UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
[ ] 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. 2-76003
BAY AREA BANCSHARES
(Exact name of registrant as specified in its charter)
California 94-2779021
(State or other jurisdiction of IRS Employer
incorporation or organization) (Identification No.)
900 Veterans Boulevard, Redwood City, CA 94063
(Address of principal executive office (Zip Code)
(415) 367-1600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. YES X NO Aggregate market value of the voting stock held by
non-affiliates of the Registrant at March 15, 1996: $ 7,447,000 .
Number of shares of Common Stock outstanding at March 15, 1996: 832,138
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE>
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 2. Properties 33
Item 3. Legal Proceedings 34
*-
Item 4. Submission of Matters to a Vote of Security
Holders 34
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 34
Item 6. Selected Financial Data 36
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 37
Item 8. Financial Statements and Supplementary Data 41
Item 9. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 41
PART III
Item 10. Directors and Executive Officers of the
Registrant 42
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial
Owners and Management 48
Item 13. Certain Relationships and Related
Transactions 51
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 53
SIGNATURE __
<PAGE>
PART I
Item 1. Business.
(a) General
Bay Area Bancshares, formerly known as Area Financial Corp (the
"Company"), is a California corporation and bank holding company which was
incorporated on October 22, 1981. Bay Area Bank (the "Bank") was organized as a
California banking corporation in 1979 and, through a reorganization in 1982,
became a wholly owned subsidiary of the Company. The Bank is the only active
entity affiliated with the Company. It is a full service commercial bank
primarily serving Redwood City and San Carlos, California.
(b) Executive Officers of the Registrant.
Mr. Robert R. Haight, 67, has served as the Company's President and Chief
Executive Officer since May, 1991. Mr. Haight is a director of the Company and
the Bank. He is the owner and founder of Woodside Road Insurance Company in
Redwood City. Mr. Haight graduated from the University of California at Berkeley
in 1952.
Mr. John O. Brooks, 55, began his position as President/Chief Executive
Officer and Director of Bay Area Bank and Chief Operating Officer of Bay Area
Bancshares on November 2, 1992. In 1995 he was elected to also serve as a
director of Bay Area Bancshares. He has 32 years of experience in the banking
industry. From 1990 to 1992, he was President and CEO of Heritage Oaks Bank in
Paso Robles. From 1987 to 1990, he was President/CEO at the Bank of Pleasanton
and from 1980 to 1987 he held the same position at Foothill Bank in Mountain
View, Ca. Mr. Brooks is currently involved in local Rotary groups, serves on the
Boards of Directors of the Sequoia YMCA, Peninsula Outreach Programs, IBAA State
Chapter, and is a member of the Community Bankers Association, American Bankers
Association, and the honor society, Beta Gamma Sigma.
Mr. Anthony Gould, 34, has been with Bay Area Bank since 1988. He
currently serves as the Chief Financial Officer of the Company and Senior Vice
President and Chief Financial Officer of the Bank. Prior to his employment at
the Bank, Mr. Gould was Controller of Old Stone Bank of California and an
auditor at Deloitte and Touche, Certified Public Accountants, in Minneapolis,
Minnesota. He successfully completed the uniform Certified Public Accountant's
Examination in 1988. Mr. Gould received his MBA in Finance from Cal
State-Hayward in 1992 and a BA in Business Administration from The University of
Wisconsin - Eau Claire in 1984.
Frank M. Bartaldo, Jr., 47, has been with Bay Area Bank since 1986. He
currently serves as Executive Vice President and Senior Banking Officer of the
Bank. In February 1996, Mr. Bartaldo was elected to serve as a director of the
company's sole subsidiary, Bay Area Bank. Before his employment at Bay Area
Bank, Mr. Bartaldo was a partner in a mortgage banking business and prior to
that he was employed for eight years at Wells Fargo Bank. Mr. Bartaldo received
his BS in Business Administration from California State University at Chico in
1971.
Peter J. Altieri, 58, was appointed Senior Vice President/Senior Credit
Officer of Bay Area Bank effective April 1, 1994. Prior to his employment with
the Bank, Mr. Altieri was Vice President (Loans) of WestCal National Bank in San
Mateo. From 1985 to 1992, he was Senior Vice President, Credit Administration
with The Financial Center Bank in San Francisco. Mr. Altieri obtained a BA
Degree from the University of California at Berkeley and has attended the
National Installment Banking School in Boulder Colorado and Barclays Bank
Management School in London.
1
<PAGE>
(c) Bay Area Bank - Company Subsidiary.
General Banking Services
The Bank provides a wide range of commercial banking services to
individuals, professionals and small to medium-sized businesses. The services
provided include those typically offered by commercial banks, such as:
interest-bearing and noninterest-bearing checking accounts, savings and time
deposit accounts, business and personal loans, collection services, safe
depository facilities, funds transfers, the issuance of money orders, cashiers
checks, and the sale of travelers' checks. The Bank also operates a network of
off-site Automated Teller Machines (ATMs), and a Mortgage Department, which
sells the loans it originates in the secondary mortgage market.
The Bank does not generally provide international banking or trust
services but has arranged for its correspondent banks to offer those and other
services to its customers.
Individuals and small to medium-sized businesses form the core of the
Bank's customer and deposit base. In order to attract these types of customers,
the Bank offers extensive personalized contact, specialized services and banking
convenience, including extended banking hours.
The Bank is not a member of the Federal Reserve System. However, the
deposits of each of its depositors are insured up to $100,000 by the Bank
Insurance Fund which is managed by the Federal Deposit Insurance Corporation
(the "FDIC").
The Bank's business is not seasonal with the exception of ATM revenues
which are highest in the summer months.
Existing Locations
The Bank conducts business from its principal office located at 900
Veterans Boulevard, Redwood City, California. One other location in Redwood City
houses the Bank's data processing and accounting activities. See "Item
2-Properties". The Bank also operates 55 (as of December 31, 1995) automated
teller machines (ATMs) at 35 additional locations in California.
Deposits
Most of the Bank's deposits are obtained from individuals,
professionals and small to medium-sized businesses. As of December 31, 1995, the
Bank had a total of 5,027 accounts consisting of 1,339 noninterest-bearing
demand deposit (checking) accounts with an average balance of approximately
$17,176 each; 2,733 savings, interest-bearing demand, and money market accounts
with an average balance of approximately $16,413 each; and 955 certificates of
deposit, IRAs and Keoghs with an average balance of approximately $16,885. See
"Description of Business - Selected Statistical Information - Deposits and Time
Deposits."
The Bank has a corporate customer whose total deposit relationship
comprised approximately 7% of the Bank's total deposit balances at 12/31/95.
This customer has never borrowed from the Bank. Bank management believes that
the deposit relationship is stable. Given the Bank's ability to raise cash
through taking on additional deposits, using its available credit facilities,
and the sale of liquid assets, the loss of any one or a few depositors would not
have a material adverse effect on the business of the Bank.
2
<PAGE>
Lending Activities
The Bank concentrates its lending activities primarily in four areas:
1) business loans, 2) short-term real estate loans, with a particular emphasis
on providing loans to small to medium-sized businesses, 3) construction lending
and 4) consumer/installment loans. As of December 31, 1995 these four loan
categories accounted for approximately 29%, 46%, 18% and 7%, respectively, of
the Bank's gross loan portfolio. The interest rates charged for the various
loans made by the Bank vary with the degree of risk and size and maturity of the
loans involved and are generally affected by competition, governmental
regulation and current money market rates. As of December 31, 1995 the Bank had
gross loans outstanding of $60,725,000 and undisbursed loan commitments for
$24,347,000.
For borrowers desiring loans in excess of the Bank's lending limits,
the Bank may make such loans on a participation basis with its correspondent
banks taking the amount of the loans which are in excess of the Bank's lending
limits. In other cases, the Bank may refer such borrowers to larger banks or
lending institutions.
The Bank's business activity is primarily with customers located within
San Mateo County. Although management of the Bank attempts to keep the loan
portfolio diversified, a significant portion of the loan portfolio is dependent
upon the real estate economic sector. If the local real estate sector were to
experience a substantial economic decline, it could have a material detrimental
effect on the performance of the Bank's loans.
In an effort to dilute the potential effect of such an event, the Bank
has several precautionary measures in place. Generally, the Bank's loans are
secured by real estate, stock or other assets. Loans are based on the borrowers'
established integrity, historical cash flow, and their willingness and ability
to perform on commitments. The Bank's policy is to protect the soundness of the
loan and to secure it with collateral where deemed necessary. In the event of
loan default, the Bank's means of recovery is through collection efforts and
judicial procedures. For most loans, the Bank is required by law to obtain an
appraisal of collateral to determine the adequacy of security. Loans secured by
real estate generally do not exceed 80% of appraised market value at the time of
origination.
The Bank does not normally make long-term fixed rate loans to be held
to maturity. Approximately 80% of the loans in the portfolio were originated as
adjustable rate loans. The most frequently used index to determine adjustments
is the prime rate as published in The Wall Street Journal. Other indexes used
are the six month treasury bill rate and an internal bank base rate. Most of
these loans are subject to adjustment on a monthly, quarterly, semi-annual or
annual basis. The Bank typically holds the loans originated, in the normal
lending activities listed above, to maturity.
Mortgage Banking Services
The Bank also originates certain mortgage products through its Mortgage
Department, which began operations in March 1993, with the intent to sell them
in the secondary market. The Mortgage Department typically originates loans
secured by first and second deeds of trust on one to four family real estate,
with loan to collateral value ratios of up to 90% and up to a 30 year maturity.
Loans which do not meet the Bank's loan portfolio underwriting criteria are
typically funded with a commitment in place to sell the loans.
3
<PAGE>
During 1995, the Mortgage Department funded approximately $31.9 million
in loans, sold approximately $31.4 million in loans and generated $946,000 in
gross revenue. The department contributed $22,700 ( after elimination of a
profit on loans sold to the bank of $91,900) to Bank pretax income after
allocation of all overhead costs. Due to the service intensive nature of the
mortgage lending industry, the largest component of the Mortgage Department's
expense was salaries and benefits, which was $483,300 or 58% of total expense.
In addition, $134,000 of costs were allocated to the department from the Bank.
These costs included $104,000 of internal charges for the use of funds, and
$30,000 in administrative support. At December 31, 1995, there was approximately
$772,000 in loans held for sale that were originated through the Mortgage
Department. Income from the Mortgage Department is volatile, as demand from
investors or purchasers of the mortgage products varies and profit margins on
loans sold may decrease if demand decreases. The Company is prepared to reduce
Mortgage Department expenses if there is a prolonged period of lower revenues in
the future.
Electronic Funds Services
In 1993, the Bank started an Electronic Funds Transfer (EFT) Department
with the goal of increasing service fee income primarily by establishing a
network of off-site automatic teller machines (ATMs). As of December 31, 1995
the Bank had 55 machines in 35 various locations in California, including
tourist centers, horse racing tracks, truck stops and shopping centers. As of
December 31, 1995, the Bank's investment in ATMs and related equipment was
$1,233,000. This equipment had a book value (cost less accumulated depreciation)
of approximately $708,000 at December 31, 1995. The average cash outstanding in
the machines throughout 1995 was $2.6 million. The Bank enters into individual
agreements with the owner of each site to place the machine; the Bank does not
own these premises.
The Bank receives revenue from each transaction based on a service
contract negotiated with the management at each site. During 1995, ATM service
fee income was $1,084,000 and ATM interchange and other income was $423,900.
Total revenue from the EFT department was $1,507,900. Total expense for the
department was $1,369,100 bringing the EFT department's contribution to pretax
income for the year to $138,800. These figures include approximately $164,600 in
costs allocated to the department from the Bank, including $152,600 in internal
charges for the use of funds, and $12,000 in administrative support. Another
main component of expense was $251,700 in first line and second line
maintenance, which is the cost of servicing these machines by a third party
(i.e. adding money, clearing paper jams, etc.). The Bank expects to continue
increasing the number of machines in service and to generate greater transaction
levels in 1996, with the intent to increase the profitability of the EFT
department. Income from the EFT Department may be reduced or may not increase as
expected if state or federal regulations are enacted, limiting the ability of
the Bank to place more ATMs in service , or limiting the charges the Bank may
collect from the use of those ATMs.
Correspondent Banks
The Bank's primary correspondent banking relationship is with First
Interstate Bank, Los Angeles(which is in the process of being acquired by Wells
Fargo Bank, N.A. San Francisco). The Bank also has accounts with The Bank of
California, Bank of America, The Federal Reserve Bank of San Francisco, Citibank
of Nevada, and First USA Bank. These relationships are a result of the Bank's
efforts to obtain a wide range of services for the Bank and its customers. The
Bank does not expect correspondent bank activities with First Interstate Bank to
change as a result of the pending acquisition of First Interstate Bank by Wells
Fargo Bank.
4
<PAGE>
The Bank is also a member of the Federal Home Loan Bank of San
Francisco (FHLB). The Bank has purchased $273,300 of FHLB stock, which typically
pays quarterly dividends at approximately the 90 day treasury bill yield. The
Bank sought membership to the FHLB primarily to access the intermediate and long
term credit the FHLB offers.
The Bank may borrow up to 25% of its assets subject to collateral and
additional FHLB stock purchase requirements. Borrowing is limited to seven times
the Bank's FHLB stock holdings ($1,913,000). Borrowings in excess of that amount
require the purchase of FHLB stock at a ratio of one dollar of stock for every
seven dollars of excess borrowing. The additional stock above the original
$250,000 purchase may be retired as the debt is repaid. During 1995, the Bank
did not have any credit advances from the FHLB.
The Bank does not currently serve, nor does it have plans to serve, as
a correspondent to other banks.
Employees
As of March 15, 1996, the Bank employed 46 full-time employees, including 15
Bank officers, 10 commissioned Mortgage Department sales people, and 8 part-time
employees. As of March 15, 1996, the Company employed no full-time or part-time
employees. The Bank pays a salary to Mr. Brooks and Mr. Gould and the Bank was
reimbursed $12,000 by the Company in 1995 for administrative services rendered
by Mr. Brooks, Mr. Gould and the Bank's accounting staff. Mr. Haight receives
remuneration for his services through Director fees. See "Business - Executive
Officers of the Registrant".
(d) Selected Statistical Information
The following tables present certain consolidated statistical
information concerning the business of the Company and its subsidiary (the
Bank). This information should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations at Item
7, herein, and the consolidated financial statements and the notes thereto
included in the Company's 1995 Financial Statements, herein, at Item 8.
5
<PAGE>
Distribution of Average Assets, Liabilities and Shareholders' Equity
The following table sets forth the distribution of consolidated average
assets, liabilities and shareholders' equity for the years ended December 31,
1995 and 1994. Average balances have been computed using daily balances.
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/95 12/31/94
Average Average
Balance Percent Balance Percent
(000's) of Total (000's) of Total
<S> <C> <C> <C> <C>
ASSETS
Cash and Due From Banks $9,277 10.9% $9,468 11.8%
Interest-Bearing Deposits With Other Banks 110 0.1 165 0.2
Taxable Investment Securities 9,432 11.1 8,398 10.4
Non-Taxable Investment Securities 1,612 1.9 1,676 2.1
Federal Funds Sold 9,460 11.2 5,926 7.4
Loans, Net1 50,874 60.0 51,809 64.3
Loans Held for Sale 1,748 2.1 678 0.8
Premises & Equipment, Net 974 1.1 595 0.7
Real Estate Owned 0 0.0 580 0.7
Other Assets & Accrued Int. Receivable 1,353 1.6 1,249 1.6
----- --- ----- ---
Total Assets $84,840 100.0% $80,544 100.0%
======= ====== ======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest-Bearing Transaction Accounts $36,567 43.1% $34,350 42.7%
Demand 20,613 24.3 19,818 24.6
Savings 4,504 5.3 2,894 3.6
Time 15,049 17.7 16,315 20.3
------ ---- ------ ----
Total Deposit 76,733 90.4 73,377 91.2
Notes Payable & Debentures 0 0 104 0.1
Other Liabilities & Accrued Interest 582 0.7 433 0.5
Shareholders' Equity 7,525 8.9 6,630 8.2
----- ---
Total Liabilities & Shareholders' Equity $84,840 100.0% $80,544 100.0%
====== ====== ======= ======
- --------------------
<FN>
1 Average loans include nonaccrual loans and are net of the allowance for loan losses.
</FN>
</TABLE>
6
<PAGE>
Interest Rates and Differentials
The following table sets forth information concerning interest-earning
assets and interest-bearing liabilities, and respective average yields or rates,
the amount of interest income or interest expense, the net interest margin and
net interest spread.
<TABLE>
<CAPTION>
Year Ended December 31, 1995
Interest
Average Income/ Average
Balance Expense Yield/
(000's) (000's) Rate
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest-Bearing Deposits With Other Banks $110 $6 5.5%
Taxable Investment Securities 9,432 581 6.2
Non-Taxable Investment Securities 1,612 70 4.3
Federal Funds Sold 9,460 558 5.9
Loans (Net of loan loss allowance)2,3 50,874 6,088 12.0
Loans Held for Sale 1,748 204 11.7
----- --- ----
Total Interest-Earning Assets $73,236 $7,507 10.3%
INTEREST-BEARING LIABILITIES
Deposits:
Interest-Bearing Transaction Accounts $36,567 $1,263 3.5%
Savings 4,504 202 4.5
Time 15,049 758 5.0
------ --- ----
Total Interest-Bearing Liabilities $56,120 $2,223 4.0%
====== ===== ====
Net Interest Income and Margin4 $5,284 7.2%
===== ====
Net Interest Spread5 6.3%
====
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1994
Interest
Average Income/ Average
Balance Expense Yield/
(000's) (000's) Rate
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest-Bearing Deposits With Other Banks $165 $8 4.9%
Taxable Investment Securities 8,398 518 6.2
Non-Taxable Investment Securities 1,676 73 4.3
Federal Funds Sold 5,926 243 4.1
Loans (Net of loan loss allowance)2,3 51,809 5,411 10.4
Loans Held for Sale 678 111 16.4
--- --- ----
Total Interest-Earning Assets $68,652 $6,363 9.3%
====== ===== ===
INTEREST-BEARING LIABILITIES
Deposits:
Interest-Bearing Transaction Accounts $34,350 903 2.6%
Savings 2,894 85 2.9
Time 16,315 594 3.6
Notes Payable and Debentures 104 10 9.7
--- -- ---
Total Interest-Bearing Liabilities $53,663 $1,589 3.0%
====== ===== ===
Net Interest Income and Margin4 $4,774 7.0%
===== ===
Net Interest Spread5 6.3%
===
- ---------------
<FN>
1 Yields on non-taxable investment securities are not tax adjusted.
2 Average loans include nonaccrual loans and are net of allowances for possible loan losses.
3 Loan interest income includes loan fees of $431,900 and $381,800 in 1995 and 1994, respectively.
4 Net interest margin is computed by dividing net interest income by total average interest-earning assets.
5 Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on
interest-bearing liabilities.
</FN>
</TABLE>
7
<PAGE>
Rate and Volume Variances
The following tables set forth, for the periods indicated, a summary of
the changes in interest earned and interest paid resulting from changes in
average asset and liability balances (volume) and changes in average interest
rates. The change in interest, due to both rate and volume, has been allocated
to change due to volume and rate in proportion to the relationship of absolute
dollar amounts in each.
(Note: Some totals may not foot or agree to financial statements or Management's
Discussion by immaterial amounts due to averaging and rounding.)
<TABLE>
<CAPTION>
Year Ended December 31, 1995
Compared to 1994
Volume Rate Total
(000's) (000's) (000's)
INCREASE (DECREASE) IN INTEREST INCOME
<S> <C> <C> <C>
Interest-Bearing Deposits With Other Banks $(3) $1 $(2)
Taxable Investment Securities 64 0 64
Non-Taxable Investment Securities (3) 0 (3)
Federal Funds Sold 145 170 315
Loans (98) 775 677
Loans Held for Sale 176 (83) 93
--- ---- --
Total $281 $863 $1,144
INCREASE (DECREASE) IN INTEREST EXPENSE
Interest-Bearing Transaction Accounts $58 $302 $360
Savings Deposits 47 70 117
Time Deposits (46) 212 166
Notes Payable and Debentures (10) 0 (10)
---- - ----
Total $49 $584 $633
Change in Net Interest Income $233 $278 $511
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1994
Compared to 1993
Volume Rate Total
(000's) (000's) (000's)
INCREASE (DECREASE) IN INTEREST INCOME
<S> <C> <C> <C>
Interest-Bearing Deposits With Other Banks $(7) $1 $(6)
Taxable Investment Securities 55 (67) (12)
Non-Taxable Investment Securities 5 2 7
Federal Funds Sold 78 62 140
Loans (48) 231 182
Loans Held for Sale (1) 70 69
--- ----- ----
Total $82 $299 $380
== ==== ===
INCREASE (DECREASE) IN INTEREST EXPENSE
Interest-Bearing Transaction Accounts $64 $51 $115
Savings Deposits 2 13 15
Time Deposits 22 11 33
Notes Payable and Debentures (9) 2 (7)
-- - -
Total $79 $77 $155
== == ===
Change in Net Interest Income $3 $222 $225
== ==== ====
</TABLE>
8
<PAGE>
GAP Table
The following table shows the Company's interest sensitive assets and
liabilities based on respective maturity dates or earliest repricing
opportunities (whichever is earliest) as of December 31, 1995 (in thousands of
dollars). Non accrual loans of $470,100 are excluded from the table below. Loans
held for sale of $772,000 are included below at their stated maturity/repricing
date. Adjustable rate loans which have reached an interest rate floor or ceiling
are considered fixed rate loans in accordance with FDIC accounting guidelines.
<TABLE>
<CAPTION>
3 Months 3 to 6 6 Months 1 Year More than
ASSETS or Less Months to 1 Year to 5 Years 5 Years Total
------- ------ --------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Fed Funds Sold $9,800 $0 $0 $0 $0 $9,800
CD Investments 103 0 0 0 0 103
Investments 502 1,000 757 10,985 0 13,244
Gross Loans 23,965 15,293 10,196 8,360 3,213 61,027
------ ------ ------ ----- ----- ------
Total (A) $34,370 $16,293 $10,953 $19,345 $3,213 $84,174
====== ======= ======= ======= ====== =======
LIABILITIES
Money Market & Savings $44,856 $0 $0 $0 $0 $44,856
Time Deposits 7,848 3,448 2,621 2,208 0 16,125
Notes Payable 0 0 0 0 0 0
---------- --------- --------- --------- --- ----------
Total (B) $52,704 $3,448 $2,621 $2,208 $0 $60,981
======= ====== ====== ====== == =======
GAP (A) - (B) ($18,334) $12,845 $8,332 $17,137 $3,213 $23,193
========= ======= ====== ======= ====== =======
GAP / (A) % -53.34% 78.84% 76.07% 88.59% 100.00% 27.55%
====== ===== ===== ===== ====== =====
Cumulative Gap ($18,334) ($5,489) $2,843 $19,980 $23,193 $23,193
========= ======== ====== ======= ======= =======
Cumulative Gap % -53.34% -10.83% 4.61% 24.68% 27.55% 27.55%
====== ====== ==== ===== ===== =====
</TABLE>
The table shows the Company had approximately $61.6 million dollars in
assets and $58.8 million in liabilities which mature or can reprice during 1996.
This indicates a cumulative one year GAP position of approximately 4.6% of one
year assets. Because $2.8 million more assets than liabilities can mature or
reprice in 1996, the Company was slightly asset sensitive at December 31, 1995
(i.e., net interest margin will most likely expand when rates rise and compress
if rates fall).
Historically, the Company has maintained a strong net interest margin
as compared to the overall banking industry. The Company manages its net
interest rate margin by using defensive strategies such as extending the
maturity or repricing of new liability fundings or shortening the maturity or
repricing of new assets fundings. In addition, the Company has had success in
recent years in growing demand deposits, which do not pay interest, thus
lowering the cost of funds and exposure to rising rates.
The Company's net interest margin (net interest income divided by
average earning assets, see Item 1 "Business, Interest Rates and Differentials")
was 7.2% in 1995, 7.0% in 1994 and 6.9% in 1993. The Company uses a computer
software program which goes beyond a simple GAP analysis in its asset and
liability management and measurement of interest rate exposure. This software
quantifies and estimates the speed that different indexes and rates move
relative to each other as well as the effect of interest rate "ceilings and
floors." It also estimates the repricing speed that will most likely occur in
the Company's deposit portfolio. This information is used as an indicator of the
Company's real interest rate risk position, and to determine the pricing of
loans and deposits, as well as to make investment decisions.
9
<PAGE>
Management believes that declining rates may compress the Company's net
interest margin in 1996 but the effect may be mitigated by growth in the
Company's balance sheet and by the use of defensive strategies described above.
Investment Portfolio
The investment portfolio is used primarily for investment income and
secondarily to provide a source of liquidity to the Company through the sale and
maturity of securities and through pledging of securities to secure borrowings.
The investments purchased are readily marketable and have a stated or expected
maturity of five years or less so as to reduce the impact on the portfolio's
value when changes in interest rates occur in the marketplace.
In 1995, the Company held $3,111,000 million in U.S. Treasury and
Mortgage backed Securities, with a carrying value of approximately $3,101,000 at
December 31, 1995, as "Available for Sale" pursuant to Financial Accounting
Standard Board Statement No. 115 (SFAS No. 115). The Company's intent is to hold
the remainder of the instruments until maturity and management believes that the
Company has the ability to do so. The FASB allowed companies to revisit the
designations of their "held to maturity" and "available for sale" securities in
the fourth quarter of 1995. In December of 1995, the Company elected to transfer
a security from its held to maturity portfolio to its available for sale
portfolio in anticipation that it may be sold prior to maturity. The security
had an amortized cost of $595,000 and an unrealized loss of $13,000 at the time
of transfer.
During 1995, the Company sold a security with a par value of $500,000 from its
"available for sale" portfolio. As a result of this transaction, the Company
realized a loss of $16,000. The Company did not sell any securities in 1994.
The total investment portfolio at December 31, 1995 and 1994 had an
average expected maturity of approximately 2.1 and 2.4 years, respectively.
Expected maturity differs from actual maturity in the case of mortgage-backed
securities due to the possibility of the loans being paid-off or refinanced
before the maturity date.
At December 31, 1995, the Company's total investment portfolio (which
includes both available for sale and held to maturity securities) had a net
unrealized gain of $146,000 (or 1.1% of the total portfolio), while on December
31, 1994 there was a $381,000 net unrealized loss (3.8%of the total portfolio).
The unrealized gain at December 31, 1995 was comprised of a $136,000 net
unrealized gain in the Investment Securities Held to Maturity and a $10,000 gain
in the Investment Securities Available for Sale. The unrealized loss at December
31, 1994 was comprised of a $305,000 net unrealized loss in the Investment
Securities Held to Maturity and a $76,000 loss in the Investment Securities
Available for Sale. The increase in the market value of the portfolio was a
result of declining interest rates in the bond market in 1995, which increased
the relative market value of the Company's fixed rate bond portfolio.
The Company has purchased municipal securities since June 1991 in an
effort to lower the Company's effective tax rate. The Company held municipal
securities with an amortized cost of $1,582,000 at December 31, 1995. The
Company's effective tax rate was 40.9% in 1995, 40.2% in 1994 and 40.5% in 1993.
10
<PAGE>
The amortized cost and market value of the portfolio of investment
securities as of December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
INVESTMENT SECURITIES HELD TO MATURITY
December 31, 1995
Amortized Market Unrealized
Cost Value Gain(Loss)
(000's) (000's) (000's)
<S> <C> <C> <C>
U.S. Treasury and Securities of
Other Government Agencies and Corporations $4,046 $4,082 $36
States of the U.S. and Political Subdivisions 1,582 1,584 2
Mortgage Backed Securities 4,505 4,603 98
----- ----- --
Total $10,133 $10,269 $136
====== ====== ===
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
Amortized Market Unrealized
Cost Value Gain(Loss)
(000's) (000's) (000's)
<S> <C> <C> <C>
U.S. Treasury and Securities of
Other Government Agencies and Corporations $4,574 $4,458 ($116)
States of the U.S. and Political Subdivisions 1,586 1,539 (47)
Mortgage Backed Securities 2,267 2,125 (142)
----- ----- -----
Total $8,427 $8,122 ($305)
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT SECURITIES AVAILABLE FOR SALE
December 31, 1995
Amortized Market Unrealized
Cost Value Gain(Loss)
(000's) (000's) (000's)
<S> <C> <C> <C>
U.S. Treasury Securities $2,507 $2,516 $9
Mortgage Backed Securities 594 595 1
--- --- -
Total $3,101 $3,111 $10
===== ===== ==
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
Amortized Market Unrealized
Cost Value Gain(Loss)
(000's) (000's) (000's)
<S> <C> <C> <C>
U.S. Treasury Securities $1,515 $1,439 $(76)
===== ===== ====
</TABLE>
11
<PAGE>
The following table is a summary of the relative maturities and
weighted average yields of investment securities as of December 31, 1995. Yields
on securities have been calculated by dividing interest income, adjusted for
amortization of premium and accretion of discount, by the amortized cost of the
related securities. Yields on municipal securities are calculated on a tax
equivalent basis using a tax rate of 40%.
<TABLE>
<CAPTION>
INVESTMENT SECURITIES HELD TO MATURITY
U.S. Treasury States of
and Securities of the U.S. and Mortgage
Other Government Political Backed
Agencies & Corporations Subdivisions Securities
Maturing in One Year or Less
<S> <C> <C> <C> <C>
Amount (000's) $1,253 $400 $501
Yield 5.24% 6.75% 6.98%
Maturing After One but Within
Five Years
Amount (000's) $2,520 $1,182 $4,004
Yield 5.93% 6.74% 7.43%
Maturing After Five but Within
Ten Years
Amount (000's) $0 $0 $0
Yield -- -- --
</TABLE>
<TABLE>
<CAPTION>
EQUITY SECURITIES*
U.S. Treasury States of
and Securities of the U.S. and Mortgage
Other Government Political Backed
Agencies & Corporations Subdivisions Securities
<S> <C> <C> <C>
Amount (000's) $273 -- --
Yield* 4.88% -- --
<FN>
* Equity Securities consist of Federal Home Loan Bank stock.
</FN>
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT SECURITIES AVAILABLE FOR SALE
U.S. Treasury States of
and Securities of the U.S. and Mortgage
Other Government Political Backed
Agencies & Corporations Subdivisions Securities
<S> <C> <C> <C>
Maturing in One Year or Less
Amount (000's) $505 -- --
Yield 5.98%
Maturing After One but Within
Five Years $2,002 -- $594
Yield 5.79% 5.91%
</TABLE>
12
<PAGE>
Loan Portfolio
The following table shows the composition of loans by type of loan or
borrower as of December 31, 1995 and 1994:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
(000's) (000's)
<S> <C> <C>
Commercial and Financial $17,390 $15,668
Real Estate--Construction 10,849 6,856
Real Estate--Mortgage 27,962 26,446
Installment Loans to Individuals 4,524 4,552
----- -----
Total $60,725 $53,522
Less:
Reserve for Possible Loan Losses 1,516 1,505
----- -----
Loans Held to Maturity--Net $59,209 $52,017
====== ======
Loans Held for Sale $772 $327
=== ===
</TABLE>
Total portfolio loans (excludes loans held for sale), net of reserves,
increased $7.2 million from $52.0 million at December 31, 1994 to $59.2 million
at December 31, 1995. This increase in the portfolio occurred primarily in the
fourth quarter. Portfolio loans averaged $50.9 million in 1995 a decrease of
$900,000 in comparison to average portfolio loans of $51.8 million in 1994.
The Company's market area is primarily suburban and within commuting
distance of downtown San Francisco and San Jose. Housing prices in the San
Francisco Bay Area escalated rapidly in the late 1980's, creating demand for
more affordable new home construction. The housing market slump beginning in
1990 has resulted in decreased demand and decreasing property values that
continued through 1994 but which management believes property values have begun
to stabilize in 1995.
Commercial and financial lending is typically to professional
corporations and companies with sales from $1 million to $10 million. Commercial
revolving lines of credit are made for short-term working capital purposes and
are normally secured by business assets. The Company evaluates these lines based
upon the borrower's ability to service the debt through its business trade
cycles. Business term loans are granted for expansion or equipment acquisition.
These loans are typically repaid within five years and are granted after
evaluation of the borrowers' ability to service the debt through its business
operations.
The Company's real estate construction loans are primarily for single
family residences and commercial properties under $2 million located within San
Mateo and Santa Clara counties. Loans are made to developers with a successful
history of developing projects in the Company's market area. Loan to value
ratios on construction loans depend upon the nature of the property, whether the
property is residential or commercial and whether or not it is to be owner
occupied. Typically, for residential construction loans, whether built to be
owner-occupied or not, the Company's policy is to require that the loan-to-value
ratio be no more than 70% and that the borrower have no less than a 50% equity
interest in the land. With respect to commercial construction loans, the Company
typically requires that the loan not exceed 65% of the value of the property
based on capitalization of projected net income.
13
<PAGE>
The Company's policy is to maintain an interest reserve for the life of
a construction loan, or verify adequate cash reserves or income sources to
service the loan. Progress payment disbursements are made upon receipt of lien
waivers, or after analysis of the project's progress by a Construction Loan
Officer. The construction lending officers for the loan also make unannounced
visits to the site. Construction loan balances averaged $8.5 million in 1995
compared to $6.3 million in 1994, an increase of 35%. There were no loan losses
or transfers to real estate owned from construction loans in 1995 or 1994.
The Company generally does not make first deed of trust, one to four
family real estate loans to be held in portfolio. However, in the event that
such a loan is made, the loan amount will generally not exceed 75% of the
current market value of the collateral on owner occupied properties. For
non-owner occupied first deed of trust, one to four family real estate loans,
the Company requires that the loan-to-value ratio be no more than 70%. Fixed
rate loans of this type have a maturity of five years or less. Loans with annual
or more frequent rate adjustment periods have a maximum maturity of fifteen
years. Loan amortizations do not exceed twenty-five years.
The Company originates loans for sale in the secondary market that are
secured by first and second deeds of trust on one to four family real estate,
with loan to collateral value ratios of up to 90% and up to a 30 year maturity,
through its Mortgage Department, which began operations in 1993. See discussion
of the Mortgage Banking Services at Item 1.c.
Included in installment loans to individuals are home equity lines of
credit which are secured primarily by second trust deeds on single family
residences. The Company requires a loan-to-value ratio of no more than 75% for
home equity loans. Rates adjust annually and terms do not exceed fifteen years.
The Company offers new and used direct automobile financing. Automobile loan
terms do not exceed five years for new vehicles, with shorter terms for used
cars depending on the age of the vehicle. Loans are made for up to 90% of the
wholesale value for used autos and 80% of purchase price, including tax and
license, on new vehicles. The Company originates and funds all of its automobile
loans directly and does not engage in indirect automobile financing or the
purchase of loans from auto dealers and other third party sources. Automobile
loans are included in the installment loan category.
The Company had standby letter of credit commitments aggregating
$101,000 and $235,000 at December 31, 1995 and December 31, 1994, respectively.
In addition, the Company had commitments to grant $6.7 million in real estate
construction loans, $14.3 million in commercial loans, $1.0 million in consumer
loans and $2.3 million in other real estate loans at December 31, 1995.
Loan Concentrations
The Company held $17.4 million, or 29% of the Company's total loans, in
Commercial and Financial loans at December 31, 1995. Since a majority of these
loans are to businesses in the San Mateo county area, a major economic recession
in that area could have a significant and detrimental impact on the Company.
There were also $28.0 million or 46% of its total loans in real estate
mortgage loans. These loans are generally secured by first deeds of trust on
commercial properties and are due in five years or less.
At December 31, 1995, approximately $10.8 million or 18% of the
Company's total loans consisted of real estate construction loans. In addition,
as discussed above, undisbursed construction loan commitments totalled $6.7
million.
14
<PAGE>
The Company is subject to the fluctuations of the California housing
market generally and specifically in the San Mateo and Santa Clara County areas.
The Company's construction lending business is subject to, among other things,
the volatility of interest rates, real estate prices in the Company's service
area and market availability of conventional real estate financing to repay such
construction loans since the Company does not usually require take-out
commitments. General economic conditions and, more specifically, changes in real
estate values in California and the San Mateo and Santa Clara County areas could
have an impact on the repayment of construction and conventional real estate
loans. There can be no assurance that builders or developers will find buyers
for the types of properties being constructed at prices which will insure
repayment to the Company. A significant decline in real estate values and/or the
demand for housing in California or in the San Mateo and Santa Clara County
areas could have a material adverse impact on the financial condition of the
Bank.
Maturity Distribution and Interest Rate Sensitivity of Loans
The following tables show the estimated maturity distribution (in
thousands of dollars) of the Company's loan portfolio, as of December 31, 1995.
The timing of payments is based on the final maturity of the loans, rather than
amortization schedules. Loans held for sale of approximately $772,000 are
included. Non accrual loans of $470,100 are excluded from the table below.
Adjustable rate loans which have reached an interest rate floor or ceiling are
considered fixed rate loans in accordance with FDIC accounting guidelines.
<TABLE>
<CAPTION>
<S> <C>
Commercial Loans:
Loans with a Remaining Maturity of:
One Year or Less $4,547
Over One Year to Five Years 7,241
Over Five Years 5,602
-----
Total $17,390
Construction Loans
Loans with a Remaining Maturity of:
One Year or Less 10,849
Over One Year to Five Years _
Over Five Years _
Total $10,849
=======
Real Estate, Installment and Other
Loans with a Remaining Maturity of:
One Year or Less $10,969
Over One Year to Five Years 10,354
Over Five Years 11,935
------
Total $33,258
=======
Grand Total $61,497
Total Loans Due in One Year or More
Fixed Rate Loans with a Remaining Maturity of:
Over One Year to Five Years $8,360
Over Five Years 3,213
-----
Total Fixed Rate loans due in One Year or More $11.573
=======
Variable Rate Loans with a Repricing Frequency Of:
Annually or more frequently, but less frequently than quarterly $23,559
Total Variable Rate Loans due in One Year or More $23,559
Total Loans due in One Year or More $35,132
=======
</TABLE>
15
<PAGE>
Nonaccrual, Past Due and Restructured Loans
The following table shows the amount of loans classified as nonaccrual,
90 days or more past due as to principal and/or interest and restructured (as
defined in Statement of Financial Accounting Standards 15) as of December 31,
1995 and 1994:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
(000's) (000's)
<S> <C> <C>
Nonaccrual Loans $470 $200
Accruing Loans Past Due 90
Days or More 25 0
Restructured Loans 0 0
----- -----
Total $495 $200
=== ===
</TABLE>
At December 31, 1995 and 1994, the Company carried an unsecured loan
(with a principal balance of $156,100 at December 31, 1995) on nonaccrual
status. The borrower has maintained current interest payments since the loan was
originally made. The Company, however, is not recognizing these payments as
interest income at this time. Despite making principal reductions of $343,900 on
the original loan of $500,000, the borrower has not met the original schedule of
principal reductions, and the Bank is not recognizing interest income and has
been applying all payments to principal. If the borrower continues to make
regular payments the bank will most likely recognize the deferred interest
income (approximately $83,600 at December 31, 1995) after all principal has been
retired. This loan is currently being modified and its risk of default has been
considered by management in determining the year-end loan loss reserve of
$1,516,000.
There were seven loans totaling $339,000 past due 90 days or more at
December 31, 1995. There were no loans past due 90 days or more at December 31,
1994. There were five loans totaling $821,000 past due 90 days or more at
December 31, 1993. Loans past due 30 days or more but less than 90 days at
December 31, 1995, 1994 and 1993, totalled $509,200, $636,000 and $508,600,
respectively.
Loans are generally placed on a nonaccrual status and any accrued but
unpaid interest income is typically reversed and charged against income when
payment of interest or principal on the loan is 90 or more days past due. The
interest accrued through 90 days may not be reversed when a loan is placed on
nonaccrual status if, in the opinion of management, the collateral is sufficient
to support the principal, accrued interest and any other liens, and the loan is
in the process of collection. Real estate and consumer loans which are well
secured by residential property or highly marketable collateral and which are in
the process of collection, or if other circumstances exist which would justify
the treatment of the loan as fully collectible, may be excepted for limited
periods. Additionally, loans are placed on nonaccrual if classified doubtful or
if full and timely collection becomes uncertain. Loans in the nonaccrual
category are treated as nonaccrual loans even though the Company may ultimately
recover all or a portion of the interest due. The classification of a loan as a
nonaccrual loan is not necessarily indicative of a potential charge-off. The
Company believes its procedures for administering and reviewing its loan
portfolio are effective in identifying loans where significant problems exist.
16
<PAGE>
Restructured loans reflect situations where, due to the inability of
the borrower to comply with the original terms of the loan, the terms have been
modified, usually with an extension in maturity. These loans may reflect accrual
of interest at a reduced rate. The Company's policy is to place restructured
loans on nonaccrual status until such time as management determines the
restructured loan's performance warrants the recognition of interest on an
accrual basis. The Company may also change the terms of a loan in return for
additional consideration from the borrower such as additional collateral,
accelerated payment terms or principal reductions. In such cases if Company
management feels the Company's position has substantially improved from the
terms of the original note, the loan will not be classified as restructured.
Interest income on loans on nonaccrual status during the year ended
December 31, 1995, that would have been recognized in that year if the loans had
been current in accordance with their original terms, totalled $43,000.
There were no loans, other than those discussed above, as of December
31, 1995, where known information about possible credit problems of borrowers
caused management to have serious doubts as to the ability of the borrowers to
comply with the existing loan repayment terms. The Company adopted Financial
Accounting Standards Board Statement No. 114 (SFAS No. 114), Accounting by
Creditors for Impairment of a Loan, effective January 1, 1995. As a result of
applying the new rules, certain impaired loans, generally non-accrual loans, are
reported at the present value of expected future cash flows using the loan's
effective interest rate, or as a practical expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. The valuation allowance for impaired loans at December 31, 1995 under
SFAS No. 114 was $185,000 which is included in the Company's allowance for
possible loan losses.
Summary of Loan Loss Experience
Inherent in the lending function is the fact that loan losses will be
experienced and the risk of loss will vary with each type of loan made and the
credit worthiness of the borrower over the term of the loan. To reflect the
currently perceived risks of loss associated with its loan portfolio, additions
are made to the Company's allowance for possible loan losses. The Company's
allowance has been created by direct charges against operations through the
provision for loan losses.
The allowance for possible loan losses is based upon actual loan losses
incurred, recoveries of previously charged off loans and other factors which, in
management's judgment, deserve recognition in estimating possible loan losses,
including credit risks associated with specific loans as determined by
management and regulatory agencies, the historical relationship between
charge-offs and the level of the allowance, the amount of past due and
non-performing loans and prevailing economic conditions. In determining the
actual allowance for possible loan losses to be maintained and in revising risk
category assignments from time to time, management also considers the comments
of a third party loan review consultant hired by the Company on a quarterly
basis. Thus, the actual calculation of the adequacy of the allowance is
augmented by an analysis of the present and prospective financial condition of
certain borrowers, industry concentrations within the portfolio and general
economic conditions.
The above factors used by management are essentially judgmental. After
reviewing these factors, management has established the allowance at $1,516,000
or 2.5% of total gross loans at December 31, 1995. There can be no assurance
that in any given period the Company might not sustain charge-offs which are
substantial in relation to the size of the allowance. Loans are charged to the
allowance for possible loan losses when a loss is considered probable. It is the
policy of management to make additions from earnings to the allowance in
relation to anticipated loan
17
<PAGE>
charge-offs and the inherent risk given the portfolio's composition. The
continuing evaluation of the loan portfolio and assessment of current economic
conditions will dictate future allowance levels.
An analysis of the reserve for loan losses for the fiscal years ending
December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
(000's) (000's)
Allowance for possible loan losses--January 1 $1,505 $1,006
<S> <C> <C>
Loans Charged Off:
Commercial and Financial (213) 0
Real Estate--Construction 0 0
Real Estate--Mortgage 0 0
Installment Loans to Individuals (20) (3)
---- --
Total Loans Charged Off (233) (3)
Recoveries:
Commercial and Financial 33 202
Real Estate--Construction 0 0
Real Estate--Mortgage 0 0
Installment Loans to Individuals 1 0
- -
Total Recoveries 34 202
-- ---
(Charge-Offs) Net Loan Recoveries (199) 199
Provision for Possible Loan Losses 210 300
--- ---
Allowance for Possible Loan Losses--December 31 $1,516 $1,505
===== =====
(Charge-Offs) Net Recoveries as a Percentage of
Average Outstanding Loans (.36)% .38%
Allowance For Possible Loan Losses as a
Percentage of Gross Loans at Year End 2.50% 2.80%
Allowance For Possible Loan Losses as a
Percentage of Non-Performing Loans 323% 753%
Non-Performing Loans as a Percentage of
Gross Loans at Year End .76% .37%
Non-Performing Assets as a Percentage of
Total Assets at Year End .50% .25%
Loans:
Average Gross Loans Outstanding During Year $54,539 $52,487
Total Gross Loans at End of Year $60,725 $53,849
</TABLE>
As illustrated in the table above, loan charge-offs exceeded recoveries
by $199,000 in 1995 while loan recoveries exceeded charge-offs by $199,000 in
1994.
18
<PAGE>
Management has a reporting system that monitors past due loans and has
adopted policies to pursue its creditor's rights in order to preserve the
Company's position. The primary risk elements considered by management with
respect to each installment and conventional real estate loan is lack of timely
payment and the value of the collateral. The primary risk elements considered by
management with respect to real estate construction loans are fluctuations in
real estate values in the Company's market areas, fluctuations in interest
rates, the availability of conventional financing, the demand for housing in the
Company's market areas, and general economic conditions. (See "Loan Portfolio"
and "Loan Concentrations," above.) The primary risk elements with respect to
commercial loans are the financial condition of the borrower, general economic
conditions in the borrower's market area, the sufficiency of collateral, the
timeliness of payment, and, with respect to adjustable rate loans, interest rate
fluctuations. Management has a policy of requesting and reviewing annual
financial statements from its commercial loan customers and periodically reviews
the existence of collateral and its value. As indicated by the table above,
commercial loans have been the largest category of loans charged-off in the last
two years.
While it is the Company's policy to charge off in the current period
those loans where a loss is considered probable, there also exists the risk of
future losses which cannot be precisely quantified or attributed to particular
loans or classes of loans. Because this risk is continually changing in response
to factors beyond the control of the Company, such as the state of the economy,
management's decisions as to the level of the provision are necessarily
approximate. At December 31, 1995 commercial loans comprised approximately 29%
of gross loans, real estate mortgage loans were 46%, real estate construction
loans were 18% and installment and other loans were 7%. At December 31, 1994,
commercial loans comprised approximately 29% of gross loans, real estate
mortgage loans were 49%, real estate construction loans were 13% and installment
and other loans were 9%. The allowance for possible loan losses at December 31,
1995 of $1,516,000 could be allocated approximately as follows: commercial
loans, $750,000; real estate mortgage, $300,000; real estate construction,
$350,000; and installment loans, $116,000. The allowance for possible loan
losses at December 31, 1994 of $1,505,000 can be allocated approximately as
follows: commercial loans, $700,000; real estate mortgage, $350,000; real estate
construction, $350,000; and installment loans, $105,000.
The allowance for possible loan losses is maintained without any
internal allocation to the segments of the loan portfolio. The above information
is being presented in accordance with the Securities and Exchange Commission's
requirements to provide an allocation of the allowance. The allocation is based
on the subjective estimates that take into account historical loss experience
and management's current assessments of the relative risk characteristics of the
portfolio as of the reporting date noted above and as described more fully under
the section "Summary of Loan Loss Experience".
Among other factors, any loans classified for regulatory purposes as
either substandard, doubtful or loss are considered when determining the
adequacy of the allowance for possible loan losses. Management believes that
these loans do not represent or result from trends or uncertainties which are
reasonably expected to materially impact future operating results, liquidity or
capital resources of the Company or the Bank.
In assessing adequacy of the allowance for possible loan losses,
management relies predominantly on its ongoing review of the loan portfolio,
which is undertaken both to ascertain whether there are probable losses which
must be charged off and to assess the risk characteristics of the portfolio in
the aggregate.
19
<PAGE>
Real Estate Owned
At December 31, 1995 and 1994, the Company had no real estate owned
("REO").
Deposits
The following table reflects average balances and the average rates
paid for the major categories of deposits for the years ended December 31, 1995
and 1994:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 Average 1995 1994 Average 1994
Balance Average Balance Average
(000's) Rate (000's) Rate
<S> <C> <C> <C> <C>
Non-interest bearing demand deposits $20,613 --% $19,818 --%
Interest bearing transaction accounts 36,567 3.5% 34,350 2.6%
Savings Deposits 4,504 4.5% 2,894 2.9%
Time Deposits 15,049 5.0% 16,315 3.6%
------ ------
Total Deposits $76,733 2.90% $73,377 2.2%
====== ======
</TABLE>
Time Deposits
The following table sets forth, by time remaining to maturity, the
domestic time deposits in amounts of $100,000 or more at December 31, 1995.
<TABLE>
<CAPTION>
December 31,
1995
Time Deposits Maturing In (000's)
<S> <C>
Three months or less $3,214
Over three through six months 1,696
Over six through twelve months 1,132
Over twelve months 1,808
-----
Total $7,850
</TABLE>
20
<PAGE>
Selected Financial Ratios
The following table sets forth certain financial ratios for the periods
indicated (averages are computed using monthly figures):
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
<S> <C> <C>
Net income to:
Average total assets 1.43% 1.18%
Average shareholders' equity 16.09% 14.28%
*Cash dividend payments to:
Net income 19.90% 19.85%
Average shareholders' equity 3.20% 2.84%
Common Stock Dividend per share to:
Primary earnings per share 21.17% 21.10%
Fully Diluted earnings per share 22.14% 21.10%
Average shareholders' equity to:
Average total assets 8.87% 8.23%
<FN>
* Includes both common stock and preferred stock cash dividends
</FN>
</TABLE>
(e) Competition
The Company's primary market area consists of the entire city of
Redwood City and portions of Menlo Park, Woodside and San Carlos. The banking
business in California generally, and specifically in the Company's primary
market area, is highly competitive with respect to both loans and deposits. The
business is dominated by a relatively small number of major banks which have
many offices operating over wide geographic areas. Many of the major commercial
banks offer certain services (such as international, trust and securities
brokerage services) which are not offered directly by the Company. By virtue of
their greater total capitalization, such banks have substantially higher lending
limits than the Company and substantial advertising and promotional budgets.
However, smaller independent financial institutions also represent a
competitive force. To illustrate the Company's relative market share, total
deposits in financial institutions in Redwood City, California ( the Bank's
primary market place) at December 31, 1995 approximated $1.95 billion. This
market is allocated approximately as follows: Banks 35%, Savings and Loans 23%
and Credit Unions 42%. The Company's deposits at December 31, 1995 represent
approximately 4.3% of total deposits and approximately 12% of bank deposits.
To compete with major financial institutions in its service area, the
Company relies upon specialized services, responsive handling of customer needs,
local promotional activity, and personal contacts by its officers, directors and
staff, as opposed to large multibranch banks, most of which compete primarily
through interest rates and location of branches. For customers whose loan
demands exceed the Company's lending limits, the Company seeks to arrange for
such loans on a participation basis with its correspondent banks or other
independent commercial banks. The Company also assists customers requiring
services not offered by the Company to obtain such services from its
correspondent banks.
21
<PAGE>
In the past, an independent bank's principal competitors for deposits
and loans have been other banks (particularly major banks), savings and loan
associations and credit unions. To a lesser extent, competition was also
provided by thrift and loans, mortgage brokerage companies and insurance
companies. Other institutions, such as brokerage houses, credit card companies,
and even retail establishments have offered new investment vehicles, such as
money market funds, which also compete with banks for deposit business. The
direction of federal legislation in recent years seems to favor competition
between different types of financial institutions and to foster new entrants
into the financial services market, and it is anticipated that this trend will
continue. While the impact of these changes cannot be predicted with certainty,
it is clear that the business of banking in California will remain highly
competitive.
(f) Supervision and Regulation
Bank Holding Company Regulation
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956 and is subject to the supervision of the Board of Governors
of the Federal Reserve System ("Board"). As a bank holding company, the Company
must obtain the approval of the Board before it may acquire all or substantially
all of the assets of any bank, or ownership or control of the voting shares of
any bank if, after giving effect to such acquisition of shares, the Company
would own or control more than 5% of the voting shares of such bank. With
certain limited exceptions, the Company is prohibited from engaging in or
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company engaged in non-banking activities, unless the Federal
Reserve Board determines that such activities are so closely related to banking
as to be a proper incident thereof.
The Company and any subsidiary which it may acquire or organize in the
future are deemed to be affiliates of the Bank within the meaning set forth in
the Federal Reserve Act. This means, for example, that there are limitations on
loans by the Bank to affiliates, on investments by the Bank in any affiliate's
stock and on the Bank's taking any affiliate's stock as collateral for loans to
any borrower. All affiliate transactions must satisfy certain limitations and
otherwise be on terms and conditions that are consistent with safe and sound
banking practices. In this regard, the Bank generally may not purchase from any
affiliate a low-quality asset (as that term is defined in the Federal Reserve
Act). Also, transactions by the Bank with an affiliate must be on substantially
the same terms as would be available for non-affiliates.
The Company and its subsidiary are also subject to certain restrictions
with respect to engaging in the underwriting, public sale and distribution of
securities.
The Company and the Bank are prohibited from engaging in certain tie-in
arrangements in connection with the extension of credit. For example, the Bank
generally may not extend credit on the condition that the customer obtain some
additional service from the Bank or the Company, or refrain from obtaining such
service from a competitor.
Dividends Payable by the Company
Holders of Common Stock of the Company are entitled to receive
dividends as and when declared by the Board of Directors out of funds legally
available therefor under the laws of the State of California. Under California
law, the Company is prohibited from paying dividends unless: (a) the amount of
its retained earnings immediately prior to the dividend payment equals or
exceeds the amount of the dividend; or (b) immediately after giving effect to
the dividend (i) the sum of its assets
22
<PAGE>
would be at least equal to 125 percent of its liabilities and (ii) its current
assets would be at least equal to its current liabilities, or, if the average of
its earnings before taxes on income and before interest expense for the two
preceding fiscal years was less than the average of its interest expense for the
two preceding fiscal years, at least equal to 125 percent of its current
liabilities.
The Board of Governors has advised bank holding companies that it
believes that payment of cash dividends in excess of current earnings from
operations is inappropriate and may be cause for supervisory action. As a result
of this policy, banks and their holding companies may find it difficult to pay
dividends out of retained earnings from historical periods prior to the most
recent fiscal year or to take advantage of earnings generated by extraordinary
items such as sales of buildings or other large assets in order to generate
profits to enable payment of future dividends. Further, the Board of Governors'
position that holding companies are expected to provide a source of managerial
and financial strength to their subsidiary banks potentially restricts a bank
holding company's ability to pay dividends.
The Company's ability to pay dividends on its Common Stock is dependent
upon its separate liquidity needs. See Item 7 - "Management's Discussion and
Analysis of Financial Condition." In that regard, Federal and state statutes,
regulations and policies impose restrictions on the payment of management fees
and cash dividends by the Bank to the Company. Information regarding the
Company's cash dividend payment history can be found at Part II, Item 5 "Market
for Registrant's Common Stock and Related Stockholder Matters." The Company's
Board of Directors will examine the earnings, financial position and cash flows
of the Company on a quarterly basis to determine the propriety of future
dividend payments to shareholders.
Bank Regulation
The Bank is subject to regulation, supervision and regular examination
by the California Superintendent of Banks (the "Superintendent"). The deposits
of the Bank are insured up to the maximum legal limits by the Bank Insurance
Fund, which is managed by the Federal Deposit Insurance Corporation ("FDIC"),
and the Bank is therefore subject to applicable provisions of the Federal
Deposit Insurance Act, and is also subject to regulation, supervision and
regular examination by the FDIC. The regulations of these agencies affect most
aspects of the Bank's business and prescribe permissible types of loans and
investments, the amount of required reserves, requirements for branch offices,
the permissible scope of the Bank's activities and various other requirements.
While the Bank is not a member of the Federal Reserve System, it is nevertheless
also subject to certain regulations of the Board of Governors dealing primarily
with check clearing activities, establishment of banking reserves, Truth in
Lending (Regulation Z), Equal Credit Opportunity (Regulation B) and Truth in
Savings (Regulation DD).
Supervision and Examinations
Federal law mandates frequent examinations of all banks, with the costs
of examinations to be assessed against the bank being examined. In the case of
the Bank, its primary Federal regulator is the FDIC. The Federal banking
regulatory agencies have substantial enforcement powers over the depository
institutions that they regulate. Civil and criminal penalties may be imposed on
such institutions and persons associated with those institutions for violations
of any law or regulation. The penalties can be up to $ 5,000 per day that a
violation continues when the violation is unintentional, or up to $1 million per
day that a violation continues when the violation is willful. The amount of the
penalty also depends on whether the violation is part of a pattern or causes a
loss to the financial institution.
23
<PAGE>
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") places limits on brokered deposits and extends the limits to any bank
that is not "well capitalized" or is notified that it is in "troubled
condition." Previously, the limitations applied only to troubled banks. A
well-capitalized institution (which generally includes an institution that is
considered well capitalized for purposes of the prompt corrective action
regulations discussed below) may still accept brokered deposits without
restriction, unless it has been informed by its appropriate Federal regulatory
agency that it is in "troubled condition." All other insured depository
institutions are prohibited from accepting brokered deposits unless a waiver is
obtained from the FDIC. If a waiver is obtained, the interest paid on such
deposits may not exceed the rate paid for deposits in its normal market area, or
the national rate as determined in the FDIC's regulation.
If a depository institution solicits deposits by offering interest
rates significantly higher than rates being offered in its market area, it is
deemed under FDICIA to be a deposit broker. Therefore, depending on its capital
category, it may be prohibited from such practice, or need a prior waiver from
the FDIC in order to offer such rates. The FDIC's regulations specify that an
institution that is not well capitalized may offer rates that exceed the
prevailing effective rates offered in the normal market area only if the
institution obtains a waiver, but the institution may not offer rates more than
75 basis points above such prevailing rates.
The Bank is at this time considered well capitalized and not in a
"troubled condition," and it is not, therefore, subject to the brokered-deposit
limitations. If the Bank's status changes in the future, these regulations could
restrict the ability to attract such deposits.
Risk-Based Deposit Insurance Assessments
In addition, FDICIA required the FDIC to develop and implement a system
to account for risks attributable to different categories and concentrations of
assets and liabilities in assessing deposit insurance premiums. The FDIC adopted
a risk-assessment system effective January 1, 1994. Under this system, each
bank's deposit insurance premium assessment is calculated based on the level of
risk that the Bank Insurance Fund will incur a loss if that bank fails and the
amount of the loss if such failure occurs. This requirement, along with the
increased emphasis on exceeding capital measures, may cause banks to adjust
their asset mix in order to affect their deposit insurance premium and their
ability to engage in activities.
Dividends Payable by the Bank to the Company
The Bank is a legal entity which is separate and distinct from the
Company. Aside from raising capital on its own or borrowing funds for operating
capital, it is anticipated that the Company may receive additional income
through dividends paid by, and management fees charged to, the Bank. Subject to
the regulatory restrictions described below, future cash dividends by the Bank
will depend upon management's assessment of future capital requirements,
contractual restrictions and other factors.
The power of the Board of Directors of a California chartered
commercial bank to declare a cash dividend is subject to California law, which
restricts the amount available for cash dividends to the lesser of the retained
earnings or the bank's net income for its last three fiscal years (less any
distributions to shareholders made during such period). Where the above test is
not met, cash dividends may still be paid, with the prior approval of the
Superintendent, in an amount not exceeding the greatest of (1) the retained
earnings of the bank; (2) the net income of the bank for its last fiscal year;
or (3) the net income of the bank for its current fiscal year. On December 31,
1995, the Bank was legally able to pay dividends.
24
<PAGE>
Under the Federal Deposit Insurance Act, bank regulators also have
authority to prohibit a bank from engaging in business practices which are
considered to be unsafe or unsound. It is possible, depending upon the financial
condition of the bank in question and other factors, that such regulators could
assert that the payment of dividends or other payments might under certain
circumstances be an unsafe or unsound practice, even if technically permissible.
California Law. The activities of the Bank are also regulated by state
law. State law, for example, regulates certain loans to any officer of the Bank,
directly or indirectly, or to any related corporation in which such officer is a
stockholder, director, officer or employee.
California law permits California state-chartered banks to invest in
the stock and equity securities of other corporations, to engage directly in or
invest directly in subsidiaries which conduct real estate related activities
(including property management and real estate appraisal), and to participate in
management consulting and data processing services for third parties. FDICIA
limits the powers, including investment authority and subsidiaries, of state
banks to those activities that are either permitted to national banks, or
activities that the FDIC finds do not pose a significant risk to the deposit
insurance fund. As a result, state chartered banks in California may no longer
engage in certain activities, such as real estate investment, that might
otherwise be permitted under California law.
California law was amended effective January 1, 1996 to permit the
California Superintendent of Banks the authority to give state-chartered banks
the powers and rights that national banks have, even if those powers and rights
are inconsistent with state law. The legislation also corrected several
technical areas where California state-chartered banks were subject to more
cumbersome or onerous regulatory requirements than national banks. It is
generally expected that this legislation will reduce the disadvantage to
state-chartered banks that arose under FDICIA, but the extent depends on whether
the Superintendent adopts regulations to give to state-chartered banks the
powers and rights that national banks have.
Capital Regulations
The Federal Reserve Board requires bank holding companies to maintain
adequate capital and has adopted capital leverage guidelines for evaluating the
capital adequacy of bank holding companies. The FDIC has also adopted a similar
minimum leverage regulation, requiring insured banks to maintain at least a
minimum capital to asset ratio. The Board's guidelines and the FDIC's
regulations require the banks and bank holding companies subject to them to
achieve and maintain a Tier 1 capital to total asset ratio of at least three
percent (3.0%) to five percent (5.0%), depending on the condition and rate of
growth of the bank or holding company. Tier 1 or core capital is defined to
consist primarily of common equity, retained earnings, and certain qualified
perpetual preferred stock. These minimum leverage ratio requirements limit the
ability of the banking industry, including the Bank, to leverage assets.
The Board also uses risk-based capital guidelines to evaluate the
capital adequacy of member banks and bank holding companies. Under these
guidelines, assets are categorized according to risk and the various categories
are assigned risk weightings. Assets considered to present less risk than others
require allocation of less capital. In addition, off-balance sheet and
contingent liabilities and commitments must be categorized and included as
assets for this purpose. Under these guidelines, when the Company's total assets
equal or exceed $150 million it will be required to maintain total capital of at
least 8.00% of risk-adjusted assets, and half of that minimum total capital must
consist of Tier 1 capital as defined above. For bank holding companies with less
than $150 million in total assets, the Board reviews the capital adequacy of the
subsidiary bank of the holding company, instead of the consolidated entity.
25
<PAGE>
The FDIC requires insured banks to maintain capital in proportion to
risk-adjusted assets under capital guidelines that are similar to the Federal
Reserve's risk-based capital guidelines. At this time, the Bank is required to
maintain total capital of at least 8.00% of risk-adjusted assets.
The capital totals of the Bank as of December 31, 1995 and 1994
exceeded the amounts of capital required under the regulatory guidelines at
those times. The following table shows the capital of the Bank, as a percentage
of assets, and the capital that it is required to maintain under the capital
regulations, as of December 31, 1995 and 1994:
26
<PAGE>
RISK BASED CAPITAL COMPUTATION
(Note: Some totals may not foot or agree to financial statements or Management's
Discussion by immaterial amounts due to averaging calculations and rounding)
<TABLE>
<CAPTION>
Risk Weighted Weighted
Weighting Assets Assets
Adjustment 12/31/95 12/31/94
<S> <C> <C> <C>
Beginning Unadjusted Assets $93,815 $79,549
Less:
Fed. Reserve Balances 100% (310) (507)
Currency and Coin 100% (3,000) (3,245)
US Treasury Securities 100% (6,291) (4,752)
Time Deposits with Other Banks 80% (82) (158)
Agency and Municipals 80% (5,562) (4,090)
Federal Funds Sold 80% (7,840) (5,084)
Balances at U.S. Banks 80% (3,973) (3,723)
Loans Secured by Deposits 80% (344) (497)
1-4 Family 1st Deeds 50% (3,885) (1,320)
Plus Off Balance Sheet Items:
Letters of Credit 20% 20 47
Home Equity Lines 50% 1,158 1,238
Original Commitments Over 1 Year 50% 207 516
--- ---
Total Risk Weighted Assets $63,913 $57,974
====== ======
Tier 1 Capital
Common Stock $3,620 $3,620
Retained Earnings 4,425 3,343
Unrealized Loss on Securities Held For Sale 10 76
-- --
Total Tier 1 Capital $8,055 $7,039
===== =====
Tier 1 Capital/Risk Weighted Assets 12.60% 12.14%
====== ======
Tier 2 Capital
Tier 1 Capital $8,055 $7,039
Loan Allowances up to 1.25% of Risk Weighted Assets 799 725
--- ---
Total Tier 2 Capital $8,854 $7,764
===== =====
Tier 2 Capital/Risk Weighted Assets 13.85% 13.39%
====== ======
Leverage capital ratio 8.59% 8.85%
Required leverage capital ratio1 4.00% 4.00%
Total risk-based capital ratio 13.85% 13.39%
Required total risk-based capital ratio 8.00% 8.00%
Tier 1 risk-based capital ratio 12.60% 12.14%
Required tier 1 risk-based capital ratio 4.00% 4.00%
- -------------------
<FN>
1 Depending upon the FDIC's determination with respect to the Bank.
</FN>
</TABLE>
27
<PAGE>
The risk-based guidelines and the leverage ratio do not have a
significant effect on the Company and the Bank at this time because the Bank
meets its required ratios. The effect the requirements may have in the future is
uncertain, but management does not believe they will have an adverse effect on
the Company or the Bank. The risk-based capital guidelines may affect the
allocation of the Bank's assets between various types of loans and investments.
If the Bank continues to grow with its present asset composition, it may be
required to raise additional capital.
As required by FDICIA, the Federal banking agencies now take credit
risk concentrations and an individual institution's ability to manage such
concentrations into account when they assess a bank's capital adequacy.
Non-traditional investments and activities, such as the use of derivatives, are
also taken into account in assessing capital requirements. The agencies can
adjust the standards for risk-based capital on a case by case basis to take such
risks into account, but there is no formula that a bank can use prior to
evaluation by the agency to determine how credit concentration or nontraditional
activities will affect its capital requirements.
The banking agencies adopted amendments to the risk-based capital rules
in 1995 to take interest rate risk into account. Now, when the agencies assess
the capital adequacy of a bank, they must take into account the effect on that
bank's capital that would occur if interest rates moved up or down. The purpose
of the amendment is to ensure that banks with high levels of interest rate risk
have enough capital to cover the loss exposure.
The amendments to the capital rules do not specify how interest rate
risks will be measured. The agencies proposed a measurement framework in 1995 to
measure the interest rate risk to a particular bank. However, the agencies later
announced in December of 1995 that they need more time to analyze the risk
measurement proposal. It is not known whether the final measurement framework
will affect the Bank's capital requirements.
Prompt Corrective Action
FDICIA requires the banking agencies to take corrective action against
certain financial institutions, based upon the financial institutions'
compliance with the various capital measurements. A financial institution is
subject to corrective action if its total risk-based capital is less than 8%, or
its Tier 1 risk-based capital ratio or leverage ratio is less than 4%. In
addition, an institution having a total risk-based capital to assets ratio of
less than 10%, a Tier 1 risk-based ratio of less than 6%, or a leverage ratio of
less than 5% may be subject to corrective action if it receives a
less-than-satisfactory rating for assets, management, earnings or liquidity in
an examination or if such ratios fall significantly below such standards. These
corrective actions become increasingly more severe as an institution becomes
more and more undercapitalized. Ultimately, the federal regulator is required to
seize an institution within 90 days of its becoming "critically
undercapitalized," unless the regulator can document that another course of
action will better achieve the purposes of this section of the law.
As discussed above, the Bank has capital ratios in excess of all such
capital measurements, and is not subject to any corrective actions.
Impact of Monetary Policies
Banking is a business in which profitability depends on rate
differentials. In general, the difference between the interest rate received by
the Bank on loans extended to its customers and securities held in the Bank's
investment portfolio and the interest rate paid by the Bank on its deposits and
its other borrowings comprise the major portion of the Bank's earnings. To the
extent that the Bank is not able to compensate for increases in the cost of
deposits and other borrowings
28
<PAGE>
with greater income from loans, securities and fees, the net earnings of the
Bank will be reduced. The interest rates paid and received by the Bank are
highly sensitive to many factors which are beyond the control of the Bank,
including the influence of domestic and foreign economic conditions.
The business of the Bank is also affected by the Board's regulations,
which require the Bank to maintain cash reserve balances on transaction accounts
and non-personal time deposits at the Federal Reserve Bank. The average reserve
requirement for the Bank for the year ended December 31, 1995 was approximately
$569,000.
The earnings and growth of the Bank are also affected by the monetary
and fiscal policy of the United States and its agencies, particularly the Board.
These agencies can and do implement national monetary policy, which is used in
part to curb inflation and combat recession. Among the instruments of monetary
policy used by these agencies are open market transactions in United States
Government securities, changes in the discount rates of member bank borrowings
and changes in reserve requirements. The actions of the Board have had a
significant effect on lending by banks, investments and deposits, and such
actions are expected to continue to have a substantial effect in the future. The
nature and timing of any further changes in such polices and their impact on the
Bank cannot be predicted.
Environmental Regulation
Federal, state and local regulations regarding the discharge of
materials into the environment may have an impact on the Company and the Bank.
Under Federal law, liability for environmental damage and the cost of cleanup
may be imposed upon any person or entity who is an owner or operator of
contaminated property. State law provisions, which were modeled after Federal
law, impose substantially similar requirements. A resulting risk to the Company
and the Bank is the possibility that property securing a loan made by the Bank
may be environmentally impaired and not provide adequate security for the Bank.
In addition, these statutes subject the Bank to a risk that it might be
considered to be an owner or operator of such property and therefore liable for
the costs associated with cleaning up the environmental damage.
California law provides some protection against the first risk, by
establishing certain additional, alternative remedies for a lender in the
situation where the property securing a loan is later found to be
environmentally impaired. Primarily, the law permits the lender in such a case
to pursue remedies against the borrower other than foreclosure under the deed of
trust. Additional legislation is now pending in California to protect lenders
against the second risk, but there can be no assurance that such legislation
will be adopted.
The Environmental Protection Agency had adopted a rule that limited the
environmental clean-up liability of a lender with limited interest in and
control over contaminated property. In 1994, however, that rule was struck down
by the Federal courts, on the ground that the rule was not authorized by the
statutory law. In spite of this, the EPA has continued to follow the rule's
provisions in its enforcement policy. Although legislation to give lenders
similar protection is pending in Congress, there can be no assurance that it
will pass or that it will provide similar protection to lenders if it is
enacted.
Americans With Disabilities Act
The Americans With Disabilities Act ("ADA") enacted by Congress, in
conjunction with similar California legislation, is having an impact on banks
and their cost of doing business. The legislation requires employers with 15 of
more employees and all businesses operating "commercial facilities" or "public
accommodations" to accommodate disabled employees and customers. The ADA has
29
<PAGE>
two major objectives (1) to prevent discrimination against disabled job
applicants, job candidates and employees and (2) to provide disabled persons
with ready access to commercial facilities and public accommodations. Commercial
facilities, such as the Bank, must ensure all new facilities are accessible to
disabled persons, and in some instances may be required to adapt existing
facilities to make them accessible, such as ATMs and bank premises.
New and Pending Legislation
(a) Interstate Banking and Branching.
The Caldera, Weggeland and Killea California Interstate Banking and
Branching Act of 1995 ("Interstate Banking Act") became effective October 2,
1995. The Interstate Banking Act implements in California a limited form of
interstate branching. A bank from outside of California may now acquire a whole
bank in California and merge the California bank into the out-of-state bank. The
effect of such merger is that the out-of-state bank will have full branch
offices in California. Federal law authorizing these mergers was passed in 1994
and became effective September 30, 1995.
Out of state banks may not establish branch offices in California by
opening a new branch or acquiring one or more (but less than all) of the
branches of a California bank. They may only acquire a whole bank that has been
in existence for at least five years. As a result of the Interstate Banking Act,
California banks may now be permitted to branch into other states that have also
adopted early opt-in legislation.
There may be a gradual increase in the number of offices of foreign
banks in California, and a possible decrease in banks headquartered in
California, as such banks are acquired by out-of-state entities. It is too early
to predict the specific effect of the Interstate Banking Act on the Bank and its
particular market.
The Interstate Banking Act also authorizes California state-chartered
banks to appoint unaffiliated banks in other states to act as an agent of the
California state-chartered bank. The agent can accept deposits and evaluate loan
applications on behalf of the principal bank.
(b) New Community Reinvestment Act Regulations.
The Federal banking agencies amended substantially their Community
Reinvestment Act ("CRA") regulations in 1995. CRA requires banks to help meet
the credit needs of their entire communities, including minorities and low and
moderate income groups. Prior regulations required banks to adopt a CRA
statement and prove to the regulators that the bank has engaged in activities to
determine and meet the credit needs of minority and low and moderate income
groups. Those regulations had been criticized on the ground that regulatory
examinations to determine compliance focused on the processes a bank goes
through rather than the results of the effort or actual performance.
Under the revised CRA regulations, the agencies determine a bank's
rating under the CRA by evaluating its performance on lending, service and
investment tests, with the lending test as the most important. The tests are to
be applied in an "assessment context" that is developed by the agency for the
particular institution. The assessment context takes into account demographic
data about the community, the community's characteristics and needs, the
institution's capacities and constraints, the institution's product offerings
and business strategy, the institution's prior performance, and data on
similarly situated lenders. Since the assessment context is developed by
30
<PAGE>
the regulatory agencies, there is substantial concern that a particular bank
will not know until it is examined whether its CRA programs and efforts have
been sufficient.
Larger institutions are required under the revised regulations to
compile and report certain data on their lending activities in order to measure
performance. Some of this data is already required under other laws, such as the
Equal Credit Opportunity Act.
Small institutions (with less than $250 million in assets) will be
examined on a "streamlined assessment method". The streamlined method will focus
on the institution's loan to deposit ratio, degree of local lending, record of
lending to borrowers and neighborhoods of differing income levels, and record of
responding to complaints.
Large and small institutions have the option of being evaluated for CRA
purposes in relation to their own pre-approved strategic plan. Such a strategic
plan must be submitted to the institution's regulator three months before its
effective date and be published for public comment.
The Bank is considered a small institution, therefore it is not now
subject to the service and investment tests. Therefore, the initial impact of
this amendment on the business of the Bank will be less than the impact if the
Bank grows to more than $250 million in assets. At that time, the new
regulations will significantly increase the amount of reports the Bank is
required to prepare and submit, and it could cause the Bank to change its asset
mix, in order to meet the performance standards. In the meanwhile, the new
regulations will increase the uncertainty of the Bank's business as the rating
and examination procedures changes.
(c) The Private Securities Litigation Reform Act of 1995.
The Private Securities Litigation Reform Act of 1995 was enacted near
the end of 1995 to implement procedural protections to discourage frivolous
securities litigation. The Reform Act now requires certain specific pleadings to
be made in connection with litigation involving securities fraud, and limits
plaintiffs' rights of recovery against certain defendants. The Reform Act also
provides a legislative safe harbor against liability for the release of certain
"forward-looking" statements, such as projections.
This legislation should have several indirect effects on all publicly
held companies, including the Company and the Bank. First, such companies should
face less risk of being sued by investors over issues relating to disclosures
and/or stock price. Second, companies may find that it is now easier to obtain
the services of highly qualified persons to serve as officers and directors, as
this legislation should reduce the risks such individuals face of being named in
frivolous litigation. Finally, this should reduce, over time, insurance premiums
for director and liability insurance.
(d) Safety and Soundness Guidelines.
The Federal banking agencies issued final safety and soundness
guidelines in 1995, as required by FDICIA. The guidelines contain operational
and managerial standards and prohibit certain compensation practices. The effect
of the guidelines is to require on general standards of safe and sound business
and banking practices with respect to internal controls and information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure and compensation. The banking agencies have indicated that the
standards are the same as the agencies previously applied in their examinations
of institutions, so the adoption should not affect individual institutions that
comply with the regulations. If an agency determines that an institution is not
in compliance with the guidelines, the institution must submit a plan to come
into compliance to the regulator within 30 days of notification.
31
<PAGE>
In addition, the agencies re-proposed guidelines for asset quality and
earnings. If adopted, the proposal would set forth similar guidelines for
institutions in the areas of monitoring asset quality and the quality and
quantity of earnings that are similar to the operational and managerial
standards.
The effect of these guidelines on the Bank, as adopted and re-proposed,
depends on how they are implemented by the Bank's primary regulator, the Federal
Deposit Insurance Corporation. The Bank expects that the guidelines may increase
the Bank's cost of doing business, since it now must document its compliance
with all the requirements in the guidelines.
(e) Truth in Lending Act Amendments.
Amendments to the Truth in Lending Act were enacted in 1995. The
amendments increase the tolerances for errors and reduce the potential liability
of lenders for errors in disclosure. The legislation also places limitations on
borrowers' rights to rescind consumer credit transactions based on the
disclosures provided to the borrower by the lender. The amendments provide
relief to banks and other consumer lenders generally from some of the
uncertainty and potential liability that accompanies consumer lending.
(f) Reduced Deposit Insurance Premiums.
During 1995 the FDIC reduced substantially the deposit insurance
premiums paid by most banks. The Bank's premium was reduced, effective June 1,
1995, from 23 cents per $100 to 4 cents per $100 of insured deposits. The
premium assessment was further reduced for the first half of 1996 to zero cents
per $100 of insured deposits for most healthy banks, including the Bank. Banks
must still pay the legal minimum annual premium of $2,000. This has reduced and
will reduce the Bank's cost of doing business by the amount of the reductions.
The second reduction to the legal minimum premium has been criticized
substantially by other governmental representatives and quasi-governmental
groups, however, and there can be no assurance that the Bank will continue to
pay such a small deposit insurance premium.
(g) FDIC Compensation Guidelines.
In early 1996, the FDIC adopted a guideline limiting "golden parachute"
and indemnification payments by insured banks and their holding companies. The
new guidelines limit the ability of insured banks to structure compensation
packages and indemnification agreements, and may restrict banks' ability to
attract top quality executive officers and directors.
(h) Proposed Legislation and Regulation.
Certain legislative and regulatory proposals that could affect the
Company, the Bank and the banking business in general are pending or may be
introduced, before the United States Congress, the California State Legislature,
and Federal and state government agencies. The United States Congress is
considering numerous bills that could reform the banking laws substantially.
Bills are also pending that would reduce the banking industry's regulatory
burden, in areas such as Truth in Lending, Truth in Savings, and Real Estate
Settlement Procedures Act disclosure requirements, and in various reporting
requirements.
In addition, various legislative proposals to merge the Bank Insurance
Fund ("BIF") with the Savings Association Insurance Fund ("SAIF"), and to
address the current deposit insurance premium discrepancy between banks and
savings associations, are currently under consideration. Banks insured by the
BIF fund now pay substantially lower deposit insurance premiums than
32
<PAGE>
institutions insured by the SAIF fund. Should the funds be merged, the premiums
paid by banks such as the Bank may increase substantially, which would increase
the Bank's expenses.
Other proposals to permit banks to engage in related financial
services, and to permit other financial services companies to offer
banking-related services are pending and, if adopted, would increase competition
to the Bank.
It is not known to what extent, if any, these proposals will be enacted
and what effect such legislation would have on the structure, regulation and
competitive relationship of financial institutions. It is likely, however, that
many of these proposals would subject the Company and the Bank to increased
regulation, disclosure and reporting requirements and would increase competition
to the Bank and its cost of doing business.
In addition to pending legislative changes, the various banking
regulatory agencies frequently propose rules and regulations to implement and
enforce already existing legislation. It cannot be predicted whether or in what
form any such legislation or regulations will be enacted or the effect that such
legislation may have on the Bank's business.
Item 2. Properties
The Company's and the Bank's principal offices are located in a modern,
six-story building at 900 Veterans Boulevard, Redwood City, which provides
approximately 8,300 square feet of ground floor interior space. In June of 1995
the Bank executed a lease for 7.5 years (90 months) with a seven year option to
renew. The new lease was made at essentially the same terms as the previous
lease that was negotiated with a non-related party. The current monthly cost for
this space (which includes an allocation of certain operating expenses) is
approximately $21,052 per month or approximately $2.53 per square foot. The
rental amounts are subject to further adjustments annually based on the Consumer
Price Index and the allocation of property taxes and operating expenses. This
building was acquired in September of 1992 by Nine-C Corporation, which is owned
by Mr. James Burney, a major shareholder of the Company and a Director Emeritus
of the Company and the Bank.
In addition to the 8,300 square feet the Company leases for its primary
operations, an additional 2,100 square feet was leased in the same building in
1993 for the Bank's Mortgage Department. The current cost for this additional
space (which includes an allocation of certain operating expenses) is
approximately $3,989 per month or $1.88 per square foot. The lease expired in
December 1995 and was renewed for a three year period with a three year option
to renew. This lease is also subject to adjustment annually based on the
Consumer Price Index and the allocation of property taxes and operating
expenses.
The Company leases additional premises for its data processing,
accounting and centralized operations departments in Redwood City. These
premises are located in a building owned by Mr. Alan Miller, a major shareholder
and Director Emeritus of the Company and the Bank. The lease covers total space
of approximately 5,200 square feet. On May of 1991, the Company executed a three
year lease with Mr. Alan Miller, which was later extended to June 30, 1996. The
current monthly cost under the lease (which includes an allocation and
adjustments for certain operating expenses) is $4,750 per month, or $.91 per
square foot. The monthly rent payment is subject to annual adjustment based on
the cost of living index as published by the U.S. Department of Labor, Bureau of
Labor Statistics. In addition to monthly rent payments, the Company is also
responsible for operating expenses (i.e., taxes, utilities, insurance,
landscaping, security) of the building based on the Company's proportionate
share of the building's square footage (29%).
33
<PAGE>
The Company's leases were reviewed by management and the Board of
Directors and found to be equitable and competitive with other leases within the
immediate market area.
The Company owns leasehold improvements and furniture, fixtures and
equipment located at the above locations, all of which are used in the banking
business.
Item 3. Legal Proceedings.
As of December 31, 1995, neither the Company nor the Bank was a party
to, nor is any of their property the subject of, any material pending legal
proceedings, nor are any such proceedings known to be contemplated by
governmental authorities. At the same date, the Company and the Bank were
involved as plaintiffs in ordinary routine litigation incidental to their
business and not considered financially material.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted, through the solicitation of proxies or
otherwise, to a vote of security holders during the fourth quarter of the fiscal
year covered by this Form 10-K.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.
The Company's Common Stock is not listed on any exchange nor is it
listed on the NASDAQ system. U.S. Stock Transfer Corporation acts as transfer
agent and registrar for trades. Hoeffer & Arnett, Inc., Sutro & Company, and Van
Kasper and Company handle transactions in the Company's stock. At March 15, 1996
the Company had approximately 380 shareholders of common stock.
The following table indicates the range of high and low bid prices, not
including broker's commissions, for the periods shown, based upon information
provided by Hoeffer & Arnett, Inc., Van Kasper and Company, and Sutro & Company.
The table does not include transactions made privately by individuals.
<TABLE>
<CAPTION>
Bid Prices of the Company's Common Stock
Approximate
Quarter Ended High Low Trading Volume
- ------------- ---- --- --------------
<S> <C> <C> <C>
March 31, 1994 $6.50 $5.75 13,100
June 30, 1994 7.50 6.25 53,300
September 30, 1994 7.50 7.00 99,400
December 31, 1994 7.38 7.00 35,300
March 31, 1995 $7.50 $6.75 80,400
June 30, 1995 7.75 7.25 33,200
September 30, 1995 11.50 9.75 9,300
December 31, 1995 12.37 10.88 11,200
</TABLE>
34
<PAGE>
The following table sets forth the Company's cash dividend history from
1991 to the date this report is filed.
<TABLE>
<CAPTION>
Cash Dividends on the Company's Common Stock
Date Declared Date Paid Amount/Share
<S> <C> <C> <C>
Common stock November 19, 1991 December 11, 1991 $.05
March 17, 1992 April 8, 1992 $.05
June 16, 1992 July 8, 1992 $.05
September 15, 1992 October 7, 1992 $.05
December 15, 1992 December 23, 1992 $.05
March 16, 1993 April 9, 1993 $.05
June 15, 1993 July 9, 1993 $.05
September 21, 1993 October 15, 1993 $.05
November 16, 1993 December 17, 1993 $.05
March 15, 1994 April 8, 1994 $.05
June 21, 1994 July 15, 1994 $.06
September 20, 1994 October 14, 1994 $.06
November 15, 1994 December 16, 1994 $.06
March 31, 1995 April 7, 1995 $.07
June 30, 1995 July 7, 1995 $.07
October 6, 1995 October 13, 1995 $.07
December 29, 1995 January 5, 1996 $.08
March 19, 1996 April 5, 1996* $.08
<FN>
* Expected payment date.
</FN>
</TABLE>
Continuation of future cash dividend payments by the Company is
contingent upon the Board of Directors' assessment of the Company's current
financial position as well as their expectation of future results. The Board
also considers, among other factors, the current capital position of both the
Company and the Bank as well as the need for cash and capital in the future.
For a discussion of the legal and other restrictions on the Company's
ability to pay dividends, see "(f) Supervision and Regulation --Bank Holding
Company Regulation-Dividends Payable by the Company" and "Bank Regulation" under
the heading "Item 1. Business" above.
35
<PAGE>
Item 6. Selected Financial Data.
The selected consolidated financial information for the Company and
its subsidiaries presented below for the five years ended December 31, 1995
should be read in conjunction with the Company's consolidated financial
statements and the notes thereto which are included in the Annual Report on this
Form 10-K.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest Income $7,507,300 $6,362,534 $5,983,105 $6,310,286 $7,115,359
Interest Expense 2,223,451 1,589,395 1,434,085 2,014,902 3,024,235
--------- --------- --------- --------- ---------
Net Interest Income 5,283,849 4,773,139 4,549,020 4,295,384 4,091,124
Provision for Loan Losses 210,000 300,000 420,000 450,000 185,000
Other Income 2,531,684 1,832,447 692,405 311,996 340,985
Other Expenses 5,555,366 4,721,855 3,375,786 2,984,430 3,171,960
Provision for Income Taxes 839,000 637,000 586,000 472,000 442,000
------- ------- ------- ------- -------
Net Income $1,211,167 $946,731 $859,639 $700,950 $633,149
========= ======= ======= ======= =======
Primary Net Income per share $1.37 $1.09 $1.02 $.91 $.76
Fully Diluted Net Income per share $1.31 $1.09 $1.02 $.91 $.76
Dividends per Common Share $.29 $.23 $.20 $.20 $.05
Net Loans $59,980,551 $52,343,927 $55,389,178 $52,430,749 $51,002,770
Total Assets $93,814,517 $79,536,882 $78,718,572 $73,651,612 $68,764,634
Total Deposits $83,979,253 $72,013,589 $71,981,685 $67,728,320 $62,971,249
Shareholders' Equity $ 8,077,972 $ 6,970,645 $ 6,203,969 $ 5,410,189 $ 4,862,815
</TABLE>
36
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included as part of Item 8
herein, and selected statistical data included in Item 1, herein. Since the
Company is a holding company whose only asset (with the exception of average
cash and prepaid assets, which averaged less than $150,000 in 1995) is the Bank,
the following relates principally to the financial condition and results of
operations of the Bank.
Because the Company's primary operations are concentrated in a
relatively small geographic market place (San Mateo County), there are certain
inherent risks that the Company's financial operations may be adversely affected
if the local economy were to sustain a severe or prolonged economic decline. The
decline in real estate values has been between approximately 5% and 20%
(depending on the specific property, location and property type) in the San
Mateo region since 1988. The Company has endured the real estate decline despite
the concentration of real estate loans (approximately 64% at December 31, 1995)
by tightening its underwriting standards and utilizing both management's and the
board's knowledge of the local real estate market.
The San Mateo region has consistently outperformed the State of
California as a whole in employment since the most recent recession began in
1988. While the national unemployment rate averaged approximately 7% over the
past five years and the state unemployment rate averaged 9% over the same
period, San Mateo County averaged just 5%. Economic growth in the Company's
local area has continued to be strong, bolstered by the residential and
commercial development of the Redwood Shores area which is within five miles of
the Company.
Liquidity
Liquidity is the ability of the Company and the Bank to meet their
present and future obligations. The Company's liquidity requirements on a parent
company-only basis are centered primarily around debt obligations that it may
incur and costs associated with managing corporate affairs.
The Company's (parent only) principal sources of liquidity consist of
dividends from the Bank, borrowings and infusion of additional capital. During
1995, the Bank paid $275,000 in dividends to the parent as compared to $325,000
paid in 1994. Stock options exercised in 1995 generated $51,000 as compared to
$83,000 generated in 1994. Management believes liquidity will be adequate to
meet the Company's obligations in 1996, which include approximately $50,000 in
operational expenses. The Company had no borrowings at December 31, 1995, and
does not anticipate securing additional debt in 1996. Any excess liquidity of
the Company may be used to pay additional cash dividends to shareholders and/or
to reduce the Company's reliance on dividends from the Bank.
The Bank's need for liquidity arises from potential withdrawals of
maturing time deposits, savings accounts and demand deposit accounts. The Bank's
ability to maintain adequate levels of liquidity is also significant in
providing for funding of loans to new and existing borrowers as well as to fund
the activities of the Bank's Mortgage Department. Both assets and liabilities
contribute to the Bank's liquidity ratio. Assets such as investment securities,
cash and due from banks, time deposits with other banks, federal funds sold and
loan repayments contribute to liquidity. The Bank's funding sources include
corporate borrowings, demand deposits, interest-bearing transaction accounts,
savings and time deposits.
37
<PAGE>
There was an increase in Bank liquidity in comparing year-end balances
in 1995 with 1994. As of December 31, 1995, cash and due from banks, investment
securities, time deposits with other banks and federal funds sold amounted to
$31.4 million, which represents a $6.6 million or 27% increase over the $24.8
million at year end 1994. The Bank's year-end deposits increased $12.0 million
or 16.6% and ended 1995 at $84.0 million. Liquid assets as a percentage of total
year-end deposits increased from 34.5% at year-end 1994 to 37.4% at the end of
1995. During 1995, liquid assets averaged $30.0 million or 39.0% of average
deposits, as compared to 1994 when average liquid assets averaged $25.6 million
or 34.9% of average deposits.
This increase in average liquid assets was driven primarily by an
increase in average deposits. Average deposits were $76.7 million in 1995, which
constitutes a $3.4 million (4.6%) increase over average deposits in 1994. During
1995 total net loans (including loans held for sale) averaged $52.6 million, a
$135,000 decrease from average net portfolio loans in 1994.
In comparing the change in cash flows during 1995 with 1994, the
Company increased cash and cash equivalents by $3.3 million to $18.1 million.
The increase was funded by an increase in year-end deposits and federal funds
purchased of $13.0 million. These funds were partially (85%) invested in total
loans which increased $7.6 million and total investments which increased $3.4
million at December 31, 1995 as compared to December 31, 1994.
As of March 15, 1996, the Company has in place $5,000,000 in unsecured
liquidity lines of credit through its correspondent banks and maintains
additional secured liquidity lines through the Federal Reserve Bank. The Company
may borrow up to 25% of its assets from The Federal Home Loan Bank (FHLB)
subject to collateral and additional FHLB stock purchase requirements. See Item
1," Business", at "(c) Bay Area Bank -- Company Subsidiary, Correspondent
Banks."
Capital Resources
The Company is subject to Federal Reserve Board ("FRB") guidelines and
the Bank is subject to Federal Deposit Insurance Corporation ("FDIC")
regulations governing capital adequacy. The Company and the Bank exceed the
minimum capital levels as required by the FRB and FDIC as of December 31, 1995.
(See "Item 1 Business at " (e) Supervision and Regulation, Capital Guidelines".)
The Bank is required to be in compliance with the "Risk Based Capital"
regulations as required by the FDIC. As of December 31, 1995 the Bank had Tier 1
risk based capital of 12.60% and Tier II risk based capital of 13.85%, both of
which exceed the risk based capital requirements of the FDIC.
Total Bank capital plus allowances for possible loan losses at year end
1995 of $9.6 million represents an increase of $1.1 million, or 13% growth over
the 1994 year-end balance of $8.5 million. Bank capital continues to grow
despite dividends paid to the Company of $275,000 in 1995 and $325,000 in 1994.
Results of Operations
Bay Area Bancshares posted after-tax earnings of $1,211,000 in 1995, a
28% increase over 1994 in which net income was $947,000, and a 41% increase over
1993 in which net income was $860,000. Pretax earnings were $2.05 million in
1995, a $466,000 increase over 1994 and a $604,000 increase over 1993.
Improvement in 1995 over 1994 was a result of a $511,000 increase in net
interest income, a $90,000 reduction in loan loss provisions and a $699,000
increase in noninterest income, offset in part by a $834,000 increase in
noninterest expense.
38
<PAGE>
Primary earnings per share were $1.37 in 1995 as compared to $1.09 in
1994 and $1.02 in 1993. The increase in earnings per share of 25.7% in 1995
compared with 6.9% in 1994 was a result of the 28% increase in earnings being
offset in part by a 13,000 (1.5% ) share increase in common stock and
equivalents used to compute primary earnings per share. Fully diluted earnings
per share were $1.31 in 1995 as compared to $1.09 in 1994 and $1.02 in 1993. The
increase in earnings per share of 20.2% in 1995 compared with 6.9% in 1994 was a
result of the 28% increase in earnings being offset in part by a 54,000 (6.2% )
share increase in common stock and equivalents used to compute fully diluted
earnings per share. Shares used to compute fully diluted earnings per share
increased more than shares used to calculate primary earnings per share because
the year end market price was higher than the average price throughout 1995.
Consolidated net income was comprised of Bank-only profits of
$1,270,000 in 1995 as compared to $1,033,000 in 1994 and $934,600 in 1993. The
parent Company (without consideration of inter-company dividends) recorded a
loss of $59,000 in 1995 as compared to losses of $86,000 in 1994 and $75,000 in
1993. The Company's (parent only) loss in 1995 was primarily comprised of legal
costs, director fees, fees paid to the Bank for administrative services, annual
report costs and other miscellaneous costs. The decrease in Company expenses was
primarily a result of the completion of debt retirement in 1994 and the
resulting reduction in interest expense.
The Company recorded consolidated net interest income of $5.3 million
in 1995, $4.8 million in 1994, and $4.5 million in 1993. The Company's net
interest margin (net interest income divided by average earning assets) was 7.2%
in 1995, 7.0% in 1994, and 6.9% in 1993. Rising interest rates in 1995 increased
both the yield on the Company's loan portfolio and the rate paid on the
Company's deposit portfolio. The average yield on the Company's earning assets
was 10.3% in 1995 as compared to 9.3% in 1994 and 9.1% in 1993. Interest paid on
deposits and other liabilities was 4.0% in 1995, 3.0% in 1994 and 2.8% in 1993.
A $511,000 increase in net interest income in 1995 was a result of an increase
in interest income of $1,144,000, offset in part by an increase in interest
expense of $633,000. The increase in interest income of $1,144,000 was primarily
a result of increasing rates ($862,000 or 75% of the increase). The increase in
interest expense of $633,000 was also driven by rising rates ($584,000 or 92% of
the increase). A $224,000 increase in net interest income in 1994 over 1993
interest income was a result of an increase in interest income of $380,000,
partially offset by an increase in interest expense of $156,000. (See "Item 1
Business, (d) Selected Statistics/Information-Distribution of Average Assets;
Interest Rates and Differentials, and Rate and Volume Variances.")
Loan loss provisions were $210,000 in 1995, as compared to $300,000 in
1994 and $420,000 in 1993. Loan charge-offs in 1995 were $233,000 in 1995,
$3,000 in 1994 and $339,000 in 1993. Total 1995 charge-offs represent a $230,000
increase as compared to 1994. Loan loss recoveries were $34,000 in 1995,
$202,000 in 1994, and $44,000 in 1993 resulting in net loan charge-offs
(charge-offs less recoveries) of $199,000 in 1995 and $295,000 in 1993. In 1994
net loan recoveries (recoveries less charge-offs) were $199,000. Net loan
charge-offs (recoveries) as a percentage of average loans were .36% in 1995,
(.38%) in 1994, and .56% in 1993. Management evaluates the size, quality,
composition and growth of the portfolio as well the historical experience of
losses in various loan categories when determining the amount of the allowance
for possible loan losses. Potential adverse economic conditions and threats to
the local real estate market are considered as well as their effect on a
borrower's ability to repay the debt. The Board continues to employ a former
regulator as an outside loan consultant to review specific loans as well as the
adequacy of the entire loan loss allowance. Management has established a 1995
year end allowance for possible loan losses of $1,516,000 or 2.50% of year end
gross loans.
39
<PAGE>
The Company's allowance for possible loan losses ratios and asset
performance ratios were less favorable at December 31, 1995 than December 31,
1994. (See Item 1d "Business, Selected Statistical Information, Summary of Loan
Loss Experience"). There was no real estate owned at December 31, 1995 or
December 31, 1994. Of the Company's gross loans, $470,000 or .77% were not
performing at December 31, 1995, .37% or $200,000 were not performing at year
end 1994, and 1.47% were not performing at year end 1993. The Company's ratio of
nonperforming assets to total assets was .50% at year end 1995, .25% at year end
1994 and 1.81% at year end 1993. The Company's allowance for possible loan
losses as a percentage of nonperforming loans was 322% at year end 1995, as
compared to 753% at December 31, 1994 and 123% at December 31, 1993.
Nonperforming assets are discussed at "Item 1-Business at "(d) Selected
Statistical Information, Nonaccrual, Past Due and Restructured Loans." This
resulted from a combination of factors including a lesser provision for loan
losses than in the preceding two years and increases in charge-offs and
nonperforming loans during 1995.
The Company's concentration of real estate secured loans was
approximately 64% at year end 1995, 62% at year end 1994 and 63% in 1993. The
Company's concentration in real estate in the San Mateo region represents an
inherent and continued risk to operations. Local real estate prices began to
flatten and fall beginning in 1988 and there is no guarantee that a continuation
of the severe decline in real estate prices would not materially affect the
Company's earnings and capital position.
Noninterest income increased $699,000 or 38% to $2.53 million in 1995
as EFT revenues increased from $792,000 in 1994 to $1,494,000 in 1995, and
Mortgage Department revenues (after elimination of a $91,900 transaction with
the Bank) increased $76,000 from $778,000 in 1994 to $853,000 in 1995. The
increases in both noninterest income and noninterest expense over the past two
years can be directly attributed to the growth in the Bank's Mortgage and
Electronic Funds Transfer (EFT) Departments, which both began operations in
1993. There can be no assurance as to the continued profitability of the
Mortgage or EFT Departments. The volume and profitability of the Mortgage
Department fluctuates depending on interest rates and is therefore especially
volatile. For a further discussion of the Mortgage and EFT Department's
operating results, see Item 1.c "Business, Bay Area Bank- Company Subsidiary,
Mortgage Banking Services and Electronic Funds Services".
Noninterest expense increased $834,000 or 17.6% in 1995 as compared to
an increase of $1.35 million or 39.9% in 1994 and $391,000 or 13.1% in 1993. The
components of noninterest expense which increased significantly in 1995 were
salaries and benefits, equipment expense, Automated Teller Machine (ATM) network
expenses and other expenses. Salaries and benefits were up $331,000 or 14.6%,
equipment expense (which includes depreciation of the ATMs in the EFT
department) was up $165,000 or 42.9%, ATM network expenses increased $202,000 or
66.9% and other expenses increased $84,000 or 7.9%.
The Company's tax expense increased from $586,000 in 1993 to $637,000
in 1994 and to $839,000 in 1995. The 1995 tax amount represents a $202,000 or
32% increase over the prior year. This is a result of a 29% increase in pretax
income during 1995 which resulted in an effective tax rate of 40.9% for 1995 (as
compared to 40.2% for 1994 and 40.5% in 1993).
40
<PAGE>
Impact of Inflation
The low proportion of the Company's fixed assets to total assets (1.0%
at year end 1995) reduces the potential for inflated earnings resulting from
understated depreciation and the potential understatement of absolute asset
values. The effect of higher interest rates in the bond and credit markets would
be to increase the net interest margin in the short term as a result of the
Company's loan portfolio's sensitivity to interest rates. Offsetting this
increase would be a loss in the Company's bond portfolio and an increase in the
Company's cost of funds.
Item 8. Financial Statements and Supplementary Data.
Audited consolidated balance sheets as of the last two fiscal years and
audited consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the last three fiscal years, appear commencing on
page ___ of this Annual Report on Form 10-K and are incorporated by reference.
Supplementary data are not required.
41
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
(Dollar amounts in thousands, except per share data)
For the years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
Interest income: 1995 1994 1993
<S> <C> <C> <C>
Interest and fees on loans $6,292 $5,520 $5,270
Interest on taxable investment securities 581 519 530
Interest on tax exempt investment securities 70 73 66
Interest on federal funds sold 558 243 103
Interest on time deposits with other financial institutions 6 8 14
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 7,507 6,363 5,983
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest-bearing transaction accounts 1,263 903 787
Savings deposits 202 85 70
Time deposits 758 592 560
Notes payable and redeemable debentures -- 10 17
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 2,223 1,590 1,434
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 5,284 4,773 4,549
Provision for possible loan losses 210 300 420
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 5,074 4,473 4,129
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 270 288 309
Loss on securities sold (16) -- --
Gain on disposal of assets 8 28 17
Gain on sale of loans held for sale 456 530 228
Other mortgage banking income 193 138 9
ATM network revenue 1,494 792 46
Other 127 57 83
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,532 1,833 692
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and related benefits 2,604 2,273 1,827
Occupancy 378 336 332
Equipment 550 385 134
Professional fees 236 224 196
ATM network expenses 504 302 53
Stationery and supplies 135 137 71
Other 1,149 1,065 762
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 5,556 4,722 3,375
- ---------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 2,050 1,584 1,446
Provision for income taxes 839 637 586
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $1,211 $947 $860
- ---------------------------------------------------------------------------------------------------------------------------
Primary Earnings per share:
Weighted average common and common equivalent shares-
primary earnings per share 878,000 865,000 839,000
- ---------------------------------------------------------------------------------------------------------------------------
Primary Net income per share $1.37 $1.09 $1.02
- ---------------------------------------------------------------------------------------------------------------------------
Fully Diluted Earnings per share:
Weighted average common and common equivalent shares-
fully diluted earnings per share 919,000 865,000 839,000
- ---------------------------------------------------------------------------------------------------------------------------
Fully Diluted Net income per share $1.31 $1.09 $1.02
- ---------------------------------------------------------------------------------------------------------------------------
Dividends declared per common share $.29 $.23 $.20
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
(Dollar amounts in thousands, except per share data)
December 31,
- ------------------------------------------------------------------------------------------------------------------------
Assets 1995 1994
<S> <C> <C>
Cash and due from banks $8,276 $8,406
Federal funds sold 9,800 6,355
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 18,076 14,761
Time deposits with other financial institutions 103 198
Investment securities held to maturity 10,133 8,427
(market value of $10,269 in 1995 and $8,122 in 1994)
Investment securities available for sale (at market) 3,111 1,439
Loans, net of allowance for possible loan losses of $1,516 in 1995 and $1,505 in 1994 59,209
52,017
Loans held for sale 772 327
Premises and equipment, net 948 1,023
Interest receivable and other assets 1,463 1,345
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $93,815 $79,537
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Deposits
Demand $22,998 $20,818
Interest-bearing transaction 40,480 32,885
Savings 4,376 4,439
Time 16,125 13,872
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 83,979 72,014
Interest payable and other liabilities 758 552
Federal Funds Purchased 1,000 --
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 85,737 72,566
- ---------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, $10 stated value; 6% Series A, non-voting, convertible and
redeemable:
Authorized -- 10,000,000 shares
Issued and outstanding-- 1,000 shares in 1995 and 10,300 shares in 1994 10 103
Common stock, no par value:
Authorized -- 20,000,000 shares
Issued and outstanding-- 821,829 shares in 1995 and 789,525 shares in 1994 4,053 3,909
Net unrealized gain(loss) on securities available for sale 10 (76)
Retained earnings 4,005 3,035
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 8,078 6,971
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $93,815 $79,537
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
43
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
(Dollar amounts in thousands, except per share data)
For the years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $1,211 $947 $860
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 426 250 56
Provision for possible loan losses 210 300 420
Loss on securities sold 16 -- --
Gain on sale of other assets (8) (28) (17)
Net proceeds from sale (funding) of loans held for sale 11 619 (187)
Gain on sales of loans held for sale (456) (530) (228)
Net amortization and accretion of investment premiums and discounts 51 66 60
Net (increase) decrease in interest receivable and other assets (118) (377) 275
Net increase in interest payable and other liabilities 206 169 95
Net decrease in deferred loan fees (23) (14) (19)
- ---------------------------------------------------------------------------------------------------------------------------
Total adjustments 315 455 455
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,526 1,402 1,315
Cash flows from investing activities:
Net decrease in time deposits with other financial institutions 95 4 195
Proceeds from maturity of investment securities held to maturity 1,705 1,425 2,000
Sale of investment securities available for sale 484 -- --
Principal payments received on mortgage backed securities 239 1,066 708
Purchase of investment securities held to maturity (4,285) (2,587) (1,967)
Purchase of investment securities available for sale (1,502) (499) (501)
Net (increase) decrease in gross loans (7,379) 2,670 (4,150)
Net capital expenditures, premises and equipment (343) (1,105) (196)
Proceeds from the sale of real estate owned -- 628 1,935
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (10,986) 1,602 (1,976)
Cash flows from financing activities:
Net increase in demand deposits 2,180 2,656 185
Net increase (decrease) in interest-bearing transaction and
savings deposits 7,532 (75) 3,448
Net increase (decrease) in time deposits 2,253 (2,549) 620
Federal funds purchased 1,000 -- --
Principal payments on note payable -- (150) (75)
Proceeds from the exercise of common stock warrants and options 51 83 93
Cash dividends (241) (188) (159)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 12,775 (223) 4,112
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 3,315 2,781 3,451
Cash and cash equivalents, beginning of period 14,761 11,980 8,529
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $18,076 $14,761 $11,980
- ---------------------------------------------------------------------------------------------------------------------------
Cash payments for interest $2,166 $1,576 $1,452
Cash payments for taxes 884 926 424
Loans transferred to real estate owned -- -- 1,295
</TABLE>
See accompanying notes.
44
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
(Dollar amounts in thousands, except per share data)
For the Years ended December 31, 1995, 1994 and 1993
Net Unrealized
Gain(Loss) on
Securities
Preferred Common Available Retained
Stock Stock for Sale Earnings Total
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $123 $3,713 -- $1,575 $5,411
Cash dividends -- -- -- (159) (159)
Stock options exercised -- 93 -- -- 93
Net income -- -- -- 860 860
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 123 3,806 -- 2,276 6,205
Preferred stock converted to common (20) 20 -- -- --
Unrealized loss on securities held for sale -- -- (76) -- (76)
Cash dividends -- -- -- (188) (188)
Stock options exercised -- 83 -- -- 83
Net income -- -- -- 947 947
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 103 3,909 (76) 3,035 6,971
Preferred stock converted to common (93) 93 -- -- --
Unrealized gain on securities held for sale -- -- 86 -- 86
Cash dividends -- -- -- (241) (241)
Stock options exercised -- 51 -- -- 51
Net income -- -- -- 1,211 1,211
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $10 $4,053 $10 $4,005 $8,078
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and the Board of Directors of Bay Area Bancshares:
We have audited the accompanying consolidated balance sheets of BAY AREA
BANCSHARES as of December 31, 1995 and 1994, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion. In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Bay
Area Bancshares as of December 31, 1995 and 1994, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
/s/Ernst & Young LLP
San Francisco, California
January 19, 1996
45
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
December 31, 1995
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING PROCEDURES
The consolidated financial statements of Bay Area Bancshares (the Company), and
its wholly owned subsidiary, Bay Area Bank (the Bank), have been prepared in
conformity with generally accepted accounting principles and general practice
within the banking industry. The Company's significant accounting policies are
as follows:
a. Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation. All dollar amounts are shown
in thousands except per share data.
b. Use of Estimates in the Preparation of Financial Statements
The preparation of the consolidated financial statements of the Company requires
management to make estimates and assumptions that affect reported amounts. These
estimates are based on information available as of the date of the financial
statements. Therefore, actual results could differ from those estimates.
c. Cash and Cash Equivalents
The Company considers cash and due from banks and federal funds sold to be cash
and cash equivalents.
d. Investment Securities Held to Maturity and Available for Sale
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from investments. Interest and dividends are included in interest income from
investments. Realized gains and losses, and declines in value judged to be
other-than-temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method. Management
determines the appropriate classification of debt securities at the time of
purchase and re-evaluates such designation as of each balance sheet date. Debt
securities are classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity. Available-for-sale
securities are stated at fair value, with the unrealized gains and losses, net
of tax, reported as a separate component of shareholders' equity.
e. Loans
Loans are stated at the amount of principal outstanding at the balance sheet
date. Interest on commercial, installment and real estate loans is accrued daily
on a simple interest basis on the amount of principal outstanding. The Bank's
policy is to place loans on nonaccrual status if either principal or interest
has become past due for 90 days or more, or when payment in full of principal or
interest is not expected. When a loan is placed on nonaccrual status, all
interest previously accrued is reversed against current period income. Bank
management may waive nonaccrual status and the previously accrued interest may
not be reversed if a loan is well secured and in the process of collection. Cash
received on non-accrual loans is applied to reduce the principal balance.
f. Loans Held for Sale
Loans held for sale in the normal course of business consist of residential real
estate loans that were originated or acquired with the intent to sell. These
loans are recorded at the lower of cost or fair value and are originated through
the Bank's Mortgage Department which began operations in 1993.
g. Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a level considered by
management as adequate to provide for losses that are inherent in the loan
portfolio. The allowance is increased by provisions charged to operating expense
and reduced by net charge-offs. The Bank makes periodic credit reviews of the
loan portfolio and considers current economic conditions, historical loan loss
experience and other factors in determining the adequacy of the allowance. The
allowance for possible loan losses is based on estimates, and ultimate losses
may vary from the current estimates. These estimates are reviewed periodically
and, as adjustments become necessary, they are reported in earnings in the
periods in which they become known.
h. Premises and Equipment
Premises and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, which are
generally three to five years for furniture and equipment. Leasehold
improvements are amortized over the term of the respective lease or the
estimated useful life of the property, whichever is shorter.
i. Real Estate Owned
Other real estate owned is carried at the lower of cost or fair value. When the
property is acquired through foreclosure, any excess of the related loan balance
over the fair value is charged to the reserve for possible loan losses.
Subsequent write-downs, operating expense, and losses upon sale, if any, are
charged to operating expenses.
j. Earnings per Share
Earnings per common and common equivalent shares are computed by dividing net
income by the weighted average number of common shares and common equivalent
shares outstanding which include dilutive and anti-dilutive stock options,
preferred stock and a corresponding adjustment of net interest income net of
income taxes. The computation of common equivalent shares for primary earnings
per share is based on the weighted average market price of the Company's common
stock throughout the period. The computation of common equivalent shares for
fully diluted earnings per share is based on the market price of the Company's
common stock at the end of the period.
46
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
k. Reclassifications
Certain reclassifications have been made to prior years amounts to conform with
the current year presentation. These reclassifications have no effect on
previously reported income
NOTE 2-NATURE OF OPERATIONS
The Company, through its subsidiary bank, provides a wide range of commercial
banking services to individuals, professionals and small to medium sized
businesses. The services provided include those typically offered by commercial
banks, such as: interest-bearing and noninterest bearing checking accounts,
savings and time deposits, business and personal loans, collection services,
safe depository facilities, funds transfer, the issuance of money orders,
cashiers checks, and the sale of travelers' checks. The Bank also operates a
network of off-site Automated Teller Machines (ATM's), and a Mortgage
Department, which generally sells the loans it originates in the secondary
mortgage market.
NOTE 3--INVESTMENT SECURITIES
The maturity of mortgage backed securities is estimated based on expected
principal prepayments, all other securities have defined maturities. The
amortized cost and approximate market value of investment securities as of
December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Investment Securities Available for Sale
1995 1994
Amortized Cost Market Value Amortized Cost Market Value
<S> <C> <C> <C> <C>
Securities of the U.S. government and its agencies:
Within one year $505 $508 -- --
After one year but within five years 2,002 2,008 1,515 1,439
- ---------------------------------------------------------------------------------------------------------------------------
Total 2,507 2,516 1,515 1,439
Mortgage backed securities:
After one year but within five years 594 595 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total investment securities available for sale $3,101 $3,111 $1,515 $1,439
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Investment Securities Held to Maturity
1995 1994
Amortized Cost Market Value Amortized Cost Market Value
<S> <C> <C> <C> <C>
Securities of the U.S. government and its agencies:
Within one year $1,253 $1,253 $1,506 $1,506
After one year but within five years 2,520 2,556 2,808 2,692
Federal Home Loan Bank Stock 273 273 260 260
- ---------------------------------------------------------------------------------------------------------------------------
Total 4,046 4,082 4,574 4,458
States of the U.S. and political subdivisions:
Within one year 400 401 205 205
After one year but within five years 1,182 1,183 1,381 1,334
- ---------------------------------------------------------------------------------------------------------------------------
Total 1,582 1,584 1,586 1,539
Mortgage backed securities:
Within one year 501 499 153 148
After one year but within five years 4,004 4,104 2,114 1,977
- ---------------------------------------------------------------------------------------------------------------------------
Total 4,505 4,603 2,267 2,125
- ---------------------------------------------------------------------------------------------------------------------------
Total investment securities held to maturity $10,133 $10,269 $8,427 $8,122
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
In 1995, the Company sold a security with a par value of $500 from its available
for sale portfolio. As a result of this transaction, the Company realized a loss
of $16. The Company did not sell any securities in 1994. Gross unrealized gains
for securities held to maturity at December 31, 1995 and 1994 were approximately
$144 and $5 respectively. Gross unrealized losses for securities held to
maturity at December 31, 1995 and 1994 for the security portfolio were
approximately $8 and $310 respectively. The net adjustment to unrealized gain on
investment securities available for sale, included as a separate component of
shareholders' equity, was $86 between December 31, 1994 and December 31, 1995.
The Financial Accounting Standards Board allowed companies to revisit the
designations of their held to maturity and held for sale securities in the
fourth quarter of 1995. In December of 1995 the Company elected to transfer a
security from its held to maturity portfolio to its held for sale portfolio in
anticipation that it may be sold prior to maturity. The security had an
amortized cost of $595 and an unrealized loss of $13 at the time of transfer. As
of December 31, 1995 and 1994, investment securities with an amortized cost of
$1,590 and $1,000 respectively, were pledged to secure public deposits and other
borrowings as required by law. The Bank is required to maintain reserves with
the Federal Reserve Bank (FRB) of San Francisco. Reserve requirements are
primarily based on a percentage of deposit liabilities. At December 31, 1995 and
1994 the Bank had balances of $310 and $507 respectively with the FRB.
47
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
NOTE 4--LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES Loan balances as of
December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Commercial and financial $17,390 $15,668
Real estate mortgage 27,962 26,446
Real estate construction 10,849 6,856
Installment 4,524 4,552
- ---------------------------------------------------------------------------------------------------------------------------
60,725 53,522
Less--Allowance for possible loan losses 1,516 1,505
- ---------------------------------------------------------------------------------------------------------------------------
Net loans $59,209 $52,017
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The changes in the allowance for possible loan losses for the years ended
December 31, 1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C> <C>
Balance at January 1, $1,505 $1,006 $881
Provision for possible loan losses 210 300 420
Loans charged off (233) (3) (339)
Recoveries 34 202 44
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, $1,516 $1,505 $1,006
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company adopted Financial Accounting Standards Board Statement (SFAS) No.
114, Accounting by Creditors for Impairment of a Loan, effective January 1,
1995. As a result of applying the new rules, certain impaired loans are reported
at the present value of expected future cash flows using the loan's effective
interest rate, or as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
If the estimated value of the loan is less than the carrying value of the loan,
the impairment is recorded through a valuation allowance. The valuation
allowance for impaired loans at December 31, 1995 under SFAS No. 114 was $185
which is included in the Company's allowance for loan loss.
The Company considers all nonaccrual loans to be impaired loans. At December 31,
1995 and 1994 there were loans totaling approximately $470 and $200
respectively, on nonaccrual status. Interest earned but not recorded on all
loans that were on nonaccrual status during the years ended December 31, 1995,
1994, and 1993 was approximately $43, $60 and $58, respectively.
The Bank has, and expects to havein the future, banking transactions in the
ordinary course of its business with directors, executive officers, principal
shareholders and their associates. These transactions, including loans and
deposits, are granted on substantially the same terms, including interest rates
and collateral, as those prevailing at the same time for comparable transactions
with others and do not involve more than the normal risk of collectability or
present other unfavorable features. The loan activity with respect to these
related parties during 1995 is summarized below:
<TABLE>
<CAPTION>
Balance as of Paydowns or Balance as of
December 31, 1994 Additions Retirements December 31, 1995
<S> <C> <C> <C> <C>
Loans to directors, executive officers,
principal shareholders and
their associates $1,024 -- $79 $945
</TABLE>
<TABLE>
<CAPTION>
NOTE 5--PREMISES AND EQUIPMENT
Premises and equipment as of December 31, 1995 and 1994 was comprised of the
following:
1995 1994
<S> <C> <C>
Automobiles $37 $36
Furniture and equipment 2,149 1,800
Leasehold improvements 170 169
- ---------------------------------------------------------------------------------------------------------------------------
2,356 2,005
Less - Accumulated depreciation and amortization 1,408 982
- ---------------------------------------------------------------------------------------------------------------------------
Net premises and equipment $948 $1,023
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
NOTE 6--DEPOSITS AND INTEREST ON DEPOSITS
As of December 31, 1995 and 1994, the Bank had time certificates of deposit in
denominations of $100 or more totaling approximately $7,850 and $7,070,
respectively. Interest paid on these deposits was approximately $347 in 1995,
$333 in 1994 and $282 in 1993.
NOTE 7--AVAILABLE CREDIT
As of December 31, 1995 and 1994, the Bank had in place $3,000 in unsecured
liquidity lines of credit and $2,000 in secured lines of credit. These funds
were available through its correspondent banks. During 1993 the Bank was
approved for membership in the Federal Home Loan Bank of San Francisco (FHLB).
The Bank may borrow up to 25% of its assets subject to collateral and FHLB stock
purchase requirements. At December 31, 1995 the Bank held $273 in FHLB stock and
was able to borrow up to approximately $1,913, however, there were no borrowings
in 1995 or 1994.
NOTE 8--SHAREHOLDERS EQUITY
The retained earnings of the Company include undistributed earnings of the Bank.
Dividends by the Bank to the Company are restricted under California law to the
lesser of the Bank's retained earnings, or the Bank's net income for the latest
three fiscal years, less dividends previously declared during that period, or
with the approval of the California Superintendent of Banks, to the greater of
the retained earnings of the Bank, the net income of the Bank for its last
fiscal year or the net income of the Bank for its current fiscal year. As of
December 31, 1995, the Bank had retained earnings available for dividend
distribution of $3,438.
Additionally, the Federal Reserve Act generally restricts loans, advances and
investments by the Bank, in or to the Company, to 10% of the shareholder's
equity of the Bank.
In August 1988, the Company issued$123 of 6% noncumulative preferred stock at
$10 stated value per share. The preferred stock is convertible to no par common
stock of the Company at an initial conversion price of $4.33 per common share
(as adjusted for stock dividends) and is redeemable at the option of the Company
at a $10 per share redemption price. The preferred stock has a liquidation
preference of $10 per share. A 6% preferred stock cash dividend has been paid in
five consecutive years beginning in 1991. Through December 31, 1995, $113 in
preferred stock, or 11,300 shares, had been converted to 26,100 shares of common
stock.
NOTE 9--COMMITMENTS AND CONTINGENT LIABILITIES
The Company is obligated for rental payments under certain operating leases and
contract agreements. Rental expense included in occupancy expense and equipment
expense was approximately $359, $315 and $309 for the years ended December 31,
1995, 1994 and 1993, respectively. At December 31, 1995, the approximate future
lease rentals payable under operating leases for premises were as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $303
1997 276
1998 276
1999 232
2000 232
Thereafter 463
- ---------------------------------------------------------------------------------------------------------------------------
Total Minimum Lease Payments $1,782
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's primary location (900 Veterans Blvd.) was acquired by a former
director in October of 1992. The lease for approximately 8,300 square feet,
which was negotiated with the previous lessor, a non-related party, was renewed
for a seven year term in June of 1995 with an additional seven year option. An
additional lease for approximately 2,100 square feet for the Bank's Mortgage
Department was negotiated with the former director and renewed for a three year
term in December of 1995 with an additional three year option. Total rent paid
in 1995 for all space leased at 900 Veterans Blvd was $286. The Company's data
processing center is also owned by a former director. Total rent paid in 1995
for the data processing center was approximately $54. In the opinion of
management, the terms of the leases are no less favorable than terms which could
have been obtained from unrelated parties.
In the normal course of business, the Company is at times subject to pending and
threatened legal actions and proceedings. After reviewing pending and threatened
actions and proceedings with counsel, management believes that the outcome of
such actions or proceedings will not have a material adverse effect on the
consolidated financial condition of the Company.
NOTE 10--OFF-BALANCE SHEET INSTRUMENTS WITH RISK
In the ordinary course of business, the Bank enters into various types of
transactions which involve financial instruments with off-balance sheet risk.
These instruments include commitments to extend credit and standby letters of
credit and are not reflected in the accompanying balance sheets. These
transactions may involve, to varying degrees, credit and interest rate risk in
excess of the amount, if any, recognized in the balance sheets. Management does
not anticipate any loss to result from these commitments.
The Bank's off-balance sheet credit risk exposure is the contractual amount of
commitments to extend credit and standby letters of credit. The Bank applies the
same credit standards to these contracts as it uses in its lending process.
Financial instruments whose contractual amount represented risk:
49
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Commitments to extend credit $24,347 $20,936
Standby letters of credit $101 $235
</TABLE>
Commitments to extend credit are agreements to lend to customers. These
commitments have specified interest rates and generally have fixed expiration
dates but may be terminated by the Bank if certain conditions of the contract
are violated. Although currently subject to drawdown, many of these commitments
are expected to expire or terminate without funding. Therefore, the total
commitment amounts do not necessarily represent future cash requirements.
Collateral held relating to these commitments varies, but may include cash,
securities and real estate.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Credit risk arises in
these transactions from the possibility that a customer may not be able to repay
the Bank upon default of performance. Collateral held for standby letters of
credit is based on an individual evaluation of each customer's creditworthiness,
but may include cash and securities.
The Bank's business activity is with customers primarily located within San
Mateo County. The Bank grants real estate, commercial, and installment loans to
these customers. Although the Bank has a diversified loan portfolio, a
significant portion of its customers' ability to repay the loans is dependent
upon the real estate economic sector. Generally, the loans are secured by assets
or stock. Loans are based on the borrowers' established integrity, historical
cash flow, and their willingness and ability to perform on commitments. The
Bank's policy is to secure collateral where deemed necessary to protect the
soundness of the loan. In the event of loan default, the Bank's means of
recovery is through judicial procedures.
NOTE 11--PROFIT SHARING AND SALARY CONTINUATION PLANS
The Bank has a qualified profit sharing plan for most full-time employees.
Employer contributions are to be made from current-year profits, predicated on
the performance of the Bank based on a formula approved annually by the Bank's
Board of Directors. Participants in the plan are allowed to make contributions
in accordance with the plan agreement. The Bank matches the participants
contributions up to 5% of their annual salary so long as certain Bank
profitability goals are met. Full vesting of the Bank's contribution to the
employee occurs after four years of employment. The Bank provided for
contribution expense of $64, $64 and $58 during 1995, 1994 and 1993,
respectively.
At December 31, 1995 the Company was in the process of
implementing a salary continuation plan for the Bank's Chief Executive Officer.
The officer will vest in the benefits of the proposed plan equally each year and
fully vest in 2005 if certain bank performance standards are met and if he
reaches normal retirement age while working for the Bank. The costs of these
benefits will be accrued over the remaining expected service life of the officer
based on the estimated present value of the related liability. Salary
continuation expense was approximately $81 in 1995. The Bank has elected to fund
its obligation under the plan described above with a life insurance contract.
The Bank acquired a life insurance policy with a current cash surrender value of
$53 which is included in other assets at December 31, 1995. The Company made a
premium payment of $89 to this policy in 1995 and anticipates making additional
premium payments of $89 for the next three fiscal years to the policy if the
plan is adopted. This policy is expected to cover plan expenses.
NOTE 12--EMPLOYEE STOCK OPTION PLAN
The Company has a stock option plan for full-time, salaried officers and
directors and employees who have substantial responsibility for the successful
operation of the Company. Options are granted at no less than the fair market
value of the stock at the date of the grant. The options may be granted in
accordance with terms determined by the Board of Directors until the expiration
of the plan. During 1993, the original stock option plan of 1983 expired. A new
plan was ratified by the Company's Shareholders at the Annual Meeting in May
1993. At December 31, 1995, 19,558 shares were available for grant. The
following table summarizes the option activity in the 1993 and 1983 plans for
the years ended December 31, 1995, 1994 and 1993 (all share amounts are in
thousands):
<TABLE>
<CAPTION>
1983 Plan Available Outstanding Price Per Share
<S> <C> <C> <C>
Balance, December 31, 1993 -- 2 $4.88
Exercised -- (2) $4.88
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1993 Plan Available Outstanding Price Per Share
<S> <C> <C> <C>
Inception of Plan 231 -- --
Granted (207) 207 $4.75 - $5.23
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 24 207 $4.75 - $5.23
Exercised -- (16) $4.75
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 24 191 $4.75 - $5.23
Granted (5) 5 $7.25
Exercised -- (11) $4.75
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 19 185 $4.75 - $7.25
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
NOTE 13--INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are set forth below:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Book loan loss allowance in excess of tax $414 $411
Book depreciation in excess of tax 8 26
State franchise tax 87 52
Other 14 28
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax asset $523 $517
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The current and deferred amounts of the tax provision (benefit) for the years
ended December 31, 1995, 1994, and 1993 were as follows:
<TABLE>
<CAPTION>
Total
Federal State Provision
<S> <C> <C> <C>
1995
Current $583 $262 $845
Deferred (14) 8 (6)
- ---------------------------------------------------------------------------------------------------------------------------
$569 $270 $839
- ---------------------------------------------------------------------------------------------------------------------------
1994
Current $561 $233 $794
Deferred (104) (53) (157)
- ---------------------------------------------------------------------------------------------------------------------------
$457 $180 $637
- ---------------------------------------------------------------------------------------------------------------------------
1993
Current $498 $184 $682
Deferred (74) (22) (96)
- ---------------------------------------------------------------------------------------------------------------------------
$424 $162 $586
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The provisions for income taxes differ from the amounts computed by applying the
statutory federal income tax rates to income before taxes as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Federal income tax expense, based on statutory 34% federal income tax rate $697 $539 $492
State franchise taxes, net of federal benefit 178 119 107
Tax exempt income (21) (24) (21)
Other, net (15) 3 8
- ---------------------------------------------------------------------------------------------------------------------------
$839 $637 $586
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
NOTE 14-FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107 "Disclosures about Fair Value of Financial
Instruments", the estimated fair value of the Company's financial instruments
are disclosed below. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not necessarily
represent or affect the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosure for financial instruments:
Cash and Cash Equivalents:
Cash and cash equivalents, which includes federal funds sold, is carried at
an amount that approximates fair value.
Time Deposits With Other Financial Institutions:
Time deposits are carried at an amount that approximates fair value.
Investment Securities:
Fair value is based on quoted market prices, where available or quoted market
prices of comparable instruments. If not material, the carrying value of
investment securities approximates fair value.
Loans and Loans Held for Sale:
The allowance for loan losses and most adjustable rate loans are valued at the
carrying amount. All fixed and adjustable rate loans with interest rate caps and
floors are valued by loan type. To determine the fair value, the interest rate
used to discount the cash flows is the current market rate for a like class of
loans.
Interest Receivable:
Interest receivable is carried at an amount that approximates fair
value.
Deposits:
The fair values disclosed for demand (interest bearing transaction and savings
deposits) are equal to the amount payable on demand at the reporting date
(carrying amount). Fair value for time deposits (fixed-rate certificate of
deposits) are estimated using a discounted cash flow calculation that applies
interest rates currently offered on deposits of similar remaining maturities.
Interest Payable:
Interest payable is carried at an amount that approximates fair value.
Fed Funds Purchased:
Fed funds purchased are carried at an amount that approximates fair
value.
Off-Balance-Sheet Instruments:
The fair value of commitments to extend credit were not significant.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1995
Carrying Amount Fair Value
<S> <C> <C>
Assets
Cash and cash equivalents $18,076 $18,076
Time deposits with other financial institutions 103 103
Investment securities available for sale 3,111 3,111
Investment securities held to maturity 10,133 10,269
Loans 59,209 59,251
Loans held for sale 772 795
Interest receivable 589 589
Liabilities
Demand deposits 22,998 22,998
Interest bearing transaction and savings deposits 44,856 44,856
Time deposits 16,125 15,776
Interest payable 124 124
Federal funds purchased 1,000 1,000
</TABLE>
52
<PAGE>
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data)
NOTE 15--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
Condensed balance sheets, statements of income, and cash flows for Bay Area
Bancshares (parent company only) are presented below:
<TABLE>
Bay Area Bancshares (Parent) Balance Sheets at December 31, 1995 and 1994
<CAPTION>
Assets 1995 1994
<S> <C> <C>
Cash and cash equivalents $120 $20
Investment in subsidiary 8,045 6,964
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $8,165 $6,984
Liabilities & Shareholders' Equity
Other liabilities 87 13
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 87 13
Total shareholders' equity 8,078 6,971
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $8,165 $6,984
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Bay Area Bancshares (Parent) Statements of Income For the Years Ended
December 31, 1995, 1994 and 1993
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Cash dividends received from subsidiary $275 $325 $200
Other income 1 1 1
Interest expense --- (10) (17)
Professional fees (25) (37) (14)
Miscellaneous expense (35) (40) (45)
- ---------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed income of subsidiary 216 239 125
Equity in undistributed income of subsidiary 995 708 735
- ---------------------------------------------------------------------------------------------------------------------------
Net income $1,211 $947 $860
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Bay Area Bancshares (Parent) Statements of Cash Flows For the Years Ended
December 31, 1995, 1994 and 1993
<CAPTION>
Cash flows from operating activities: 1995 1994 1993
<S> <C> <C> <C>
Net income $1,211 $947 $860
Adjustments to reconcile net income to cash provided by operating
activities:
Net decrease in unamortized offering expenses -- -- 2
Net decrease in other assets -- 2 1
Net increase (decrease) increase in other liabilities 74 8 (5)
Equity in undistributed income of subsidiary (995) (708) (735)
- ---------------------------------------------------------------------------------------------------------------------------
Total adjustments (921) (698) (737)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 290 249 123
Cash flows from financing activities:
Principal payment on note payable -- (150) (75)
Exercise of common stock options 51 83 93
Cash dividends (241) (188) (159)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (190) (255) (141)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 100 (6) (18)
Cash and cash equivalents, beginning of year 20 26 44
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $120 $20 $26
- ---------------------------------------------------------------------------------------------------------------------------
Cash paid for interest -- $11 $17
</TABLE>
53
<PAGE>
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table provides certain information regarding the Board of
Directors of the Company and the Bank.
<TABLE>
<CAPTION>
Director of
Position Position the Company
Name Age with Company with Bank Since
<S> <C> <C> <C> <C>
Frank M. Bartaldo Jr. 47 N/A Director, N/A
Executive Vice
President
Mario A. Biagi 67 Director Chairman of 1981
the Board
John O. Brooks 55 Director Director, 1995
Executive Vice President,
President, Chief Executive
Chief Operating Officer
Officer
Gary S. Goss 60 Director, Director, 1981
Secretary Secretary
Robert R. Haight 67 Chairman of Director 1981
the Board,
President,
Chief Executive
Officer
Stanley A. Kangas 58 Director Director 1996
David J. Macdonald 56 Director Director 1981
Thorwald A. Madsen 79 Director Director 1981
Dennis Royer 53 Director Director 1995
</TABLE>
None of the directors of the Company or the Bank were selected pursuant
to any arrangement or understanding other than the directors and officers of the
Company and the Bank acting in their capacities as such. There are no family
relationships between any two or more of the directors or officers.
Set forth below are brief summaries of the background and business
experience, including the principal occupation, of the Company's and Bank's
directors. Except for the Bank, no corporation or organization discussed below
is an active affiliate or a subsidiary of the Company.
54
<PAGE>
FRANK M. BARTALDO, JR. Mr. Bartaldo has been with Bay Area Bank since 1986. He
currently serves as Executive Vice President and Senior Banking Officer of the
Bank. In February 1996, Mr. Bartaldo was elected to serve as a director of the
company's sole subsidiary, Bay Area Bank. Before his employment at Bay Area
Bank, Mr. Bartaldo was a partner in a mortgage banking business and prior to
that he was employed for eight years at Wells Fargo Bank. Mr. Bartaldo received
his BS in Business Administration from California State University at Chico in
1971. Mr. Bartaldo is president elect of the Redwood City-San Mateo County
Chamber of Commerce.
MARIO BIAGI: Presently a rancher/consultant, Mr. Biagi owned and operated Ethan
Allen Furniture Store in Belmont for 15 years and Biagi Interiors in Redwood
City for 10 years. From 1976 to 1984, Mr. Biagi served as a councilman for
Redwood City and from 1980 to 1982, as the City's mayor. He currently serves on
the Advisory Board of Kainos having served as a board member for 8 years. In
addition to other active involvement in the community, he acted as Interim
President of the Bank from December 1984 to May 1985, and as the Chairman of the
Board from 1981 to 1991. In May 1995 Mr. Biagi was once again elected to the
position of Chairman of the Board of Bay Area Bank.
JOHN O. BROOKS: Mr. Brooks began his position as President/Chief Executive
Officer and Director of Bay Area Bank and Chief Operating Officer of Bay Area
Bancshares on November 2, 1992. On June 27, 1995 Mr. Brooks was appointed a
Director of Bay Area Bancshares. He has more than 30 years of experience in the
banking industry. From 1990 to 1992, he was President/CEO of Heritage Oaks Bank
in Paso Robles. From 1987 to 1990, he was President/CEO at the Bank of
Pleasanton and from 1980 to 1987, he held the same position at Foothill Bank in
Mountain View, Ca. Mr. Brooks is currently involved in local Rotary groups, the
San Carlos Youth Center Foundation, serves on the Board of Directors of the
Mid-Peninsula YMCA and the Peninsula Outreach Program and is a member of the
honor society, Beta Gamma Sigma. GARY S. GOSS: Certified Public Accountant since
1961 and principal in the accounting firm of Gary S. Goss, San Carlos,
California. Currently a member of the Redwood City, San Carlos and Foster City
Chambers of Commerce and the San Carlos Rotary. Mr. Goss has been president of
the San Carlos Chamber and served on the Board of Directors of the Half Moon Bay
Chamber of Commerce. He also served as president of the YMCA. ROBERT R. HAIGHT:
Owner and founder of Woodside Road Insurance Agency in Redwood City. He is also
a licensed insurance broker and agent. Mr. Haight graduated from Redwood City's
Sequoia High School, having lived in Redwood City since 1942. He is a past
president and director of the Redwood City Chamber of Commerce, the Redwood City
Independent Insurance Agents Association, and San Mateo County Independent
Agents Association. Currently, Mr. Haight is Director of the Redwood City
Independent Insurance Agents Association and a member of the Sequoia Club. Mr.
Haight was elected Chairman of the Board, President and Chief Executive Officer
of Bay Area Bancshares in 1991. STANLEY A. KANGAS. Chairman of the Board of
Brian Kangas Foulk (BKF), a civil engineering firm in Redwood City. Mr. Kangas
was President of BKF from 1975 to 1995. He has over 35 years of experience in
all aspects of civil engineering and land surveying. Mr. Kangas has provided
engineering consulting services to Stanford University, its Medical Center and
Research/Industrial Park and the Stanford Shopping Center. He served as
Principal-In-Charge for many of BKF's large scale projects including the 1,200
acre Redwood Shores community in Redwood City. He also
55
<PAGE>
serves as District Engineer for the Belmont County Water District. Professional
affiliations include the American Society of Civil Engineers, American Water
Works Association, Bay Counties Civil Engineers and Land Surveyors Association,
Consulting Engineers and Land Surveyors of California, Peninsula Association of
Contractors and Engineers, Peninsula Chapter of Civil Engineers and Land
Surveyors, San Mateo County Economic Development Association, Northern
California Surveyors Joint Apprenticeship Committee and the Northern California
Surveyors Trust. Mr. Kangas is currently involved in many local community
programs and non-profit groups including the Redwood City-San Mateo County
Chamber of Commerce, Kainos, the Sequoia Hospital Foundation, San Carlos Youth
Center Foundation and the Boys and Girls Club of the Peninsula. Mr. Kangas and
BKF were recently honored with the Sequoia Award for civic service by a Redwood
City business.
DAVID J. MACDONALD: A real estate developer and syndicator, Mr. Macdonald is
owner and broker of David J. Macdonald Real Estate Company in San Carlos. Mr.
Macdonald is a member of the San Mateo County Sheriff's Air Squadron and Search
and Rescue.
THORWALD A. MADSEN: Retired since 1989, Mr. Madsen was Manager of Bay Counties
Builders Escrow from 1972 to 1989, and Executive Director of the Peninsula
Builder's Exchange from 1972 to 1984. Prior to assuming dual responsibilities at
PBE, he ran his own company, Thor Madsen Plumbing and Heating from 1944 to 1970.
Always an active member of the community, Mr. Madsen served as Mayor of San
Carlos in 1974 and served on the city council from 1972 to 1976. He was on the
San Carlos Park & Recreation Commission for 12 years, serving as Chairman five
times. Currently Mr. Madsen is an active participant in the San Carlos Lions
Club, PACE Engineers Club, San Mateo Men's Garden Club, and served as President
of the San Carlos Branch of Sons in Retirement in 1990.
DENNIS W. ROYER. Mr. Royer is a partner in his family owned and operated
business, Royer Realty in Redwood City, which his father began in 1954. Upon
receiving his MBA from the University of Santa Clara in 1967, Mr. Royer began
his career as a residential real estate broker. He is a former board member of
the Redwood City/San Carlos Association of Realtors and the Peninsula Golf and
Country Club. Mr. Royer was appointed to the Board of Directors of Bay Area Bank
and Bay Area Bancshares on June 6, 1995.
Executive Officers of the Registrant
The information required herein is incorporated by reference from Item
1(b), herein.
56
<PAGE>
Item 11. Executive Compensation.
The following table sets forth the cash compensation paid to or
allocated for the Chief Executive Officer of the Company and the Bank and those
executive officers whose cash compensation exceeded $100,000 for services
rendered in 1995, 1994, and 1993.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Name and Regular Compensation All Other
Principal Position Year1 Salary1, 2 Bonus Stock Options* Compensation3,4
- ------------------ ---- ------ ----- -------------- ------------
<S> <C> <C> <C> <C> <C>
Robert R. Haight 1995 $17,750 N/A 0 $ 6,000
CEO of Company 1994 $15,600 N/A 0 $ 5,920
1993 $16,500 N/A 11,613 $ 4,507
John O. Brooks 1995 $135,000 $49,000 0 $13,500
CEO of Bank 1994 $127,500 $36,000 0 $13,500
1993 $127,500 $56,000 37,035 $13,250
<FN>
* Number of shares
- ---------------------
1 Amounts for Mr. Haight include all compensation received in the fiscal year.
2 Mr. Haight is paid $300 per Board meeting in addition to his regular, non-officer director fees. Mr. Brooks
has an annual base salary of $135,000.
3 Mr. Haight is not eligible for the Bank's 401(k) Plan as he is not an employee of the Bank. Mr. Haight
receives health benefits with a cost of $500 per month during 1995. During 1995, Mr. Brooks received
$6,000 ($500/month) as an auto allowance and $7,500 as a matching contribution under the Bank's 401(k)
Plan.
4 In addition to this compensation, a Salary Continuation Plan was adopted
effective January 1, 1995, to provide deferred compensation to Mr. Brooks,
subject to certain terms and conditions as described below.
</FN>
</TABLE>
Executive Salary Continuation Plan
The Board of Directors of the Bank has approved the principal terms of
a Salary Continuation Plan for John Brooks effective January 1, 1995 by which he
will receive deferred compensation in accordance with the terms and conditions
of a written agreement. This could result in a maximum benefit of annual
payments to Mr. Brooks of $80,000 per year for a period of up to 15 years from
2006 through 2020. Each such annual payment is to consist of a basic benefit of
$2,000 and a target benefit of $78,000. The target benefit accrues
proportionately for each calendar year from 1995 through 2005 in which Mr.
Brooks remains as chief executive officer of the Bank and in which the Bank
achieves certain performance standards. If the performance standards are not
achieved in a particular year, the proportion of the target benefit does not
vest. The payment of the annual payments to the extent they are vested will
commence in 2006 and continue for up to 15 years through 2020 if certain
conditions are met. The written agreement setting forth the Salary Continuation
Plan has not been finalized.
The following table sets forth certain information regarding the Salary
Continuation Plan:
57
<PAGE>
<TABLE>
<CAPTION>
LONG TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
Performance or
Number of Other Period
Shares, Units Until Maturation
Name or other Rights or Payout Threshold Target Maximum
<S> <C> <C> <C> <C> <C>
John O. Brooks N/A 11 years $2,000/yr. $78,000/yr. $80,000/yr.
</TABLE>
Profit Sharing Plan
The Bank instituted a capital accumulation and profit-sharing plan (the
"Plan") for eligible employees of the Bank effective January 1, 1985 which was
last amended November 1, 1987. The Plan is intended to provide benefits to the
Bank's employees at retirement or upon death or disability. To be eligible for
participation in the Plan, an employee must complete one half year of service
and not be included in a collective bargaining unit.
Benefits are provided through the Bank's discretionary profit-sharing
contributions as well as from salary saving contributions ("401(k)
contributions") made by the employee. 401(k) contributions are made with
before-tax dollars thereby reducing the employee's taxable income. The Bank may
contribute a matching amount equal to a percentage of the employee's 401(k)
contribution up to a maximum of 5% of the employee's earnings determined prior
to the 401(k) contribution. The amount of the Bank's matching contribution, if
any, is determined each year by the Bank's Board of Directors; however,
contributions by the Bank are not allowed until the Company has achieved certain
predefined performance standards. The Bank is not required to make a matching
contribution even if such performance standards are achieved.
The 401(k) contribution may be contributed in an amount from 1% to 15%
of the employee's earnings. If the employee contributes more than 5% of his
earnings each year, no more than 5% will be matched by the Bank in the event the
Bank determines it will make a discretionary contribution. The amount of the
Bank's discretionary contribution, if any, is determined on a yearly basis.
Following two years of service, the Bank's contributions begin to vest,
with 100% vesting occurring after four years of service. For the years ending
December 31, 1995, 1994 and 1993, the Bank contributed $64,000, $64,000 and
$58,600, respectively, to the Plan.
Stock Option Plan
The Company adopted a Qualified Stock Option Plan (the "1993 Plan") in
1993, which was approved by the shareholders at the 1993 Annual Meeting. The
1993 Plan provides for the issuance of incentive and non-incentive stock options
to directors, key full-time employees and officers and consultants of the
Company and the Bank. The 1993 Plan initially covered 231,431 shares of the
Company's Common Stock, no par value, for which such options could be granted.
As of March 15, 1996, 177,169 shares were subject to outstanding options and
19,558 shares remained available for future grant under the plan.
The Plan provides that all options be granted at an exercise price of
not less than 100% of fair market value on the date of grant in the case of
incentive stock options or not less than 85% of fair market value on the date of
grant in the case of other stock options. The Board of Directors of
58
<PAGE>
the Company may issue options which become vested in the future based upon
achieving certain longevity requirements and/or performance standards. Within
three months following termination of employment for any reason other than death
or disability, an optionee (other than a director-optionee) may exercise his or
her option to the extent such option was exercisable on the date of termination,
subject to earlier termination by reason of expiration of the option. In the
event of the death or disability of an optionee (other than a
director-optionee), the option is exercisable for a period of six months after
that event, which is also subject to earlier termination if the option expires.
Director-optionees may exercise their options for a period of five years
following retirement, death or disability, subject to earlier termination of the
options.
The following table sets forth the value realized by the exercise of
options during 1995 and the value of outstanding stock options held by the
executive officers named in the Summary Compensation Table at December 31, 1995,
pursuant to the 1993 Plan. In addition, in February of 1996, Mr. Brooks
exercised options for 2,000 shares, with an exercise price of $4.75.
<TABLE>
<CAPTION>
AGGREGATE OPTIONS EXERCISED IN LAST FISCAL YEAR AND
YEAR-END OPTION VALUES
Value of
Number of Unexercised
Unexercised In-The-Money
Options Options
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise1 Realized2 Unexercisable1 Unexercisable3
<S> <C> <C> <C> <C>
Robert R. Haight 0 $0 11,613/0 $87,100 / $0
John O. Brooks 3,100 $17,600 30,935/0 $232,000 / $0
<FN>
1 Number of shares
2 Value determined based on the difference between exercise price for shares
and fair market value of shares on date of exercise.
3 Value estimated based on fair market value of Common Stock at December 31, 1995 ($12.25 estimated
bid price ) less the exercise price of those options.
</FN>
</TABLE>
Employment Agreement
On September 2, 1992, Bank President and Chief Executive Officer John
O. Brooks entered into an employment agreement with the Bank. The agreement has
no term and Mr. Brooks' employment is "at will" thus it may be terminated at any
time. The agreement primarily outlines Mr. Brooks' base salary (originally
$127,500, currently $135,000 annually), auto allowance ($500 per month),
performance requirements for bonuses (annual bonus payments not to exceed 4.5%
of Bank pretax income), maximum severance benefits (six months if the Bank is
sold or merged before September 1997), authorities and responsibilities, and
other miscellaneous benefits.
59
<PAGE>
Compensation of Directors
In 1995, non-officer directors of the Company received $100 per Company
Board meeting. The Chairman of the Bank Board received an additional $200 per
monthly meeting and the Chairman of the Company's Board received an additional
$100 per meeting. Each non-officer director also received $400 per Bank Board
meeting as well as $150 per committee meeting. Each director also received $500
per month for health insurance premiums. Total compensation for the current six
non-officer directors was $93,050 in 1995.
In March of 1996 the directors approved an increase in their director
fees, effective April 1, 1996, as follows: non-officer directors of the Company
will receive $200 per Company Board meeting. Each non-officer director will
receive $650 per Bank Board meeting as well as $150 per committee meeting. Each
director also will receive $550 per month for health insurance premiums. The
Chairman of the Bank Board will continue to receive an additional $200 per
monthly meeting and the Chairman of the Company's Board will receive an
additional $100 per meeting.
Directors are also eligible to receive options and have received
options under the 1993 Plan and the prior plan of the Company. In 1995,
directors exercised options for 8,100 shares of stock, by which those directors
realized $38,475. In February of 1996, directors exercised options for an
additional 8,000 shares of stock, realizing value of $38,000. As of March 15,
1996 the directors of the Company have options exercisable for a total of 94,775
shares. The value of those exercisable options as of March 15, 1996 was
approximately $706,000, which value is estimated based on fair market value of
Common Stock at March 15, 1996 ($12.25 estimated bid price) less the exercise
price of those options.
The Bank's bylaws provide that a director may be designated as a
"Director Emeritus" upon retirement. Mr. James E. Burney and Mr. Alan Miller
retired from the Board of Directors of the Bank on March 21, 1995 and May 16,
1995, respectively. Each entered into a Director Emeritus Agreement with the
Bank whereby they will receive $1,000 per month for 5 years as a Director
Emeritus.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Security Ownership of Management
The following table sets forth information as of March 15, 1996,
pertaining to beneficial ownership of the Company's Common Stock by current
directors of the Company and all directors and executive officers1 of the
Company as a group. The information contained herein has been obtained from the
Company's records and from information furnished directly by the individual or
entity to the Company.
The table should be read with the understanding that more than one
person may be the beneficial owner or possess certain attributes of beneficial
ownership with respect to the same securities. Therefore, careful attention
should be given to the footnote references set forth in the column entitled
"Amount Held and Nature of Holdings." In addition, shares issuable pursuant to
- --------------------
1 As used throughout this Form 10-K and unless indicated to the contrary,
the terms "officer" and "executive officer" refer to the Company's
Chairman of the Board of Directors, President and Chief Executive
Officer, Chief Operating Officer, and Chief Financial Officer, and the
Bank's Senior Banking Officer and Senior Credit Officer.
60
<PAGE>
options which may be exercised within 60 days of March 15, 1996 are deemed to be
issued and outstanding and have been treated as outstanding in calculating the
percentage ownership of those individuals possessing such interest, but not for
any other individuals. Thus, the total number of shares considered to be
outstanding for the purposes of this table may vary depending upon the
individual's particular circumstance.
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address Relationship Beneficial Percent
of Beneficial Owner2,3 With Company Ownership4 of Class
<S> <C> <C> <C>
Mario A. Biagi Director 51,641 5 6.12%
John O. Brooks Director/Chief
Operating Officer 36,935 6 4.28%
Gary S. Goss Director & Secretary 92,894 7 11.03%
Robert R. Haight Chairman of the Board, 54,508 8 6.42%
President and Chief
Executive Officer
Stanley A. Kangas Director 1,417 9 .17%
David J. Macdonald Director 46,280 10 5.41%
Thorwald A. Madsen Director 28,098 11 3.35%
Dennis W. Royer Director 1,977 12 .24%
------ ---
All directors, nominees and officers
of the Company and Bank as a Group
(11 in number) 351,282 13 36.71%
- --------------------
<FN>
2 Includes shares beneficially owned, directly and indirectly, together with
associates. Subject to applicable community property laws and shared
voting or investment power with a spouse, the persons listed have sole
voting and investment power with respect to such shares unless otherwise
noted.
3 The address for all persons is: 900 Veterans Boulevard, Redwood City, California 94063.
4 Includes ownership of Common Stock, as well as shares of Common Stock
which could be acquired through the exercise of options currently
outstanding within 60 days of March 15, 1996.
5 Includes 39,775 held by Mario and June Biagi as joint tenants; 254 shares currently in street name; and options to
acquire 11,613 shares of Common Stock.
6 Includes 6,000 shares of Common Stock held by the John O. Brooks Revocable Trust; and vested options to acquire
30,935 shares of Common Stock.
7 Includes 35,889 shares of Common Stock held by Gary and Chrystel Goss as
community property; 1,029 shares held by Gary S. Goss as custodian; 35,814
shares held in trust for Gary and Chrystel Goss; 10,162 in the name of
Gary S. Goss; and options to acquire 10,000 shares of Common Stock. On
December 27, 1991, the State Banking Department approved an application by
Mr. Goss to acquire up to 24.99% of the Company's stock on the open
market.
8 Includes 41,995 shares of Common Stock held by Robert and Sherrill Haight
as joint tenants; 600 shares held by Robert R. Haight IRA; 300 shares
Sherrill Haight IRA; and options to acquire 11,613 shares of Common Stock.
9 Includes 1,000 shares of Common Stock held by Stanley and Teresa A. Kangas as joint tenants; and 417 shares
held by the Brian Kangas Foulk Retirement Plan & Trust of which Mr. Kangas is a Trustee.
10 Includes 23,107 shares of Common Stock held by David and Pauline Macdonald
as joint tenants; and options to acquire 23,173 shares of Common Stock.
61
<PAGE>
11 Includes 20,633 shares of Common Stock held by Thorwald and Jonelle Madsen
as Trustees of the Madsen Family Trust; 22 shares of Common Stock held by
Thorwald Madsen as custodian for his grandchild, a minor; and options to
acquire 7,443 shares of Common Stock.
12 Includes 1,977 shares of Common Stock held in the name of Dennis W. Royer.
13 Includes as if currently outstanding, 177,169 shares subject to stock options granted under the Company's 1993
Stock Option Plan.
</FN>
</TABLE>
Major Shareholders
The following sets forth information as of March 15, 1996, pertaining to
beneficial ownership of the Company's Common Stock by persons, other than
management , known to the Company to own 5% or more of the Company's common
stock. This information was obtained through the Company's stock transfer agent
and registrar.
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address Relationship Beneficial Percent
of Beneficial Owner With Company Ownership1 of Class
<S> <C> <C> <C>
James & Katherine Burney Director Emeritus 73,171 2 8.55%
Nine C Corporation Major Shareholder
900 Veterans Blvd.
Redwood City, CA
Alan Miller Director Emeritus 56,480 3 6.60%
#4 Bridle Lane Major Shareholder
Woodside, CA
- ----------------------
<FN>
1 Includes shares beneficially owned, directly and indirectly, together with
associates. Subject to applicable community property laws and shared
voting or investment power with a spouse, the persons listed have sole
voting and investment power with respect to such shares unless otherwise
noted.
2 Includes 49,988 shares of Common Stock held by James and Katherine Burney
as Trustees of the Burney Family Trust; and options to acquire 23,173
shares of Common Stock. On 6/24/91 the State Banking department approved
an application by Mr. James E. Burney to acquire up to 24.99% of the
Company's outstanding stock on the open market.
3 Includes 8,472 shares of Common Stock held by Heart Construction Company,
which is wholly owned by Alan B. Miller; 24,835 shares solely owned by
Alan B. Miller; and options to acquire 23,173 shares of Common Stock.
</FN>
</TABLE>
62
<PAGE>
Item 13. Certain Relationships and Related Transactions.
Buildings Leases with Major Shareholders
The Company's and the Bank's principal offices are located in a modern,
six-story building at 900 Veterans Boulevard, Redwood City, which provides
approximately 8,300 square feet of ground floor interior space. In June of 1995
the Bank executed a lease for 7.5 years (90 months) with a seven year option to
renew. The new lease was made at essentially the same terms as the previous
lease that was negotiated with a non-related party. The current monthly cost for
this space (which includes an allocation of certain operating expenses) is
approximately $21,052 per month or approximately $2.53 per square foot. The
rental amounts are subject to further adjustments annually based on the Consumer
Price Index and the allocation of property taxes and operating expenses. This
building was acquired in September of 1992 by Nine-C Corporation, which is owned
by Mr. James Burney, a major shareholder of the Company and a Director Emeritus
of the Company and the Bank.
In addition to the 8,300 square feet the Company leases for its primary
operations, an additional 2,100 square feet was leased in the same building in
1993 for the Bank's Mortgage Department. The current cost for this additional
space (which includes an allocation of certain operating expenses) is
approximately $3,989 per month or $1.88 per square foot. The lease expired in
December 1995 and was renewed for a three year period with a three year option
to renew. This lease is also subject to adjustment annually based on the
Consumer Price Index and the allocation of property taxes and operating
expenses.
The Company leases additional premises for its data processing,
accounting and centralized operations departments in Redwood City. These
premises are located in a building owned by Mr. Alan Miller, a major shareholder
and Director Emeritus of the Company and the Bank. The lease covers total space
of approximately 5,200 square feet. On May of 1991, the Company executed a three
year lease with Mr. Alan Miller, which was later extended to June 30, 1996. The
current monthly cost under the lease (which includes an allocation and
adjustments for certain operating expenses) is $4,750 per month, or $.91 per
square foot. The monthly rent payment is subject to annual adjustment based on
the cost of living index as published by the U.S. Department of Labor, Bureau of
Labor Statistics. In addition to monthly rent payments, the Company is also
responsible for operating expenses (i.e., taxes, utilities, insurance,
landscaping, security) of the building based on the Company's proportionate
share of the building's square footage (29%).
The Company's leases were reviewed by management and the Board of
Directors and found to be equitable and competitive with other leases within the
immediate market area.
The Company owns leasehold improvements and furniture, fixtures and
equipment located at the above locations, all of which are used in the banking
business.
Indebtedness of Management
Some of the Company's directors and executive officers, as well as
their immediate family and associates, are customers of, and have had banking
transactions with, the Bank in the ordinary course of the Bank's business and
the Bank expects to have such ordinary banking transactions with these persons
in the future. In the opinion of management of the Bank, all loans and
commitments to lend included in such transactions were made in compliance with
applicable laws, and on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other persons of similar creditworthiness, and did not involve more than a
normal risk of collectibility or present other unfavorable features. The
63
<PAGE>
aggregate amount the Bank can lend to directors and officers as a group is
limited to 100% of the Bank's capital. Loans to individual directors and
officers must comply with the Bank's respective lending policies and statutory
lending limits, and prior approval of the Bank's Board of Directors is required
for most of these loans. Total loans outstanding at December 31, 1995 to current
directors and executive officers, and their associates was $680,975 or
approximately 8.46% of the Bank's capital.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements.
Reference Page
Report of Independent Auditors:
Ernst & Young....................................................
Consolidated Financial Statements of
Bay Area Bancshares and Subsidiaries:............................
Consolidated Balance Sheets as
of December 31, 1995 and 1994: ..................................
Consolidated Statements of
Income for the Years Ended
December 31, 1995, 1994 and 1993: ................................
Consolidated Statements of Changes
in Shareholders' Equity for the
Years Ended December 31, 1995, 1994, and 1993: ...................
Consolidated Statements of Cash
Flows for the Years Ended
December 31, 1995, 1994, and 1993: ...............................
Notes to Consolidated Financial Statements:.......................
64
<PAGE>
2. Financial Statement Schedules. In accordance with the rules of Regulation
S-X, schedules are not submitted because (a) they are not applicable to or
required of the Company, or (b) the information required to be set forth therein
is included in the financial statements or footnotes thereto.
3. Exhibits. Management contracts and compensation plans are identified
with a number sign ("#").
Exhibit
Number
3.1 Restated Articles of Incorporation of Company1
3.2 Amendment to Restated Articles of
Incorporation2
3.3 Bylaws of Company, as amended3
3.4 Amendment to Bylaws of Company3
4.1 Certificate of Determination of Preferred Stock4
10.3 Lease Entered Into By and Between
Alan B. Miller and Bay Area Bank5
10.4 # Employment Agreement Between John O. Brooks,
Bay Area Bancshares and Bay Area Bank dated
as of September 2, 19925
10.8 # 1993 Stock Option Plan6
10.9 # Forms of Stock Option Agreements6
10.11 #Director Emeritus Agreement Bay Area Bank and James E.
Burney dated
March 21, 1995
10.12 #Director Emeritus Agreement Bay Area Bank and Alan Miller
dated May 16, 1995
65
<PAGE>
10.13 Commercial Lease between Nine C Corporation dated June 30,
1995 for the Bank's primary facility
10.14 Commercial Lease between Nine C Corporation dated November
30, 1995 for the Bank's Mortgage Department
22 The only significant subsidiary of the
Company is Bay Area Bank--100%-owned
subsidiary incorporated in the State of
California. Bay Area Bank owns 100% of
Bay Counties Builders Escrow, Inc., an
inactive California corporation.
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
- -------------------
1 Filed as Exhibits 3.1, to the Company's Annual Report on Form 10-K for
the fiscal year ended
December 31, 1988.
2 Filed as Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989.
3 Filed as Exhibits 3.2, and 3.3, respectively, to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987.
4 Filed as Exhibits 4.1, to the Company's Current Report on Form 8-K filed
September 15, 1988.
5 Filed as Exhibits 10.4 and 10.5, respectively, to the Company's Annual
Report on Form 10-K for the
fiscal year ended December 31, 1991.
6 Filed as Exhibits 10.8, 10.9 and 10.10 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter.
Supplemental Information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered
Securities Pursuant to Section 12 of the Act.
The Registrant's proxy material for its 1995 Annual Meeting of
Shareholders and its Annual Report to Shareholders covering Registrant's
last fiscal year is to be furnished to security holders subsequent to the
filing of this Annual Report on Form 10-K. The Registrant shall furnish
copies of such material to the Commission when it is sent to security
holders.
66
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE: March 27, 1996
BAY AREA BANCSHARES
By /s/ Robert R. Haight
Robert R. Haight, Chairman of the
Board, President
and Chief Executive Officer
(Principal Executive Officer)
By /s/ John O. Brooks
John O. Brooks, Director, Executive
Vice President
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE: DATE:
/s/ Mario A. Biagi March 26, 1996
MARIO A. BIAGI, Director
/s/ John O. Brooks March 26, 1996
JOHN O. BROOKS, Director
/s/ Gary S. Goss March 26, 1996
GARY S. GOSS, Director
/s/ Robert R. Haight March 26, 1996
ROBERT R. HAIGHT, Chairman
of the Board of Directors, President
and Chief Executive Officer
/s/ Stanley A. Kangas March 26, 1996
STANLEY A. KANGAS, Director
67
<PAGE>
/s/ David J. Macdonald March 26, 1996
DAVID J. MACDONALD, Director
/s/ Thorwald A. Madsen March 26, 1996
THORWALD A. MADSEN, Director
/s/ Dennis W. Royer March 26, 1996
DENNIS W. ROYER, Director
/s/ Anthony J. Gould March 26, 1996
ANTHONY J. GOULD, Vice President
Chief Accounting Officer
68
DIRECTOR EMERITUS AGREEMENT
This Director Emeritus Agreement is entered into between Bay Area Bank (The
"Bank") and JAMES E. BURNEY (the "Retiring Director"), as of MARCH 21, 1995.
RECITALS
A. The Bank's bylaws provide, at Section 16 of Article III, that a director who
has served as such for at least 10 years is eligible to serve as a Director
Emeritus of the Bank, and may receive compensation in the discretion of the
Board of Directors; and
B. The Retiring Director has served on the Board of the Bank for 10
years, and the Board desires to appoint him a Director Emeritus upon his
retirement from the Board of the Bank and its holding company, Bay Area
Bancshares ("Bancshares").
AGREEMENT
IN CONSIDERATION OF THE FOREGOING, AND OF THE PROMISES AND AGREEMENTS
HEREIN, the parties agree as follows:
1. The Board of Directors of the Bank shall appoint the Retiring
Director as a Director Emeritus upon his retirement from the Board of Directors
of the Bank and from the Board of Directors of Bancshares. Such retirement shall
become effective no later than MARCH 21, 1995 .
2. The Bank shall pay the Retiring Director as a Director Emeritus
$1,000 per month for five (5) years. The first payment shall be paid on or about
MAY 1, 1995 and payments shall continue monthly thereafter until the last
payment is paid on or about APRIL 1, 2000. The foregoing payments shall be
payable according to the above schedule to the Retiring Director's estate or
representative if the Retiring Director dies before the end of the period
described above.
3. As a Director Emeritus, the Retiring Director may be a member of the
Bank's honorary Ex Officio Board. Effective upon retirement the Retiring
Director shall not be entitled to any of the powers or rights conferred upon
duly elected directors by law or by the articles and bylaws of the Bank and
Bancshares. The Retiring Director shall not be entitled to any employee benefits
as a result of his appointment as a Director Emeritus.
4. The Retiring Director shall not, directly or indirectly disclose any
confidential information about the Bank or Bancshares.
5. The stock rights of the Retiring Director shall remain as set forth
in the corporate documents setting forth such rights, except as provided herein.
This Agreement shall not affect the Retiring Director's right to convert
preferred shares of Bancshares into common stock and the Retiring Director shall
be entitled to exercise any stock options issued to him in accordance with the
applicable option agreement. The Retiring Director shall comply with all
securities laws applicable to any transaction involving his stock of Bancshares.
1
<PAGE>
6. The term of this Agreement shall be five (5) years. If either party
fails to perform any obligation within fifteen (15) days of the date that
performance is due, then the other party shall give the defaulting party written
notice of same and the defaulting party shall have ten (10) days from the date
of the notice within which to perform hereunder. In the event that the
defaulting party fails to perform or otherwise cure the default within said ten
(10) day period, then the other party shall have the right to terminate this
Agreement prior to the expiration of the term upon further written notice to the
defaulting party.
7. Any notice required under this Agreement shall be in writing and
shall be deemed effective one business day after having been deposited in the
United States mail, postage prepaid, registered or certified, and addressed to
the party at its address set forth below by the parties signature. Any party may
change its address for purposes of this Agreement by written notice given as set
forth herein.
8. This Agreement constitutes the entire agreement between the parties
concerning the subject matter hereof, and supersedes all prior and
contemporaneous agreements between the parties, other than as referred to in
this Agreement. This Agreement may be amended only in writing, signed by the
party or parties to be bound by the amendment.
9. This Agreement shall be construed in accordance with and governed by the
laws of the State of California.
BAY AREA BANK
__________________________________ By __________________________________
Name of Director Name and Title
- ---------------------------------- ----------------------------------
Address of Director Address of Bank
- ---------------------------------- ----------------------------------
2
DIRECTOR EMERITUS AGREEMENT
This Director Emeritus Agreement is entered into between Bay Area Bank (The
"Bank") and ALAN B. MILLER (the "Retiring Director"), as of MAY 16, 1995 .
RECITALS
A. The Bank's bylaws provide, at Section 16 of Article III, that a director who
has served as such for at least 10 years is eligible to serve as a Director
Emeritus of the Bank, and may receive compensation in the discretion of the
Board of Directors; and
B. The Retiring Director has served on the Board of the Bank for 10
years, and the Board desires to appoint him a Director Emeritus upon his
retirement from the Board of the Bank and its holding company, Bay Area
Bancshares ("Bancshares").
AGREEMENT
IN CONSIDERATION OF THE FOREGOING, AND OF THE PROMISES AND AGREEMENTS
HEREIN, the parties agree as follows:
1. The Board of Directors of the Bank shall appoint the Retiring
Director as a Director Emeritus upon his retirement from the Board of Directors
of the Bank and from the Board of Directors of Bancshares. Such retirement shall
become effective no later than MAY 16, 1995 .
2. The Bank shall pay the Retiring Director as a Director Emeritus One
Thousand Dollars ($1,000.00) per month for five (5) years. The first payment
shall be paid on or about JULY 1, 1995 and payments shall continue monthly
thereafter until the last payment is paid on or about JUNE 1, 2000. The
foregoing payments shall be payable according to the above schedule to the
Retiring Director's estate or representative if the Retiring Director dies
before the end of the period described above.
3. Effective upon retirement the Retiring Director shall not be
entitled to any of the powers or rights conferred upon duly elected directors by
law or by the articles and bylaws of the Bank and Bancshares. The Retiring
Director shall not be entitled to any employee benefits as a result of his
appointment as a Director Emeritus.
4. The Retiring Director shall not, directly or indirectly disclose any
confidential information about the Bank, Bancshares, or their customers; make or
publish any statements that may be damaging to the Bank or Bancshares; bring a
legal or arbitration action against the Bank or Bancshares without first
exhausting all informal means of dispute resolution; or take any other actions
that are inconsistent with those of a retired director or are contrary to the
best interests of the Bank or Bancshares.
1
<PAGE>
5. The stock rights of the Retiring Director shall remain as set forth
in the corporate documents setting forth such rights, except as provided herein.
This Agreement shall not affect the Retiring Director's right to convert
preferred shares of Bancshares into common stock and the Retiring Director shall
be entitled to exercise any stock options issued to him in accordance with the
applicable option agreement. The Retiring Director shall comply with all
securities laws applicable to any transaction involving his stock of Bancshares.
6. The term of this Agreement shall be five (5) years. If either party
fails to perform any obligation within fifteen (15) days of the date that
performance is due, then the other party shall give the defaulting party written
notice of same and the defaulting party shall have ten (10) days from the date
of the notice within which to perform hereunder. In the event that the
defaulting party fails to perform or otherwise cure the default within said ten
(10) day period, then the other party shall have the right to terminate this
Agreement prior to the expiration of the term upon further written notice to the
defaulting party.
7. Any notice required under this Agreement shall be in writing and
shall be deemed effective one business day after having been deposited in the
United States mail, postage prepaid, registered or certified, and addressed to
the party at its address set forth below by the parties signature. Any party may
change its address for purposes of this Agreement by written notice given as set
forth herein.
8. This Agreement constitutes the entire agreement between the parties
concerning the subject matter hereof, and supersedes all prior and
contemporaneous agreements between the parties, other than as referred to in
this Agreement. This Agreement may be amended only in writing, signed by the
party or parties to be bound by the amendment.
9. This Agreement shall be construed in accordance with and governed by the laws
of the State of California.
BAY AREA BANK
__________________________________ By __________________________________
Signature Signature
- ---------------------------------- ----------------------------------
Name of Director Name and Title
- ---------------------------------- ----------------------------------
Address of Director Address of Bank
2
COMMERCIAL LEASE
This lease, dated for reference purposes only this 30 day of June,
1995, is made between NINE-C CORPORATION (the "Landlord") and Bay Area Bank (the
"Tenant").
1. PREMISES.
1.01 Landlord hereby leases to Tenant and Tenant hires from Landlord on
the terms, covenants and conditions set forth herein, those premises by
crosshatching on Exhibit "A" attached hereto, (the "Leased Premises"), and
incorporated by reference herein. The Leased Premises, approximately 8312 square
feet, is located at 900 Veterans Boulevard, Redwood City, California (the
"Building"). The Building is a part of a commercial project which includes the
Building, an adjacent parking lot and parking structure and the underlying real
property (the "Project").
2. BASE RENT.
2.01 Tenant agrees to pay Landlord as base rent (Base Rent), without
notice, demand, deduction, or offset, the monthly sum of $19,302.81 until
January 1, 1996, and then adjusted as provided in Paragraph 2.03 for all months
thereafter, in advance on or before the first day of each and every successive
calendar month during the term hereof. The rent shall commence on the First day
of July, 1995 (the "Commencement Date"). All payments to Landlord under this
Lease shall be paid to Landlord at the address for notice set forth in paragraph
31.15, or at such other address provided to Tenant by Landlord in writing from
time to time.
2.02 Rent for any period which is for less than one month shall be a
prorated portion of the monthly rental based upon a thirty (30) day month.
Tenant acknowledges that late payment by Tenant to Landlord of rent or other
sums due hereunder will cause Landlord to incur certain costs not contemplated
by this Lease, the exact amount of which would be extremely difficult and
impractical to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed on Landlord by the
terms of any trust deed covering the Leased Premises. Therefore, in the event
Tenant shall fail to pay any installments of rent or any sum due hereunder
within five (5) days after receiving notice of such delinquency, Tenant shall
pay to Landlord as additional rent a late charge equal to FIVE percent (5%) of
each such installment or other sum. A $15.00 charge will be paid by the Tenant
to the Landlord for each returned check, in addition to the late charge.
1
<PAGE>
2.03 The base Rent(effective January 1, 1996) set forth in Paragraph
2.01 shall be increased in all years if the Consumer Price Index - San Francisco
- - All Items (Index) as published by the United States Department of Labor's
Bureau of Labor Statistics, increases over the base period Index. The base
period Index for any year shall be the Index for the calendar month which is the
fourth month preceding the month in which any lease year commences. The base
period Index shall be compared with the Index for the same calendar month for
each subsequent year (comparison month). If the Index for any comparison month
is higher than the base period Index, then the rental for the next year shall be
increased by the identical percentage commencing with the next rental
commencement month; provided, however, that no such rental increase shall be
less than 3% or more than 8%, of the rental for the previous year. In no event
shall the rental be less than that set forth in Paragraph 2.01. (By way of
illustration only, if Tenant commenced paying rent in July 1991, then the base
period Index for the second year is that for April 1992 (assume 130) and that
Index shall be compared with the Index for April 1991 (assume 136), and because
the Index for April 1992 is 4.61% higher, the rental commencing July 1992 shall
be 4.61% higher; likewise the Index for April 1993 shall be compared with the
Index for April 1992.)
Should the Bureau revise or discontinue the publication of the above
Index, Landlord and Tenant shall convert to the revised index or adopt the
successor index in accordance with the guidelines therefor issued by the federal
government.
3. PROJECT OPERATING COSTS.
3.01(a) In order that the Rent payable during the Term reflect any
increase in Project Operating Costs (described below), Tenant agrees to pay to
Landlord as Rent, Tenant's Proportionate Share (defined in Paragraph 3.02) of
all increases in costs, expenses and obligations attributable to the Project and
its operation, all as provided below.
(b) If, during any Calendar year during the Term, Project Operating
Costs exceed the Project Operating Costs for the first year of the Term, Tenant
shall pay to Landlord, in addition to the Base Rent and all of the payments due
under this Lease, an amount equal to Tenant's Proportionate Share of such excess
Project Operating Costs in accordance with the provisions of this Paragraph
3.01(b).
(c) The term "Project Operating Costs" shall include all those
items described in the following subparagraphs (1) and (2).
(1) All taxes, assessments, water and sewer charges
and other similar governmental charges levied on or attributable to the Building
or Project as a whole or their operation, including without limitation, (i) real
property taxes or assessments levied
2
<PAGE>
or assessed against the Building or Project as a whole, and (ii) assessments or
charges levied or assessed against the Building or Project as a whole by any
redevelopment agency; but excluding any tax measured by gross rentals received
from the leasing of the Premises, Building or Project.
(2) Operating costs incurred by Landlord in
maintaining and operating the Building and Project, including without limitation
the following: costs of (i) utilities; (ii) supplies; (iii) insurance (including
public liability, property damage, earthquake, and fire and extended coverage
insurance for the full replacement costs of the Building and Project as required
by Landlord or its lenders for the Project; (iv) services of independent
contractors; (v) compensation (including employment taxes and fringe benefits)
of all persons who perform duties connected with the operation, maintenance,
repair or overhaul of the Building or Project, and the HVAC system, equipment,
improve ments and facilities located within the Project, including without
limitation engineers, janitors, painters, floor waxers, window washers, security
and parking personnel, landscapers and gardeners (but excluding persons
performing services not uniformly available to or performed for substantially
all Building or Project tenants); (vi) operation and maintenance of a room for
delivery and distribu tion of mail to tenants of the Building or Project as
required by the U.S. Postal Service (including, without limitation, an amount
equal to the fair market rental value of the mail room premises); (vii)
management of the Building or Project, whether managed by Landlord or an
independent contractor (including, without limita tion, an amount equal to the
fair market value of any on-site manager's office, but excluding any commission
or fee for leasing or collecting rents); (viii) rental expenses for (or a
reasonable depreciation allowance on) personal property used in the main
tenance, operation or repair of the Building or Project: (ix) costs,
expenditures or charges (whether capitalized or not) required by any
governmental or quasi-governmental authority; (x) amortization of capital
expenses (including financing costs) (1) required for the Building as a whole by
a governmental entity for energy conservation or life safety purposes, or (2)
made by Landlord to reduce Project Operating Costs; and (xi) any other costs or
expenses incurred by Landlord under this Lease and not otherwise reimbursed by
tenants of the Project.
(3) Project Operating Costs shall not include costs
or expenses only for the benefit of other tenants.
(d) Tenant's Proportionate Share of Project Operating
Costs shall be payable by Tenant to Landlord as follows:
(1) Beginning with the year of the term (January 1,
1996) and for each year thereafter ("Comparison Year"), Tenant shall pay
Landlord an amount equal to Tenant's Proportionate Share of the Project
Operating Costs incurred by Landlord in the
3
<PAGE>
Comparison Year which exceeds the total amount of Project Operating Costs
payable by Landlord for the first year of the term. This excess is referred to
as the "Excess Expenses."
(2) To provide for current payments of Excess
Expenses, Tenant shall, at landlord's request, pay as additional rent during
each Comparison Year, an amount equal to Tenant's Proportionate Share of the
Excess Expenses payable during such Comparison Year, as estimated by Landlord
from time to time. Such payments shall be made in monthly installments,
commencing on the first day of the month following the month in which Landlord
notifies Tenant of the amount it is to pay hereunder and continuing until the
first day of the month following the month in which Landlord gives Tenant a new
notice of estimated Excess Expenses. It is the intention hereunder to estimate
from time to time the amount of the Excess Expenses for each Comparison Year and
Tenant's Proportionate Share thereof, and then to make an adjustment in the
following year based on the actual Excess Expenses incurred for that Comparison
Year.
(e) On or before the 90th day of each Comparison Year after
the first Comparison Year (or as soon thereafter as is practical), Landlord
shall deliver to Tenant a statement setting forth Tenant's Proportionate Share
of the Excess Expenses for the preceding Comparison Year. If Tenant's
Proportionate Share of the actual Excess Expenses for the previous Comparison
Year exceeds the total of the estimated monthly payments made by Tenant for such
year, Tenant shall pay Landlord the amount of the deficiency within ten (10)
days of the receipt of the statement. If such total exceeds Tenant's
Proportionate Share of the actual Excess Expenses for such Comparison Year, then
Landlord shall credit against Tenant's next ensuing monthly installment(s) of
additional rent an amount equal to the difference until the credit is exhausted.
If a credit is due from Landlord on the Expiration Date, Landlord shall pay
Tenant the amount of the credit. The obligations of Tenant and Landlord to make
payments required under this Paragraph 3.01 shall survive the Expiration Date.
(f) Tenant's Proportionate Share of Excess Expenses in any
Comparison Year having less than 365 days shall be appropriate ly prorated.
(g) If any dispute arises as to the amount of any additional
rent due hereunder, Tenant shall have the right after reasonable notice and at
reasonable times to inspect Landlord's accounting records at Landlord's
accounting office and, if after such inspection Tenant still disputes the amount
of additional rent owed, Landlord and Tenant shall refer the dispute to an
independent certified public accountant selected by them for certification of
the proper amount. Such accountant's certification of the amount and direction
as to the allocation between Landlord and Tenant of the cost of certification
shall be final and conclusive.
4
<PAGE>
3.02 Tenant's Proportionate share shall be 16.4%, the area of the
Leased Premises divided by the gross floor area of the Building, times 100,
computed as follows:
Gross Area: 8312 = .164 x 100 = 16.4%
--------------------
Gross Building Area: 50,724 sq. ft.
3.03 All costs and expenses which Tenant assumes or agrees to pay to
Landlord under this Lease shall be deemed additional rent (which, together with
the Base Rent, is sometimes referred to as the "Rent"). The Rent shall be paid
to the Building manager (or other person) and at such place, as Landlord may
from time to time designate in writing, without any prior demand therefor and
without deduction or offset, in lawful money of the United States of America.
3.04 In addition to the Rent and any other charges to be paid by Tenant
hereunder, Tenant shall reimburse Landlord upon demand for any and all taxes
payable by Landlord (other than net income taxes) which are not otherwise
reimbursable under this Lease, whether or not now customary or within the
contemplation of the parties, where such taxes are upon, measured by or
reasonably attributable to (a) the cost or value of Tenant's equipment,
furniture, fixtures and other personal property located in the Premises, or the
cost or value of any leasehold improvements made in or to the Premises by or for
Tenant, other than standard tenant improvements made by Landlord, regardless of
whether title to such improvements is held by Tenant or Landlord; (b) the gross
or net Rent payable under this Lease, including, without limitation, any rental
or gross receipts tax levied by any taxing authority with respect to the receipt
of the Rent hereunder; (c) the possession, leasing, operation, management,
maintenance, alteration, repair, use or occupancy by Tenant of the Premises or
any portion thereof; or (d) this transaction or any document to which Tenant is
a party creating or transferring an interest or an estate in the Premises. If it
becomes unlawful for Tenant to reimburse Landlord for any costs as required
under this Lease, the Base Rent shall be revised to net Landlord the same net
Rent after imposition of any tax or other charge upon Landlord as would have
been payable to Landlord but for the reimbursement being unlawful.
3.05 Landlord agrees to operate the Project in a prudent manner with a
view to controlling costs in a manner consistent with the sound operation of the
Project.
4. CONDITION OF THE PREMISES. Tenant's taking possession of the
Premises shall be deemed conclusive evidence that as of the date of taking
possession the Premises are in good order and satisfactory condition, except for
such matters as to which Tenant gave Landlord written notice on or before the
Commencement Date. No promise of Landlord to alter, remodel, repair or improve
the Premises or the Building and no representation, express or implied,
5
<PAGE>
respecting any matter or thing relating to the Premises or Building or this
Lease (including, without limitation, the condition of the Premises or the
Building) have been made to Tenant by Landlord or its Broker or Sales Agent,
other than as may be contained herein or in a separate exhibit or addendum
signed by Landlord and Tenant.
5. TERM.
5.01 The lease term shall commence on the Commencement Date and shall
be for a period of 7 years & 6 months (90 months).
5.02 Providing that Tenant is not in default of this Lease, or of any of its
terms, covenants, or conditions, Tenant shall have an option to extend this
Lease for an additional term of seven(7) years. To exercise the Tenant's option
to extend, Tenant shall notify Landlord of Tenant's election to exercise its
option to extend at least six (6) months prior (June 30,2002) to expira tion of
the first seven (7) year term. Such notice shall be in writing and in the manner
prescribed for notices by Paragraph 31.15 hereof. Upon Tenant's exercise of its
option to extend this Lease, all terms, covenants and conditions hereof shall
continue in force and effect, except that no option shall be included in the
Lease after the exercise of the option to extend.
6. USE OF PREMISES. The Leased Premises may be used and occupied only
for a Commercial Bank or Bank Holding Company offices and for no other purpose
without Landlord's prior written consent. Landlord does not represent nor
warrant that the premises can be used for such purpose, as it is incumbent upon
Tenant to ascertain from the proper governmental authorities whether or not the
premises can be used for Tenant's intended use. Tenant shall promptly comply
with all laws, ordinances, orders and regulations affecting the Leased Premises
and their cleanliness, safety, occupation and use. Tenant shall not commit, or
suffer to be committed, any waste on the Premises, nor shall Tenant maintain,
commit, or permit the maintenance or commission of any nuisance, as defined in
California Civil Code Section 3479, on the Premises. This provision shall
specifically preclude the storage in or on the Premises, or release in or about
the Premises, of hazardous materials as that term is defined in Federal and
California laws, statutes, rules and regulations.
7. UTILITIES INTERRUPTION. Landlord shall not be liable in
damages or otherwise for any failure or interruption of any utility
service, and no such failure or interruption shall entitle Tenant
to terminate this Lease or abate the rent and other charges.
8. ALTERATIONS, MECHANICS LIENS.
8.01 Alterations may not be made to the Leased Premises without the
prior written consent of Landlord and any alterations of the Leased Premises
except movable furniture and trade fixtures
6
<PAGE>
shall at Landlord's option become part of the realty and belong to
the Landlord.
8.02 Notwithstanding anything contained in Paragraph 8.01 above, Tenant
may, upon the written consent of Landlord, install trade fixtures, machinery or
other trade equipment in conformance with the ordinances of the applicable city
and county, and the same may be removed prior to the termination of this Lease
provided Tenant shall not be in default under any of the terms and condi tions
of this Lease. Tenant further agrees to repair, at Tenant's sole cost, any
damage caused by removal of such equipment and fixtures. Tenant shall keep the
Leased Premises, and the property in which the Leased premises are a part, free
from any liens arising out of any work performed, materials furnished to, or
obligations incurred by Tenant. All such work provided for above shall be done
at such times and in the manner as Landlord may from time-to-time designate.
Tenant shall give Landlord written notice five (5) days prior to employing any
laborer or contractor to perform work resulting in an alteration of the Leased
Premises so that the Landlord may post a notice of non-responsibility. Not
withstanding the above, the Tenant shall remove its vault from the premises.
Landlord hereby consents to the removal by Tenant of the trade fixtures
described in Exhibit "B" attached hereto, subject to the requirements of this
Paragraph 8.02.
9. FIRE INSURANCE HAZARDS.
9.01 No use shall be made or permitted to be made of the Leased
Premises, nor acts done, which will increase the existing rate of insurance upon
the Building or cause the cancellation of any insurance policy covering the
Building, or any part thereof, nor shall Tenant sell, or permit to be kept, used
or sold, in or about the Leased Premises, any article which may be prohibited by
the standard form of fire insurance policies. Tenant shall, at its sole cost and
expense, comply with any and all requirements pertaining to the Leased Premises
of any insurance organization or company, necessary for the maintenance of
reasonable fire and public liability insurance, covering the Leased Premises, or
the Building of which it is a part. Tenant agrees to pay to Landlord as
additional rent, any increase in premiums on policies which may be carried by
Landlord on the Leased Premises covering damages to the Building and loss of
rent caused by fire and the perils normally included in extended coverage above
the rates for the least hazardous type of occupancy for industrial, warehousing,
office and distribution operations.
9.02 Tenant shall maintain in full force and effect on all of its
fixtures and equipment in the Leased Premises a policy or policies of fire and
extended coverage insurance with malicious mischief and theft endorsements to
the extent of at least eighty percent (80%) of their insurable value. During the
term of this Lease the proceeds from any such policy or policies of insurance
7
<PAGE>
shall be used for the repair or replacement of the fixtures and equipment so
insured. Landlord shall have no interest in the insurance upon Tenant's
equipment ad fixtures and will sign all documents necessary or proper in
connection with the settlement of any claim or loss by Tenant. Landlord will not
carry insurance on Tenant's possessions, nor on any leasehold improvements made
by Tenant. Tenant shall furnish Landlord with a certificate of such policy
within thirty (30) days of the commencement of this Lease and whenever required
shall satisfy Landlord that such policy is in full force and effect.
10. LIABILITY INSURANCE. Tenant, commencing upon Tenant's initial entry
into the premises, at its own expense, shall provide and keep in force with
companies acceptable to Landlord public liability insurance for the benefit of
Landlord and Tenant jointly against liability for bodily injury and property
damage in the amount of not less than One Million Dollars ($1,000,000) in
respect to injuries to or death of one person and in an amount of not less than
Two Million Dollars ($2,000,000) in respect to injuries to or death of more than
one person in any one occurrence, and in the amount of not less than Four
Hundred Ninety-Five Thousand Dollars ($495,000) per occurrence in respect to
damage to property, such limits to be in any greater amounts as may be
reasonably indicated by circumstances from time to time existing. Tenant shall
upon occupancy furnish Landlord with a certificate of such policy and whenever
required shall satisfy Landlord that such policy is in full force and effect.
Such policy shall name Landlord as an additional insured and shall be primary
and non-contributing with any insurance carried by Landlord. The policy shall
further provide that it shall not be canceled or altered without twenty (20)
days' prior written notice to Landlord. Insurance required hereunder shall be in
companies rated A+, AAA or better in "Best's Insurance Guide."
11. INDEMNIFICATION BY TENANT.
11.01 This Lease is made on the express condition that Landlord shall
not be liable for or suffer loss by reason of injury to person or property from
any cause (excluding Landlord's negligent act or omission and excluding any
environmental matters not caused by Tenant) in any way connected with the
condition or use of the Leased Premises or the installation or construction of
improvements or personal property therein, including without limitation any
liability for injury to the person or property of Tenant, its agents, officers,
employees or invitees. Tenant agrees to indemnify Landlord and hold it harmless
from any and all liability, loss, cost, or obligation on account of, or arising
out of, any such injury or loss.
11.02 In case any action, suit or proceeding is brought against
Landlord by reason of any such occurrence, under the paragraph above, Tenant,
upon Landlord's request, will at Tenant's
8
<PAGE>
expense, resist and defend such action, suit or proceeding, or cause the same to
be resisted and defended by counsel designated by the insurer whose policy
covers the occurrence or by counsel designated by Tenant and approved by
Landlord. The obligations of Tenant under this section arising by reason of any
occurrence taking place during the Lease Term shall survive any termination of
this Lease.
12. REPAIRS.
12.01 Tenant shall, at Tenant's sole cost and expense, keep the
Premises and every part thereof in good condition and repair (except as
hereinafter provided with respect to Landlord's obligations) including without
limitation, the maintenance, replacement and repair of any storefront, doors,
window casements and glazing. Tenant shall, upon the expiration or sooner
termina tion of this Lease hereof, surrender the Leased Premises to the Landlord
in good condition, broom clean, ordinary wear and tear and damage from causes
beyond the reasonable control of Tenant excepted. Any damage to adjacent
premises caused by Tenant's use of the Premises shall be repaired at the sole
cost and expense of Tenant.
12.02 Notwithstanding the Provisions of Paragraph 12.01 hereinabove,
Landlord shall repair and maintain the structural portions of the Leased
Premises, including the exterior walls and roof, plumbing, pipes, electrical
wiring and conduits, unless such maintenance and repairs are caused in part or
in whole by the act, neglect, fault or omission of any duty by the Tenant, its
agents, servants, employees, invitees, or any damage caused by breaking and
entering, in which case Tenant shall pay to Landlord the reasonable cost of such
maintenance and repairs. All costs and expenses of Landlord under this Paragraph
12.02 shall be Project Operating Costs under Paragraph 3.01. Landlord shall not
be liable for any failure to make any such repairs or to perform any maintenance
unless such failure shall persist for an unreasonable time after written notice
of the need of such repairs or maintenance is given to Landlord by Tenant.
Except as provided in Article 16 hereof, there shall be no abatement of rent and
no liability of Landlord by reason of any injury to or interference with
Tenant's business arising from the making of any repairs, alterations or
improvements in or to any portion of the Leased Premises or building of which
the Leased Premises are a part, or in or to fixtures, appurtenances and
equipment therein. Tenant waives the right to make repairs at Landlord's expense
under any law, statute or ordinance now or hereafter in effect.
13. PARKING AND COMMON AREAS. Tenant, for the use and
benefit of Tenant, its agents, employees, customers, licensees and
subtenants, shall have the non-exclusive right in common with
Landlord, and other present and future owners, tenants and their
agents, employees, customers, licensees and subtenants, to use the
9
<PAGE>
Common areas and parking garage adjacent to the building during the entire term
of this Lease, for ingress and egress, and automobile parking. In addition,
Tenant shall have the exclusive right to use all parking spaces located in the
parking lot located to the west of the Building, as outlined on Exhibit "C"
attached hereto.
14. SIGNS. The Tenant may retain the existing signs of Tenant located
on the top of the building and shall be fully responsible for its utilities,
maintenance & repairs. If Tenant does not maintain or repair said sign within 3
days of written notice from Landlord that maintenance or repair is required,
Landlord shall have the right to conduct any such required maintenance or repair
and charge the cost thereof to Tenant. Such sign shall be treated as a fixture
as described in Paragraph 8 of this lease.
15. ENTRY BY LANDLORD. Tenant shall permit Landlord and Landlord's
agents to enter the Leased Premises after business hours on weekdays, and on
weekends, for the purpose of inspecting the same or for the purpose of
maintaining the Leased Premises or adjacent premises or for the purpose of
making repairs, altera tions, or additions to any portion of same including the
erection and maintenance of such scaffolding, canopies, fences, and props as may
be required, or for the purpose of posting notices of non-responsibility for
alterations, additions, or repairs without any rebate of rent and without any
liability to Tenant for any loss of occupation or quiet enjoyment of the Leased
Premises thereby occasioned. For each of the aforesaid purposes, Landlord shall
at all times have and retain a key with which to unlock all of the doors in,
upon and about the Leased Premises, excluding Tenant's vaults and safes. The
tenant shall not alter any lock or install a new or additional lock or any bolt
on any door of the Leased Premises without prior written consent of the
Landlord. If Landlord shall give its consent, the Tenant shall in each case
furnish the Landlord with a key for any such lock.
16. DESTRUCTION OR DAMAGE.
16.01 If the Premises or the portion of the Building necessary for
Tenant's occupancy is damaged by fire, earthquake, act of God, the elements or
other casualty, Landlord shall, subject to the provisions of this Article,
promptly repair the damage, if such repairs can, in Landlord's opinion, be
completed within (90) ninety days. If Landlord determines that repairs can be
completed within ninety (90) days, this Lease shall remain in full force and
effect, except that if such damage is not the result of the negligence or
willful misconduct of Tenant or Tenant's agents, employees, contractors,
licensees or invitees, the Base Rent shall be abated to the extent Tenant's use
of the Premises is impaired, commencing with the date of damage and continuing
until completion of the repairs required of Landlord under Paragraph 16.04.
10
<PAGE>
16.02. If in Landlord's opinion, such repairs to the Premises or
portion of the Building necessary for Tenant's occupancy cannot be completed
within ninety (90) days, Landlord shall notify Tenant of that opinion in writing
within thirty (30) days after the date of such fire or other casualty. In such
event, Landlord and Tenant may each terminate this Lease unilaterally by giving
the other party written notice of such termination within 15 days of the
effective date of the notice described above, and this Lease shall terminate as
of the date of such fire or casualty. If neither party notifies the other of
such termination, this Lease shall continue in full force and effect, but the
Base Rent shall be partially abated as provided in Paragraph 16.01.
16.03(a) If any other portion of the Building or Project is totally
destroyed or damaged to the extent that in Landlord's opinion repair thereof
cannot be completed within ninety (90) days, Landlord may elect upon notice to
Tenant given within thirty (30) days after the date of such fire or other
casualty, to repair such damage, in which event this Lease shall continue in
full force and effect, but the Base Rent shall be partially abated as provided
in Paragraph 16.01. If Landlord does not elect to make such repairs, this Lease
shall terminate as of the date of such fire or other casualty.
16.03(b) If any other such portion of the Building or Project is
totally destroyed or damaged to the extent that in Landlord's opinion repair
thereof cannot be completed within ninety (90) days, and Tenant's business
operations are substantially and adversely impacted by such damage, and Landlord
elects to repair such damage, then, nevertheless, Tenant shall have the right to
terminate this Lease if the substantial adverse impact is not cured by Landlord
within one hundred fifty (150) days of the date of such fire or casualty. Tenant
shall exercise this right by giving written notice to Landlord no later than one
hundred fifty-five (155) days after the date of such fire or casualty.
16.04 If the Premises are to be repaired under this Article, Landlord
shall repair at its cost any injury or damage to the Building and standard
tenant improvements in the Premises. Tenant shall be responsible at its sole
cost and expense for the repair, restoration and replacement of any other
Leasehold improvements and Tenant's Property. Landlord shall not be liable for
any loss of business, inconvenience or annoyance arising from any repair or
restoration of any portion of the Premises or Building as a result of any damage
from fire or other casualty.
16.05 This Lease shall be considered an express agreement governing any
case of damage to or destruction of the Premises or Building by fire or other
casualty, and any present or future law which purports to govern the rights of
Landlord and Tenant in such circumstances in the absence of express agreement,
shall have no
11
<PAGE>
application. The opinions and determinations of Landlord under
this Section 16 shall be reasonable.
17. ASSIGNMENT AND SUBLETTING. Tenant shall not either voluntarily, or
by operation of law, assign, transfer, mortgage, pledge, hypothecate or encumber
this Lease or any interest therein, and shall not sublet the Leased Premises or
any part thereof, or any right or privilege appurtenant thereto, or allow any
other person (the employees, agents, servants and invitees or Tenant excepted)
to occupy or use the Leased Premises, or any portion thereof, without the
written consent of Landlord first had and obtained, which consent shall not be
unreasonably withheld. A consent to one assignment, subletting, occupation or
use by any other person shall not be deemed to be a consent to any subsequent
assignment, subletting, occupation or use by another persona. Consent to any
such assignment or subletting shall not relieve Tenant of any liability under
this Lease. Any such assignment or subletting without such consent shall be
void, and shall, at the option of the Landlord, constitute a default under the
terms of this Lease.
In the event that Landlord shall consent to a sublease or
assignment hereunder, Tenant shall pay Landlord reasonable fees, not to exceed
One Thousand Dollars ($1,000.00), incurred in connection with the processing of
documents necessary to giving of such consent and assumption by the assignee.
18. TENANT'S DEFAULT. The occurrence of any one or more of
the following events shall constitute a default and breach of this
Lease by Tenant:
A. The vacating or abandonment of the Premises by
Tenant.
B. The failure by Tenant to make any payment or rent or
any other payment required to be made by Tenant hereunder, as and
when due.
C. The failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed by
the Tenant, other than described in B, above, where such failure shall continue
for a period of fifteen (15) days after written notice thereof by Landlord to
Tenant; provided, however, that if the nature of Tenant's default is such that
more than fifteen (15) days are reasonably required for its cure, then Tenant
shall not be deemed to be in default if Tenant commences such cure within said
fifteen (15) days period and thereafter diligently prosecutes such cure to
completion.
D. The making by Tenant of any general assignment or
general arrangement for the benefit of creditors; or the filing by
or against Tenant of a petition to have Tenant adjudged a bankrupt,
12
<PAGE>
or a petition or reorganization or arrangement under any law relating to
bankruptcy (unless, in the case of a petition filed against Tenant, the same is
dismissed within sixty (60) days); or the appointment of a trustee or a receiver
to take possession of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease, where possession is not restored
to Tenant within thirty (30) days; or the attachment, execution or other
judicial seizure of substantially all of Tenant's assets located at the Leased
Premises or of Tenant's interest in this Lease, where such seizure is not
discharged in thirty (30) days.
19. REMEDIES ON DEFAULT. In the event of any such default or
breach by Tenant, Landlord may at any time thereafter, with or
without notice or demand and without limiting Landlord in the
exercise of a right or remedy which Landlord may have by reason of
such default or breach:
A. Terminate Tenant's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Premises to Landlord. In such event
Landlord shall be entitled to recover from Tenant all damages incurred by
Landlord by reason of Tenant's default including, but not limited to: the cost
of recovering possession of the Premises; expenses of reletting, including
necessary renovation and alteration of the Premises; reasonable attorney's fees;
the worth at the time of award by the court having jurisdiction thereof of the
amount by which the unpaid rent and other charges and adjustments called for
herein for the balance of the term after the time of such award exceeds the
amount of such loss for the same period that Tenant proves could be reasonably
avoided; and that portion of any leasing commission paid by Landlord and
applicable to the unexpired term of this Lease. Unpaid installments of rent or
other sums shall bear interest from the date due at the rate of ten percent
(10%) per annum. "Worth" as used in this provision, is computed by discounting
the total at the discount rate of the Federal Reserve Bank of San Francisco at
the time of the judgment, or award, plus one percent (1%).
B. Maintain Tenant's right to possession, in which case this
Lease shall continue in effect whether or not Tenant shall have abandoned the
Premises. In such event, Landlord shall be entitled to enforce all of Landlord's
rights and remedies under this Lease, including the right to recover the rent
and any other charges and adjustments as may become due hereunder; or
C. Pursue any other remedy now or hereafter available
to Landlord under the laws or judicial decisions of the State in
which the Premises are located.
20. LANDLORD'S RIGHT TO CURE DEFAULTS. Landlord may, but
shall not be obligated to, cure, any anytime, without notice, any
default by Tenant under this Lease; and whenever Landlord so
13
<PAGE>
elects, all costs and expenses incurred by Landlord including without limitation
reasonable attorney's fees and expenses, together with interest on the amount of
costs and expenses so incurred at the maximum legal rate then in effect in the
State of California shall be paid by Tenant to Landlord on demand.
21. DEFAULT BY LANDLORD. Landlord shall not be in default unless
Landlord or the beneficiary under any deed of trust fails to perform obligations
required of Landlord within a reasonable time, but in no event later than thirty
(30) days after written notice by Tenant to Landlord and to the beneficiary of
any deed of trust covering the Premises whose name and address shall have
theretofore been furnished to Tenant in writing, specifying wherein Landlord has
failed to perform such obligation; provided, however, that if the nature of
Landlord's obligation is such that more than thirty (30) days are required for
performance, then Landlord shall not be in default if Landlord or said
beneficiary commences performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion. In no event shall
Tenant have the right to terminate this Lease as a result of Landlord's default
and Tenant's remedies shall be limited to damages and/or an injunction.
22. ATTORNEY'S FEES/COLLECTION CHARGES. In the event of any legal
action or proceeding between the parties hereto, reasonable attorney's fees and
expenses of the prevailing party in any such action or proceeding may be added
to the judgment therein, including attorney's fees on appeal. In addition to the
charges provided for above, Tenant shall pay a charge of $25.00 to Landlord for
preparation of each demand for delinquent rent.
23. SURRENDER OF LEASE NOT MERGER. The voluntary or other surrender of
this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger,
and shall, at the option of Landlord terminate all or any existing subleases,
and/or subtenan cies, or may, at the option of Landlord, operate as an
assignment to it of any or all of such subleases or subtenancies.
24. CONDEMNATION. If any part of the Leased Premises or the building of
which it is a part, or the Center or parking or common areas therein, shall be
taken or condemned for a public or quasi-public use, and a part thereof remains
which is reasonably suitable for Tenant's purposes hereunder, this Lease shall,
as to the part so taken, terminate as of the date title shall vest in the
condemnor, and the rent payable hereunder shall be equitably adjusted. If all
the Leased Premises, or such part thereof be taken or condemned so that there
does not remain a portion reasonably suitable for Tenant's purposes hereunder,
this Lease shall thereupon terminate.
25. WAIVER. The waiver by Landlord of any breach of any
term, covenant, or condition herein contained shall not be deemed
14
<PAGE>
to be a waiver of such term, covenant, or condition or any subsequent breach of
the same or any other term, covenant, or condition herein contained. The
subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a
waiver of any preceding breach by Tenant of any term, covenant, or condition of
this Lease, other than the failure of Tenant to pay the particular rental so
accepted, regardless of Landlord's knowledge of such preceding breach at the
time of acceptance of such rent.
26. EFFECT OF HOLDING OVER. If Tenant should remain in possession of
the Leased Premises after the expiration of the Lease Term and without executing
a new Lease, then such holding over shall be construed as a tenancy from
month-to-month, subject to all the conditions, provisions, and obligations of
this Lease insofar as the same are applicable to a month-to-month tenancy;
provided, however, that Base Rent during any such holding over shall be 150% of
the Base Rent in effect immediately prior to the expiration of the Lease term.
27. TENANT'S STATEMENT. Tenant shall at any time and from
time to time upon not less than five (5) days prior written notice
from Landlord execute, acknowledge and deliver to Landlord a statement in
writing (a) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of such modification and certifying
that this Lease as so modified is in full force and effect), and the date to
which the rental and +other charges are paid in advance, if any, and (b)
acknowledging that there are not, to Tenant's knowledge, any uncured defaults on
the part of the Landlord hereunder, or specifying such defaults if any are
claimed, and (c) setting forth the date of commencement of rents and expiration
of the term hereof. Any such statement may be relied upon by any prospective
purchaser or encumbrancer of all or any portion of the real property of which
the Premises are a part.
28. TENANT'S FINANCIAL INFORMATION. Tenant shall promptly
furnish to Landlord, from time to time, financial statements and
annual reports, reflecting Tenant's current financial condition, whenever
requested by Landlord.
29. RELATIONSHIP OF THE PARTIES. Nothing contained herein
shall be deemed or construed by the parties hereto nor by any third
party, as creating the relationship of principal and agent or of partnership or
of joint venture between the parties hereto, it being understood and agreed that
neither the method of computation of rent nor any other provision contained
herein, nor any acts of the parties hereto, shall be deemed to create any
relationship other than Landlord and Tenant.
30. RULES AND REGULATIONS. Tenant shall faithfully observe
and comply with all reasonable rules and regulations that Landlord
shall from time to time promulgate and/or modify. The rules and
15
<PAGE>
regulations shall be binding upon the Tenant upon delivery of a copy of them to
the Tenant. Landlord shall not be responsible to Tenant for the nonperformance
of any said rules and regulations by any other tenants or occupants. Said rules
may include (1) the restricting of employee parking, and (2) regulation of waste
removal.
31. GENERAL PROVISIONS.
31.01 Plats and Riders. Clauses, plats, riders and
addendums, if any, affixed to this Lease are a part hereof.
31.02 Venue. Landlord will execute this Lease and will receive the rent
and other payments at Landlord's office. Therefore the county in which
Landlord's office is located is hereby deemed to be a proper place of venue for
transitory actions.
31.03 Marginal Headings. The marginal headings and
article titles to the articles of this Lease are not a part of this
Lease and shall have no effect upon the construction or interpreta
tion of any part hereof.
31.04 Time. Time is of the essence of this Lease and each
and all of its provisions in which performance is a factor.
31.05. Successors and Assigns. The covenants and condi
tions herein contained, subject to the provisions as to assignment,
apply to and bind the heirs, successors, executors, administrators
and assigns of the parties hereto.
31.06. Recordation. Neither Landlord nor Tenant shall
record this Lease, but a short form memorandum hereof may be
recorded at the request of the Landlord.
31.07. Quiet Possession. Upon Tenant paying the rent reserved hereunder
and observing and performing all of the covenants, conditions and provisions on
Tenant's part to be observed and performed hereunder, Tenant shall have quiet
posses sion of the Premises for the entire term hereof, subject to all the
provisions of this Lease.
31.08. Prior Agreements. This Lease contains all of the agreements of
the parties hereto with respect to any matter covered or mentioned in this
Lease, and no prior agreements or understand ing pertaining to any such matter
shall be effective for any purpose. No provision of this Lease may be amended or
added to except by an agreement in writing signed by the parties hereto or their
respective successors in interest. This Lease shall not be effective or binding
on any party until fully executed by both parties hereto.
16
<PAGE>
31.09. Inability to Perform. This lease and the obliga tions of the
Tenant hereunder shall not be affected or impaired because the Landlord is
unable to fulfill any of its obligations hereunder or is delayed in doing so, if
such inability or delay is caused by reason of strike, labor troubles, acts of
God, or any other cause beyond the reasonable control of the Landlord.
31.10. Partial Invalidity. Any provision of this Lease
which shall prove to be invalid, void, or illegal shall in no way
affect, impair or invalidate any other provisions hereof and such
other provision shall remain in full force and effect.
31.11. Cumulative Remedies. No remedy or election
hereunder shall be deemed exclusive but shall, wherever possible,
be cumulative with all other remedies at law or in equity.
31.12. Choice of Law. This Lease shall be governed by the
laws of the State of California.
31.13. Sale of Premises by Landlord. In the event of any sale of the
Premises by Landlord, Landlord shall be and is hereby entirely freed and
relieved of all liability under any and all of its covenants and obligations
contained in or derived from this Lease arising out of any act, occurrence or
omission occurring after the consummation of such sale; but only if the
purchaser at such sale or any subsequent sale of the Premises shall have assumed
and agreed to carry out any and all of the covenants and obliga tions of the
Landlord under this Lease.
31.14. Subordination, Attornment. Upon request of the Landlord, Tenant
will in writing subordinate its rights hereunder to the lien of any mortgage, or
deed of trust, to any bank, insurance company or other lender (including the
Building owner and its successors and assigns) now or hereafter in force against
the premises, and to all advances made or hereafter to be made upon the security
thereof, provided that such company or institution agrees to honor this Lease
for the full term hereof so long as Tenant is not in default hereunder.
In the event any proceedings are brought for foreclosure, or in the
event of the exercise of the power of sale under any mortgage or deed of trust
made by the Landlord covering the Premises, the Tenant shall attorn to the
purchaser upon any such foreclosure or sale and recognize such purchaser as the
Landlord under this Lease.
31.15. Notices. All notices and demands which may be or
are required or permitted to be given by either party on the other
hereunder shall be in writing. All notices and demands by the
Landlord to the Tenant shall be sent by United States Mail, postage
prepaid, addressed to the Tenant at the Premises, and to the
address hereinbelow, or to such other place as Tenant may from time
17
<PAGE>
to time designate in a notice to the Landlord. All notices and demands by the
Tenant to the Landlord shall be sent by United States Mail, postage prepaid,
addressed to the Landlord at the address set forth herein, and to such other
person or place as the Landlord may from time to time designate in a notice to
the Tenant.
To Landlord at: NINE C CORPORATION
P.O. Box 5764
Redwood City, CA 94063
To Tenant at: BAY AREA BANK
900 Veterans Blvd.
Redwood City, CA 94063
32. SERVICES TO PREMISES. Notwithstanding anything herein to the
contrary, the Landlord shall provide water, power, heating, air conditioning,
janitorial and other services, including but not limited to floor waxing, trash
removal, window washing and all facilities regarding maintenance of the exterior
of the building, including gardening, subject to payment or reimbursement by
Tenant as provided herein.
Attachment 32 (schedule of services)hereto more com pletely
sets forth the types and frequency of service and the minimum acceptable service
standard levels.
33. SUBSTITUTION FOR EXISTING LEASE. The execution of the
Lease by the parties shall be in full and complete satisfaction of
any and all claims under the existing lease and in complete
substitution for such lease.
34. TOXIC/HAZARDOUS MATERIALS CONSIDERATION. Upon request
Lessor will make available a Toxic Report that shows Benzene under
the garage area. This is being monitored by the County Health
Department at this time. Lessor believes it does not present a
hazard.
35. DRIVE-UP FACILITY. This lease includes Tenant's right to utilize and
operate during the term hereof the drive-up facility utilizing the space
adjacent to and outside the Leased Premises in the manner heretofore operated.
36. Both parties of this Lease agree there is no paragraph
36.
18
<PAGE>
THE PARTIES HAVE EXECUTED THIS LEASE THE DATE AND YEAR SET BELOW THEIR
SIGNATURE:
LANDLORD TENANT
NINE-C CORPORATION BAY AREA BANK
By:____________________________ By:____________________________
James E. Burney John O. Brooks
Title: President TITLE: President
Date:__________________________ Date:__________________________
By:_________________________
Title:
9c15.95
19
<PAGE>
EXHIBIT "A"
LEASED PREMISES
[Exhibit A consists of a scaled drawing of the first floor of the building
in which the premises are located, showing by shading the premises leased by the
Bank.]
<PAGE>
EXHIBIT B
Trade fixtures which have resale value or are useful to bank if
relocated:
1. Vault door
2. Electronic surveillance/alarm system (cameras, etc.)
3. ATM machine/night deposit vault
4. Lighted Bay Area Bank sign on building exterior
5. Metal teller counter structure including locking drawers
and cabinets
6. Undercounter metal card file cabinets on west wall
<PAGE>
ATTACHMENT 32
SCHEDULE OF SERVICES
(A) Daily Service (Five-day week service, excluding New
Year's Day, Presidents Day, Memorial Day, Independence
Day, Labor Day, Columbus Day, Thanksgiving Day, and
Christmas Day):
1. Dust all furniture and fixtures.
2. Empty and wipe all wastepaper baskets.
3. Clean all ash trays.
4. Vacuum all carpeted areas.
5. Dust mop all tile floors.
6. Spot clean doors, walls and woodwork.
(B) Weekly Service:
1. Damp mop and buff all tile floors throughout
the premises.
2. Dust all window sills, door casings and mop
boards.
(C) Monthly Service:
1. Vacuum upholstered furniture.
2. Vacuum draperies.
3. Refinish and buff all tile floors.
(D) Quarterly Service:
1. Clean all steel desk tops.
2. Polish all wooden desks and furniture.
3. Dust all light fixtures and air conditioning
vents.
(E) Semi-Annual Service: Wash windows, inside and outside.
(F) Annual SErvice: Dry clean carpeted areas.
(G) As Required: All tile floors shall be stripped and
refinished as often as necessary to keep floors in top
condition.
COMMERCIAL LEASE
This lease, dated for reference purposes only this 30 day of November,
1995, is made between NINE-C CORPORATION (the "Landlord") and BAY AREA BANK (the
"Tenant").
1. PREMISES.
1.01 Description. Landlord hereby leases to Tenant and Tenant hires
from Landlord on the terms, covenants and conditions set forth herein, those
premises specifically known as Suite 530 designated and identified by
crosshatching on Exhibit "A" attached hereto, (the "Leased Premises"), and
incorporated by reference herein. The Leased Premises, approximately 1873 square
feet of usable space, and approximately 2119 square feet of rentable space (by
BOMA Modified Standards), is located at 900 Veterans Boulevard, Redwood City,
California (the "Building"). The Building is a part of a commercial project
which includes the Building, an adjacent parking lot and parking structure and
the underlying real property (the "Project").
1.02 Confirmation of Terms. Within thirty (30) days after Landlord
delivers a fully executed copy of this Lease to Tenant, Tenant's architect may,
at Tenant's expense, verify the rentable area contained in the Leased Premises.
The term "rentable area" as used in this Lease means the rentable area as
determined by the most recent version of the BOMA (Building Owners and Managers
Association International) American National Standard. If tenant's verification
of the rentable area differs from the rentable area specified in Paragraph 1.01,
then the parties shall immediately execute "Confirmation of Lease Terms" to
confirm the rentable area, the Base Rent, Tenant's Pro Rata Share and other
changes that are based on the rentable area of the Premises.
2. BASE RENT.
2.01 Tenant agrees to pay Landlord as base rent (Base Rent), without
notice, demand, deduction, or offset, the monthly sum of $3729.44 for the first
12 months, adjusted as provided in Paragraph 2.03 for all months thereafter, in
advance on or before the first day of each and every successive calendar month
during the term hereof, except that last month's deposit shall be paid upon
execution hereof. Credit will be given for Tenant's current deposit. The rent
shall commence on the First day of January, 1996 (the "Commencement Date"). All
payments to Landlord under this Lease shall be paid to Landlord at the address
for notice set forth in paragraph 32.15, or at such other address provided to
Tenant by Landlord in writing from time to time.
1
<PAGE>
2.02 Rent for any period which is for less than one month shall be a
prorated portion of the monthly rental based upon a thirty (30) day month.
Tenant acknowledges that late payment by Tenant to Landlord of rent or other
sums due hereunder will cause Landlord to incur certain costs not contemplated
by this Lease, the exact amount of which would be extremely difficult and
impractical to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed on Landlord by the
terms of any trust deed covering the Leased Premises. Therefore, in the event
Tenant shall fail to pay any installments of rent or any sum due hereunder
within five (5) days after receiving notice of such delinquency, Tenant shall
pay to Landlord as additional rent a late charge equal to TEN percent (10%) of
each such installment or other sum. A $15.00 charge will be paid by the Tenant
to the Landlord for each returned check, in addition to the late charge.
2.03 The base Rent set forth in Paragraph 2.01 shall be increased in
all years after the first year of the term if the Consumer Price Index - San
Francisco - All Items (Index) as published by the United States Department of
Labor's Bureau of Labor Statistics, increases over the base period Index. The
base period Index for any year shall be the Index for the calendar month which
is the fourth month preceding the month in which any lease year commences. The
base period Index shall be compared with the Index for the same calendar month
for each subsequent year (comparison month). If the Index for any comparison
month is higher than the base period Index, then the rental for the next year
shall be increased by the identical percentage commencing with the next rental
commencement month; provided, however, that no such rental increase shall be
less than 4% or more than 8%, of the rental for the previous year. In no event
shall the rental be less than that set forth in Paragraph 2.01. (By way of
illustration only, if Tenant commenced paying rent in July 1991, then the base
period Index for the second year is that for April 1992 (assume 130) and that
Index shall be compared with the Index for April 1991 (assume 136), and because
the Index for April 1992 is 4.61% higher, the rental commencing July 1992 shall
be 4.61% higher; likewise the Index for April 1993 shall be compared with the
Index for April 1992.)
Should the Bureau revise or discontinue the publication of the above
Index. Landlord and Tenant shall convert to the revised index or adopt the
successor index in accordance with the guidelines therefor issued by the federal
government.
3. PROJECT OPERATING COSTS.
3.01(a) In order that the Rent payable during the Term reflect any
increase in Project Operating Costs (described below), Tenant agrees to pay to
Landlord as Rent, Tenant's Proportionate Share (defined in Paragraph 3.02) of
all increases in costs,
2
<PAGE>
expenses and obligations attributable to the Project and its
operation, all as provided below.
(b) If, during any Calendar year during the Term, Project Operating
Costs exceed the Project Operating Costs for the first year of the Term, Tenant
shall pay to Landlord, in addition to the Base Rent and all of the payments due
under this Lease, an amount equal to Tenant's Proportionate Share of such excess
Project Operating Costs in accordance with the provisions of this Paragraph
3.01(b).
(c) The term "Project Operating Costs" shall include all those
items described in the following subparagraphs (1) and (2).
(1) All taxes, assessments, water and sewer charges
and other similar governmental charges levied on or attributable to the Building
or Project as a whole or their operation, including without limitation, (i) real
property taxes or assessments levied or assessed against the Building or Project
as a whole, and (ii) assessments or charges levied or assessed against the
Building or Project as a whole by any redevelopment agency; but excluding any
tax measured by gross rentals received from the leasing of the Premises,
Building or Project.
(2) Operating costs incurred by Landlord in
maintaining and operating the Building and Project, including without limitation
the following: costs of (i) utilities; (ii) supplies; (iii) insurance (including
public liability, property damage, earthquake, and fire and extended coverage
insurance for the full replacement costs of the Building and Project as required
by Landlord or its lenders for the Project; (iv) services of independent
contractors; (v) compensation (including employment taxes and fringe benefits)
of all persons who perform duties connected with the operation, maintenance,
repair or overhaul of the Building or Project, and the HVAC system, equipment,
improve ments and facilities located within the Project, including without
limitation engineers, janitors, painters, floor waxers, window washers, security
and parking personnel, landscapers and gardeners (but excluding persons
performing services not uniformly available to or performed for substantially
all Building or Project tenants); (vi) operation and maintenance of a room for
delivery and distribu tion of mail to tenants of the Building or Project as
required by the U.S. Postal Service (including, without limitation, an amount
equal to the fair market rental value of the mail room premises); (vii)
management of the Building or Project, whether managed by Landlord or an
independent contractor (including, without limita tion, an amount equal to the
fair market value of any on-site manager's office, but excluding any commission
or fee for leasing or collecting rents); (viii) rental expenses for (or a
reasonable depreciation allowance on) personal property used in the main
tenance, operation or repair of the Building or Project: (ix) costs,
expenditures or charges (whether capitalized or not)
3
<PAGE>
required by any governmental or quasi-governmental authority; (x) amortization
of capital expenses (including financing costs) (1) required for the Building as
a whole by a governmental entity for energy conservation or life safety
purposes, or (2) made by Landlord to reduce Project Operating Costs; and (xi)
any other costs or expenses incurred by Landlord under this Lease and not
otherwise reimbursed by tenants of the Project, but specifically excluding the
cost of maintenance and operation of the elevator.
(3) Project Operating Costs shall not include costs
or expenses only for the benefit of other tenants.
(d) Tenant's Proportionate Share of Project Operating
Costs shall be payable by Tenant to Landlord as follows:
(1) Beginning with the second year of the term and
for each year thereafter ("Comparison Year"), Tenant shall pay Landlord an
amount equal to Tenant's Proportionate Share of the Project Operating Costs
incurred by Landlord in the Comparison Year which exceeds the total amount of
Project Operating Costs payable by Landlord for the first year of the term. This
excess is referred to as the "Excess Expenses."
(2) To provide for current payments of Excess
Expenses, Tenant shall, at landlord's request, pay as additional rent during
each Comparison Year, an amount equal to Tenant's Proportionate Share of the
Excess Expenses payable during such Comparison Year, as estimated by Landlord
from time to time. Such payments shall be made in monthly installments,
commencing on the first day of the month following the month in which Landlord
notifies Tenant of the amount it is to pay hereunder and continuing until the
first day of the month following the month in which Landlord gives Tenant a new
notice of estimated Excess Expenses. It is the intention hereunder to estimate
from time to time the amount of the Excess Expenses for each Comparison Year and
Tenant's Proportionate Share thereof, and then to make an adjustment in the
following year based on the actual Excess Expenses incurred for that Comparison
Year.
(e) On or before the 90th day of each Comparison Year after
the first Comparison Year (or as soon thereafter as is practical), Landlord
shall deliver to Tenant a statement setting forth Tenant's Proportionate Share
of the Excess Expenses for the preceding Comparison Year. If Tenant's
Proportionate Share of the actual Excess Expenses for the previous Comparison
Year exceeds the total of the estimated monthly payments made by Tenant for such
year, Tenant shall pay Landlord the amount of the deficiency within ten (10)
days of the receipt of the statement. If such total exceeds Tenant's
Proportionate Share of the actual Excess Expenses for such Comparison Year, then
Landlord shall credit against Tenant's next ensuing monthly installment(s) of
additional rent an amount equal to the difference until the credit is exhausted.
If
4
<PAGE>
a credit is due from Landlord on the Expiration Date, Landlord shall pay Tenant
the amount of the credit. The obligations of Tenant and Landlord to make
payments required under this Paragraph 3.01 shall survive the Expiration Date.
(f) Tenant's Proportionate Share of Excess Expenses in any
Comparison Year having less than 365 days shall be appropriate ly prorated.
(g) If any dispute arises as to the amount of any additional
rent due hereunder, Tenant shall have the right after reasonable notice and at
reasonable times to inspect Landlord's accounting records at Landlord's
accounting office and, if after such inspection Tenant still disputes the amount
of additional rent owed, Landlord and Tenant shall refer the dispute to an
independent certified public accountant selected by them for certification of
the proper amount. Such accountant's certification of the amount and direction
as to the allocation between Landlord and Tenant of the cost of certification
shall be final and conclusive.
3.02 Tenant's Proportionate share shall be 3.9%, the usable area of the
Leased Premises divided by the useable area of the Building, times 100, computed
as follows:
Premises Usable Area: 1,873__ = .039 x 100 =3.9%
--------
Building Usable Area: 47,692 sq. ft.
3.03 All costs and expenses which Tenant assumes or agrees to pay to
Landlord under this Lease shall be deemed additional rent (which, together with
the Base Rent, is sometimes referred to as the "Rent"). The Rent shall be paid
to the Building manager (or other person) and at such place, as Landlord may
from time to time designate in writing, without any prior demand therefor and
without deduction or offset, in lawful money of the United States of America.
3.04 In addition to the Rent and any other charges to be paid by Tenant
hereunder, Tenant shall reimburse Landlord upon demand for any and all taxes
payable by Landlord (other than net income taxes) which are not otherwise
reimbursable under this Lease, whether or not now customary or within the
contemplation of the parties, where such taxes are upon, measured by or
reasonably attributable to (a) the cost or value of Tenant's equipment,
furniture, fixtures and other personal property located in the Premises, or the
cost or value of any leasehold improvements made in or to the Premises by or for
Tenant, other than standard tenant improvements made by Landlord, regardless of
whether title to such improvements is held by Tenant or Landlord; (b) the gross
or net Rent payable under this Lease, including, without limitation, any rental
or gross receipts tax levied by any taxing authority with respect to the receipt
of the Rent hereunder; (c) the possession, leasing, operation, management,
maintenance, alteration, repair,
5
<PAGE>
use or occupancy by Tenant of the Premises or any portion thereof; or (d) this
transaction or any document to which Tenant is a party creating or transferring
an interest or an estate in the Premises. If it becomes unlawful for Tenant to
reimburse Landlord for any costs as required under this Lease, the Base Rent
shall be revised to net Landlord the same net Rent after imposition of any tax
or other charge upon Landlord as would have been payable to Landlord but for the
reimbursement being unlawful.
3.05 Landlord agrees to operate the Project in a prudent manner with a
view to controlling costs in a manner consistent with the sound operation of the
Project.
4. CONDITION OF THE PREMISES. Tenant's taking possession of the
Premises shall be deemed conclusive evidence that as of the date of taking
possession the Premises are in good order and satisfactory condition, except for
such matters as to which Tenant gave Landlord written notice on or before the
Commencement Date. No promise of Landlord to alter, remodel, repair or improve
the Premises or the Building and no representation, express or implied,
respecting any matter or thing relating to the Premises or Building or this
Lease (including, without limitation, the condition of the Premises or the
Building) have been made to Tenant by Landlord or its Broker or Sales Agent,
other than as may be contained herein or in a separate exhibit or addendum
signed by Landlord and Tenant.
5. TERM.
5.01 The lease term shall commence on the Commencement Date of January
1, 1996 and shall be for a period of 36 months (3 years) ending December 31,
1998.
5.02 The option to extend this lease for an additional 3 years (36
months) is granted, provided they have been and are, incompliance with all terms
& conditions of this lease. The Tenant will provide, in writing, no later than
October 1, 1998,to excercise this option or vacate the premises.
6. USE OF PREMISES. The Leased Premises may be used and occupied only
for offices and for no other purpose without Landlord's prior written consent.
Landlord does not represent nor warrant that the premises can be used for such
purpose, as it is incumbent upon Tenant to ascertain from the proper
governmental authorities whether or not the premises can be used for Tenant's
intended use. Tenant shall promptly comply with all laws, ordinances, orders and
regulations affecting the Leased Premises and their cleanliness, safety,
occupation and use. Tenant shall not commit, or suffer to be committed, any
waste on the Premises, nor shall Tenant maintain, commit, or permit the
maintenance or commission of any nuisance, as defined in California Civil Code
Section 3479, on the Premises. This provision shall specifically preclude the
storage in or on the Premises, or release in or about
6
<PAGE>
the Premises, of hazardous materials as that term is defined in Federal and
California laws, statutes, rules and regulations.
7. UTILITIES INTERRUPTION. Landlord shall not be liable in
damages or otherwise for any failure or interruption of any utility
service, and no such failure or interruption shall entitle Tenant
to terminate this Lease or abate the rent and other charges.
8. ALTERATIONS, MECHANICS LIENS.
8.01 Alterations may not be made to the Leased Premises without the
prior written consent of Landlord and any alterations of the Leased Premises
except movable furniture and trade fixtures shall at Landlord's option become
part of the realty and belong to the Landlord.
9. FIRE INSURANCE HAZARDS.
9.01 No use shall be made or permitted to be made of the Leased
Premises, nor acts done, which will increase the existing rate of insurance upon
the Building or cause the cancellation of any insurance policy covering the
Building, or any part thereof, nor shall Tenant sell, or permit to be kept, used
or sold, in or about the Leased Premises, any article which may be prohibited by
the standard form of fire insurance policies. Tenant shall, at its sole cost and
expense, comply with any and all requirements pertaining to the Leased Premises
of any insurance organization or company, necessary for the maintenance of
reasonable fire and public liability insurance, covering the Leased Premises, or
the Building of which it is a part. Tenant agrees to pay to Landlord as
additional rent, any increase in premiums on policies which may be carried by
Landlord on the Leased Premises covering damages to the Building and loss of
rent caused by fire and the perils normally included in extended coverage above
the rates for the least hazardous type of occupancy for industrial, warehousing,
office and distribution operations.
9.02 Tenant shall maintain in full force and effect on all of its
fixtures and equipment in the Leased Premises a policy or policies of fire and
extended coverage insurance with malicious mischief and theft endorsements to
the extent of at least eighty percent (80%) of their insurable value. During the
term of this Lease the proceeds from any such policy or policies of insurance
shall be used for the repair or replacement of the fixtures and equipment so
insured. Landlord shall have no interest in the insurance upon Tenant's
equipment ad fixtures and will sign all documents necessary or proper in
connection with the settlement of any claim or loss by Tenant. Landlord will not
carry insurance on Tenant's possessions, nor on any leasehold improvements made
by Tenant. Tenant shall furnish Landlord with a certificate of such policy
within thirty (30) days of the commencement of this Lease
7
<PAGE>
and whenever required shall satisfy Landlord that such policy is in full force
and effect.
10. LIABILITY INSURANCE. Tenant, commencing upon Tenant's initial entry
into the premises, at its own expense, shall provide and keep in force with
companies acceptable to Landlord public liability insurance for the benefit of
Landlord and Tenant jointly against liability for bodily injury and property
damage in the amount of not less than One Million Dollars ($1,000,000) in
respect to injuries to or death of one person and in an amount of not less than
Two Million Dollars ($2,000,000) in respect to injuries to or death of more than
one person in any one occurrence, and in the amount of not less than Four
Hundred Ninety-Five Thousand Dollars ($495,000) per occurrence in respect to
damage to property, such limits to be in any greater amounts as may be
reasonably indicated by circumstances from time to time existing. Tenant shall
upon occupancy furnish Landlord with a certificate of such policy and whenever
required shall satisfy Landlord that such policy is in full force and effect.
Such policy shall name Landlord as an additional insured and shall be primary
and non-contributing with any insurance carried by Landlord. The policy shall
further provide that it shall not be canceled or altered without twenty (20)
days' prior written notice to Landlord. Insurance required hereunder shall be in
companies rated A+, AAA or better in "Best's Insurance Guide."
11. INDEMNIFICATION BY TENANT.
11.01 This Lease is made on the express condition that Landlord shall
not be liable for or suffer loss by reason of injury to person or property from
any cause (excluding Landlord's negligent act or omission and excluding any
environmental matters not caused by Tenant) in any way connected with the
condition or use of the Leased Premises or the installation or construction of
improvements or personal property therein, including without limitation any
liability for injury to the person or property of Tenant, its agents, officers,
employees or invitees. Tenant agrees to indemnify Landlord and hold it harmless
from any and all liability, loss, cost, or obligation on account of, or arising
out of, any such injury or loss.
11.02 In case any action, suit or proceeding is brought against
Landlord by reason of any such occurrence, under the paragraph above, Tenant,
upon Landlord's request, will at Tenant's expense, resist and defend such
action, suit or proceeding, or cause the same to be resisted and defended by
counsel designated by the insurer whose policy covers the occurrence or by
counsel designated by Tenant and approved by Landlord. The obligations of Tenant
under this section arising by reason of any occurrence taking place during the
Lease Term shall survive any termination of this Lease.
8
<PAGE>
12. REPAIRS.
12.01 Tenant shall, at Tenant's sole cost and expense, keep the
Premises and every part thereof in good condition and repair (except as
hereinafter provided with respect to Landlord's obligations) including without
limitation, the maintenance, replacement and repair of any storefront, doors,
window casements and glazing. Tenant shall, upon the expiration or sooner
termina tion of this Lease hereof, surrender the Leased Premises to the Landlord
in good condition, broom clean, ordinary wear and tear and damage from causes
beyond the reasonable control of Tenant excepted. Any damage to adjacent
premises caused by Tenant's use of the Premises shall be repaired at the sole
cost and expense of Tenant.
12.02 Notwithstanding the Provisions of Paragraph 12.01 hereinabove,
Landlord shall repair and maintain the structural portions of the Leased
Premises, including the exterior walls and roof, plumbing, pipes, electrical
wiring and conduits, unless such maintenance and repairs are caused in part or
in whole by the act, neglect, fault or omission of any duty by the Tenant, its
agents, servants, employees, invitees, or any damage caused by breaking and
entering, in which case Tenant shall pay to Landlord the reasonable cost of such
maintenance and repairs. All costs and expenses of Landlord under this Paragraph
12.02 shall be Project Operating Costs under Paragraph 3.01. Landlord shall not
be liable for any failure to make any such repairs or to perform any maintenance
unless such failure shall persist for an unreasonable time after written notice
of the need of such repairs or maintenance is given to Landlord by Tenant.
Except as provided in Article 16 hereof, there shall be no abatement of rent and
no liability of Landlord by reason of any injury to or interference with
Tenant's business arising from the making of any repairs, alterations or
improvements in or to any portion of the Leased Premises or building of which
the Leased Premises are a part, or in or to fixtures, appurtenances and
equipment therein. Tenant waives the right to make repairs at Landlord's expense
under any law, statute or ordinance now or hereafter in effect.
13. PARKING AND COMMON AREAS. Tenant, for the use and benefit of
Tenant, its agents, employees, customers, licensees and subtenants, shall have
the non-exclusive right in common with Landlord, and other present and future
owners, tenants and their agents, employees, customers, licensees and
subtenants, to use the Common areas and parking garage adjacent to the building
during the entire term of this Lease, for ingress and egress, and automobile
parking.
14. SIGNS. The Tenant shall obtain Landlord's approval
before signs are placed on the exterior and/or interior of the
Building.
9
<PAGE>
15. ENTRY BY LANDLORD. Tenant shall permit Landlord and Landlord's
agents to enter the Leased Premises after business hours on weekdays, and on
weekends, for the purpose of inspecting the same or for the purpose of
maintaining the Leased Premises or adjacent premises or for the purpose of
making repairs, altera tions, or additions to any portion of same including the
erection and maintenance of such scaffolding, canopies, fences, and props as may
be required, or for the purpose of posting notices of non-responsibility for
alterations, additions, or repairs without any rebate of rent and without any
liability to Tenant for any loss of occupation or quiet enjoyment of the Leased
Premises thereby occasioned. For each of the aforesaid purposes, Landlord shall
at all times have and retain a key with which to unlock all of the doors in,
upon and about the Leased Premises, excluding Tenant's vaults and safes. The
tenant shall not alter any lock or install a new or additional lock or any bolt
on any door of the Leased Premises without prior written consent of the
Landlord. If Landlord shall give its consent, the Tenant shall in each case
furnish the Landlord with a key for any such lock.
16. DESTRUCTION OR DAMAGE.
16.01 If the Premises or the portion of the Building necessary for
Tenant's occupancy is damaged by fire, earthquake, act of God, the elements or
other casualty, Landlord shall, subject to the provisions of this Article,
promptly repair the damage, if such repairs can, in Landlord's opinion, be
completed within (90) ninety days. If Landlord determines that repairs can be
completed within ninety (90) days, this Lease shall remain in full force and
effect, except that if such damage is not the result of the negligence or
willful misconduct of Tenant or Tenant's agents, employees, contractors,
licensees or invitees, the Base Rent shall be abated to the extent Tenant's use
of the Premises is impaired, commencing with the date of damage and continuing
until completion of the repairs required of Landlord under Paragraph 16.04.
16.02. If in Landlord's opinion, such repairs to the Premises or
portion of the Building necessary for Tenant's occupancy cannot be completed
within ninety (90) days, Landlord shall notify Tenant of that opinion in writing
within thirty (30) days after the date of such fire or other casualty. In such
event, Landlord and Tenant may each terminate this Lease unilaterally by giving
the other party written notice of such termination within 15 days of the
effective date of the notice described above, and this Lease shall terminate as
of the date of such fire or casualty. If neither party notifies the other of
such termination, this Lease shall continue in full force and effect, but the
Base Rent shall be partially abated as provided in Paragraph 16.01.
16.03(a) If any other portion of the Building or Project is totally
destroyed or damaged to the extent that in Landlord's opinion repair thereof
cannot be completed within ninety (90) days,
10
<PAGE>
Landlord may elect upon notice to Tenant given within thirty (30) days after the
date of such fire or other casualty, to repair such damage, in which event this
Lease shall continue in full force and effect, but the Base Rent shall be
partially abated as provided in Paragraph 16.01. If Landlord does not elect to
make such repairs, this Lease shall terminate as of the date of such fire or
other casualty.
16.03(b) If any other such portion of the Building or Project is
totally destroyed or damaged to the extent that in Landlord's opinion repair
thereof cannot be completed within ninety (90) days, and Tenant's business
operations are substantially and adversely impacted by such damage, and Landlord
elects to repair such damage, then, nevertheless, Tenant shall have the right to
terminate this Lease if the substantial adverse impact is not cured by Landlord
within one hundred fifty (150) days of the date of such fire or casualty. Tenant
shall exercise this right by giving written notice to Landlord no later than one
hundred fifty-five (155) days after the date of such fire or casualty.
16.04 If the Premises are to be repaired under this Article, Landlord
shall repair at its cost any injury or damage to the Building and standard
tenant improvements in the Premises. Tenant shall be responsible at its sole
cost and expense for the repair, restoration and replacement of any other
Leasehold improvements and Tenant's Property. Landlord shall not be liable for
any loss of business, inconvenience or annoyance arising from any repair or
restoration of any portion of the Premises or Building as a result of any damage
from fire or other casualty.
16.05 This Lease shall be considered an express agreement governing any
case of damage to or destruction of the Premises or Building by fire or other
casualty, and any present or future law which purports to govern the rights of
Landlord and Tenant in such circumstances in the absence of express agreement,
shall have no application. The opinions and determinations of Landlord under
this Section 16 shall be reasonable.
17. ASSIGNMENT AND SUBLETTING. Tenant shall not either voluntarily, or
by operation of law, assign, transfer, mortgage, pledge, hypothecate or encumber
this Lease or any interest therein, and shall not sublet the Leased Premises or
any part thereof, or any right or privilege appurtenant thereto, or allow any
other person (the employees, agents, servants and invitees or Tenant excepted)
to occupy or use the Leased Premises, or any portion thereof, without the
written consent of Landlord first had and obtained, which consent shall not be
unreasonably withheld. A consent to one assignment, subletting, occupation or
use by any other person shall not be deemed to be a consent to any subsequent
assignment, subletting, occupation or use by another persona. Consent to any
such assignment or subletting shall not relieve Tenant of any liability under
this Lease. Any such assignment or
11
<PAGE>
subletting without such consent shall be void, and shall, at the option of the
Landlord, constitute a default under the terms of this Lease.
In the event that Landlord shall consent to a sublease or
assignment hereunder, Tenant shall pay Landlord reasonable fees, not to exceed
One Thousand Dollars ($1,000.00), incurred in connection with the processing of
documents necessary to giving of such consent and assumption by the assignee.
18. TENANT'S DEFAULT. The occurrence of any one or more of
the following events shall constitute a default and breach of this
Lease by Tenant:
A. The vacating or abandonment of the Premises by
Tenant.
B. The failure by Tenant to make any payment or rent or
any other payment required to be made by Tenant hereunder, as and
when due.
C. The failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed by
the Tenant, other than described in B, above, where such failure shall continue
for a period of fifteen (15) days after written notice thereof by Landlord to
Tenant; provided, however, that if the nature of Tenant's default is such that
more than fifteen (15) days are reasonably required for its cure, then Tenant
shall not be deemed to be in default if Tenant commences such cure within said
fifteen (15) days period and thereafter diligently prosecutes such cure to
completion.
D. The making by Tenant of any general assignment or general
arrangement for the benefit of creditors; or the filing by or against Tenant of
a petition to have Tenant adjudged a bankrupt, or a petition or reorganization
or arrangement under any law relating to bankruptcy (unless, in the case of a
petition filed against Tenant, the same is dismissed within sixty (60) days); or
the appointment of a trustee or a receiver to take possession of substantially
all of Tenant's assets located at the Premises or of Tenant's interest in this
Lease, where possession is not restored to Tenant within thirty (30) days; or
the attachment, execution or other judicial seizure of substantially all of
Tenant's assets located at the Leased Premises or of Tenant's interest in this
Lease, where such seizure is not discharged in thirty (30) days.
19. REMEDIES ON DEFAULT. In the event of any such default or
breach by Tenant, Landlord may at any time thereafter, with or
without notice or demand and without limiting Landlord in the
exercise of a right or remedy which Landlord may have by reason of
such default or breach:
12
<PAGE>
A. Terminate Tenant's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Premises to Landlord. In such event
Landlord shall be entitled to recover from Tenant all damages incurred by
Landlord by reason of Tenant's default including, but not limited to: the cost
of recovering possession of the Premises; expenses of reletting, including
necessary renovation and alteration of the Premises; reasonable attorney's fees;
the worth at the time of award by the court having jurisdiction thereof of the
amount by which the unpaid rent and other charges and adjustments called for
herein for the balance of the term after the time of such award exceeds the
amount of such loss for the same period that Tenant proves could be reasonably
avoided; and that portion of any leasing commission paid by Landlord and
applicable to the unexpired term of this Lease. Unpaid installments of rent or
other sums shall bear interest from the date due at the rate of ten percent
(10%) per annum. "Worth" as used in this provision, is computed by discounting
the total at the discount rate of the Federal Reserve Bank of San Francisco at
the time of the judgment, or award, plus one percent (1%).
B. Maintain Tenant's right to possession, in which case this
Lease shall continue in effect whether or not Tenant shall have abandoned the
Premises. In such event, Landlord shall be entitled to enforce all of Landlord's
rights and remedies under this Lease, including the right to recover the rent
and any other charges and adjustments as may become due hereunder; or
C. Pursue any other remedy now or hereafter available
to Landlord under the laws or judicial decisions of the State in
which the Premises are located.
20. LANDLORD'S RIGHT TO CURE DEFAULTS. Landlord may, but shall not be
obligated to, cure, any anytime, without notice, any default by Tenant under
this Lease; and whenever Landlord so elects, all costs and expenses incurred by
Landlord including without limitation reasonable attorney's fees and expenses,
together with interest on the amount of costs and expenses so incurred at the
maximum legal rate then in effect in the State of California shall be paid by
Tenant to Landlord on demand.
21. DEFAULT BY LANDLORD. Landlord shall not be in default unless
Landlord or the beneficiary under any deed of trust fails to perform obligations
required of Landlord within a reasonable time, but in no event later than thirty
(30) days after written notice by Tenant to Landlord and to the beneficiary of
any deed of trust covering the Premises whose name and address shall have
theretofore been furnished to Tenant in writing, specifying wherein Landlord has
failed to perform such obligation; provided, however, that if the nature of
Landlord's obligation is such that more than thirty (30) days are required for
performance, then Landlord shall not be in default if Landlord or said
beneficiary commences performance
13
<PAGE>
within such thirty (30) day period and thereafter diligently prosecutes the same
to completion. In no event shall Tenant have the right to terminate this Lease
as a result of Landlord's default and Tenant's remedies shall be limited to
damages and/or an injunction.
22. ATTORNEY'S FEES/COLLECTION CHARGES. In the event of any legal
action or proceeding between the parties hereto, reasonable attorney's fees and
expenses of the prevailing party in any such action or proceeding may be added
to the judgment therein, including attorney's fees on appeal. In addition to the
charges provided for above, Tenant shall pay a charge of $25.00 to Landlord for
preparation of each demand for delinquent rent.
23. SURRENDER OF LEASE NOT MERGER. The voluntary or other surrender of
this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger,
and shall, at the option of Landlord terminate all or any existing subleases,
and/or subtenan cies, or may, at the option of Landlord, operate as an
assignment to it of any or all of such subleases or subtenancies.
24. CONDEMNATION. If any part of the Leased Premises or the building of
which it is a part, or the Center or parking or common areas therein, shall be
taken or condemned for a public or quasi-public use, and a part thereof remains
which is reasonably suitable for Tenant's purposes hereunder, this Lease shall,
as to the part so taken, terminate as of the date title shall vest in the
condemnor, and the rent payable hereunder shall be equitably adjusted. If all
the Leased Premises, or such part thereof be taken or condemned so that there
does not remain a portion reasonably suitable for Tenant's purposes hereunder,
this Lease shall thereupon terminate.
25. WAIVER. The waiver by Landlord of any breach of any term, covenant,
or condition herein contained shall not be deemed to be a waiver of such term,
covenant, or condition or any subsequent breach of the same or any other term,
covenant, or condition herein contained. The subsequent acceptance of rent
hereunder by Landlord shall not be deemed to be a waiver of any preceding breach
by Tenant of any term, covenant, or condition of this Lease, other than the
failure of Tenant to pay the particular rental so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
rent.
26. EFFECT OF HOLDING OVER. If Tenant should remain in possession of
the Leased Premises after the expiration of the Lease Term and without executing
a new Lease, then such holding over shall be construed as a tenancy from
month-to-month, subject to all the conditions, provisions, and obligations of
this Lease insofar as the same are applicable to a month-to-month tenancy;
provided, however, that Base Rent during any such holding over shall be 150%
14
<PAGE>
of the Base Rent in effect immediately prior to the expiration of
the Lease term.
27. TENANT'S STATEMENT. Tenant shall at any time and from
time to time upon not less than five (5) days prior written notice
from Landlord execute, acknowledge and deliver to Landlord a statement in
writing (a) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of such modification and certifying
that this Lease as so modified is in full force and effect), and the date to
which the rental and +other charges are paid in advance, if any, and (b)
acknowledging that there are not, to Tenant's knowledge, any uncured defaults on
the part of the Landlord hereunder, or specifying such defaults if any are
claimed, and (c) setting forth the date of commencement of rents and expiration
of the term hereof. Any such statement may be relied upon by any prospective
purchaser or encumbrancer of all or any portion of the real property of which
the Premises are a part.
28. TENANT'S FINANCIAL INFORMATION. Tenant shall promptly
furnish to Landlord, from time to time, financial statements and
annual reports, reflecting Tenant's current financial condition, whenever
requested by Landlord.
29. RELATIONSHIP OF THE PARTIES. Nothing contained herein
shall be deemed or construed by the parties hereto nor by any third
party, as creating the relationship of principal and agent or of partnership or
of joint venture between the parties hereto, it being understood and agreed that
neither the method of computation of rent nor any other provision contained
herein, nor any acts of the parties hereto, shall be deemed to create any
relationship other than Landlord and Tenant.
30. RULES AND REGULATIONS. Tenant shall faithfully observe and comply
with all reasonable rules and regulations that Landlord shall from time to time
promulgate and/or modify (see Exhibit "C" attached hereto). The rules and
regulations shall be binding upon the Tenant upon delivery of a copy of them to
Tenant. Landlord shall not be responsible to Tenant for the nonperformance of
any said rules and regulations by any other tenants or occupants. Said rules may
include (1) the restricting of employee parking, and (2) regulation of waste
removal.
31. GENERAL PROVISIONS.
31.01 Plats and Riders. Clauses, plats, riders and
addendums, if any, affixed to this Lease are a part hereof.
31.02 Venue. Landlord will execute this Lease and will receive the rent
and other payments at Landlord's office. Therefore the county in which
Landlord's office is located is hereby deemed to be a proper place of venue for
transitory actions.
15
<PAGE>
31.03 Marginal Headings. The marginal headings and
article titles to the articles of this Lease are not a part of this
Lease and shall have no effect upon the construction or interpreta
tion of any part hereof.
31.04 Time. Time is of the essence of this Lease and each
and all of its provisions in which performance is a factor.
31.05. Successors and Assigns. The covenants and condi
tions herein contained, subject to the provisions as to assignment,
apply to and bind the heirs, successors, executors, administrators
and assigns of the parties hereto.
31.06. Recordation. Neither Landlord nor Tenant shall
record this Lease, but a short form memorandum hereof may be
recorded at the request of the Landlord.
31.07. Quiet Possession. Upon Tenant paying the rent reserved hereunder
and observing and performing all of the covenants, conditions and provisions on
Tenant's part to be observed and performed hereunder, Tenant shall have quiet
posses sion of the Premises for the entire term hereof, subject to all the
provisions of this Lease.
31.08. Prior Agreements. This Lease contains all of the agreements of
the parties hereto with respect to any matter covered or mentioned in this
Lease, and no prior agreements or understand ing pertaining to any such matter
shall be effective for any purpose. No provision of this Lease may be amended or
added to except by an agreement in writing signed by the parties hereto or their
respective successors in interest. This Lease shall not be effective or binding
on any party until fully executed by both parties hereto.
31.09. Inability to Perform. This lease and the obliga tions of the
Tenant hereunder shall not be affected or impaired because the Landlord is
unable to fulfill any of its obligations hereunder or is delayed in doing so, if
such inability or delay is caused by reason of strike, labor troubles, acts of
God, or any other cause beyond the reasonable control of the Landlord.
31.10. Partial Invalidity. Any provision of this Lease
which shall prove to be invalid, void, or illegal shall in no way
affect,impair or invalidate any other provisions hereof and such
other provision shall remain in full force and effect.
31.11. Cumulative Remedies. No remedy or election
hereunder shall be deemed exclusive but shall, wherever possible,
be cumulative with all other remedies at law or in equity.
31.12. Choice of Law. This Lease shall be governed by the
laws of the State of California.
16
<PAGE>
31.13. Sale of Premises by Landlord. In the event of any sale of the
Premises by Landlord, Landlord shall be and is hereby entirely freed and
relieved of all liability under any and all of its covenants and obligations
contained in or derived from this Lease arising out of any act, occurrence or
omission occurring after the consummation of such sale; but only if the
purchaser at such sale or any subsequent sale of the Premises shall have assumed
and agreed to carry out any and all of the covenants and obliga tions of the
Landlord under this Lease.
31.14. Subordination, Attornment. Upon request of the Landlord, Tenant
will in writing subordinate its rights hereunder to the lien of any mortgage, or
deed of trust, to any bank, insurance company or other lender (including the
Building owner and its successors and assigns) now or hereafter in force against
the premises, and to all advances made or hereafter to be made upon the security
thereof, provided that such company or institution agrees to honor this Lease
for the full term hereof so long as Tenant is not in default hereunder.
In the event any proceedings are brought for foreclosure, or in the
event of the exercise of the power of sale under any mortgage or deed of trust
made by the Landlord covering the Premises, the Tenant shall attorn to the
purchaser upon any such foreclosure or sale and recognize such purchaser as the
Landlord under this Lease.
31.15. Notices. All notices and demands which may be or are required or
permitted to be given by either party on the other hereunder shall be in
writing. All notices and demands by the Landlord to the Tenant shall be sent by
United States Mail, postage prepaid, addressed to the Tenant at the Premises,
and to the address hereinbelow, or to such other place as Tenant may from time
to time designate in a notice to the Landlord. All notices and demands by the
Tenant to the Landlord shall be sent by United States Mail, postage prepaid,
addressed to the Landlord at the address set forth herein, and to such other
person or place as the Landlord may from time to time designate in a notice to
the Tenant.
To Landlord at: NINE C CORPORATION
P.O. Box 5764
Redwood City, CA 94063
To Tenant at: Bay Area Bank
900 Veterans Blvd.
Redwood City, CA 94063
32. SERVICES TO PREMISES. Notwithstanding anything herein to
the contrary, the Landlord shall provide water, power, heating, air
conditioning, janitorial and other services, including but not
limited to floor waxing, trash removal, window washing and all
facilities regarding maintenance of the exterior of the building,
17
<PAGE>
including gardening, subject to payment or reimbursement by Tenant
as provided herein.
Exhibit "B" hereto more completely sets forth the types and
frequency of service and the minimum acceptable service standard levels.
33. VALIDITY OF LEASE. The Lease shall be effective only
after Tenant has received a fully executed copy of this Lease from
Landlord.
34. TOXIC/HAZARDOUS MATERIALS CONSIDERATION. Upon request
Lessor will make available a Toxic Report that shows Benzene under
the garage area. This is being monitored by the County Health
Department at this time. Lessor believes it does not present a
hazard.
18
<PAGE>
THE PARTIES HAVE EXECUTED THIS LEASE THE DATE AND YEAR SET BELOW THEIR
SIGNATURE:
LANDLORD TENANT
NINE-C CORPORATION BAY AREA BANK
By:____________________________ By:____________________________
James E. Burney
Title: President Title: President
Date:__________________________ Date:__________________________
By:_________________________
Title:
9c30.95
19
<PAGE>
Exhibit "A"
[Exhibit A consists of a scale drawing of the floor on which the premises are
located, showing the leased premises by sharing.]
<PAGE>
Exhibit "B"
CLEANING SPECIFICATIONS
Significant Cleaning Services will perform the following services:
1. DAILY FIVE DAYS PER WEEK
A. General
1. Hand dust and/or damp wipe and/or wash counters, file
cabinets, desks, telephones, chairs, tables and other
office furniture.
2. Empty all ashtrays and urns, damp wipe or wash.
3. Hand dust all ledges and flat surfaces within reach.
4. Gather all waste paper, replace plastic liners as
needed and place for disposal.
5. Remove fingerprints and marks from woodwork, walls,
doors, partitions and partition glass.
6. Properly arrange all furniture.
7. Sweep all resilient tile floors and spot mop any soiled
areas.
8. Vacuum all carpeted areas and spot clean as needed.
9. Clean and sanitize drinking fountains.
10. Keep janitor closet neat and clean at all times.
11. Dry clean chalkboards and trays as needed. (If Erased)
12. Upon completion of work, leave only designated lights
on. Check windows, doors etc. prior to leaving building.
13. Lock all suite doors while performing cleaning.
<PAGE>
B. RESTROOMS
1. Clean and refill dispensers from Customer's stock.
2. Clean and sanitize fixtures, polish chrome fittings.
3. Spot wash walls and partitions.
4. Clean and sanitize mirrors.
5. Damp mop and sanitize floors.
6. Dust around doors leading to bathrooms.
C. ENTRANCE WAYS/OUTSIDE PATIO AREAS
1. Clean entrance glass.
2. Clean and maintain entrance mats.
3. Sweep/mop entrance tile, vacuum carpeted areas.
4. Polish all bright metal.
5. Wet mop all tiled landings nightly.
6. Sweep/police outside entrance ways.
7. Empty ashtrays of debris and remove any debris in the
area surrounding ashtrays.
D. LUNCH ROOMS OR EATING AREAS
1. Sweep/mop all floors.
2. Gather all trash, replace plastic liners in receptacles
and place for disposal.
3. Properly arrange all furniture.
4. Clean all table tops.
E. ASSEMBLY AREAS (Labs, Machine shops, etc.)
1. Sweep/mop all floors.
2. Gather all trash, furnish and replace plastic liners as
needed in receptacles and place for disposal.
<PAGE>
3. Remove fingerprints and marks from walls, partitions,
doors, and partition glass.
4. Hand dust all ledges and flat surfaces within reach.
F. COMPUTER ROOMS
1. Sweep/mop all floors.
2. Gather all trash, furnish and replace plastic liners as
needed in receptacles and place for disposal.
3. Remove fingerprints and marks from walls, partitions,
doors, and partition glass.
G. STOCK ROOMS
1. Sweep/mop all floors
2. Gather all trash and place for disposal.
<PAGE>
II. PERIODIC CLEANINGS
A. FLOORS
1. Scrub and refinish all tiled areas quarterly.
B. GENERAL
1. Once each 30 days
a. High dust overhead vents, ceiling around
light fixtures, ledges etc.
b. Vacuum fabric drapes anad upholstered furniture.
C. RESTROOMS
1. Once each quarter
a. Wash down and sanitize walls and partitions.
b. Machine scrub floors and seal.
D. WINDOWS
1. Monthly
a. Wash all lobby glass inside and out.
E. RETURN REGISTERS
1. Clean twice yearly.
All work to be performed after general working hours and/or
weekends as desired.
<PAGE>
EXHIBIT "C"
RULES AND REGULATIONS
Tenant, its contractors, employees, agents, visitors, guests and licensees shall
faithfully observe and comply with the rules and regulations set forth herein,
and such additional rules and regulations as Landlord hereafter at any time from
time to time may make and communicate in writing to Tenant, which, in the
judgment of Landlord, shall be necessary or desirable for the reputation,
safety, care of appearance of the Building, or the preservation of good order
therein, or the operation or maintenance of the building, or the equipment
thereof, or the comfort of Tenant or others in the Building, provided, however,
that in the case of any conflict between the provisions of the Lease and any
such rules & regulations, the provisions of the Lease shall control, and
provided further that nothing contained in the Lease shall be construed to
impose upon Landlord any duty or obligation to enforce the rules and regulations
or the terms, covenants or conditions in any other lease as against any other
Tenant for violation of the same by any other tenant, its servants, employees,
agents, visitors, invitees, lessees or licensees.
1. The rights of Tenant in the entrances, corridors, elevators and escalators
of the Building are limited to ingress and egress from the Tenant's Demised
Premises for the Tenant and its employees, licensees and invitees, and
Tenant shall not use, or permit the use of the entrances, corridors,
escalators or elevators for an other purpose. Tenant shall not invite to
the Tenant's Demised Premises, or permit the visit of, persons in such
numbers or under such conditions as to interfere with the use and enjoyment
of any of the plazas, parking areas, entrances, corridors, escalators,
elevators and other facilities of the Building by other tenants. Fire exits
and stairways are for emergency use only, and they shall not be used for
any other purpose by the Tenant, its employees, licensees, or invitees.
Tenant shall not encumber or obstruct, or permit the encumbrances for
obstruction of any of the lobbies , sidewalks, plazas, parking areas,
entrances, corridors, escalators, elevators, fire exits, stairways or other
public portions of the Building. The Landlord reserves the right to control
and operate the public portions of the building and the public facilities,
as well as facilities furnished for the common use of the Tenant, in such
manner as it deems best for the benefit of the Tenant generally.
INITIAL_________
1
<PAGE>
2. The Landlord may refuse admission to the Building outside of ordinary
business hours to any person not known to the watchman in charge or not
having a pass issued by the Landlord or not properly identified, and may
require all persons admitted to or leaving the Building outside of ordinary
business hours to register. Tenant, employees, agents and visitors shall be
permitted to enter and leave the Building whenever appropriate arrangements
have been previously made between the Landlord an Tenant with respect
thereto. Tenant shall be responsible for all persons for whom Tenant
requests such permission and shall be liable to the Landlord for all acts
of such persons. Any person whose presence in the Building at any time
shall, in the judgment of the Landlord, be prejudicial to the safety,
character, reputation and interests of the Building or its Tenant may be
denied access to the Building or may be ejected therefrom. In the case of
invasion, riot, public excitement or other commotions, the Landlord may
prevent all access to the Building during the continuance of the same, by
closing the doors or otherwise, for the safety of the Tenant and protection
of property in the Building. The Landlord may require any person leaving
the Building with any package or other object to exhibit a pass from the
Tenant from whose Demised Premises the package or object is being removed,
but the establishment and enforcement of such requirement shall not impose
any responsibility on the Landlord for the protection of any Tenant against
the removal of property from the Demised Premises of the Tenant. The
Landlord shall, in no way, be liable to any Tenant for damages or loss
arising from the admission, exclusion or ejection of any person to or from
the Tenant's Demised Premises for the Building under provisions of this
rule.
3. Tenant shall not obtain or accept for use in its Demised Premises food,
beverage, towel, barbering, boot blacking, floor polishing, lighting
maintenance, cleaning, messenger service or other similar services from
any persons not authorized by the Landlord in writing to furnish such
services, provided always that the charges for such services by persons
authorized by the Landlord are not excessive. Such services shall be
furnished only at such hours in such places within the Tenant's Demised
Premises and under such regulations as may be fixed by the Landlord.
4. There shall not be used in any space, or in the public halls of the
Building, either by the Tenant or by jobbers or others, in the delivery
or receipt of merchandise, any hand trucks, except those equipped with
rubber tires and side guards.
2 INITIAL__________
<PAGE>
5. No noise, including the playing of any musical instruments, radio or
television which, in the judgment of the Landlord, might disturb other
lessees in the Building, shall be made or permitted by Tenant, and no
cooking shall be done in the Tenant's Demised Premises, except as expressly
approved by the Landlord in writing. Nothing shall be done or kept in
Tenant's Demised Premises which would impair or interfere with any of the
Building services or the proper and economic heating, cleaning or other
servicing of the Building or the Demised Premises, or the use or enjoyment
by any other lessee of any other Demised Premises, nor shall there be
installed by Tenant any ventilating, air conditioning, electrical or other
equipment of any kind which, in the judgment of the Landlord, might cause
any such impairment or interference. No dangerous, flammable, combustible
or explosive object or material shall be brought into the building by
Tenant or with the permission of any lessee.
6. Tenant shall not install vending machines in the Demised Premises without
the written consent of Landlord.
7. No acids, vapors or other materials shall be discharged or permitted to be
discharged into the waste lines, vents or flues of the Building which may
damage them. The water and wash closets and other plumbing fixtures in or
serving Tenant's Demised Premises shall not be used for any purpose other
than the purpose for which they were designed or constructed, and no
sweepings, rubbish, rags, acids or other foreign substances shall be
deposited therein. All damages resulting from any misuse of the fixtures
shall be borne by the Tenant who, or whose servants, employees, agents,
visitors or licensees, shall have caused the same. All cost of repairs to
special installed plumbing fixtures in Tenant's Demised Premises shall be
at Tenant's expense whether initial installation was paid for by Landlord
or Tenant.
8. No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the
outside or inside of the Building without the written consent of
Landlord first had and obtained, and Landlord shall have the right to
remove any such sign, placard, picture, advertisement, name or notice
without notice to and at the expense of Tenant. All approved signs or
lettering on doors shall be printed, painted, affixed or inscribed a
the expense of Tenant by a person approved of by the Landlord.
3 INITIAL_______
<PAGE>
9. The toilet rooms, urinals, wash bowls and other apparatus shall not be
used for any purpose other than that for which they were constructed
and no foreign substance of any kind whatsoever shall be thrown
therein, and the expense of any breakage, stoppage or damage resulting
from the violation of this rule shall be borne by the Tenant who, or
whose employees or invitees, shall have caused it.
10. Tenant shall not overload the floor of the Demised Premises or in any way
deface the Demised Premises or any part thereof.
11. No furniture, freight or equipment of any kind shall be brought into the
building without the prior notice to Landlord and all moving of the same
into or out of the building shall be done at such time and in such manner
as Landlord shall designate. Landlord shall have the right to prescribe the
weight, size and position of all safes and other heavy equipment brought
into the building and also the times and manner of moving the same in and
out of the Building. Safes or other heavy objects shall, if considered
necessary by Landlord, stand on supports of such thickness as is necessary
to properly distribute the weight. Landlord will not be responsible for
loss of or damage to any such safe or property from any cause, and all
damage done to the Building by moving or maintaining any such safe or other
property shall be repaired at the expense of Tenant.
12. Landlord will direct electricians as to where and how telephone and
telegraph wires are to introduced. No boring or cutting for wires will
be allowed without the consent of the Landlord. The locations of
telephones, call boxes and other office equipment affixed to the
Demised Premises shall be subject to the approval of Landlord.
13. Landlord reserves the right to exclude or expel from the Building any
person who, in the judgment of Landlord, is intoxicated or under the
influence of liquor or drugs, or who shall in any manner do any act in
violation of any of the rules and regulations of the Building.
14. Tenant shall not alter any lock or install any new or additional locks or
any bolts of any doors or windows of the Premises.
4 INITIAL__________
<PAGE>
15. Landlord shall have the right to control and operate the public
portions of the Building, and the public facilities, and heating and
air conditioning, as well as facilities furnished for the common use of
the Tenant, in such manner as it deems best for the benefit of the
Tenant generally.
16. All entrance doors in the Demised Premises shall be left locked when
the Demised Premises are not in use, and all doors opening to public
corridors shall be kept closed except for normal ingress and egress
from the Demised Premises.
17. Landlord shall not be responsible for replacing or repairing any
interior light fixtures, ballasts, tubes or bulbs other than for normal
drop-in fluorescent 2' x 4' fixtures which are located in Tenant's
Demised Premises.
18. Tenant shall pay for any and all costs of extra trash removal above
that trash constituted as normal office waste. Extra trash in this
instance means, but is not limited to packing, crates, boxes, or
insulation whether created from moving in, moving out, or in the
day-to-day operation of the Tenant's business.
19. Tenant must supply desk chair pads for every desk.
20. Monthly rental not received by our office within seven (7) days of its
due date shall incur a late charge of TEN percent (10%) of the rent
rate then in effect or the maximum charge allowable by the then current
law, whichever is greater. This charge will be assessed as liquidated
damages for said late payment.
21. Nothing is to be placed on or hung from the suspended ceiling including
plants, brackets, hooks or decorative items.
5 INITIAL_________
<PAGE>
READ AND APPROVED:
NINE-C CORPORATION TENANT
BY: JAMES E. BURNEY BY:
TITLE: PRESIDENT TITLE:
DATE: DATE:
frm18.93a
6 INITAL__________
