provide in reasonable quantities all
customary utilities except those specified in paragraph (4), below,
but Lessee shall reimburse Lessor the costs thereof as provided:
[ ] (a) In Exhibit E: Lessor's Operating Costs (triple net
lease).
[ ] (b) In Exhibit F: Building & Common Area Costs.
[X] (c) In Exhibit J: Supplemental Terms and Conditions.
J. PERSONAL PROPERTY (Section 9)
Lessor ([ ] shall) ([X] shall not) have a lien on the Lessee's
personal property for the purpose of securing the performance by
Lessee of its obligations under the lease.
K. INSURANCE (Section 11)
(1) Lessee's Insurance. Unless otherwise provided below,
Lessee shall procure and maintain:
[X] (a) Liability Insurance. Public liability insurance,
initially with single limit coverage for personal injury & property
damage in the amount of $ 10,000,000 (Section 11.3.1).
[X] (b) Personal Property. Fire and casualty insurance on
Lessee's leasehold improvements and personal property in an amount
not less than 90 % of ([X] actual cash value) ([ ] replacement
value) (Section 11.3.2).
[ ] (c) Business Interruption Insurance. Lessee ([ ] shall)
([X] shall not) be required to procure and maintain rent
continuation insurance (Section 11.3.3).
[X] (d) Additional Policy Endorsements. Lessee shall obtain
the following endorsements to its liability and/or property
insurance with initial limits not less than those indicated below:
Endorsement Yes No Amount
Products Liability [ ] [X] $
Dram Shop Liability [ ] [X] $
Plate Glass Insurance [ ] [X] $
Boiler and Machinery [ ] [X] $
Professional Liability [ ] [X] $
Non-owned Auto [X] [ ] $ 10,000,000
(2) Insurance on Building & Improvements. Unless otherwise
provided below, ([X] Lessor) ([ ] Lessee) (herein, the "Insuring
Party") shall procure and maintain:
[X] (a) Fire and Casualty Insurance. Fire and casualty
insurance with vandalism and malicious mischief endorsements in an
amount which does not exceed ([ ] % of actual cash value)
([X] 100 % of full replacement value) and may have a deductible
of not less than ([ ] $ ) ([X] 1.0 % of the full insurable
value) (Section 11.4.1).
[ ] (b) Flood and Earthquake. The Insuring Party :
Shall
Shall not be required to procure and maintain
[ ] [X] earthquake coverage (Section 11.4.2)
[ ] [X] flood insurance (Section 11.4.2)
[X] (c) Rent Continuation Insurance. Rent continuation
insurance in an amount sufficient to assure the continuing payment
of the minimum monthly rent for a period of twelve (12) months
following the occurrence of an insured casualty to the Building
(Section 11.4.3).
[X] (d) Additional Coverage. At the election of Lessor,
such insurance may include the following endorsements and/or
provisions (check each applicable item):
Endorsement Yes No Maximum Deductible
Inflation Guard [X] [ ]
Full Replacement
Cost [X] [ ]
Stated Value [X] [ ]
Sprinkler Leakage [X] [ ]
Contingent Liability
(Down Zoning) [X] [ ] $ 1% of FMV
Demolition and
Grading [ ] [X]
Plate Glass
Insurance [ ] [X]
Flood [ ] [X] $
Earthquake [X] [ ] $ 10% of FMV
(3) Costs of Insurance. The costs of the insurance permitted
or required to be maintained pursuant to subparagraph (2), above
shall be: (check each applicable item):
[ ] (a) Borne by Lessor without reimbursement by Lessee.
[ ] (b) Paid directly by Lessee.
[X] (c) Paid by Lessor but reimbursed by Lessee as provided:
[ ] (i) In Exhibit E: Lessor's Operating Costs
(triple net lease).
[ ] (ii) In Exhibit F: Building & Common Area Costs.
[X] (iii) In Exhibit J: Supplemental Terms and
Conditions.
L. SUBLETTING (Section 16)
Lessee may not assign or sublet the premises without Lessor's
prior written consent, which consent ([ ] shall be at Lessor's sole
discretion) ([X] shall not be unreasonably withheld).
M. BASE YEAR (Sections 5, 8 & 11)
[X] (1) Not applicable
[ ] (2) For the purpose of determining the increase in any
operating or occupancy costs payable by Lessee under this lease,
the Base Year shall be the calendar year ending on December 31,
19 , or, if the building in which the leased premises are situated
is not yet constructed, the first calendar year in which an
installment of real property taxes is based on the assessed value
of the completed building and improvements after completion of
construction.
N. ATTACHMENTS AND EXHIBITS
The following exhibits and appendices are attached to and are
incorporated as an integral part of this lease by reference:
YES NO
[X] Standard Terms and Conditions
[ ] [X] Exhibit A: Rules and Regulations
[ ] [X] Exhibit B: Preparation of Premises
[ ] [X] Exhibit C: Adjustment to Minimum Rent
[ ] [X] Exhibit D: Percentage Rent Provisions
[ ] [X] Exhibit E: Lessor's Operating Costs (triple net
lease)
[ ] [X] Exhibit F: Building & Common Area Costs
[X] [ ] Exhibit G: Lessee's Option to Renew
[X] Exhibit J: Supplemental Terms & Conditions
[X] Exhibit L: Lessee's First Refusal Option
OFFER BY LESSOR
Lessor offers to lease the
building to Buyer on the terms
and conditions set forth above.
Date:
PUEBLO ASSOCIATES,
a California limited
partnership
By
Donald M. Anderson
General Partner
Lessor's Mailing Address:
PUEBLO ASSOCIATES, a
partnership
1021 Anacapa Street
Santa Barbara, CA 93101
Attn: Donald M. Anderson
Telephone: (805) 564-6300
ACCEPTANCE BY LESSEE
Lessee agrees to lease the
building from Lessor on the
terms and conditions set forth
above.
Date:
SANTA BARBARA BANK & TRUST,
a California corporation
By
David Spainhour
President
Lessee's Mailing Address:
Santa Barbara Bank & Trust
1021 Anacapa Street
Santa Barbara, CA 93101
Attn: David Spainhour
Telephone: (805) 564-6300
<PAGE>
FREE STANDING BUILDING LEASE
STANDARD TERMS AND CONDITIONS
THESE STANDARD TERMS AND CONDITIONS are an integral part of
the Free Standing Building Lease between the following parties:
LESSOR: PUEBLO ASSOCIATES, a California limited
partnership
LESSEE: SANTA BARBARA BANK & TRUST, a California
corporation
PREMISES: 1021 Anacapa Street
Each reference in the Standard Terms and Conditions to information
set forth in the Basic Provisions of this lease shall be construed
to incorporate all of the information to which reference is made.
Any conflict between these Standard Terms and Conditions and the
information set forth in the Basic Provisions shall be resolved in
favor of these Standard Terms and Conditions.
TABLE OF CONTENTS
Section Page
1. LEASED PREMISES. . . . . . . . . . . . . . . . . . . . . . 1
1.1 Description of Premises. . . . . . . . . . . . . . . 1
1.2 Preparation of Premises; Occupancy . . . . . . . . . 1
2. TERM OF LEASE . . . . . . . . . . . . . . . . . . . . . . 1
3. RENTAL . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3.1 Minimum Monthly Rent . . . . . . . . . . . . . . . . 1
3.2 Time and Manner of Payment . . . . . . . . . . . . . 1
4. INTENTION OF PARTIES; NEGATION OF PARTNERSHIP. . . . . . . 2
5. PROPERTY TAXES AND ASSESSMENTS . . . . . . . . . . . . . . 2
5.1 Personal Property Taxes. . . . . . . . . . . . . . . 2
5.2 Real Property Taxes. . . . . . . . . . . . . . . . . 2
5.3 Taxes Defined; Special Assessments . . . . . . . . . 2
6. USE; LIMITATIONS ON USE. . . . . . . . . . . . . . . . . . 3
6.1 Lessee's Use of Premises . . . . . . . . . . . . . . 3
6.2 Limitations on Use . . . . . . . . . . . . . . . . . 3
7. ALTERATIONS. . . . . . . . . . . . . . . . . . . . . . . . 4
7.1 Changes by Lessee. . . . . . . . . . . . . . . . . . 4
7.2 Mechanics' Liens . . . . . . . . . . . . . . . . . . 5
8. UTILITIES. . . . . . . . . . . . . . . . . . . . . . . . . 5
8.1 Utility Service to Leased Premises . . . . . . . . . 5
8.2 Interruptions in Service . . . . . . . . . . . . . . 5
9. LESSEE'S PERSONAL PROPERTY . . . . . . . . . . . . . . . . 5
9.1 Installation of Property . . . . . . . . . . . . . . 5
9.2 Removal of Personal Property . . . . . . . . . . . . 6
10. CARE AND MAINTENANCE . . . . . . . . . . . . . . . . . . . 6
10.1 Lessor's Maintenance . . . . . . . . . . . . . . . . 6
10.2 Lessee's Maintenance . . . . . . . . . . . . . . . . 7
10.3 No Right to Offset . . . . . . . . . . . . . . . . . 7
11. INDEMNITY AND INSURANCE. . . . . . . . . . . . . . . . . . 7
11.1 Indemnification Agreement. . . . . . . . . . . . . . 7
11.2 Duty to Defend . . . . . . . . . . . . . . . . . . . 8
11.3 Lessee's Insurance . . . . . . . . . . . . . . . . . 8
11.4 Insurance on Building & Improvements . . . . . . . . 8
11.5 Miscellaneous Insurance Provisions . . . . . . . . . 10
11.6 Adjustments to Coverage. . . . . . . . . . . . . . . 10
11.7 Policy Provisions. . . . . . . . . . . . . . . . . . 10
11.8 Proof of Payment . . . . . . . . . . . . . . . . . . 11
11.9 Waiver of Subrogation. . . . . . . . . . . . . . . . 11
11.10 Payment of Proceeds. . . . . . . . . . . . . . . . . 11
12. DAMAGE OR DESTRUCTION. . . . . . . . . . . . . . . . . . . 11
12.1 Insubstantial Damage . . . . . . . . . . . . . . . . 11
12.2 Substantial Damage . . . . . . . . . . . . . . . . . 11
12.3 Uninsured Losses . . . . . . . . . . . . . . . . . . 12
12.4 Costs and Expenses . . . . . . . . . . . . . . . . . 12
12.5 Repairs & Restoration. . . . . . . . . . . . . . . . 12
12.6 Insurance Trustee. . . . . . . . . . . . . . . . . . 13
12.7 Termination; Abatement of Rent . . . . . . . . . . . 13
13. CONDEMNATION . . . . . . . . . . . . . . . . . . . . . . . 14
13.1 Definitions. . . . . . . . . . . . . . . . . . . . . 14
13.2 Condemnation Proceedings . . . . . . . . . . . . . . 15
13.3 Total or Substantial Taking. . . . . . . . . . . . . 16
13.4 Partial Taking . . . . . . . . . . . . . . . . . . . 16
13.5 Arbitration. . . . . . . . . . . . . . . . . . . . . 16
14. ASSIGNING, SUBLETTING AND HYPOTHECATING. . . . . . . . . . 17
14.1 Transfers of Leasehold Estate. . . . . . . . . . . . 17
14.2 Organizational Changes of Lessee . . . . . . . . . . 17
14.3 Applications for Consent . . . . . . . . . . . . . . 17
14.4 Assumption by Assignee.. . . . . . . . . . . . . . . 18
14.5 Reimbursement of Expenses. . . . . . . . . . . . . . 18
14.6 Continuing Obligation. . . . . . . . . . . . . . . . 18
15. DEFAULT BY LESSEE. . . . . . . . . . . . . . . . . . . . . 18
15.1 Insolvency of Lessee.. . . . . . . . . . . . . . . . 18
15.2 Breach of Covenant; Abandonment, Etc . . . . . . . . 19
15.3 Failure to Pay Rent, Etc . . . . . . . . . . . . . . 19
16. LESSOR'S REMEDIES. . . . . . . . . . . . . . . . . . . . . 19
16.1 Termination. . . . . . . . . . . . . . . . . . . . . 19
16.2 Reentry Without Termination. . . . . . . . . . . . . 20
16.3 Recovery of Rent . . . . . . . . . . . . . . . . . . 20
16.4 Lessor's Damages . . . . . . . . . . . . . . . . . . 20
16.5 Assignment of Subrents . . . . . . . . . . . . . . . 20
16.6 Remedies Cumulative and Not Exclusive. . . . . . . . 21
16.7 Rights and Remedies Not Waived . . . . . . . . . . . 21
17. LESSOR'S RIGHT TO CURE DEFAULTS. . . . . . . . . . . . . . 21
18. SUBORDINATION OF LEASE; ESTOPPEL . . . . . . . . . . . . . 22
18.1 Subordination; Estoppel Certificates . . . . . . . . 22
18.2 Failure to Deliver . . . . . . . . . . . . . . . . . 22
18.3 Attornment . . . . . . . . . . . . . . . . . . . . . 22
18.4 Financial Statements . . . . . . . . . . . . . . . . 22
19. SIGNS AND ADVERTISING. . . . . . . . . . . . . . . . . . . 23
20. LESSOR'S ENTRY ON PREMISES . . . . . . . . . . . . . . . . 23
20.1 Right of Entry . . . . . . . . . . . . . . . . . . . 23
20.2 Exercise of Right. . . . . . . . . . . . . . . . . . 23
21. SALE OR TRANSFER OF PREMISES . . . . . . . . . . . . . . . 24
22. SURRENDER ON TERMINATION; HOLDING OVER . . . . . . . . . . 24
22.1 Surrender of Premises. . . . . . . . . . . . . . . . 24
22.2 Removal of Alterations . . . . . . . . . . . . . . . 24
23. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . 24
23.1 Notices. . . . . . . . . . . . . . . . . . . . . . . 24
23.2 Joint and Several Liability. . . . . . . . . . . . . 25
23.3 Bindings on Successors, Etc. . . . . . . . . . . . . 25
23.4 Attorneys' Fees. . . . . . . . . . . . . . . . . . . 25
23.5 Partial Invalidity . . . . . . . . . . . . . . . . . 25
23.6 Complete Agreement . . . . . . . . . . . . . . . . . 25
1. LEASED PREMISES
1.1 Description of Premises. As used herein, the terms
"premises" or "leased premises" shall mean the land on which the
building described in the Basic Provisions is situated and the
building and other improvements situated thereon.
1.2 Preparation of Premises; Occupancy. If so provided in
the Basic Provisions, Lessor agrees to perform any work identified
in Exhibit B as Lessor's work, and to cause the leased premises to
be ready for occupancy by Lessee on or before the Anticipated
Completion Date set forth in the Basic Provisions.
2. TERM OF LEASE
The initial term of this lease shall begin on the commencement
date specified in the Basic Provisions. If the Basic Provisions
require Lessor to perform or complete any work to prepare the
premises for occupancy by Lessee, the initial term shall commence
on the date determined pursuant to Section 1.2, above. Subject to
extension or sooner termination as hereinafter provided, this lease
shall continue for the term specified in the Basic Provisions. If
the term of this lease begins on a day other than the first day of
a month, the Lessee shall pay, in advance, the prorated minimum
monthly rent for such partial month, and the initial term of this
lease shall be adjusted to commence on the first day of the
following month.
3. RENTAL
3.1 Minimum Monthly Rent. Lessee shall pay to Lessor a
minimum monthly rent, initially in the amount set forth in the
Basic Provisions, during each month of the term of this lease.
Minimum monthly rent for a period constituting less than a full
month shall be prorated on the basis of a thirty (30) day month.
If so provided in the Basic Provisions, the minimum monthly rent
shall be adjusted at the times and in the manner specified in the
Basic Provisions, and Lessee shall pay the minimum monthly rent, as
so adjusted, at the times and in the manner provided by this lease.
3.2 Time and Manner of Payment. Lessee agrees that all rent
payable by Lessee hereunder shall be paid by Lessee to Lessor not
later than five o'clock p.m. on the day on which first due, without
any deduction, set-off, prior notice or demand. All rents shall be
paid in lawful money of the United States at such place as Lessor
shall designate to Lessee from time to time in writing. Lessor
shall not be obligated to accept checks (other than cashier's or
certified checks) if at any time a check previously tendered by
Lessee was returned by Lessee's bank for any reason other than bank
error.
4. INTENTION OF PARTIES; NEGATION OF PARTNERSHIP
Nothing in this lease is intended and no provision of this
lease shall be construed to make Lessor a partner of or a joint
venturer with Lessee, or associated in any other way with Lessee in
the operation of the leased premises, or to subject Lessor to any
obligation, loss, charge or expense resulting from or attributable
to Lessee's operation or use of the premises.
5. PROPERTY TAXES AND ASSESSMENTS
5.1 Personal Property Taxes. Lessee shall pay before
delinquency all taxes assessed against any personal property of
Lessee installed or located in or upon the leased premises and that
become payable during the term of this lease.
5.2 Real Property Taxes. If so provided in the Basic
Provisions, Lessee shall pay as additional rent all real property
taxes levied or assessed against the leased premises and the
improvements situated thereon. Real property taxes for any frac-
tional portion of a fiscal year included in the lease term shall be
prorated on the basis of a 360-day year.
5.2.1 Each year, Lessor shall (a) notify Lessee of
the real property taxes payable by Lessee hereunder and shall
furnish Lessee with a copy of the applicable tax bill, or at its
option, (b) cause the tax bill to be mailed directly to Lessee.
5.2.2 Lessee shall pay the real property taxes
semi-annually not later than ten (10) days before the delinquency
date or ten (10) days after receipt of the tax bill, whichever is
later. Lessee shall furnish proof of such payment to Lessor
promptly upon the request of Lessor.
5.2.3 Should Lessor pay any installment of real
property taxes required to be paid by Lessee hereunder, then Lessee
shall reimburse Lessor for the payment so made within ten (10) days
after Lessee's receipt of a copy of the tax bill and Lessors'
request for reimbursement, but Lessee shall not be required to make
any such reimbursement until the due date any semi-annual install-
ments that have been prepaid by Lessor before the due date of such
installment.
5.3 Taxes Defined; Special Assessments. The term "real
property taxes" as used in this lease shall mean and include all
taxes, assessments, and other governmental charges, general and
special, ordinary and extraordinary, of any kind and nature
whatsoever, levied or assessed against all or any part of the
building and other improvements and the land of which the leased
premises are a part, including but not limited to assessments for
public improvements, benefits or facilities (including parking
district assessments) which shall be levied or assessed against the
land and/or building or any part thereof, but excluding franchise,
estate, inheritance, succession, capital levy, transfer, income or
excess profits tax imposed upon Lessor. If at any time during the
term of this lease, under the laws of California, or any political
subdivision thereof in which the leased premises are situated, a
tax or excise on rents or any other tax, however described, is
levied or assessed against Lessor on account of the rent expressly
reserved hereunder, in addition to or as a substitute in whole or
in part for taxes assessed or imposed by California or such
political subdivision on land and/or buildings, such tax or excise
shall be included within the definition of "real property taxes,"
but only to the extent of the amount thereof which is lawfully
assessed or imposed as a direct result of Lessor's ownership of
this lease or of the rental accruing under this lease. If Lessee
is required by the Basic Provisions to pay or reimburse real
property taxes, then with respect to any assessment that may be
levied against or upon the building, land or improvements of which
the leased premises are a part, and which under the laws then in
force may be evidenced by improvement or other bonds, or may be
paid in annual installments, Lessee shall be required to pay each
year only the amount of such annual installment or portion thereof
as Lessor shall be required to pay during such year (with appropri-
ate proration for any partial year) and shall have no obligation to
continue such payments after the termination of this lease.
6. USE; LIMITATIONS ON USE
6.1 Lessee's Use of Premises. Lessee agrees that the leased
premises shall be used and occupied only for the purpose specified
in the Basic Provisions, and for no other purpose without Lessor's
prior written consent.
6.2 Limitations on Use. Lessee's use of the leased premises
shall be in accordance with the following requirements:
6.2.1 Insurance Hazards. Lessee shall neither engage
in nor permit others to engage in any activity or conduct that will
cause the cancellation of any fire insurance maintained by Lessor,
and will pay any increase in the fire insurance premiums attribu-
table to Lessee's particular use of the leased premises. Lessee
shall, at Lessee's sole cost, comply with all requirements of any
insurance organization or company pertaining to the use of the
premises necessary for the maintenance of reasonable fire and
public liability insurance covering the building.
6.2.2 Compliance with Law. Lessor warrants to Lessee
that, to the best of its knowledge, as of May 1, 1994, the leased
premises are in compliance with applicable building codes and
ordinances, and with covenants, conditions and restrictions of
record as of that date. Lessee shall, at Lessee's sole cost and
expense, comply with all of the requirements, ordinances and
statutes of all municipal, state and federal authorities now in
force, or which may hereafter be in force, pertaining to the leased
premises and the use and occupancy thereof by Lessee, including any
statutes or ordinances requiring modifications to the building or
other improvements of which the leased premises are a part in order
to protect or promote the health, safety or well-being of persons
who are or may be present therein or to enable such improvements to
be used or any business operated therein to be conducted in a
manner that is more efficient or economical or with fewer environ-
mental impacts. The judgment of any court of competent juris-
diction, or the admission of Lessee in any action or proceeding
against Lessee, whether Lessor be a party thereto or not, that
Lessee has violated any such ordinances or statutes in the use of
the premises shall be conclusive of that fact as between Lessor and
Lessee. The judgment of any court of competent jurisdiction, or
the admission of Lessee in any action or proceeding against Lessee,
whether Lessor be a party thereto or not, that Lessee has violated
any such ordinances or statutes in the use of the premises shall be
conclusive of that fact as between Lessor and Lessee.
6.2.3 Waste; Nuisance. Lessee shall not commit, or
suffer to be committed, any waste of the leased premises, or any
nuisance or other unreasonable annoyance which may disturb the
quiet enjoyment of the owners or occupants of adjacent areas,
buildings or properties.
6.2.4 Hazardous Substances. Lessor represents that,
to the best of its knowledge, there are no hazardous or toxic
substances on the property in amounts that exceed permissible
levels under applicable federal, state and local environmental and
health and safety ordinances. Lessee shall conduct its business in
compliance with all applicable laws and regulations governing the
use, storage, transportation and discharge of hazardous materials,
and shall indemnify, defend with counsel reasonably acceptable to
Lessor and hold Lessor harmless with respect to any damage to
persons or property, including the presence of contamination in the
leased premises or the land and building and the costs of
remediation, attributable to hazardous substances owned, used or
stored by Lessee on the leased premises. Lessee shall comply with
the provisions of any Hazardous Substance Rider attached as an
exhibit to this lease.
7. ALTERATIONS
:\W Changes by Lessee. Any alterations, additions, improve-
ments or changes, including any remodeling or redecorating, that
Lessee may desire to make in, to or upon the leased premises, shall
be made at Lessee's sole cost and expense and in compliance with
all applicable governmental requirements. All such alterations and
improvements shall be made only after first submitting the plans
and specifications therefor to Lessor and obtaining the consent of
Lessor thereto in writing. Lessor shall not unreasonably withhold
it consent to any such proposed alterations and shall advise Lessee
at the time it gives any such consent whether Lessor reserves the
right to require Lessee to remove the alterations or improvements
at the expiration of the lease term. Lessee shall give Lessor not
less than three and not more than ten days prior notice of the date
on which the construction of such alterations or improvements will
begin and, at the request of Lessor, will post and record a notice
of non-responsibility on the leased premises on Lessor's behalf.
Any such alterations or improvements shall at once become a part of
the leased premises and, unless Lessor exercises its right pursuant
to Section 22.2, below, to require Lessee to remove any alterations
that Lessee has made to the premises, shall be surrendered to
Lessor upon the expiration or sooner termination of this lease.
7.2 Mechanics' Liens. Lessee shall cause to be completed in
accordance with the plans and specifications therefor any improve-
ments that Lessee causes or permits to be commenced on the leased
premises, shall pay all of the costs thereof, and shall keep the
leased premises and any improvements thereon at all times free of
mechanics' liens and other liens for labor, services, supplies,
equipment or material furnished or used for the purpose of making
such improvements.
8. UTILITIES
8.1 Utility Service to Leased Premises. Except as otherwise
provided in the Basic Provisions, Lessee shall make all arrange-
ments for and shall pay the charges when due for all water, gas and
heat, light, power, telephone service, trash collection and all
other services and utilities supplied to the leased premises during
the entire term of this lease, and shall promptly pay all connec-
tion and termination charges therefor.
8.2 Interruptions in Service. The suspension or interrup-
tion in utility services to the leased premises for reasons beyond
the ability of Lessor to control shall not constitute a default by
Lessor or entitle Lessee to any reduction or abatement of rent.
9. LESSEE'S PERSONAL PROPERTY
9.1 Installation of Property. Lessor shall have no interest
in any removable equipment, furniture or trade fixtures owned by
Lessee or installed in or upon the leased premises solely at the
cost and expense of Lessee, other than heating, ventilating and air
conditioning equipment installed in or affixed to the leased
premises or the building in which they are situated, unless Lessor
is given a lien in such personal property pursuant to the Basic
Provisions of this lease. Prior to creating or permitting the
creation of any lien or security or reversionary interest in any
removable personal property to be placed in or upon the leased
premises, Lessee shall obtain the written agreement of the party
holding such interest to make such repairs necessitated by the
removal of such property and any damage resulting therefrom as may
be necessary to restore the leased premises to good condition and
repair, excepting only reasonable wear and tear, in the event said
property is thereafter removed from the leased premises by said
party, or by any agent or representative thereof or purchaser
therefrom, pursuant to the exercise or enforcement of any rights
incident to the interest so created, without any cost or expense to
Lessor.
9.2 Removal of Personal Property. Provided that Lessee is
not then in default, at the expiration of this lease, Lessee shall
have the right to remove at its own cost and expense all removable
equipment, furniture or trade fixtures owned by or installed at the
expense of Lessee on the leased premises during the term of this
lease, other than any heating, ventilating or air conditioning
equipment installed by Lessee. All such personal property shall be
removed prior to the close of business on the last day of the lease
term, and Lessee shall make such repairs necessitated by the
removal of said property and any damage resulting therefrom as may
be necessary to restore the leased premises to good condition and
repair. Any such property not so removed shall be deemed to have
been abandoned or, at the option of Lessor, shall be removed and
placed in storage for the account and at the cost and expense of
Lessee.
10. CARE AND MAINTENANCE
10.1 Lessor's Maintenance. Unless otherwise specified in the
Basic Provisions or in an exhibit to this lease:
10.1.1 The obligations of Lessor with respect to the
repair and maintenance of the building shall be limited to any
required (a) repairs or maintenance necessary to preserve the
structural integrity of the building; and (b) any required
replacement of (i) structural components of the building shell,
including exterior and bearing walls, foundations, sub-flooring and
the roof, (ii) any encased plumbing, wiring, pipes, or conduits
(unless the replacement thereof is required as a result of Lessee's
misuse), (iii) any machinery or equipment constituting an integral
part of the building, but excluding heating, ventilating, air
conditioning equipment serving the building, (iv) the exterior
finish of the building, and (v) the sidewalks, driveways, parking
areas and landscaping; and (c) repainting the exterior of the
building when and as necessary to preserve its appearance as a
well-maintained professional office building
10.1.2 Lessee shall reimburse the costs and expense
incurred by Lessor in performing its repair and maintenance
obligations under this Section 10.1 to the extent that such
reimbursement is required by the Basic Provisions or an exhibit to
this lease. The costs of any such repairs and maintenance that are
not required to be reimbursed by Lessee shall be borne entirely by
Lessor.
10.2 Lessee's Maintenance. Except as otherwise provided in
this lease, Lessee shall, at its own cost and expense:
10.2.1 Provide the ordinary, day-to-day or periodic
maintenance necessary to (a) keep and maintain in good order and
repair (i) the interior of the building, including flooring,
partitions, wall and floor coverings and interior finishes; (ii)
the heating, ventilating and air conditioning systems, including
the repair and/or replacement of machinery and equipment; (iii) all
exposed plumbing, wiring and electrical fixtures; (iv) the
elevator, and (b) to preserve in a clean, neat and business-like
condition the exterior of the building and its finishes, including
the replacement of any broken doors, windows and/or skylights, but
excluding repainting of the exterior of the building.
10.2.2 Notify Lessor promptly of any damage to the
leased premises resulting from or attributable to the acts or
omissions of Lessee or its agents, employees, invitees or author-
ized representatives, and thereafter promptly repair all such
damage at Lessee's sole cost and expense.
10.2.3 Keep any store or building front and any
sidewalks or parking area adjacent thereto clean and neat at all
times, and remove immediately therefrom any litter, debris or other
unsightly or offensive matter placed or deposited thereon by the
agents or customers of Lessee.
10.3 No Right to Offset. Lessee waives any right that may
exist under Sections 1941 and 1942 of the California Civil Code to
make repairs and to deduct the expenses thereof from the rent
payable by Lessee.
11. INDEMNITY AND INSURANCE
11.1 Indemnification Agreement. This lease is made upon the
express condition that Lessor is to be free from all liability and
claims for damages by reason of any injury to any person and damage
to any property (including Lessee's), resulting from any cause
whatsoever while, in, upon, about, or in any way connected with the
leased premises or the building in which the premises are located
during the term of this lease, including without limitation, damage
or injury caused by the elements or from breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, plumbing,
air conditioning, or other electrical or mechanical fixtures or
equipment, excluding only any damage or injury caused by the breach
by Lessor of a duty imposed by law or under this lease. Lessee
hereby waives all claims against Lessor for, and agrees to
indemnify, defend and hold Lessor harmless from any liability,
damage, loss, cost or expense, including attorneys' fees, for any
such injury or damage to persons or property, whether resulting
from or attributable to the fault or neglect of Lessee or
otherwise, excluding only injuries or damages caused by a breach by
Lessor of a duty imposed by law or by this lease.
11.2 Duty to Defend. Should any action or proceeding be
commenced against Lessor by reason of any claim resulting from or
attributable to the use and occupancy of the leased premises by
Lessee, or actions taken by or for or permitted by Lessee in or
about the premises or the common area, Lessee shall appear in and
defend such claim at Lessee's expense with counsel reasonably
satisfactory to Lessor.
11.3 Lessee's Insurance. Unless otherwise provided in the
Basic Provisions, Lessee shall procure and maintain in force
throughout the term of this lease, at Lessee's sole cost and
expense, the following policies of insurance:
11.3.1 Public Liability Insurance. A public liability
insurance policy insuring against any liability to the public
incident to the use of or resulting from any accident occurring in
or about the leased premises or any improvements or appurtenances
to improvements situated thereon. Such policy shall insure the
contingent liability of Lessor and the performance by Lessee of its
indemnity obligations under this lease and shall provide coverage
with a combined single limit for personal injury and property
damage in an amount not less than the amount specified in the Basic
Provisions. Lessee shall obtain those endorsements to its public
liability policy that are specified in the Basic Provisions and
such other endorsements as are customary in the industry for
facilities and businesses of a size and nature similar to that
situated on the leased premises, in amounts which are one hundred
percent (100%) of the customary industry standard for such
endorsements procured by or for a similarly situated insured (and
with deductibles that are consistent with such standard).
11.3.2 Property Insurance. A policy of standard fire
and extended coverage insurance, on all of Lessee's personal
property and removable fixtures and equipment situated in, on or
about the leased premises, with vandalism and malicious mischief
endorsements, in an amount not less than as specified in the Basic
Provisions and with deductibles that are consistent with the
customary industry standard for a similarly situated insured. The
proceeds of any such policy that become payable due to damage, loss
or destruction of such property shall be used by Lessee for the
prompt repair or replacement of the personal property and equipment
used by Lessee in the conduct of its business in the leased
premises.
11.4 Insurance on Building & Improvements. The party
specified in the Basic Provisions (the "Insuring Party") shall
procure and maintain in force throughout the term of this lease for
the mutual benefit of Lessor and Lessee:
11.4.1 Fire & Casualty Insurance. A policy of
standard fire and casualty insurance upon all improvements located
on or appurtenant to the leased premises. Such policy (a) shall
insure against loss or damage by fire and such other risks as are
now or hereafter included in an extended coverage policy, (b) shall
contain such endorsements or coverages as are specified in the
Basic Provisions, (c) shall have policy limits in the amount set
forth in the Basic Provisions, and (d) shall not have a deductible
in an amount which does not exceed (i) the sum specified in the
Basic Provisions or (ii) the then-customary industry standard,
whichever is less. The Insuring Party shall obtain such other
endorsements to such fire and casualty insurance as are customary
in the industry for improvements of the size and nature as those
situated on the leased premises, in amounts which are one hundred
percent (100%) of the customary industry standard for such
endorsements procured by or for a similarly situated insured.
11.4.2 Earthquake and Flood Insurance. If so provided
in the Basic Provisions, earthquake and/or flood insurance in an
amount equal to the full insurable value of the improvements
situated on the leased premises.
A. If the Insuring Party is required to procure
earthquake or flood insurance, and if Lessee is required by the
Basic Provisions to pay or reimburse the costs of insurance
maintained on the leased premises, then Lessee's liability for the
costs of earthquake and/or flood insurance shall not exceed an
amount of the premium that would be paid if such insurance coverage
were economically available.
B. For the purpose of this Section 11.4.2,
"economically available" shall mean that the coverage specified
(i.e., flood or earthquake) is available at a premium cost not in
excess of 50% of the extended coverage insurance required by this
Section 11.4 and provides coverage to the extent of not less than
fifty percent (50%) of the replacement value of the improvements
insured with a deductible not in excess of one percent (1%) of the
replacement value of the improvements insured.
(1) For the purpose of this Section 11.4.2.B,
the flood insurance maintained by the Insuring Party need extend
only to damage to the ground floor and any subterranean floors of
the improvements so insured.
(2) Any coverages maintained under this
Section 11.4.2.B may contain such deductibles and other policy
limitations as are then standard for policies of such types written
for the geographical area which includes the leased premises.
C. Should any flood or earthquake insurance only
be available for a premium which exceeds the amount referred to in
Section 11.4.2.B, above, Lessor may nonetheless require the
Insuring Party to procure such insurance, but any premium therefor
in excess of the amount referred to in Section 11.4.2.B, above,
shall be paid by Lessor unless the Basic Provisions or an exhibit
to this lease requires such additional amount to be paid by Lessee.
11.4.3 Rent Continuation Insurance. If so provided in
the Basic Provisions, rent continuation insurance in an amount
sufficient to provide to pay the minimum monthly rent for the
period specified in the Basic Provisions if the Premises are
damaged or destroyed by any risk required to be insured against
under this Section 11.4.
11.5 Miscellaneous Insurance Provisions. Lessor shall be
named as an additional insured in each policy of insurance required
to be provided by Lessee under this Section 11, but Lessor shall
have no obligations as an insured pursuant to any such policy.
11.6 Adjustments to Coverage. The insurance required by this
Section 11, shall be reviewed by Lessor and Lessee from time to
time at the request of either for the purpose of determining
whether the coverage afforded by such insurance continues to be
available and is customary in amount for similarly situated
insureds. If the parties are unable to agree upon the amount of
such coverage prior to the expiration of the applicable period, or
if there should be a dispute to the type or amount of coverage
which should be provided hereunder, then the nature and amount of
coverage to be provided shall be adjusted to the types and amounts
of coverage determined in writing to be available and customary in
the industry for similarly situated insureds by an independent
insurance consultant not affiliated with or providing services to
either party, who shall be selected by the parties or, if they are
unable to agree, designated by the Board of Directors of the
Chapter of the Independent Insurance Brokers Association located in
the City or County in which the leased premises are situated. The
parties shall pay in equal shares the costs and fees of any such
insurance consultant and the recommendations of any such insurance
consultant shall be binding on Lessor and Lessee, respectively.
11.7 Policy Provisions. Each policy of insurance required to
be maintained under this lease shall be a primary policy, issued by
a national insurance company licensed in the State of California
and rated no less than A in the most recent edition of Best's
Insurance Reports (or a comparable rating by a comparable insurance
rating service). Each such policy shall be nonassessable and shall
contain an endorsement requiring thirty (30) days' written notice
from the insurer to Lessor and Lessee before any cancellation or
change in the nature, scope or amount of coverage, and shall
provide (to the extent available) that: (a) any loss shall be
payable notwithstanding any act of negligence of Lessor or Lessee;
(b) such policy is non-contributing with any insurance that may be
carried by Lessor or Lessee; and (c) the insurer waive any right of
subrogation against Lessor or Lessee or their respective agents.
11.8 Proof of Payment. Each policy, or a certificate of the
policy, together with evidence of current payment of premiums,
shall be deposited with Lessor at the commencement of the initial
term of this lease. Within ten (10) days of any request by Lessor
for evidence of any insurance required to be maintained by Lessee
under the terms of this lease, Lessee shall deliver to Lessor
reasonable evidence demonstrating Lessee's compliance with the
provisions of this Section 11, including the current payment of
premiums.
11.9 Waiver of Subrogation. Lessor and Lessee each release
the other and their respective agents and representatives from any
claims for damage to any person or property or to the leased
premises that are caused from risks covered by insurance under this
lease which is in force at the time of the loss, and each party
shall cause each policy of insurance obtained by it hereunder to
provide for a waiver of subrogation against either party in
connection with any loss covered by the policy.
11.10 Payment of Proceeds. The proceeds of any policy of
casualty insurance maintained pursuant to Section 11.4, above,
shall be paid to an Insurance Trustee as provided by Section 12.6,
below, except that, if the estimated cost of repairing or restoring
any damage or destruction is less than fifteen percent (15%) of the
replacement value of the improvements, such insurance proceeds
shall be paid directly to the party required to repair or restore
the damage or destruction for disposition in accordance with the
provisions of this lease.
12. DAMAGE OR DESTRUCTION
12.1 Insubstantial Damage. Should the leased premises or the
improvements situated thereon be damaged as the result of any
casualty that is required to be insured against under the provi-
sions of this lease, Lessor shall cause the building promptly to be
restored to substantially the same appearance and condition as they
were in prior to such damage or destruction if the necessary
repairs and restoration can reasonably be expected to be complete
within three hundred thirty (330) days from the date of the damage
or destruction.
12.2 Substantial Damage. Should the leased premises or the
improvements situated thereon be damaged as the result of any
casualty that is required to be insured against under Section 11,
above, and if the necessary repairs and restoration cannot
reasonably be expected to be complete within three hundred thirty
(330) days from the date of the damage or destruction, the Lessee
shall be entitled to terminate this Lease by giving written notice
of termination, specifying the effective date of termination,
within fifteen days after the parties determine the period of time
required to complete the repair and restoration. If Lessee does
not exercise its termination right as provided herein, Lessor may
elect to either terminate this Lease or to complete the necessary
repairs and restoration (including Lessee's leasehold improvements)
within a reasonable period of time and (subject to the Lessee's
rental abatement rights under Section 12.7, below) this lease shall
continue in full force and effect.
12.3 Uninsured Losses. If the damage or destruction was
attributable to a risk not required to be insured against pursuant
to Section 11, above, then Lessee and Lessor each shall have the
right to terminate this lease by giving written notice of intention
to terminate, specifying the effective date of termination, to the
other party within thirty (30) days after the date on which the
anticipated cost of repairing or restoring the improvements has
been determined, but neither party shall be entitled to exercise
such right to terminate if the other agrees to make any required
repairs at its own cost and expense. If neither party elects to
terminate this lease as provided herein, then Lessor shall proceed
to repair and restore the improvements at Lessor's own cost and
expense within a reasonable period of time and (subject to the
Lessee's rental abatement rights under section 12.7, below) and
this lease shall continue in full force and effect.
12.4 Costs and Expenses. All costs and expense incurred in
repairing, restoring or reconstructing the improvements on the
leased premises shall be paid from the available insurance
proceeds. If the available insurance proceeds are insufficient for
such purposes, or if the damage or destruction occurred due to a
risk not required to be insured against under this lease, any
resulting deficiency shall be paid by Lessor except that, if the
insufficiency of insurance proceeds is attributable to a default by
the Insuring Party in its obligation to procure and maintain any of
the insurance required to be maintained by the Insuring Party under
this lease, then the deficiency shall be paid by the Insuring
Party.
12.5 Repairs & Restoration. All repairs, restoration or
reconstruction required or permitted hereunder shall be commenced
and completed with due diligence as soon as reasonably practical
after the occurrence of any damage or destruction to the improve-
ments situated on the leased premises. In determining whether a
party has proceeded with due diligence as required by the provi-
sions of this Section 12, there shall be taken into account the
availability of any applicable insurance proceeds.
12.5.1 Any repairs, restoration or reconstruction of
the improvements situated on the Leased Premises shall be made in
accordance with the provisions of Section 7 of this lease.
12.5.2 Subject to the effects of existing zoning and
use ordinances and intervening changes thereto, the restoration or
reconstruction shall be of a quality and have a value (measured by
replacement cost or fair market value, whichever is greater) at
least equal to the quality and value of the improvements which
existed immediately prior to the occurrence of any damage or
destruction thereto. If then-existing ordinances prevent the
restoration of the improvements to substantially the same condition
and appearance as existed prior to their damage or destruction,
then (a) Lessee shall be entitled to terminate this lease if the
leased premises cannot be restored to a condition sufficient to
enable Lessee to continue to conduct its business in substantially
the same manner as it was conducted prior to the damage or
destruction, and (b) the proceeds of any down-zoning insurance
shall be paid to Lessor.
12.6 Insurance Trustee. All insurance proceeds becoming
payable on account of damage to or destruction of the improvements
on the premises, and any amounts required to be paid by Lessee for
the purpose of repairing or restoring such damage or destruction,
shall constitute trust funds. Such funds shall be paid in trust to
a bank or trust company designated by Lessor with appropriate
instructions to disburse the same to persons who supply labor or
materials for repair, restoration or reconstruction of the Premises
in accordance with architect's certificates until the work is
completed. Any insurance proceeds and other funds held by the
trustee after the repair and restoration of the leased premises has
been completed and all of the costs and expenses of such repair and
restoration have been fully paid, shall be remitted to any lender
encumbering the fee interest in the property or, if there be none,
then to Lessor, except that any unexpended funds contributed by
Lessee pursuant to Section 12.7.2, below, shall be returned to
Lessee.
12.7 Termination; Abatement of Rent. This lease shall not be
terminated on account of any damage to or destruction of the leased
premises or any building and other improvements situated thereon
unless notice of termination is given by Lessor or Lessee as
provided by Section 12.3 or Section 12.5.2, above.
12.7.1 Should the buildings or other improvements
situated on the leased premises be damaged or destroyed for reasons
other than the fault or neglect of Lessee, there shall be an
abatement or reduction of the minimum monthly rent between the date
of destruction and the date of completion of restoration, based on
the extent to which the destruction interferes with Lessee's use of
the Leased Premises, except that:
A. If Lessee was required by the Basic Provisions
to procure and maintain business interruption insurance, Lessee
shall continue to be liable for the payment of the minimum monthly
rent to the extent it does not exceed the proceeds of such business
interruption insurance; and
B. No such abatement shall relieve any insurer of
its obligations under any rent continuation policy or endorsement
to make payments to Lessor in accordance with the terms of such
policy or endorsement.
WP1{.D Should Lessor exercise any right granted under
this Section 12 to terminate the lease by reason of damage to or
the destruction of the leased premises due to a casualty not
required to be insured against, Lessee shall have the right to
reinstate the lease and to cause Lessor to restore the leased
premises to substantially the same condition as existed prior to
such damage or destruction provided that (a) Lessee gives written
notice to Lessor within ten (10) days after Lessee's receipt of
Lessor's notice of election to terminate that Lessee agrees to pay
all costs and expenses incurred by Lessor in repairing and
restoring the leased premises, and (b) within thirty (30) days
thereafter, Lessee (i) deposits with the insurance trustee in cash
an amount equal to the estimated costs of repairing and restoring
the leased premises, and (ii) provides reasonable assurance that
Lessee has sufficient financial resources to pay any actual costs
or expenses in excess of the estimated costs of repair and
restoration.
13. CONDEMNATION
13.1 Definitions. For purposes of this Section 13, the
following words and phrases shall have the meanings set forth
below:
13.1.1 Award means the compensation paid on account of
a taking, whether pursuant to a judgment or by agreement, including
any amounts paid in connection with a voluntary conveyance in lieu
of condemnation.
13.1.2 Date of Taking shall be the date on which (a)
actual physical possession is taken by the condemnor or (b) the
date on which the right to compensation and damages accrues under
the law applicable to the premises, whichever occurs later.
13.1.3 Taking shall mean the taking or damage,
including severance damage, by eminent domain or by inverse
condemnation or for any public or quasi-public use under any
statute, whether the transfer of title results from recordation of
a final order in condemnation or a voluntary transfer or conveyance
to the condemning agency or authority under threat and in lieu of
condemnation, or while condemnation proceedings are pending.
13.1.4 Partial Taking shall mean any taking of the fee
title that is neither a total nor a substantial taking.
13.1.5 Substantial Taking means a taking to such an
extent that the portion of the premises not taken cannot be so
repaired or reconstructed, taking into consideration the amount of
the award available for repair or reconstruction, as to constitute
a complete, rentable structure, capable of producing a
proportionately fair and reasonable net annual income after payment
of all operating expenses, the minimum monthly rent (as reduced as
a result of the taking), additional rent, and all other charges
payable under this lease, and after performance of all covenants
and conditions required of Lessee by law and under this lease.
13.1.6 Total Taking shall mean the taking of the fee
title to all of the Premises and the improvements situated thereon.
13.2 Condemnation Proceedings. Should either party become
aware, by oral or written communication, of a contemplated or
intended taking, or receive any notice, service of process, offer
to purchase, solicitation of an offer to sell or any other notice
or inquiry concerning a contemplated or intended taking, then such
party shall promptly furnish to the other a copy of any such notice
(if in writing) and, whether such communication was oral or
written, a written summary setting forth the nature of the notice,
service of process or other inquiry or offer received and the date
of its receipt.
13.2.1 Representation. Lessor, Lessee and all persons
or entities holding under Lessee each shall have the right to
represent his or its respective interest in any action, proceeding
or negotiation with respect to a taking or contemplated taking, and
to make full proof of his or its claims. No agreement, settlement,
sale or transfer to or with the condemning authority shall be made
without the consent of Lessor and Lessee. Lessor and Lessee each
agree to execute and deliver any instruments that may be required
to effectuate or facilitate the provisions of this Section 13.
13.2.2 Allocation of Award. Any award made in connec-
tion with a taking of all or any portion of the leased premises and
the improvements situated thereon shall be made by mutual agreement
of Lessor and Lessee and determined by them to be fair and
reasonable to both parties, taking into account the economics of
operating any remaining portion of the premises and the improve-
ments situated thereon, the costs of repairing and restoring the
portion of the premises that were not taken, and the remaining term
of this lease.
A. In determining the allocation of any award made
for any taking, consideration shall be given (1) first, to the
costs of repairing and restoring the portion of the premises that
were not taken; (2) next, (a) to compensating the Lessor for the
value of the premises taken, including the increase in value, if
any, attributable to the lease, and then (b) compensating Lessee
for the value of the leasehold estate; (3) next, to compensating
Lessor and Lessee for the value of their respective interests in
the improvements situated on the leased premises, taking into
account the remaining term of this lease; and (4) last, compensat-
ing any other damages or loss included in the award.
B. Should the parties be unable to agree upon the
allocation of any award made for taking the premises and the
improvements situated thereon, then such allocation shall be
determined by arbitration in accordance with the provisions of
Section 13.5, below.
13.3 Total or Substantial Taking. If there is a total or
substantial taking of the Leased Premises, then this lease shall
terminate upon the vesting of title or taking of possession and all
rights and obligations of the parties under this lease shall
likewise terminate.
13.4 Partial Taking. Lessor shall have the right to
terminate this lease by providing thirty (30) days prior written
notice to Lessee within thirty (30) days after the nature and
extent of the taking is finally determined in writing by the
condemning authority if the taking constitutes a partial taking
within the meaning of Section 13.1.4, above. If Lessor does not
terminate this lease as provided herein, then this lease shall
remain in full force and effect and the following shall apply:
13.4.1 The minimum monthly rent from and after the
date of the taking shall be reduced in the proportion that the
value of the Leased Premises taken bears to the total value of the
Leased Premises immediately prior to the date of the taking. If,
within thirty (30) days after the date of the taking, the parties
are unable to agree upon the adjusted minimum monthly rent, the new
minimum monthly rent shall be fixed by arbitration as set forth in
Section 13.5, below.
13.4.2 Promptly after any such partial taking, Lessee
shall make any repairs or restoration at the sole cost and expense
of Lessee necessary to restore the Leased Premises to a practical
improvement suitable for Lessee's continuing use. Such repair
shall be made in the manner specified in Section 12, above, for the
restoration of damage or destruction. However, if such partial
taking occurs during the last two (2) years of the lease term or
any renewal term, Lessee shall be relieved of the duty (but may
nonetheless elect) to repair or restore the improvements. An
election by Lessee not to repair or restore the improvements shall
not relieve Lessee of any of its obligations under this lease,
including the obligation to pay the minimum monthly rent, as
adjusted pursuant to Section 13.4.1, above.
13.5 Arbitration. Any dispute concerning (a) the extent to
which a partial taking by condemnation renders the leased premises
uneconomic and unfeasible for continuing use by Lessee after a
reasonable amount of reconstruction, or (b) the value of the area
taken and the resulting adjustment to the minimum monthly rent,
shall be submitted to and resolved by arbitration in accordance
with the then existing rules of the American Arbitration Associa-
tion. Lessee waives the provisions of Section 1265.130 of the
California Code of Civil Procedure permitting a petition by Lessee
to the Superior Court to terminate this lease in the event of a
partial taking of the leased premises.
14. ASSIGNING, SUBLETTING AND HYPOTHECATING
14.1 Transfers of Leasehold Estate. Lessee shall not sell,
transfer or assign this lease, or any part thereof or any interest
therein, or hypothecate or grant any rights hereunder, or create or
permit any subleases for the leased premises, or permit the
premises to be occupied by anyone other than Lessee or Lessee's
employees, whether voluntarily, involuntarily or by operation of
law, without in each case obtaining the prior written consent of
the Lessor, which consent shall not be unreasonably withheld.
14.2 Organizational Changes of Lessee. If Lessee is a
corporation, any dissolution, merger, consolidation or reorganiza-
tion of Lessee, or the sale or transfer of more than fifty percent
(50%) of the outstanding voting stock of the corporation otherwise
than through transactions effected on a national stock exchange, or
the sale or transfer in one (1) or a series of related transactions
of more than fifty percent (50%) of the value of the assets of
Lessee, shall be deemed an assignment subject to the provisions of
this Section 14.2. If Lessee is a partnership, a withdrawal or
change, voluntary or involuntary, or by operation of law, of the
partner or partners owning more than fifty percent (50%) of the
partnership, or the dissolution of the partnership, shall be deemed
an assignment subject to the provisions of this Section 14.2.
14.3 Applications for Consent. If Lessee desires at any time
to assign this lease or to sublet all or any portion of the
premises, Lessee shall first notify Lessor of Lessee's desire to do
so and shall submit in writing to Lessor (i) the name of the
proposed sublessee or assignee; (ii) the nature of the proposed
sublessee's or assignee's business to be carried on in the
Premises; (iii) all of the terms and provisions of the proposed
sublease or assignment; (iv) such reasonable financial information
as Lessor may request concerning the proposed sublessee or
assignee, including, but not limited to a balance sheet as of a
date within ninety (90) days of the request for consent, statements
of income or profit and loss for the two-year period preceding the
request for consent and a written statement in reasonable details
as to the business experience of the proposed sublessee or assignee
during the five (5) years preceding the request for consent; and
(v) the name and address of sublessee's or assignee's present or
previous landlord. Lessor, as a condition to granting such
consent, may require that the obligations of any assignee which is
a subsidiary or affiliate of another corporation be guaranteed by
the parent or controlling corporation. Any sublease, license,
concession, franchise or other permission to use the Premises shall
be expressly subject and subordinate to all applicable terms and
conditions of this lease.
14.4 Assumption by Assignee. Each permitted assignee or
transferee, other than Lessor, shall assume all obligations of
Lessee under this lease and shall be and remain liable jointly and
severally with Lessee for the payment of the rent, and for the due
performance of all the terms, covenants, conditions and agreements
to be performed by Lessee hereunder; provided, however, that a
transferee other than an assignee shall be liable to Lessor for
rent only in the amount set forth in the assignment or transfer.
No assignment shall be binding on Lessor unless such assignee or
Lessee shall deliver to Lessor a counterpart of such assignment and
an instrument in recordable form which contains a covenant of
assumption by such assignee satisfactory in substance and form to
Lessor, consistent with the requirements of this Section 14.4, but
the failure or refusal of such assignee to execute such instrument
of assumption shall not release or discharge such assignee from its
liability as set forth above.
14.5 Reimbursement of Expenses. Concurrently with Lessor's
consent to the proposed assignment or subletting, and as a
condition thereto, Lessee shall reimburse Lessor for the reasonable
costs and expenses, including attorneys' fees, incurred by Lessor
in connection with the processing and documentation of the proposed
transfer, assignment or sublease.
14.6 Continuing Obligation. No assignment or subletting by
Lessee shall relieve Lessee of its obligations under this lease,
and Lessee shall remain fully responsible to Lessor for the
performance of all its obligations under this lease, regardless of
any assignment or subletting. Any such transfer, assignment or
subletting shall be subject to all of the terms and conditions of
this lease, and each successive transfer, assignment or subletting
shall be made only upon like conditions.
15. DEFAULT BY LESSEE
Each of the following events shall constitute an Event of
Default within the meaning of this lease:
15.1 Insolvency of Lessee. If during the term of this lease
(a) the Lessee shall make an assignment for the benefit of
creditors; or (b) a voluntary or involuntary petition shall be
filed by or against the Lessee under any law having for its purpose
the adjudication of the Lessee as bankrupt, or the extension of
time of payment, composition, adjustment, modification, settlement
or satisfaction of the liabilities of the Lessee, or to which any
property of the Lessee may be subject and, if the petition be
involuntary, if said petition be granted; or (c) a receiver be
appointed for the leased premises by reason of the insolvency or
alleged insolvency of the Lessee and said receiver is not dis-
charged within thirty (30) days, or upon the hearing of a timely
filed petition to dismiss, absolve or otherwise terminate the
receivership, whichever shall later occur; or (d) any department of
the state or federal government, or any officer thereof duly
authorized shall take possession of the leased premises and the
improvements thereon by reason of the insolvency of the Lessee and
the taking of possession shall be followed by a legal adjudication
of the insolvency, or bankruptcy, or receivership of Lessee.
15.2 Breach of Covenant; Abandonment, Etc. If during the
term of this lease, Lessee shall (a) default in fulfilling any of
the covenants or conditions of this lease (other than the covenants
for the payment of rent or other charges payable by the Lessee
hereunder), or (b) shall abandon the leased premises; provided,
however, that a default which is capable of being cured shall not
constitute an Event of Default unless Lessor has given notice of
such default to Lessee and Lessee has failed to cure such default
within thirty (30) days after its receipt of such notice or, in the
case of a default which cannot with due diligence be cured within
a period of thirty (30), if the Lessee has failed to proceed
promptly after the service of such notice to prosecute the curing
of such default with all due diligence within a reasonable period
of time.
15.3 Failure to Pay Rent, Etc. If the payment of the rent
expressly reserved hereunder, or any part of the same, or any other
rent or charge required to be paid by the Lessee hereunder or any
part of the same, is not paid within fifteen (15) days after Lessor
gives a notice of delinquency to Lessee.
16. LESSOR'S REMEDIES
Upon the occurrence of any Event of Default:
16.1 Termination. Lessor may, at Lessor's election,
terminate this lease by giving Lessee such notice as is required by
Section 1161 of the California Code of Civil Procedure, or any
successor statute. On the giving of any such notice, this lease
shall be terminated and the same shall expire as fully and
completely as if the day of such notice were the date herein
specifically provided for the expiration of the term of this lease,
and all of Lessee's rights in the Premises and in all improvements
situated thereon shall terminate. Promptly after receiving notice
of termination, Lessee shall surrender and vacate the premises and
all such improvements in broom-clean condition, and Lessor may
reenter and take possession of the Premises and all remaining
improvements and eject all parties in possession (other than
subtenants not in default whose possession Lessor had agreed not to
disturb) or eject some and not others, or eject none. Termination
of this lease pursuant to this Section 16.1 shall not relieve
Lessee from the payment of any sum then due to Lessor or from any
claim for damages previously accrued or then accruing against
Lessee.
16.2 Reentry Without Termination. Lessor may, at Lessor's
election, reenter the premises and, without terminating this lease,
at any time, and from time to time relet the premises and improve-
ments or any part of them for the account and in the name of Lessee
or otherwise. Any reletting may be for the remainder of the term
or for a longer or shorter period. Lessor may execute any leases
made under this provision either in Lessor's name or in Lessee's
name and shall be entitled to all rents from the use, operation, or
occupancy of the Premises or improvements or both. Lessee shall
nevertheless pay to Lessor on the due date specified in this lease
the equivalent of all sums required to be paid by Lessee under this
lease, plus Lessor's expenses, but less the proceeds of any
reletting or attornment. No act by or on behalf of Lessor under
this provision shall constitute a termination of this lease unless
Lessor gives notice of termination pursuant to Section 16.1, above.
16.3 Recovery of Rent. Lessor shall be entitled at Lessor's
election to each installment of rent or to any combination of
installments for any period before termination. The proceeds of
any reletting or attornment shall be applied, when received, first
to the out-of-pocket costs and expenses incurred by Lessor in
recovering possession of the Premises and/or effecting such
reletting, including but not limited to attorneys' fees, court
costs, brokerage commissions and any costs of remodeling or
renovation, second to any amounts then due and unpaid by Lessee
under this lease, to the extent that such proceeds for the period
covered do not exceed the amount due from and charged to Lessee for
the same period, and any remaining balance shall be held for the
account of Lessee.
16.4 Lessor's Damages. Lessor shall be entitled, at Lessor's
election, to recover from Lessee all damages suffered by Lessor as
a result of Lessee's default, including without limitation, the
worth at the time of the award (computed in accordance with
paragraph (b) of Section 1951.2 of the California Civil Code) of
the amount by which the rent then unpaid for the balance of the
lease term exceeds the amount of such rental loss for the same
period which the Lessee proves could be reasonably avoided by
Lessor.
16.5 Assignment of Subrents. Lessee assigns to Lessor all
subrents and other sums becoming due from subtenants, licensees and
concessionaires (referred to collectively herein as "subrents")
during any period in which Lessor has the right under this lease,
whether exercised or not, to reenter the Premises on account of a
default by Lessee, and Lessee shall not have any right to such sums
during that period. This assignment is specifically subject and
subordinate to any and all assignments of the same subrents and
other sums made to a leasehold mortgagee under any leasehold
mortgage permitted by the provisions of this lease. Lessor may at
Lessor's election reenter the premises and improvements, without
terminating this lease, and either collect these sums or bring an
action for the recovery of such sums from the obligors.
16.6 Remedies Cumulative and Not Exclusive. The rights,
powers and remedies of Lessor hereunder shall be in addition to all
rights, powers and remedies given by statute, rule of law and in
equity, and all such remedies shall be cumulative. The exercise of
any one or more of such right, powers and remedies shall not be
construed as a waiver or election by Lessor of any other rights,
powers or remedies of Lessor arising pursuant to any provision of
law or this lease.
16.7 Rights and Remedies Not Waived. No course of dealing
between the Lessee and the Lessor or any failure or delay on the
part of the Lessor in exercising any rights or remedies pursuant to
law or arising pursuant to this lease shall operate as a waiver of
any rights or remedies of Lessor. Neither the subsequent accep-
tance by Lessor of any amounts paid to it on account of or with
respect to amounts owed by Lessee pursuant to this lease, or the
application of any such amounts in reduction of outstanding rent or
other obligations due from Lessee shall constitute a waiver or cure
of default, other than default in the timely payment of the amount
so accepted, regardless of Lessor's knowledge of the preceding
breach. Lessor's acceptance of rent or any other payment after
termination of this lease shall not entitle the Lessee to have this
lease reinstated. Any waiver, express or implied, by any party
hereto, of any breach by any party of any covenant or provision of
this lease, shall not be, nor be construed to be, a waiver of any
subsequent breach of the same or any other term or provision
hereof.
17. LESSOR'S RIGHT TO CURE DEFAULTS
Lessor, at any time after Lessee commits a default in the
performance of any of Lessee's obligations under this lease, shall
be entitled to cure such default, or to cause such default to be
cured, at the sole cost and expense of Lessee. If, by reason of
any default by Lessee, Lessor incurs any expense or pays any sum,
or performs any act requiring Lessor to incur any expense or to pay
any sum, including attorneys fees and reasonable costs and expenses
paid or incurred by Lessor in order to prepare and post or deliver
any notice permitted or required by the provisions of this lease or
otherwise permitted or contemplated by law, to appear in any
bankruptcy or insolvency proceedings, or otherwise to enforce any
of its rights under this lease, then the amount so paid or incurred
by Lessor shall be immediately due and payable to Lessor by Lessee
as additional rent. Lessee hereby authorizes Lessor to deduct said
sums from any security deposit held by Lessor. If there is no
security deposit, or if Lessor elects not to use any such security
deposit, then such sums shall be paid by Lessee immediately upon
demand by Lessor, and shall bear interest at the highest rate then
permitted by law from the date on which such demand is made until
the entire amount due has been paid in full.
18. SUBORDINATION OF LEASE; ESTOPPEL
18.1 Subordination; Estoppel Certificates. Lessee agrees to
execute, acknowledge and deliver to Lessor upon request:
18.1.1 Such documents and instruments as may be
necessary to subordinate this lease to (a) any mortgages or trust
deeds that now exist or may hereafter be placed upon the premises
by Lessor, (b) to any and all advances made or to be made thereun-
der, (c) to the interest on all obligations secured thereby, and
(d) to all renewals, modifications, consolidations, replacements
and extensions thereof; provided, however, that in each case the
mortgagee or beneficiary named in any such mortgage or trust deed
shall agree in writing that, as long as Lessee performs its
obligations under this lease, no foreclosure or deed in lieu of
foreclosure, or sale under the encumbrance or other procedures to
enforce the rights incident thereto, shall affect Lessee's rights
under this lease.
18.1.2 An estoppel certificate certifying in effect
that this lease is in full force and effect, that it has not been
amended, that Lessor is not in default hereunder, that Lessee
claims no offsets or other amounts against Lessor, and such other
information as Lessor may reasonably request (e.g., the current
monthly rent, the amount of any security deposit, the presence or
absence of renewal or purchase options, and similar factual
matters), other than such exceptions to such matters as may be
claimed by Lessee as set forth in said estoppel certificate.
18.2 Failure to Deliver. If Lessee shall fail at any time to
execute, acknowledge and deliver any such estoppel certificate or
subordination instrument, then Lessor, in addition to any other
remedies available to it, may execute, acknowledge and deliver the
instrument as the attorney-in-fact of Lessee and in Lessee's name,
place and stead, and Lessee hereby irrevocably makes, constitutes
and appoints Lessor, its successors and assigns, such
attorney-in-fact for that purpose.
18.3 Attornment. Lessee shall attorn to any purchaser at any
foreclosure sale or to any grantee or transferee designated in any
deed given in lieu of foreclosure.
18.4 Financial Statements. Lessee agrees to deliver to
Lessor from time to time at Lessor's request such financial
statements as are customarily prepared by Lessee if requested by a
prospective lender or purchaser in connection with a proposed sale
or refinancing of the building and/or land of which the leased
premises are a part. To the extent prepared by Lessee, such
financial statements shall include the most recent balance sheet
prepared by Lessee and income and loss statements for the three (3)
most recently completed fiscal years. All such financial state-
ments shall be received and held by Lessor in confidence and shall
be used only for the purposes contemplated by this Section 18.4,
but Lessor shall be entitled to furnish such financial statements
to any prospective purchaser who agrees to hold them in confidence.
19. SIGNS AND ADVERTISING
Lessee shall be entitled to place and maintain a sign to
display its trade name at a location on the exterior of the leased
premises approved by Lessor, which sign shall conform to the
reasonable requirements of Lessor as to size and format. No other
signs, advertisements, notices or other exterior decoration or
personal property of Lessee shall be placed upon or displayed by
Lessee on any part of the building or the windows of the leased
premises, or upon or about the exterior of the leased premises,
without the prior written consent of Lessor.
20. LESSOR'S ENTRY ON PREMISES
20.1 Right of Entry. Lessor and its authorized represen-
tatives shall have the right to enter the premises at all reason-
able times for any of the following purposes:
20.1.1 To determine whether the premises are in good
condition and whether Lessee is complying with its obligations
under this lease;
20.1.2 To do any necessary maintenance, repairs,
restoration or remodeling to the building or the premises that
Lessor has the right or obligation to perform;
20.1.3 To serve, post, and keep posted any notices
required or allowed under the provisions of this lease, including
"for rent" or "for lease" notices during the last three months of
this lease, or during any period while Lessee is in default, and
any notices provided by law for the protection of Lessor's interest
in the leased premises; and
20.1.4 To shore the foundations, footings, and walls
of the building and to erect scaffolding and protective barricades
around and about the building, but not so as to prevent entry to
the premises, and to do any other act or thing necessary for the
safety or preservation of the premises and the building if any
excavation or other construction is undertaken or is about to be
undertaken on any adjacent property or area.
20.2 Exercise of Right. Lessee shall not be entitled to an
abatement or reduction of minimum monthly rent on account of
Lessor's entry or the exercise of the rights retained by Lessor
under this Section. Lessor shall use reasonable care in exercising
its rights under this Section in a manner that will not interfere
unreasonably with Lessee's use and occupancy of the leased
premises; however, Lessor shall not be liable for any incon-
venience, disturbance, loss of business, nuisance, or other damage
arising out of Lessor's entry on the premises as provided herein,
except damage resulting from the negligent or tortious acts or
omissions of Lessor or its authorized representatives.
21. SALE OR TRANSFER OF PREMISES
If Lessor sells or transfers all or any portion of the
premises, or the building, improvements and land of which the
leased premises are a part, then Lessor, on consummation of the
sale or transfer, shall be released from any liability thereafter
accruing under this lease. If any security deposit or prepaid rent
has been paid by Lessee, Lessor shall transfer the security deposit
or prepaid rent to Lessor's successor and on such transfer Lessor
shall be discharged from any further liability with respect
thereto.
22. SURRENDER ON TERMINATION; HOLDING OVER
22.1 Surrender of Premises. Lessee agrees to return the
leased premises (except removable trade fixtures, furniture and
equipment owned or installed by at the expiration or sooner
termination of the lease term, in good condition and repair,
reasonable wear and tear excepted. Should the Lessee hold the
leased premises with the consent of Lessor after the expiration of
the term of this lease, then such holding over shall be construed
to be only a tenancy from month-to-month and subject to all of the
conditions and agreements herein contained.
22.2 Removal of Alterations. Lessor, by giving written
notice to Lessee within ten (10) days before the expiration or
termination of the lease, may elect to require Lessee to remove any
alterations that Lessee has made to the premises provided Lessor
reserved such right at the time it consented to such improvements
as provided in Section 7.1, above. If Lessor so elects then
Lessee, at its sole cost and expense, shall remove the alterations
specified by Lessor in its notice, and shall make such repairs
necessitated by the removal of said alterations, and any damage
resulting therefrom, as may be necessary to restore the leased
premises to good condition and repair, excepting only reasonable
wear and tear, before the last day of the lease term or within
thirty (30) days of Lessor's notice, whichever is later.
23. GENERAL PROVISIONS
23.1 Notices. All notices permitted or required under this
lease shall be in writing and shall be deemed to have been given
upon personal delivery or on the second (2nd) business day
following the date on which sent by mail, postage prepaid,
addressed, in the case of Lessor, to its principal place of
business or, in the case of Lessee, to the leased premises or to
such other address, notice of which is given as provided herein.
23.2 Joint and Several Liability. Each person or entity
named as a Lessee in this lease, or who hereafter becomes a Party
to this lease as a tenant in the leased premises, or as an assignee
of Lessee, shall be jointly and severally liable for the full and
faithful performance of each and every covenant and obligation
required to be performed by Lessee under the provisions of this
lease.
23.3 Bindings on Successors, Etc. Each of the terms,
conditions, and obligations of this lease shall extend to and bind,
or inure to the benefit of (as the case may require), the respec-
tive parties hereto, and each and every one of their respective
heirs, executors, administrators, representatives, successors and
assigns.
23.4 Attorneys' Fees. Should any legal action be instituted
by either of the parties to enforce or construe any of the terms,
conditions or covenants of this lease, or the validity thereof, the
party prevailing in any such action shall be entitled to recover
from the other party all court costs and reasonable attorneys' fees
to be set by the court, and the costs and fees incurred in
enforcing any judgment entered therein.
23.5 Partial Invalidity. If any term or provision of this
lease or the application thereof to any person or circumstance
shall, to any extent, be invalid or unenforceable, the remainder of
this lease or the application of such term or provision to persons
or circumstances other than those to which it is held invalid or
unenforceable, shall not be affected thereby, and each term and
provision of this lease shall be valid and be enforceable to the
fullest extent permitted by law.
23.6 Complete Agreement. This lease, and the attachments and
exhibits hereto, constitute the entire agreement between the
parties and may not be altered, amended, modified or extended
except by an instrument in writing signed by the parties hereto.
The parties respectively acknowledge and agree that neither has
made any representations or warranties to the other not expressly
set forth herein.
* * * END OF STANDARD TERMS AND CONDITIONS * * *
<PAGE>
EXHIBIT G
LESSEE'S OPTION TO RENEW
THIS EXHIBIT constitutes an integral part of the Free-Standing
Building Lease between the following parties:
LESSOR: PUEBLO ASSOCIATES, a California limited partnership
LESSEE: SANTA BARBARA BANK & TRUST, a California corporation
PREMISES: 1021 Anacapa Street
1. Grant of Option. Lessor hereby grants to Lessee, on the terms
and conditions set forth below, four ( 4 ) successive options to
renew this Lease. The first renewal option shall be for a renewal
term of five ( 5 ) years. Each succeeding option shall be for a
renewal term of five ( 5 ) additional years, to commence at the
expiration of the preceding renewal term. Each renewal term shall
be subject to all of the provisions of this Lease. The failure of
Lessee to exercise its option for any renewal term shall nullify
the option of the Lessee for any succeeding renewal terms.
2. Conditions to Exercise. The right of Lessee to exercise its
renewal rights for an additional lease term are subject to the
following conditions precedent:
2.1 The Lease shall be in effect at the time notice of
exercise of the renewal option is given and on the last day of the
existing Lease term;
2.2 Lessee shall not be in default under any provisions of
the Lease at the time notice of exercise is given or on the last
day of the existing Lease term;
2.3 Neither Lessor nor Lessee has exercised any right
provided by this Lease to terminate this Lease due to substantial
damage to or destruction of any improvements on the premises due to
a casualty loss occurring prior to the time notice of exercise of
the renewal option is given by Lessee; and
2.4 Lessee gives Lessor written notice to Lessor at least
six (6) months (i.e., 180 days) before the last day of the existing
Lease term of Lessee's intent to exercise its renewal rights.
Except as provided in Section 4.6, below, any such notice, once
given, shall be binding both on Lessor and on Lessee.
2.5 Notwithstanding Section 2.4, Lessee shall not be deemed
to have forfeited its renewal option by reason of the failure of
Lessee to give notice of its intent to exercise such option at
least six (6) months before the last day of the existing Lease term
unless, within such six month period, Lessor has given a written
reminder to Lessee of the imminent expiration of Lessee's renewal
option and Lessee thereafter fails to give written notice of its
intention to exercise such renewal option within ten (10) days
after its receipt of such reminder.
3. Rent During First Renewal Term. Within thirty (30) days after
delivery of Lessee's notice of exercise of its first renewal
option, Lessor and Lessee shall attempt to agree in writing on the
minimum annual rent for the renewal term. If the parties are
unable to reach agreement within such thirty (30)-day period, then
the minimum annual rent shall be determined by appraisal as
provided in Section 3.1, below.
3.1 Market Value Determination. If Lessor and Lessee are
unable to agree on the minimum annual rent and the annual adjust-
ments thereto during the first renewal term within thirty (30) days
after Lessor's receipt of Lessee's notice of intent to renew, then
within fifteen days after the request of either party for a rent
determination by appraisal, Lessor and Lessee shall endeavor to
agree in writing as to a single appraiser to be appointed by both
of them to determine the minimum annual rent and the annual
adjustments thereto. The determination of any such single appraiser
appointed by both Lessor and Lessee shall be conclusive and binding
on each of them.
3.1.1 If the parties are unable to agree on a single
appraiser within such fifteen (15)-day period, then each party,
within fifteen (15) days after the expiration of such fifteen (15)-
day period, shall appoint a real estate appraiser with at least
five (5) years' full-time commercial appraisal experience in the
area in which the premises are located to make such determination.
If either party fails to appoint an appraiser within fifteen (15)
days after the other party has given notice of the name of its ap-
praiser, the single appraiser so appointed shall be the sole
appraiser and shall make such determination. If two (2) appraisers
are appointed by the parties as provided in this section, they
shall promptly endeavor to make such determination.
3.1.2 If the two (2) appraisers appointed as provided
hereunder are unable to agree within fifteen (15) days after the
second appraiser has been appointed, then the two (2) appraisers
shall endeavor to elect a third appraiser within the next succeed-
ing fifteen (15)-day period. If the two (2) appraisers are unable
to agree on a third appraiser, either party may, by giving fifteen
(15) days' notice to the other party, apply to the presiding judge
of the Santa Barbara County Superior Court for the selection of a
third appraiser who meets the qualifications stated in this Section
3.1 and who is not active in any other capacity for either party.
3.1.3 Within fifteen (15) days after the selection of
the third appraiser, a majority of the appraisers shall determine
the fair rental value and the appropriate annual adjustments
thereto of the premises for the use then being made of the premises
by Lessee. If a majority of the appraisers are unable to establish
the fair rental value and such adjustments within the stipulated
period of time, the three (3) appraised values and adjustments
shall be added together, their total divided by three (3), and the
resulting quotient shall be the minimum annual rent and the annual
adjustments, respectively, of the premises to be paid during the
renewal term; however, if the low appraisal or the high appraisal
is more than ten percent (10%) lower or higher than the middle
appraisal, the lower appraisal or the higher appraisal or both
shall be disregarded. If only one appraisal is disregarded, the
remaining two appraised values and adjustments shall be added
together, their total divided by two (2), and the resulting
quotient shall be the minimum annual rent and the adjustments,
respectively, during the renewal term. If both the low appraisal
and the high appraisal are disregarded, then the middle appraisal
shall constitute the minimum annual rent and the annual adjustments
during the renewal term.
3.1.4 In determining the rental and the annual
adjustments thereto for the renewal term, any appraisers appointed
hereunder shall consider and take into account, inter alia, (a)
changes in the purchasing power of the dollar between the effective
date of this Lease and the commencement of the renewal term; (b)
appreciation or depreciation in the value of the property on which
the leased premises are located; (c) competitive rentals being paid
for comparable space in the area in which the premises are located,
and (d) the use being made of the premises by Lessee and other uses
to which the premises could be put without necessitating signifi-
cant leasehold improvements. Each party shall bear the costs and
fees of its respective appraiser, and Lessor and Lessee shall bear
in equal shares any costs incurred in appointing the third
appraiser and the fees charged by such third appraiser.
3.2 Rent Pending Completion of Appraisal. If the appraisal
proceedings provided for in paragraph 4 above, are not complete at
the start of the renewal term, then Lessee shall tem porarily pay
as rent an amount equal to the greater of (a) $40,539.80 per month
or (b) the rent in effect immediately prior to the start of the
renewal term until the appraisal proceedings have been completed
and a new rent determined. Once the new rent has been determined
as provided in Section 3.1, above, a retroactive adjustment to the
rent shall be made, effective as of the start of the renewal term,
and Lessee shall pay any deficiency owing to the Lessor, or Lessor
shall refund any excess payments previously received from Lessee,
within ten (10) days after the date on which the actual rent for
the renewal term has been determined.
3.3 Adjustments in Subsequent Years of Renewal Term. The
minimum monthly rent for the second and each subsequent year of any
renewal term shall be adjusted annually effective as of the first
day of May each year (the "Annual Adjustment Date") by multiplying
the minimum monthly rent in effect immediately prior to the Annual
Adjustment Date by a fraction, the numerator of which shall be
index figure from the official Consumers' Price Index for Urban
Wage Earners and Clerical Workers), All Items, for the Los Angeles-
Anaheim-Riverside area, 1984=100 Base, as published by the Bureau
of Labor Statistics, United States Department of Labor (the "CPI
Index"), for the month of February immediately preceding the Annual
Adjustment Date and the denominator of which shall be the CPI Index
figure for the month of February of the preceding year, but in no
event shall the rent be increased in any one year by more than five
percent (5%) of the minimum monthly rent in effect immediately
prior to such adjustment. The annual adjustments to the minimum
monthly rent made pursuant to this Section 3.3 shall be cumula-
tive. Should the actual percentage change in the CPI Index figures
exceed the five percent (5%) limitation in some years but not in
others, then any percentage change in the CPI Index figures not
taken into account on an Adjustment Date due to the limitation on
rental adjustments for any single year shall be taken into account
in subsequent adjustment years in which the percentage change was
less than five percent (5%), but in no event shall the minimum
monthly rent be increased by more than five percent (5%) for any
single year during the renewal term except as expressly permitted
by Section 3, 4, below, for the adjustment to be made effective on
the first day of each renewal term.
4. Rent During Subsequent Renewal Terms. Effective on the first
day of the second, third and fourth renewal terms (the "Renewal
Term Adjustment Date), the minimum monthly rent shall be adjusted
in accordance with the following formula:
4.1 If the aggregate percentage increase in the CPI Index
for the sixty (60)-month period ending on the day immediately prior
to the Renewal Term Adjustment Date (herein, the "Prior Term") is
equal to or less than 39.0%, then the minimum monthly rent for the
first year of the renewal term shall be the product obtained by
multiplying the minimum monthly rent in effect for the first year
of the Prior Term by 131.20%.
4.2 If the percentage increase in the CPI Index for the
Prior Term exceeds 39.0%, then the rent for the first year of the
renewal term shall be the product obtained by multiplying the
minimum monthly rent in effect for the first year of the Prior Term
by 180% of the actual percentage increase in the Index during the
Prior Term.
Thereafter, the minimum monthly rent shall be adjusted annually on
the first day of each subsequent year during the renewal term in
the manner provided by Section 3.3, above.
5. Substitute Index. If the CPI Index shall no longer be
published, then appropriate reference figures shall be derived from
any successor or comparable index mutually agreed by the parties to
be authoritative, and if the parties are unable to agree, then the
substituted index shall be selected by the then-presiding judge of
the Superior Court for the County in which the leased premises are
located upon the application of either party.
6. Notice of Adjustment. Lessee shall give written notice to
Lessor of the adjustments made to the minimum monthly rent pursuant
to this Exhibit G, setting forth the computation thereof, on or
before the applicable adjustment date or as soon thereafter as
practicable, but no delay in computing or giving notice of any
adjustments required hereunder shall constitute a waiver of the
right of either party to have such adjustments made, retroactive to
the applicable Adjustment Date, once such computation has been
made.
7. Adjustment to Prior Payments. Any notice of adjustment given
pursuant to this Exhibit G shall be accompanied by the lump-sum
payment of any increased rent accruing from the Adjustment Date
through the date on which such notice is given, to the extent not
previously paid.
<PAGE>
EXHIBIT J
SUPPLEMENTAL TERMS AND CONDITIONS
THIS EXHIBIT constitutes an integral part of the Free Standing
Building Lease between the following parties:
LESSOR: PUEBLO ASSOCIATES, a California limited
partnership
LESSEE: SANTA BARBARA BANK & TRUST, a California
corporation
PREMISES: 1021 Anacapa Street
Any inconsistency between the Standard Terms and Conditions of the
Lease and the provisions of this Exhibit shall be resolved in favor
of the provisions of this Exhibit.
1. Rental Adjustment Schedule
The minimum monthly rent payable under the lease shall be
increased effective as of the first day of May each year to the
amounts set forth below:
RENTAL PERIOD
(May 1 to April 30) SQUARE FT. RENTAL MONTHLY NET RENTAL
94-95 $1.38 $39,960.66
95-96 $1.39 $40,250.23
96-97 $1.40 $40,539.80
97-98 $1.42 $41,118.94
98-99 $1.44 $41,698.08
2. Seismic Reinforcement Work.
2.1 Compliance with Ordinance. Subject to the following
provisions regarding the allocation of costs, Lessor shall be re-
sponsible for complying with the requirements of Santa Barbara's
Seismic Safety Ordinance as set forth in Chapter 22.18 of the Santa
Barbara Municipal Code. In carrying out such work, Lessor shall
take, or shall cause its general contractor to take such actions
and precautions as are reasonable and necessary to assure that,
throughout the term of such seismic reinforcement work:
2.1.1 Lessee is afforded with (a) safe and unimpeded
access to the leased premises, and (b) continuing, uninterrupted
utility service to the building.
2.1.2 Such work is performed in a manner that
minimizes disruptions to and interference with Lessee's business
operations.
2.1.3 Lessee's telephone lines and computer cables
or other utility installations are kept intact and that any such
lines or cables that are accidently severed are immediately
repaired or replaced.
2.2 Allocation of Costs. Subject to the provisions of
Section 2.3, below, regarding the method of payment, the first
$425,000 of the costs of the seismic reinforcement work shall be
borne equally by the Lessor and the Lessee. Any costs or expenses
in excess of $425,000 shall be borne entirely by Lessor. For
purposes of this Section 2.2, the costs of the seismic
reinforcement work shall include the following:
2.2.1 Planning & Engineering Expense. All
architect, engineering and related costs and expense, including the
costs of any necessary tests, inspections and fees payable to
governmental agencies for plan review and approval and the issuance
of any necessary permits and/or licenses, incurred by Lessor for
the purpose of developing a plan for complying with the Santa
Barbara Seismic Reinforcement Ordinance as it applies to the leased
premises; and
2.2.2 Construction Expense. All costs and expenses
incurred by Lessor in carrying out and implementing the seismic
reinforcement plan prepared by or for Lessor and approved by the
City of Santa Barbara, including (a) all expense of the type
described in Section 2.1, above, (b) general contractor fees,
overhead and profit, and (c) the costs and fees of all subcontrac-
tors for labor and materials supplied to the seismic reinforcement
project.
2.3 Method of Payment. Lessee shall reimburse to Lessor (or
at Lessor's request shall pay directly to Lessor's contractor)
promptly upon receipt of a statement therefor, accompanied by
supporting vouchers and invoices setting forth in reasonable detail
the services or materials for which payment is sought, all seismic
reinforcement costs incurred by Lessor in carrying out the work
called for by Section 2.1, above, to the extent that the aggregate
of all such costs and expenses do not exceed $425,000.
2.3.1 One-half of all such amounts so paid by Lessee
shall be paid on Lessee's own account as its allocable share of
seismic reinforcement costs.
2.3.2 The remaining one-half shall be paid by Lessee
on behalf of Lessor, it being understood and agreed that the Mini-
mum Monthly Rent called for by Section 1, above, has been calculat-
ed by the parties so as to permit Lessee to recover over the
initial term of this lease in the form of a rental reduction the
amounts being expended by Lessee on behalf of Lessor pursuant to
this Section 2.3.
2.4 Responsibilities of Lessee. Lessee shall cooperate with
Lessor and its contractors throughout the course of the seismic
reinforcement project. To the extent that Lessee is able to do so
without unreasonable disruption to or interference with its busi-
ness, Lessee shall endeavor to configure and conduct its business
activities in a manner that facilitates free access by Lessor's
general contractor and its subcontractor to areas of the building
where the seismic reinforcement work is to be carried out,
including temporarily relocating portions of its staff and its
business operations from time to time to other parts of the
building.
2.4.1 Lessee shall bear and pay any cost or expense
incurred by it in adapting its business operations to Lessor's
seismic reinforcement work, including any temporary relocation,
storage, moving or similar expense. All such expenses shall be in
addition to the obligation of Lessee under Section 2.2, above.
2.4.2 Lessee shall not be entitled to any abatement
in rent during the course of the seismic reinforcement work on
account of any resulting inconvenience or disruption to its
business.
2.5 Supplemental Tax Provisions. Notwithstanding the
provisions of Section 5.3 of the Standard Terms and Conditions:
2.5.1 Assessments Resulting from Change of Owner-
ship. Lessee shall not be liable for any increase in real estate
taxes or assessments levied or assessed against the leased premises
by reason of an increased assessment on account of a sale or
transfer by Lessor after the effective date of this Lease of all or
any portion of its interest in the Property in a transaction that
constitutes a change of ownership under the rules and regulations
of the California State Board of Equalization. In the event of any
such reassessment, Lessee's liability for the resulting increase in
real estate taxes and assessments shall be limited to the amount of
the increased taxes that would have been payable had no change in
ownership occurred, and Lessor shall be liable for that portion of
the taxes that is attributable to the increased assessment
resulting from the change in ownership.
2.5.2 Lessee's Right to Contest Taxes. Lessee shall
have the right to contest in the name of Lessor the validity or
amount of any tax or special assessment payable by Lessee which
Lessee reasonably believes to have been improperly levied or
assessed against the Premises, upon posting a bond or making a
deposit with the Lessor in an amount sufficient to discharge the
disputed levy. For this purpose Lessee shall have the right to
institute such proceedings in the name of Lessor as Lessee may rea-
sonably deem necessary. Lessor shall cooperate with Lessee in any
such proceeding provided that all expenses incurred by Lessor at
the request of Lessee in connection therewith are paid or fully
reimbursed by Lessee. Lessee shall provide Lessor with a minimum
of fourteen (14) days notice of Lessee's intention to contest or
dispute such levy and said notice shall include a brief statement
of the action which Lessee proposes to take. Lessee shall keep
Lessor fully apprised of the nature and status of any such proceed-
ings. Upon the completion or other termination of such proceed-
ings, Lessee shall immediately pay and discharge any judgment
rendered, shall comply with any other binding determination made,
and shall pay and discharge all costs and charges incidental to any
such judgment or determination, and shall cause any related lien to
be released from the Premises.
2.6 Building & Operating Expense. Lessee shall pay to Lessor
as additional rent promptly upon receipt of an invoice therefor
those Building & Operating Costs incurred by Lessor in connection
with the ownership and operation of the Building that are the
responsibility of Lessee. Building & Operating Costs that are
attributable to periods (a) beginning before the effective date of
this Lease or (b) ending after the expiration of the term of this
Lease shall be prorated on the basis of thirty-days months for the
periods that are included within the term of this Lease. For
purposes of this Section 2.6, Lessor's Building & Operating Costs
shall include all sums paid or incurred by Lessor and not charged
directly to Lessee for or with respect to the following:
2.6.1 Real Property Taxes. Subject to the provi-
sions of paragraph 2.5.2, above, real property taxes and assess-
ments, whether resulting from increased rate and/or valuation,
levied and assessed against the Leased Premises.
2.6.2 Utility Costs. All water, gas, heat, light,
power and other utilities furnished to the building and other
improvements comprising the leased premises and the land upon which
they are situated, to the extent not metered directly to and paid
for directly by the Lessee.
2.6.3 Insurance Premiums. The purchase of fire and
casualty, public liability and other insurance coverage required or
permitted to be obtained by Lessor in accordance with the Basic
Provisions of this Lease.
2.7 Quiet Enjoyment. Lessor covenants and agrees that,as
long as Lessee is not in default in the performance of its
obligations under this lease, Lessee shall have quiet possession
and enjoyment of the leased premises, free of any disturbance by
Lessor or persons claiming through Lessor, and Lessor shall defend
the possession and enjoyment of the leased premises against each
and every person claiming the leased premises or an interest
therein.
<PAGE>
EXHIBIT L
LESSEE'S FIRST REFUSAL OPTION
THIS EXHIBIT constitutes an integral part of the Free Standing
Building Lease between the following parties:
LESSOR: PUEBLO ASSOCIATES, a California limited
partnership
LESSEE: SANTA BARBARA BANK & TRUST, a California
corporation
PREMISES: 1021 Anacapa Street
1. Offer By Lessor. During the term of this lease, Lessee shall
have the prior right to purchase the leased premises if Lessor
decides to offer the leased premises for sale. Prior to offering
the leased premises for sale to third parties Lessor shall notify
Lessee in writing that the leased premises are available for
purchase and shall advise Lessee of the terms and conditions on
which the leased premises will be offered for sale (the "Initial
Notice").
2. Response by Lessee. Lessee shall have a period of thirty (30)
days after its receipt of any such Initial Notice (the "Initial
Notice Period") to make an offer for the purchase of the leased
premises acceptable to Lessor.
2.1 If Lessee makes an offer on terms and conditions
satisfactory to Lessor prior to the expiration of the Initial Offer
Period, then Lessor and Lessee shall proceed to consummate the
transaction on the terms and conditions so agreed upon.
2.2 If Lessor and Lessee are unable to reach agreement on the
terms and conditions for the proposed sale of the leased premises
prior to the expiration of the Initial Offer Period, then Lessor
shall be entitled to offer the leased premises for sale to third
parties.
3. Offers to Third Parties. Should Lessor thereafter receive a
bona fide offer for the purchase of the leased premises from a
third party which the Lessor desires to accept, then Lessor shall
give to the Lessee a written notice of the proposed transaction
which (a) sets forth (i) the name and address of the proposed
purchaser (ii) the proposed purchase price (which must be an amount
specified in dollars, but which may be payable in a lump sum or in
installments over an extended period of time) and (iii) the other
terms and conditions of the proposed transfer, and (b) is accompa-
nied by a copy of any purchase contract or other agreement between
the Lessor and the proposed purchaser providing for the sale and
transfer of the leased premise. Such notice (a "Firm Offer") shall
constitute an offer by the Lessor to sell the premises to the
Lessee on the terms and conditions set forth therein.
4. Lessee's Purchase Option. The Lessee shall be entitled to
purchase the leased premises on the terms and conditions set forth
in the Firm Offer by giving written notice to the Lessor of its
intention to do so prior to the expiration of the Offering Period.
The Offering Period shall be:
4.1 A period of ten (10) days if the Firm Offer is received
by the Lessee at any time subsequent to the twentieth day following
the date of the Initial Offer and prior to the expiration of one
(1) year from the date of the Initial Notice.
4.2 A period of thirty (30) days if the Firm Offer is
received at any other time.
5. Conditional Exercise. Lessee, in exercising its option, shall
have the right to make a conditional exercise, contingent upon
Lessee's ability to obtain, within thirty (30) days after the date
of notice of exercise of the option, the necessary outside
financing to provide the funds needed to meet the cash requirements
of Lessor as set forth in the Firm Offer. Should Lessee make a
conditional election to exercise Lessee's option as provided
herein, then, unless within thirty (30) days after the date of the
notice by Lessee of conditional exercise of Lessee's option to
purchase, there shall have been received by Lessor from Lessee a
written waiver of the financing condition, Lessee shall be deemed
to have rejected Lessor's offer effective as of the expiration of
said thirty (30)-day period.
6. Failure of Lessee to Exercise Option. If Lessee fails to
exercise its purchase option prior to the expiration of the
Offering Period, or if Lessee fails to complete such purchase
within the period of time contemplated by the Firm Offer, then
Lessor shall be free to sell the leased premises to any third party
upon the same terms and conditions as were offered to Lessee
without resubmitting such terms and conditions to Lessee.
6.1 In consummating any such sale to a third party Lessor
shall be entitled to make non-material changes in the terms and
conditions of sale, provided that such modifications do not (a)
include more favorable provisions for owner= financing, if any, or
(b) result in a purchase price that is less than the price offered
to Lessee, or (c) otherwise affect the economic substance of the
transaction.
6.2 Except for nonmaterial changes permitted pursuant to
Section 6.1, above, no such sale shall be made on terms and
conditions different from those set forth in Lessor's Firm Offer to
Lessee without Lessor's first again complying with the provisions
of this Exhibit L.
7. Survival of Option. Should Lessor sell the premises to a
third party prior to the expiration or termination of the lease due
to the failure of Lessee to exercise its option under this Exhibit
L, such sale shall be made subject to the provisions of this lease,
including the provisions of this Exhibit L, and Lessee's right of
first refusal shall continue to exist with respect to any subse-
quent sale of the premises by the then-existing owner.
8. Cooperation in Effecting Exchange. Should Lessee exercise its
option to purchase under this Exhibit L, Lessee shall, upon the
request of Lessor, cooperate with Lessor in effecting a tax-
deferred exchange pursuant to Section 1031 of the Internal Revenue
Code provided that (a) such exchange is effected at the sole cost
and expense of Lessor; and (b) Lessee is not required to assume or
incur any personal liability in connection with any such exchange.
9. Exempt Transactions. The right of first refusal granted to
Lessee hereunder shall not apply to:
9.1 Any transfer or assignment of the leased premises
(a) that is a testamentary disposition; or (b) to the ancestors or
lineal descendant of a person comprising or holding a beneficial
ownership interest in Lessor, or the members of their immediate
families; or (c) to any corporation, trust, partnership or other
entity, substantially all of the beneficial ownership interest in
which is owned by Lessor (or by the persons then comprising or
holding beneficial ownership in Lessor), or its (or their)
ancestors or lineal descendants, or the members of their immediate
families; or (d) to any other transaction not involving the
transfer of the leased premises for consideration to an unrelated
third party in a single transaction or a series of related, pre-
planned transactions, but any such transferee or assignee shall
acquire its interest subject to all of the duties and obligations
of Lessor under this Appendix 5.
9.2 To any foreclosure by a Fee Mortgagee but shall apply to
a subsequent sale or other disposition of the fee estate by the Fee
Mortgagee or by any other person acquiring title to the fee estate
by reason of the foreclosure of a Fee Mortgage.
10. Release of Rights. If Lessee fails or declines to exercise
its first refusal rights with respect to any proposed transfer of
the fee interest in the leased premises, then Lessee shall execute
a quitclaim deed or such other instrument as Lessor or its grantee
may reasonably request for the purpose of vesting good and
insurable title in the fee estate in the name of such grantee,
subject to the continuing rights of Lessee under this Exhibit L
with respect to subsequent conveyances of the fee.
<PAGE> 67
<TABLE>
EXHIBIT 11
SANTA BARBARA BANCORP & SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
For the Six-Month Periods Ended June 30,
1994 1993
Primary Fully Diluted Primary Fully Diluted
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding 5,065,462 5,065,462 5,190,198 5,190,198
Weighted Average Options Outstanding 537,456 537,456 472,530 472,530
Anti-dilution adjustment (1) 0 0 (165,652) (165,495)
Adjusted Options Outstanding 537,456 537,456 306,878 307,035
Equivalent Buyback Shares (2) (426,339) (381,895) (260,060) (257,669)
Total Equivalent Shares 111,117 155,561 46,818 49,366
Adjustment for Non-Qualified Tax Benefit (3) (45,558) (63,780) (19,195) (20,255)
Weighted Average Equivalent Shares Outstanding 65,559 91,781 27,623 29,111
Weighted Average Shares for Computation 5,131,021 5,157,243 5,217,821 5,219,309
Fair Market Value (4) 22.39 25.50 19.06 19.25
Net Income 3,517,155 3,517,155 3,299,277 3,299,277
Per Share Earnings 0.69 0.68 0.63 0.63
<FN>
(1)Options with exercise prices above fair market value are excluded because of their
anti-dilutive effect.
(2)The number of shares that could be purchased at fair market value from the
proceeds were the adjusted options outstanding to be exercised.
(3)The Company receives a tax benefit when non-qualified options are exercised equal to its tax
rate times the difference between the market value at the time of exercise and the exercise
price. The benefit is assumed available for purchase of additional outstanding shares.
(4)Fair market value for the computation is defined as the average market price during the
period for primary dilution, and the greater of that average or the end of period market price
for full dilution.
</TABLE>
<PAGE> 68
SIGNATURES
Pursuant to the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned
thereunto duly authorized:
SANTA BARBARA BANCORP
DATE: August 3, 1994 /s/ Kent M. Vining
Kent M. Vining
Senior Vice President
Chief Financial Officer
DATE: August 3, 1994 /s/ Donald Lafler
Donald Lafler
Vice President
Principal Accounting Officer
