<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
----------------------
[ ] 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. 2-78293-LA
----------
SOUTH VALLEY BANCORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
California 94-2818095
- ------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer ID
incorporation or organization) Number)
500 Tennant Station, Morgan Hill, CA 95020
- ------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(408) 848-2161
--------------
(Registrant's telephone number,
including area code)
Indicate by check or check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
No par value Common Stock -- 1,314,166 shares outstanding as of May 1, 1996
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
SOUTH VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 (unaudited) 1995*
---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS Cash and due from banks $ 11,098,000 $ 9,436,000
Federal funds sold 17,000,000 27,900,000
---------------------------------------------------------------------------------------
Total cash and equivalents 28,098,000 37,336,000
---------------------------------------------------------------------------------------
Securities available for sale (amortized
cost-1996, $43,034,000; 1995, $34,145,000) 42,637,000 34,247,000
Securities held to maturity (market
value-1996,
$6,753,000; 1995, $7,213,000) 6,683,000 7,089,000
Loans:
Commercial 30,503,000 32,721,000
Real estate-construction 12,680,000 15,338,000
Real estate-other 31,498,000 28,524,000
Installment 13,875,000 13,496,000
---------------------------------------------------------------------------------------
Total loans 88,556,000 90,079,000
Allowance for credit losses (1,484,000) (1,313,000)
Deferred loan fees-net (487,000) (528,000)
---------------------------------------------------------------------------------------
Net loans 86,585,000 88,238,000
---------------------------------------------------------------------------------------
Premises and equipment, net 5,991,000 5,984,000
Accrued interest receivable and other assets 4,517,000 4,379,000
---------------------------------------------------------------------------------------
Total assets $174,511,000 $177,273,000
=======================================================================================
LIABILITIES AND Deposits:
SHAREHOLDERS' Demand, noninterest bearing $ 36,167,000 $ 43,873,000
EQUITY Demand, interest bearing 38,963,000 37,900,000
Savings 37,955,000 36,593,000
Time 41,554,000 39,323,000
---------------------------------------------------------------------------------------
Total deposits 154,639,000 157,689,000
Other liabilities 2,251,000 2,027,000
---------------------------------------------------------------------------------------
Total liabilities 156,890,000 159,716,000
---------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock-no par value; authorized 2,000,000
shares; no shares issued
Common stock-no par value; authorized 4,000,000
shares; issued and outstanding: 1,314,166 shares 13,123,000 11,331,000
Retained earnings 4,732,000 6,166,000
Unrealized gain (loss) on securities available-for-sale (234,000) 60,000
---------------------------------------------------------------------------------------
Total shareholders' equity 17,621,000 17,557,000
---------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $174,511,000 $177,273,000
=======================================================================================
</TABLE>
*Derived from December 31, 1995 audited balance sheet included in the Company's
1995 Annual Report on Form 10-K.
See Notes to Condensed Consolidated Financial Statements
2
<PAGE> 3
SOUTH VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED INCOME STATEMENT (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
1996 1995
-----------------------------------------------------
<S> <C> <C>
INTEREST INCOME Loans (including fees) $2,468,000 $2,422,000
Securities 657,000 423,000
Other 303,000 166,000
-----------------------------------------------------
Total interest income 3,428,000 3,011,000
INTEREST EXPENSE Deposits 1,009,000 892,000
Other 13,000 25,000
-----------------------------------------------------
Total interest expense 1,022,000 917,000
NET INTEREST INCOME BEFORE PROVISION
FOR CREDIT LOSSES 2,406,000 2,094,000
Provision for credit losses 105,000 60,000
-----------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 2,301,000 2,034,000
Other income 274,000 193,000
Other expenses 1,823,000 1,631,000
-----------------------------------------------------
INCOME BEFORE INCOME TAXES 752,000 596,000
Provision for income taxes 295,000 218,000
-----------------------------------------------------
NET INCOME $ 457,000 $ 378,000
=====================================================
NET INCOME PER COMMON AND
EQUIVALENT SHARE $ 0.35 $ 0.29
=====================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE> 4
SOUTH VALLEY BANCORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
1996 1995
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in cash and equivalents:
OPERATIONS Net income $ 457,000 $ 378,000
Reconciliation to net cash provided by (used in)
operations:
Provision for credit losses 105,000 60,000
Depreciation and amortization 110,000 60,000
Origination of loans held for sale (70,000) (856,000)
Decrease ((increase)) in other assets 70,000 (160,000)
Increase (decrease) in other liabilities 2,000 (216,000)
(Decrease) increase in deferred loan fees, net (41,000) 18,000
---------------------------------------------------------------------------------
Net cash provided by (used in) operations 633,000 (716,000)
INVESTMENT ACTIVITIES Proceeds from maturities of securities:
Held to maturity 406,000 421,000
Available for sale 1,747,000 981,000
Purchase of securities:
Held to maturity - (1,049,000)
Available for sale (10,137,000) (2,445,000)
Net decrease in loans 1,593,000 2,041,000
Capital expenditures (106,000) (635,000)
---------------------------------------------------------------------------------
Net cash used in investment activities (6,497,000) (686,000)
FINANCING ACTIVITIES Net increase in deposit accounts (3,050,000) 5,317,000
Net increase (decrease) in other borrowings (226,000) (769,000)
Payment of cash dividends (98,000)) (95,000)
---------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (3,374,000) 4,453,000
---------------------------------------------------------------------------------
Net (decrease) increase in cash and equivalents (9,238,000) 3,051,000
Cash and equivalents, beginning of period 37,336,000 19,715,000
---------------------------------------------------------------------------------
Cash and equivalents, end of period $ 28,098,000 $22,766,000
=================================================================================
OTHER CASH FLOW
INFORMATION
Interest paid $ 1,055,000 $ 851,000
============================
Income taxes paid $ 65,000 $ 25,000
============================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE> 5
SOUTH VALLEY BANCORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 1996, AND 1995
NOTE 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATION. The consolidated financial statements include South
Valley Bancorporation (the "Company") and its wholly-owned subsidiary, South
Valley National Bank (the "Bank"). All material intercompany accounts and
transactions are eliminated in consolidation.
The accounting and reporting policies of the Company and the Bank
conform to generally accepted accounting principles and prevailing practices
within the banking industry. Certain information and footnote disclosures
normally presented in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. These interim consolidated
condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
1995 Annual Report to Shareholders. The results of operations for the three
months ended March 31, 1996 may not necessarily be indicative of the operating
results for the full year.
NOTE 2. INVESTMENT SECURITIES
Effective January 1, 1994, the Bank adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" which requires the Bank to classify debt and equity
securities at time of purchase into one of three categories: held to maturity,
trading or available for sale. Investment securities classified as held to
maturity are measured at amortized cost based on the Bank's positive intent and
ability to hold such securities to maturity. Trading securities are bought and
held principally for the purpose of selling them in the near term and are
carried at market value with a corresponding recognition of unrecognized holding
gain or loss in the results of operations. The remaining investment securities
are classified as available for sale and are measured at market value with a
corresponding recognition of the unrealized holding gain or loss (net of tax
effect) as a separate component of shareholders' equity until realized. Any
gains and losses on sales of investments are computed on a specific
identification basis.
Prior to the adoption of SFAS 115, the Bank accounted for all
investment securities at amortized cost based on its intent and ability to hold
them to maturity.
5
<PAGE> 6
The carrying value and approximate market value of securities are as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------
Amortized Unrealized Unrealized Market Value
(In thousands) Cost Gains Loss
-----------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
March 31, 1996
U.S. Treasury and agency securities $25,990 $38 $170 $25,858
State and municipal obligations - - - -
Mortgage backed securities 16,009 - 278 15,731
Other 1,035 13 - 1,048
------------------------------------------------
Total $43,034 $51 $448 $42,637
================================================
SECURITIES HELD TO MATURITY:
March 31, 1996
U.S. Treasury and agency securities $ - $ - $ - $ -
State and municipal obligations 5,143 37 17 5,163
Mortgage backed securities 1,540 61 11 1,590
------------------------------------------------
Total $ 6,683 $98 $ 28 $ 6,753
================================================
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------
Amortized Unrealized Unrealized Market Value
(In thousands) Cost Gains Loss
--------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
December 31, 1995
U.S. Treasury and agency securities $23,492 $163 $56 $23,599
State and municipal obligations - - - -
Mortgage backed securities 10,123 3 8 10,118
Other 530 - - 530
------------------------------------------------
Total $34,145 $166 $64 $34,247
================================================
SECURITIES HELD TO MATURITY:
December 31, 1995
U.S. Treasury and agency securities $ - $ - $ - $ -
State and municipal obligations 5,500 56 7 5,549
Mortgage backed securities 1,589 80 5 1,664
------------------------------------------------
Total $ 7,089 $136 $12 $ 7,213
================================================
</TABLE>
At March 31, 1996, securities with a book value of approximately
$2,412,000 were pledged to secure certain deposits of public funds as required
by law or contract. There were no sales of securities during 1996 or 1995.
Effective December 15, 1995, investment securities totaling $8,426,000
in amortized cost and $8,243,535 in market value were reclassified from held to
maturity to available for sale in connection with adoption of the Financial
Accounting Standards Board Special Report "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities."
6
<PAGE> 7
NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The Bank's loans are virtually all made within its defined market area
of South Santa Clara and San Benito counties. Real estate-construction loans
represented 14% of total loans at March 31, 1996, almost all of which are for
the construction of single family residential properties. In addition, 36% of
the Bank's loans (excluding construction loans) were real estate secured term
loans. These loans were primarily made to Bank depositors and are secured by
first deeds of trust on commercial and residential properties and with original
loan to value ratios not exceeding 75%. Commercial loans comprise 34% of total
loans. The Bank's loans are not concentrated in any particular industry. The
Bank's service area is somewhat dependent on the economy of the greater Santa
Clara Valley which has a concentration of high technology companies and,
accordingly, the ability of the Bank's borrowers to repay loans may be affected
by the performance of this sector of the economy. Virtually all loans are
collateralized, and the majority have adjustable rates. Generally, real estate
loans are secured by real property, and commercial and other loans are secured
by bank deposits and business or personal assets.
For commercial and other loans, repayment is generally expected to come
from the cash flow of the borrower. In the case of construction loans, repayment
is generally expected from the sale of the related property or refinance upon
completion of construction.
The activity in the allowance for credit losses is summarized as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
(In thousands) 1996 1995
-------------------------------------------------------
<S> <C> <C>
Beginning balance $1,307 $1,331
Provision charged to expense 105 60
Loans charged-off (2) (122)
Recoveries 68 78
-------------------------------------------------------
Ending balance $1,478 $1,347
=======================================================
</TABLE>
Management believes that the allowance for credit losses at March 31,
1996 is adequate, based on information currently available. However, no
prediction of the ultimate level of loans charged off in future years can be
made with any certainty.
7
<PAGE> 8
Past due, nonaccrual and restructured loans at March 31, 1996 and
December 31, 1995, are summarized below:
<TABLE>
<CAPTION>
March 31, December 31,
(In thousands) 1996 1995
-----------------------------------------------------------------------
<S> <C> <C>
Past due 90 days or more and still accruing:
Real estate $ - $ 37
Commercial 177 83
Installment and other - -
-----------------------------------------------------------------------
subtotal 177 120
-----------------------------------------------------------------------
Nonaccrual:
Real estate 1,063 363
Commercial 572 1,116
Installment and other 9 9
-----------------------------------------------------------------------
subtotal 1,644 1,488
-----------------------------------------------------------------------
Restructured:
Real estate 147 255
Commercial 698 249
Installment and other 8 9
-----------------------------------------------------------------------
subtotal 853 513
-----------------------------------------------------------------------
Total $2,674 $2,121
=======================================================================
Other real estate owned $1,953 $1,953
=======================================================================
</TABLE>
The recorded investment in impaired loans was $1,644,000 and the
portion of the allowance for credit losses related to loan impairment was
$637,000 at March 31, 1996. Average impaired loans for the quarter ended March
31, 1996 was $674,000. The Bank did not recognize any interest income on
impaired loans during the quarter ended March 31, 1996.
NOTE 4. COMMITMENTS AND CONTINGENCIES
In the normal course of business there are various commitments
outstanding to extend credit which are not reflected in the financial
statements, including unused loan commitments of approximately $39,235,000 and
standby letters of credit of $1,140,000 at March 31, 1996. However, all such
commitments will not necessarily culminate in actual extensions of credit by the
Bank in the future. The Bank does not anticipate any losses as a result of these
transactions.
Approximately $12,032,000 of loan commitments outstanding at March 31,
1996 relate to construction loans and are expected to fund within the next
twelve months. The remainder relate primarily to revolving lines of credit or
other commercial loans and many of these commitments are expected to expire
without being drawn upon. Therefore, the total commitments do not necessarily
represent future cash requirements.
Standby letters of credit are commitments written by the Bank to
guarantee the performance of a customer to a third party. These guarantees are
issued primarily relating to purchases of inventory by the Bank's commercial
customers and are typically short term in nature. Credit risk is similar to that
involved in extending loan commitments to customers and the Bank accordingly
uses evaluation and collateral requirements similar to those for loan
commitments. Virtually all such commitments are collateralized.
8
<PAGE> 9
NOTE 5. NET INCOME PER SHARE COMPUTATION
Net income per common and common equivalent share is calculated using
the weighted average shares outstanding plus the dilutive effect of shares
issuable under stock option plans, adjusted retroactively for subsequent stock
dividends and splits. On January 25, 1996 the Company declared a 10% stock
dividend for shareholders of record of common stock as of February 16, 1996 and
payable February 23, 1996. The number of shares used to compute net income per
common and equivalent share amounts, adjusted for the stock dividend, for the
periods ended March 31, 1996 and 1995 respectively were 1,319,226 and 1,316,102.
The difference between primary and fully diluted net income per share is not
significant.
9
<PAGE> 10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
EARNINGS
The table below presents a comparison of results for the quarters ended
March 31, 1996 and 1995:
TABLE I. EARNINGS COMPARISON
<TABLE>
<CAPTION>
Three months ended
March 31,
1996 1995 $ Change % Change
---- ---- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans (including fees) $2,468,000 $2,422,000 $ 46,000 1.90%
Investment securities 657,000 423,000 234,000 55.32%
Other 303,000 166,000 137,000 82.53%
-------------------------------------------------
Total interest income 3,428,000 3,011,000 417,000 13.85%
INTEREST EXPENSE
Deposits 1,009,000 892,000 117,000 13.12%
Other 13,000 25,000 (12,000) -48.00%
-------------------------------------------------
Total interest expense 1,022,000 917,000 105,000 11.45%
NET INTEREST INCOME
BEFORE PROVISION FOR
CREDIT LOSSES 2,406,000 2,094,000 312,000 14.90%
Provision for credit losses 105,000 60,000 45,000 75.00%
-------------------------------------------------
NET INTEREST INCOME
AFTER PROVISION FOR
CREDIT LOSSES 2,301,000 2,034,000 267,000 13.13%
Other income 274,000 193,000 81,000 41.97%
Other expense 1,823,000 1,631,000 192,000 11.77%
-------------------------------------------------
INCOME BEFORE INCOME TAXES 752,000 596,000 156,000 26.17%
Provision for income taxes 295,000 218,000 77,000 35.32%
-------------------------------------------------
NET INCOME $ 457,000 $ 378,000 $ 79,000 20.90%
=================================================
</TABLE>
Earnings for the quarter ended March 31, 1996 were $457,000, or $0.35 per
share, compared to $378,000, or $0.29 per share, for the same quarter in 1995.
This 20.90% increase is attributable to increased net interest income and other
income, partially offset by increases in other operating expenses.
NET INTEREST INCOME
Net interest income refers to the difference between interest paid on
deposits and borrowings, and the interest earned on loans and investments. It is
the primary component of net earnings of a financial institution. Factors to
consider in analyzing net interest income are the composition and
10
<PAGE> 11
volume of earning assets and interest bearing liabilities including deposits,
levels of noninterest bearing liabilities and nonaccrual loans, and changes in
market interest rates.
Table II. presents an analysis of the Company's net interest income for the
quarters ended March 31, 1996 and 1995, respectively:
TABLE II. COMPOSITION OF NET INTEREST INCOME
<TABLE>
<CAPTION>
MARCH 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands, except Average Average
percentages) Balance Interest Average Rate(1) Balance Interest Average Rate(1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets:
Loans(2) $ 88,281 $2,468 11.2% $ 87,016 $2,422 11.1%
Investment securities
Taxable 37,710 590 6.3% 20,513 340 6.6%
Non-taxable(3) 5,267 102 7.8% 6,738 126 7.5%
Federal funds sold and other 21,903 303 5.5% 11,477 166 5.8%
- -------------------------------------------------------------------------------------------------------------------------
Total average earning assets 153,161 3,463 9.1% 125,744 3,054 9.7%
- -------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 9,773 8,396
Other assets 8,196 7,541
- -------------------------------------------------------------------------------------------------------------------------
Total average assets $171,130 $141,681
=========================================================================================================================
LIABILITIES & SHAREHOLDERS' EQUITY
Interest bearing
liabilities
Demand deposits $ 39,270 209 2.1% $ 32,635 216 2.6%
Savings deposits 37,013 258 2.8% 33,489 298 3.6%
Time deposits 41,463 542 5.2% 33,460 378 4.5%
Borrowed funds 764 13 6.8% 1,518 25 6.6%
- -------------------------------------------------------------------------------------------------------------------------
Total average interest 118,510 1,022
bearing liabilities 3.5% 101,102 917 3.6%
- -------------------------------------------------------------------------------------------------------------------------
Demand deposits 33,884 23,632
Other liabilities 934 541
- -------------------------------------------------------------------------------------------------------------------------
Total average 153,328 125,275
liabilities
Average shareholders' equity 17,802 16,406
- -------------------------------------------------------------------------------------------------------------------------
Total average
liabilities and $171,130 $141,681
shareholders' equity
=========================================================================================================================
Net interest income and
margin (net yield)(4) $2,441 6.4% $2,137 6.8%
=========================================================================================================================
</TABLE>
1. Annualized.
2. Loan interest includes loan fees of $258,000 and $242,000 for the
quarters ended March 31, 1996 and 1995, respectively.
3. Tax exempt income includes $34,000 and $43,000 for the quarters ended
March 31, 1996 and 1995, respectively, to adjust to a fully tax
equivalent basis using the Federal statutory rate of 34%.
4. Net interest margin is computed by dividing net interest income by
total average earning assets.
The Company experienced an increase in net interest income in the quarter
ended March 31, 1996 compared to the same quarter in 1995. This increase was
primarily attributable to a higher volume of earning assets, partially offset by
higher volumes of interest bearing liabilities, primarily deposits. During this
same period, the net interest margin declined from 6.8% to 6.4%, primarily as
the result of a higher proportion of earning assets invested in securities,
which have a lower yield than loans, and slightly lower market interest rates
for investment securities and federal funds sold.
11
<PAGE> 12
OTHER INCOME
Other income consists primarily of service charges related to deposit
accounts. The increase in other income for the quarter ended March 31, 1996 as
compared to March 31, 1995 is primarily attributable to higher volumes of
consumer checking and money market accounts. The Company had no gains from the
sale of the guaranteed portion of SBA loans and no gains or losses from the sale
of investment securities in either the first quarter of 1996 or 1995.
OTHER EXPENSES
Other expenses consist of the Company's non-interest expenses. The increase
in other expenses for the quarter ending March 31, 1996 as compared to the same
quarter in 1995 is primarily attributable to higher salary and benefit expenses.
The higher payroll expenses are directly related to higher levels of full time
equivalent staff associated with the Bank's growth in assets.
BALANCE SHEET
Total assets of the Company declined from $177,273,000 to $174,511,000 from
December 31, 1995 to March 31, 1996. This decrease is attributable to a seasonal
decline in deposits with one of the Bank's major depositors, who typically
reduces deposit balances and borrowings under a commercial line of credit
immediately after the calendar year end.
Tables III. presents the composition of the Company's loan portfolio at
March 31, 1996 and December 31, 1995:
TABLE III. LOANS BY TYPE
<TABLE>
<CAPTION>
Loans: March 31, 1996 December 31, 1995 $ Change % Change
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $30,503,000 $32,721,000 $(2,218,000) -6.78%
Real estate-construction 12,680,000 15,338,000 (2,658,000) -17.33%
Real estate-other 31,498,000 28,524,000 2,974,000 10.43%
Installment 13,875,000 13,496,000 379,000 2.81%
------------------------------------------------------------------
Total loans 88,556,000 90,079,000 (1,523,000) -1.69%
Allowance for credit losses (1,484,000) (1,313,000) (171,000) 13.02%
Deferred loan fees-net (487,000) (528,000) 41,000 -7.77%
------------------------------------------------------------------
Net loans $86,585,000 $88,238,000 $(1,653,000) -1.87%
==================================================================
</TABLE>
RISK ELEMENTS - The Company assesses and manages credit risk on an
ongoing basis through stringent credit review and approval policies, extensive
internal monitoring and established formal lending policies. Additionally, the
Bank contracts with an outside loan review consultant to periodically grade new
loans and to review the existing loan portfolio. Management believes its ability
to identify and assess risk and return characteristics of the Company's loan
portfolio is critical for profitability and growth. Management strives to
continue the historically low level of credit losses by continuing its emphasis
on credit quality in the loan approval process, active credit administration and
regular monitoring. With this in mind, management has designed and implemented a
comprehensive loan review and grading system that functions to continually
assess the credit risk inherent in the loan portfolio. Additionally, management
believes its ability to
12
<PAGE> 13
manage portfolio credit risk is enhanced by the employment of lending personnel
with knowledge of the Bank's service area. Bank offices are staffed with lending
personnel who live in the communities served by the office and virtually all of
the directors of the Company and the Bank are active members of the communities
served by the Bank. Further, the senior management and the Board of Directors of
the Company and the Bank have experienced minimal turnover since inception of
the Company in 1982 and the Bank in 1983.
At March 31, 1996, construction loans and other real estate secured
loans comprised 14% and 36%, respectively, of total loans outstanding.
Management believes that its lending policies and underwriting standards will
tend to minimize losses in an economic downturn; however, there is no assurance
that losses will be limited to the extent provided for under such circumstances.
The Bank's loan policies and underwriting standards include, but are not limited
to, the following: 1) maintaining a thorough understanding of the Bank's service
area and limiting investments outside of this area, 2) maintaining a thorough
understanding of the borrowers' knowledge and capacity in their field of
expertise, 3) basing real estate construction loan approval not only on
salability of the project, but also on the borrowers' capacity to support the
project financially in the event it does not sell within the original projected
time period, and 4) maintaining conforming and prudent loan to value and loan to
cost ratios based on independent outside appraisals and ongoing inspection and
analysis by Bank construction lending officers. In addition, the Bank strives to
diversify the risk inherent in the construction portfolio by avoiding
concentrations to individual borrowers and on any one project.
POTENTIAL PROBLEM LOANS - At March 31, 1996, the Company did not have
any loans other than those disclosed as nonaccrual loans, loans past due 90 days
or more and still accruing and troubled debt restructurings, where known
information about possible credit problems of the borrowers cause management to
have serious doubts as to the ability of such borrowers to comply with the
present loan repayment terms.
CONCENTRATIONS - At March 31, 1996, the Company does not have any
concentration of loans to multiple borrowers engaged in similar activities which
would cause them to be similarly impacted by economic or other conditions, other
than real estate-construction loans.
PROVISION AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES - The provision for
credit losses is based upon management's evaluation of the adequacy of the
existing allowance for loans outstanding. This allowance is increased by
provisions charged to expense and reduced by loan charge-offs net of recoveries.
Management determines an appropriate provision based upon the interaction of
three primary factors: (1) the loan portfolio growth in the period, (2) a
comprehensive grading and review formula for total loans outstanding, and (3)
actual previous charge-offs. At March 31, 1996, the allowance for credit losses
was $1,484,000, or 1.67% of total loans, as compared to $1,313,000, or 1.46% of
total loans, at December 31, 1995.
In evaluating the adequacy of the allowance for loan losses, the
Company does not attempt to allocate the allowance for loan losses to specific
categories of loans. Management believes that any breakdown or allocation of the
allowance for possible loan losses into loan categories lends an appearance of
exactness which does not exist in that the allowance is utilized as a single
unallocated allowance available for all loans.
13
<PAGE> 14
FUNDING SOURCES
The Company's principle funding source is core deposits, primarily obtained
from local individuals and businesses. At March 31, 1996, core deposits
represented 90.0% of total deposits, as compared to 90.9% at December 31, 1995.
Table IV. presents the deposit portfolio by type of deposits at March 31, 1996
and December 31, 1995:
TABLE IV. DEPOSITS BY TYPE
<TABLE>
<CAPTION>
Deposits March 31, 1996 December 31, 1995 $ Change % Change
------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand, noninterest bearing $36,167,000 $43,873,000 $(7,706,000) -17.56%
Demand, interest bearing 38,963,000 37,900,000 1,063,000 2.80%
Savings 37,955,000 36,593,000 1,362,000 3.72%
Time 41,554,000 39,323,000 2,231,000 5.67%
-----------------------------------------------------------
Total deposits $154,639,000 $157,689,000 $(3,050,000) -1.93%
===========================================================
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
LIQUIDITY - Liquidity management refers to the Bank's ability to
provide funds on an ongoing basis to meet fluctuations in deposit levels as well
as the credit needs and requirements of its clients. The liquidity position of
the Bank involves both assets and liabilities. In addition, off balance sheet
items such as loan commitments and available borrowing lines play an important
role in liquidity management. Cash and Federal funds lines, investment
securities, loan repayments and the acquisition of new deposits represent
sources of immediate, or short term, liquidity. This liquidity is available to
fund new loans and deposit withdrawals. The Bank assesses projected funding
requirements by reviewing historical funding patterns, current and forecasted
economic conditions and individual client funding needs. The Bank maintains a
line of credit with one of its correspondent banks for up to $10,000,000 which
is available on a short term basis. Formal and informal agreements are also in
place with various other banks to purchase participations in the Bank's loan
portfolio, if necessary.
The Bank manages its liquidity by maintaining a majority of its
investment portfolio in Federal funds sold and other liquid investments.
Liquidity is measured by various ratios, the most common being the liquidity
ratio of cash, Federal funds sold and unpledged investment securities, compared
to total deposits. At March 31, 1996, this ratio was 48.3% compared to 48.0% at
December 31, 1995. Another key liquidity ratio is the ratio of loans to
deposits, which was 57.3% at March 31, 1996 and 57.1% at December 31, 1995.
During 1995 and 1996, the Bank has experienced higher levels of liquidity than
normal compared to recent prior periods. The high levels of liquidity are
attributable, in part, to large increases in deposits which were deployed in
investment securities and Federal funds sold. Management of the Bank expects
that a portion of its liquid assets at March 31, 1996 will ultimately be used to
fund growth in the loan portfolio.
INTEREST RATE SENSITIVITY - Interest rate sensitivity is a measure of
the exposure of the Bank's future earnings to fluctuations in interest rates.
Generally, if assets and liabilities do not reprice simultaneously and in equal
volumes, the Bank's net interest margin and net interest income will change. It
is management's objective to maintain stability in the net interest margin in
times of fluctuating interest rates by maintaining an appropriate mix of
interest sensitive assets and liabilities. To achieve this goal, the Bank prices
the majority of its interest bearing liabilities at
14
<PAGE> 15
variable rates that adjust with the prime rate. At the same time, the majority
of its interest earning assets are also priced at variable rates that float with
the prime rate. This pricing structure tends to stabilize the net interest
margin.
Table V. sets forth the distribution of repricing for interest
sensitive earning assets and interest bearing liabilities included in the
Company's condensed consolidated balance sheet at March 31, 1996, and the
related interest rate sensitivity gap, both for each individual repricing period
and on a cumulative basis.
TABLE V. INTEREST RATE SENSITIVITY (IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Assets and liabilities Immediately Over Over Over one Over Total
which mature or reprice: and within thirty three year and five
30 days days and months within five years
within and years
three within
months one year
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $ 17,000 $ - $ - $ - $ - $ 17,000
Investment securities 830 9,474 21,550 17,466 49,320
Loans excluding
non-accrual
loans and overdrafts 55,071 1,037 13,920 11,153 6,736 87,917
- ------------------------------------------------------------------------------------------------------------------
Period total $ 72,071 $ 1,867 $ 23,394 $ 32,703 $ 24,202 $154,237
- ------------------------------------------------------------------------------------------------------------------
Cumulative total $ 72,071 $ 73,938 $ 97,332 $130,035 $154,237
- ------------------------------------------------------------------------------------------------------------------
Interest bearing
liabilities:
Interest bearing demand $ 38,963 $ - $ - $ - $ - $ 38,963
Savings 37,955 - - - - 37,955
Time certificates 7,592 7,727 20,145 6,090 - 41,554
Other borrowings - 605 - - - 605
- ------------------------------------------------------------------------------------------------------------------
Period total $ 84,510 $ 8,332 $ 20,145 $ 6,090 $ - $119,077
- ------------------------------------------------------------------------------------------------------------------
Cumulative total $ 84,510 $ 92,842 $112,987 $119,077 $119,077
- ------------------------------------------------------------------------------------------------------------------
Amounts:
Interest rate sensitivity gap $(12,439) $ (6,465) $ 3,249 $ 26,613 $ 24,202 $ 35,160
Cumulative interest rate
sensitivity gap $(12,439) $(18,904) $(15,655) $ 10,958 $ 35,160 $ -
Ratios:
Interest rate 0.85 0.22 1.16 5.37 N/A 1.30
sensitivity gap
Cumulative interest rate
sensitivity gap 0.85 0.80 0.86 1.09 1.30 -
</TABLE>
The table indicates the time periods in which interest earning assets
and interest bearing liabilities will mature or reprice in accordance with their
contractual terms. The table does not necessarily indicate the impact of general
interest rate movements on the net interest margin since the repricing of
various categories of assets and liabilities is subject to competitive
pressures. The Company and the Bank have historically maintained a cumulative
interest rate sensitivity gap ratio approximating 1:1 for assets and liabilities
repricing within one month, that is, approximately an equal amount of interest
earning assets and interest bearing liabilities will reprice or mature within 30
days. At March 31, 1996, the cumulative interest rate sensitivity gap for assets
and liabilities that reprice within 30 days was 0.85:1. Similarly, approximately
an equal amount of interest earning assets and interest bearing liabilities
reprice within one year as reflected in the cumulative interest rate sensitivity
gap ratio of 0.86:1 for that period. The effect of this matching of maturities
and
15
<PAGE> 16
repricing of interest earning assets and interest bearing liabilities is to
stabilize the Bank's net interest margin in times of both rising and falling
interest rates.
CAPITAL RESOURCES
The Company has been able to sustain its growth in capital through
profit retention and the exercise of stock options by directors and officers of
the Company. Prior to 1994, all earnings were retained to maintain the Company's
capital position and support additional growth in the future. In the third
quarter of 1994, the Company declared and paid an initial cash dividend of $.08
per common share. An additional cash dividend of $.08 per common share was
declared and paid in the fourth quarter of 1994. The Company declared and paid
four quarterly dividends of $0.08 per common share during 1995. In the first
quarter of 1996, the Company declared and paid a cash dividend of $0.08 per
common share and a 10% stock dividend. In addition, the Company declared a cash
dividend of $0.10 per share for shareholders on April 25, 1996, to be paid on
May 1, 1996.
The Company and Bank are subject to capital adequacy guidelines issued
by the Board of Governors of the Federal Reserve System (the "FRB") and the
Office of the Comptroller of the Currency (the "OCC"). The FRB and the OCC have
adopted risk based capital guidelines for bank holding companies and national
banks. The Company and the Bank are required to maintain capital equal to at
least 8.0% of assets and commitments to extend credit, weighted by risk. At
least 4.0% must consist primarily of common equity (including retained earnings)
and the remainder may consist of subordinated debt, cumulative preferred stock
or a limited amount of loan loss reserves. Certain assets and commitments to
extend credit present less risk than others and will be assigned to lower risk
weighted categories requiring less capital allocation than the 8.0% total ratio.
For example, cash and government securities are assigned to a 0% risk weighted
category; most home mortgage loans are assigned to a 50% risk weighted category
requiring a 4.0% capital allocation; and commercial loans are assigned to a 100%
risk weighted category requiring an 8.0% capital allocation.
In addition, the FRB and the OCC have adopted a 3.0% minimum leverage
ratio for banking organizations as a supplement to the risk weighted capital
guidelines. The minimum leverage ratio is intended to limit the ability of
banking organizations to leverage their equity capital base by increasing assets
and liabilities without increasing capital proportionately. The 3.0% ratio
constitutes a minimum ratio for well-run banking organizations under the FRB
standards and organizations experiencing or anticipating significant growth or
failing to meet such standards will be required to maintain a minimum leverage
ratio ranging from 100 to 200 basis points in excess of the 3.0% ratio.
Table VI. presents the capital and leverage ratios of the Company as of
March 31, 1996 and December 31, 1995:
TABLE VI. RISK BASED CAPITAL AND LEVERAGE RATIOS
<TABLE>
<CAPTION>
RISK BASED CAPITAL RATIOS MARCH 31, 1996 DECEMBER 31, 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital $ 17,483 13.2% $ 17,141 14.8%
Total capital $ 18,867 14.3% $ 18,448 16.0%
Total risk adjusted assets $132,483 $115,452
LEVERAGE RATIOS
- ----------------------------------------------------------------------------------------------
Tier 1 capital $ 17,483 10.2% $ 17,141 10.1%
Quarterly average total assets $171,130 $170,132
- ----------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
On December 19, 1991, the President signed the Federal Deposit
Insurance Corporation Improvement Act of 1991 (the "FDICIA"). The FDICIA, among
other matters, substantially revises banking regulations and establishes a
framework for determination of capital adequacy of financial institutions. Under
the FDICIA, financial institutions are placed into one of five capital adequacy
categories as follows: (1) "well capitalized" consisting of institutions with a
total risk based capital ratio of 10% or greater, a Tier 1 risk based capital
ratio of 6% or greater and a leverage ratio of 5% or greater, and the
institution is not subject to an order, written agreement, capital directive or
prompt corrective action directive; (2) "adequately capitalized" consisting of
institutions with a total risk based capital ratio of 8% or greater, a Tier 1
risk based capital ratio of 4% or greater and a leverage ratio of 4% or greater,
and the institution does not meet the definition of a "well capitalized"
institution; (3) "undercapitalized" consisting of institutions with a total risk
based capital ratio less than 8%, a Tier 1 risk based capital ratio of less than
4%, or a leverage ratio of less than 4%; (4) "significantly undercapitalized"
consisting of institutions with a total risk based capital ratio of less than
6%, a Tier 1 risk based capital ratio of less than 3%, or a leverage ratio of
less than 3%; and, (5) "critically undercapitalized" consisting of an
institution with a ratio of tangible equity to total assets that is equal to or
less than 2%.
Financial institutions classified as undercapitalized or below are
subject to various limitations including, among other matters, certain
supervisory actions by bank regulatory authorities and restrictions related to
(i) growth of assets, (ii) payment of interest on subordinated indebtedness,
(iii) payment of dividends or other capital distributions, and (iv) payment of
management fees to a parent holding company. The FDICIA requires the bank
regulatory authorities to initiate corrective action regarding financial
institutions which fail to meet minimum capital requirements. Such action may,
among other matters, require a financial institution to augment capital and
reduce total assets. Critically undercapitalized financial institutions may also
be subject to appointment of a receiver or conservator unless the financial
institution submits an adequate capitalization plan.
RETURN ON EQUITY AND ASSETS
Table VI presents return on average assets, return on beginning equity,
dividend payout ratio and the average equity to average assets ratio.
TABLE VI. RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
Three months ended March 31, 1996 1995
------------------------------------------------------------------------
<S> <C> <C>
Return on average assets 1.06% 1.07%
Return on beginning equity 10.40% 9.30%
Dividend payout ratio 20.91% 25.13%
Average equity to average assets ratio 10.00% 11.22%
------------------------------------------------------------------------
</TABLE>
INFLATION
The impact of inflation on a financial institution differs significantly
from that exerted on manufacturing, or other commercial concerns, primarily
because its assets and liabilities are
17
<PAGE> 18
largely monetary. In general, inflation primarily affects the Company indirectly
through its effect on market rates of interest, and thus the ability of the Bank
to attract loan customers. Inflation affects the growth of total assets by
increasing the level of loan demand, and potentially adversely affects the
Company's capital adequacy because loan growth in inflationary periods can
increase at rates higher than the rate that capital grows through retention of
earnings which the Company may generate in the future. In addition to its
effects on interest rates, inflation directly affects the Company by increasing
the Company's operating expenses.
18
<PAGE> 19
PART II -- OTHER INFORMATION
ITEM I. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits -
(10.18) Employment agreement with Brad L. Smith effective
March 28, 1996.
(10.19) Emplyment agreement with Richard L. Conniff effective
March 28, 1996.
(10.20) Employment agreement with R. Kurt Michielssen
effective March 28, 1996.
(27.1) Financial Data Schedule
(b) Reports on Form 8-K -
- Form 8-K dated February 6, 1996 reporting fourth quarter
and year-end earnings and declaration of cash dividend and
stock dividend was filed on February 12, 1996.
- Form 8-K dated April 2, 1996 announcing termination of
stock repurchase program effective April 2, 1996 was filed
on April 4, 1996.
- Form 8-K dated April 23, 1996 reporting first quarter
earnings and declaration of cash dividend was filed on
April 30, 1996.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements 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.
May 6, 1996 SOUTH VALLEY BANCORPORATION
By: /s/RICHARD L. CONNIFF
-----------------------------------------------
Richard L. Conniff, Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ BRAD L. SMITH
-----------------------------------------------
Brad L. Smith, President, Chief Executive Officer
(Principal Executive Officer & Director)
20
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.18 Brad L. Smith Employment Agreement
10.19 Richard L. Conniff Employment Agreement
10.20 R. Kurt Michielssen Employment Agreement
27.1 Financial Data Schedule
</TABLE>
21
<PAGE> 1
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of March 28, 1996 by and
between SOUTH VALLEY NATIONAL BANK, a national banking association ("Employer"),
and Brad L. Smith ("Employee").
RECITALS
WHEREAS, Employer and Employee desire to enter into an agreement for
the purposes of engaging the services of Employee by reason of his experience,
training and ability in the commercial banking industry;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the Employer and Employee agree as follows:
AGREEMENT
1. Term of Employment. Employer employs Employee and Employee hereby
accepts employment with Employer, upon the terms and conditions hereinafter set
forth, for a period of three (3) years from the date hereof, and on each
anniversary date thereafter, the term of this Agreement shall be deemed
automatically extended for an additional one (1) year term, subject to the
termination provisions of paragraph 16.
2. Duties and Obligations of Employee. Employee shall serve as the
President and Chief Executive Officer of Employer and shall perform the
customary duties of such office in the commercial banking industry as may from
time to time be reasonably requested of him by the Board of Directors of
Employer in addition to the following:
(a) Acting as a member of the Boards of Directors of Employer,
its parent holding company and affiliates thereof and all other board committees
to which Employee may be appointed or elected;
(b) Participating in community affairs which are beneficial
to the Employer;
(c) Maintaining a good relationship with shareholders and the
Boards of Directors of Employer, its parent holding company and affiliates
thereof;
(d) Maintaining a good relationship with regulatory agencies
and governmental authorities having jurisdiction over Employer, its parent
holding company and affiliates thereof;
(e) Providing leadership in planning and implementing the
conduct of business
<PAGE> 2
and the affairs of the Employer, its parent holding company and affiliates; and
(f) Hiring and firing of all employees, subject at all times
to the policies and directives set by the Employer's Board of Directors.
3. Devotion to Employer's Business.
(a) Employee shall devote his full business time, ability, and
attention to the business of Employer during the term of this Agreement and
shall not during the term of this Agreement, without the prior written consent
of Employer's Board of Directors, engage in any other business activities,
duties, or pursuits whatsoever, or directly or indirectly render any services of
a business, commercial, or professional nature to any other person or
organization, whether for compensation or otherwise, which are in conflict with
Employer's business. However, the expenditure of reasonable amounts of time for
educational, charitable, or professional activities shall not be deemed a breach
of this Agreement if those activities do not materially interfere with the
services required of Employee under this Agreement. Nothing in this Agreement
shall be interpreted to prohibit Employee from making passive personal
investments. However, Employee shall not directly or indirectly acquire, hold,
or retain any material interest in any business competing with or similar in
nature to the business of Employer.
(b) Employee agrees to conduct himself at all times with due
regard to public conventions and morals. Employee further agrees not to do or
commit any act that will reasonably tend to shock or offend the community, or to
prejudice Employer or the banking industry in general.
(c) Employee hereby represents and agrees that the services to
be performed under the terms of this Agreement are of a special, unique,
unusual, extraordinary, and intellectual character that gives them a peculiar
value, the loss of which cannot be reasonably or adequately compensated in
damages in an action at law. Employee therefore expressly agrees that Employer,
in addition to any other rights or remedies that Employer may possess, shall be
entitled to injunctive and other equitable relief to prevent or remedy a breach
of this Agreement by Employee.
4. Noncompetition by Employee. Employee shall not, during the term of
this Agreement, directly or indirectly, either as an employee, employer,
consultant, agent, principal, stockholder, officer, director, or in any other
individual or representative capacity, engage or participate in any competitive
banking or financial services business.
5. Indemnification for Negligence or Misconduct. Employee shall
indemnify and hold Employer harmless from all liability for loss, damage, or
injury to persons or property resulting from the gross negligence or intentional
misconduct of the Employee.
6. Disclosure of Information. Employee shall not, either before or
after
2
<PAGE> 3
termination of this Agreement, disclose to anyone any information relating to
Employer or any financial information, trade or business secrets, customer
lists, computer software or other information not otherwise publicly available
concerning the business or operations of Employer. Employee recognizes and
acknowledges that any financial information concerning any of Employer's
customers, as it may exist from time to time, is strictly confidential and is a
valuable, special and unique asset of Employer's business. Employee shall not,
either before or after termination of this Agreement, disclose to anyone said
financial information or any part thereof, for any reason or purpose whatsoever.
This paragraph 6 shall survive the expiration or termination of this Agreement.
7. Written or Printed Material. All written or printed materials,
notebooks and records used by Employee in performing duties for Employer, other
than Employee's personal notes and diaries, are and shall remain the sole
property of Employer. Upon termination of employment, Employee shall promptly
return all such material (including all copies) to Employer. This paragraph 7
shall survive expiration or termination of this Agreement.
8. Surety Bond. Employee agrees that he will furnish all information
and take any other steps necessary from time to time to enable Employer to
obtain or maintain a fidelity bond conditional on the rendering of a true
account by Employee of all monies, goods, or other property which may come into
the custody, charge, or possession of Employee during the term of his
employment. The surety company issuing the bond and the amount of the bond must
be acceptable to Employer. All premiums on the bond shall be paid by Employer.
If Employee cannot qualify for a surety bond at any time during the term of this
Agreement, Employer shall have the option to terminate this Agreement
immediately without any obligation to pay severance benefits to Employee in
accordance with paragraph 16 (d) of this Agreement.
9. Base Salary. In consideration for the services to be performed
hereunder, Employee shall receive a salary at the rate of One Hundred
Fifty-Three Thousand One Hundred Fifty Dollars ($153,150) per annum, payable in
installments during the term of this Agreement of approximately Six Thousand
Three Hundred Eighty-One Dollars and Twenty-Five Cents ($6,381.25) on the first
and fifteenth days of each month, subject to applicable adjustments for
withholding taxes and prorations for any partial employment period. Employee
shall receive such annual adjustments in salary, if any, as may be determined by
Employer's Board of Directors, in its sole discretion, resulting from the Board
of Directors annual review of Employee's compensation on or about January 1 of
each year during the term of this Agreement.
10. Salary Continuation During Disability. If Employee for any reason
(except as expressly provided below) becomes temporarily or permanently disabled
so that he is unable to perform the duties under this Agreement, Employer agrees
to pay Employee the base salary otherwise payable to Employee pursuant to
paragraph 9 of this Agreement, reduced by the amounts received by Employee from
state disability insurance, or worker's compensation
3
<PAGE> 4
or other similar insurance benefits through policies provided by Employer, for a
period of six (6) months from the date of disability. In addition to the
foregoing disability benefits, Employer has provided and shall maintain in force
a policy of additional supplemental disability insurance coverage for Employee
equal to fifty percent (50%) of Employee's base salary and payable until
Employee attains age sixty-five (65) under the provisions of such policy of
supplemental disability insurance attached hereto as Exhibit A, and incorporated
herein by reference.
For purposes of this paragraph 10, "disability" shall be defined as
provided in Employer's disability insurance program. Notwithstanding anything
herein to the contrary, Employer shall have no obligation to make payments for a
disability resulting from the deliberate, intentional actions of Employee, such
as, but not limited to, attempted suicide or chemical dependence of Employee.
11. Incentive Compensation. Employee shall be entitled to participate
in Employer's Incentive Compensation Plan (the "Plan"), a copy of which is
attached hereto as Exhibit B and incorporated herein by reference, and receive
incentive compensation in accordance with the Plan, subject to the right of the
Board of Directors in its sole discretion to modify the terms and provisions of
the Plan each year during the term of this Agreement in connection with its
review of Employee's performance and Employer's results of operations. Under no
circumstance shall a right to receive incentive compensation exist in favor of
or accrue to or for the benefit of Employee prior to actual receipt of a
distribution, if any, under the Plan.
12. Stock Options. Employer has previously granted stock options to
Employee evidenced by one or more stock option agreements attached hereto as
Exhibit C and incorporated herein by this reference. Employer may, but is not
obligated to, grant additional stock options to Employee in the future which
grants, if any, shall be within the sole discretion of the Board of Directors of
Employer and subject to the terms and provisions of Employer's stock option plan
pursuant to which such grants are effected. Any such grants shall be evidenced
by a stock option agreement entered into between Employer and Employee pursuant
to such stock option plan and a copy of each such stock option agreement shall
be attached to this Agreement as an exhibit. Notwithstanding any provision of
any such stock option plan or any such stock option agreement to the contrary,
no rights of employment shall be conferred upon Employee or result from any such
stock option plan or any stock option agreement entered into between Employer
and Employee. Any employment rights and corresponding duties of Employee
pursuant to his employment by Employer shall be limited to and interpreted
solely in accordance with the terms and provisions of this Agreement.
13. Other Benefits. Employee shall be entitled to those employee
benefits adopted by Employer for all employees of Employer, subject to
applicable qualification requirements and regulatory approval requirements, if
any. Employee shall be further entitled to the following additional benefits
which shall supplement or replace, to the extent duplicative of
4
<PAGE> 5
any part or all of the general employee benefits, the benefits otherwise
provided to Employee:
(a) Vacation. Employee shall be entitled to four (4) weeks
annual vacation leave at his then existing rate of base salary each year during
the term of this Agreement. Employee may be absent from his employment for
vacation as long as such leave is reasonable and does not jeopardize his
responsibilities and duties specified in this Agreement. The length of vacation
should not exceed two (2) weeks without the approval of Employer's executive
committee of the Board of Directors. Accrual of vacation time, if any, shall be
determined in accordance with Employer's personnel policies.
(b) Automobile and Insurance. Employer shall acquire or
otherwise make available to Employee for his business and incidental personal
use an automobile, suitable to his position, and (i) maintain it in good
condition and repair; and (ii) provide public liability insurance and property
damage insurance policies with insurer(s) acceptable to Employer and with
coverages in such amounts as may be acceptable to Employer from time to time.
(c) Personal Insurance. Employer shall provide during the term
of this Agreement at Employer's sole cost, policies of term life insurance
coverage in the amount of Six Hundred Fifty Thousand Dollars ($650,000) and
group life, health (including medical, dental and hospitalization), accident and
disability insurance coverage for Employee and his dependents either through a
policy or policies of standard coverage provided by the California Bankers'
Association, or other insurer(s) selected by Employer in its sole discretion.
14. Annual Physical Examination. Employer shall pay or reimburse
Employee for the cost of an annual physical examination conducted by a
California licensed physician selected by Employee and reasonably acceptable to
Employer.
15. Business Expenses. Employee shall be reimbursed for all ordinary
and necessary expenses incurred by Employee in connection with his employment.
Employee shall also be reimbursed for reasonable expenses incurred in activities
associated with promoting the business of Employer, including expenses for
entertainment, travel, conventions, educational programs, club memberships and
similar items. Employer will pay for or will reimburse Employee for such
expenses upon presentation by Employee from time to time of receipts or other
appropriate evidence of such expenditures.
16. Termination of Agreement.
(a) Automatic Termination. This Agreement shall terminate
automatically without further act of the parties and immediately upon the
occurrence of any one of the following events, subject to either party's right,
without any obligation whatsoever, to waive an event reasonably susceptible of
waiver, and the obligation of Employer to pay the amounts which would otherwise
be payable to Employee under this Agreement through the end of the
5
<PAGE> 6
month in which the event occurs, except that only in the event of termination
based upon subparagraphs (1), (4) or (12, to the extent of Employer's breach)
below shall Employee be entitled to receive severance payments based upon
automatic termination pursuant to paragraph 16 (d) of this Agreement:
(1) The occurrence of circumstances that make it
impossible or impractical for Employer to
conduct or continue its business.
(2) The death of Employee.
(3) The loss by Employee of legal capacity.
(4) The loss by Employer of legal capacity to
contract.
(5) The willful, intentional and material breach
of duty by Employee in the course of his
employment.
(6) The habitual and continued neglect by
Employee of his employment duties and
obligations under this Agreement.
(7) The continuous mental or physical incapacity
of Employee, subject to Employee's rights
under paragraph 10 of this Agreement.
(8) Employee's willful and intentional violation
of any State of California or federal
banking laws, or of the Bylaws, rules,
policies or resolutions of Employer or its
parent holding company, or of the rules or
regulations of the Office of the Comptroller
of the Currency, the Federal Deposit
Insurance Corporation, the Board of
Governors of the Federal Reserve System, or
other regulatory agency or governmental
authority having jurisdiction over Employer
or its parent holding company.
(9) The determination by a state or federal
banking agency or governmental authority
having jurisdiction over Employer that
Employee is not suitable to act in the
capacity for which he is employed by
Employer.
(10) Employee is convicted of any felony or a
crime involving moral turpitude or commits a
fraudulent or dishonest act.
6
<PAGE> 7
(11) Employee discloses without authority any
secret or confidential information
concerning Employer or takes any action
which Employer's Board of Directors
determines, in its sole discretion and
subject to good faith, fair dealing and
reasonableness, constitutes unfair
competition with or induces any customer to
breach any contract with Employer.
(12) Either party breaches the terms or
provisions of this Agreement.
(b) Termination by Employer. Employer may, at its election and
in its sole discretion, terminate this Agreement for any reason, or for no
reason, by giving not less than thirty (30) days' prior written notice of
termination to Employee, without prejudice to any other remedy to which Employer
may be entitled either at law, in equity or under this Agreement. Upon such
termination, Employee shall be entitled to receive any employment benefits which
shall have accrued prior to such termination and the severance pay specified in
paragraph 16 (d) below.
(c) Termination by Employee. This Agreement may be terminated
by Employee for any reason, or no reason, by giving not less than thirty (30)
days' prior written notice of termination to Employer. Upon such termination,
all rights and obligations accruing to Employee under this Agreement shall
cease, except that such termination shall not prejudice Employee's rights
regarding employment benefits which shall have accrued prior to such termination
and any other remedy which Employee may have at law, in equity or under this
Agreement, which remedy accrued prior to such termination.
(d) Severance Pay - Termination by Employer. In the event of
termination by Employer pursuant to paragraph 16 (b) or automatic termination
based upon paragraph 16 (a) (1), (4) or (12, to the extent of Employer's breach)
of this Agreement, Employee shall be entitled to receive severance pay at
Employee's rate of salary immediately preceding such termination equal to twelve
(12) months' salary (in addition to incentive compensation or bonus payments due
Employee, if any), payable in installments bi-monthly on the first and fifteenth
days of each month. Notwithstanding the foregoing, in the event of a "change in
control" as defined in subparagraph (e) below, Employee shall not be entitled to
severance pay pursuant to this subparagraph (d) and any rights of Employee to
severance pay shall be limited to such rights as are specified in subparagraph
(e) below. Employee acknowledges and agrees that severance pay pursuant to this
subparagraph (d) is in lieu of all damages, payments and liabilities on account
of the early termination of this Agreement and the sole and exclusive remedy for
Employee terminated at the will of Employer pursuant to paragraph 16 (b) or
pursuant to certain provisions of paragraph 16 (a) described herein.
(e) Severance Pay - Change in Control. In the event of a
"change in
7
<PAGE> 8
control" as defined herein and within a period of two (2) years following
consummation of such a change in control (i) Employee's employment is
terminated; or (ii) without Employee's consent there occurs (A) any adverse
change in the nature and scope of Employee's position, responsibilities, duties,
salary, benefits or location of employment, or (B) any event which reasonably
constitutes a demotion, significant diminution or constructive termination (by
resignation or otherwise) of Employee's employment, then Employee shall be
entitled to receive severance pay in addition to any bonus or incentive
compensation payments due Employee. Any such severance pay due Employee shall be
in an amount equal to two (2) times Employee's average annual compensation for
the five (5) years immediately preceding the change in control. Employee's
average annual compensation shall be the average of the aggregate compensation
paid by Employer to Employee which was includable in Employee's gross income for
federal income tax purposes for the five (5) tax years ending immediately prior
to the change in control divided by the number five (5).
If all or any portion of the amounts payable to Employee
pursuant to this paragraph 16 (e) alone or together with other payments which
Employee has the right to receive from Employer, constitute "excess parachute
payments" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), that are subject to the excise tax imposed by
Section 4999 of the Code (or similar tax and/or assessment), such amounts
payable hereunder shall be reduced to the extent necessary, after first applying
any similar reduction in payments to be received from any other plan or program
sponsored by Employer from which Employee has a right to receive payments
subject to Sections 280G and 4999 of the Code, including without limitation any
Salary Continuation Agreement made between Employer and Employee, so as to cause
a reduction of any excise tax pursuant to Section 4999 of the Code to equal
"zero".
Any such severance shall be payable in installments bi-monthly
on the first and fifteenth days of each month. Such severance payment, if any,
shall be in lieu of all damages, payments and liabilities on account of the
events described above for which such severance payment, if any, may be due
Employee and any severance payment rights of Employee under paragraph 16 (d) of
this Agreement. This subparagraph (e) shall be binding upon and inure to the
benefit of the parties and any successors or assigns or employer or any "person"
as defined herein.
Notwithstanding the foregoing, Employee shall not be entitled
to receive nor shall Employer, its successors, assigns or any "person" as
defined herein be obligated to pay severance payments pursuant to this
subparagraph (e) in the event of an occurrence described in paragraph 16,
subparagraphs (5), (6), (8), (10), (11) or (12, to the extent of an Employee
breach), or in the event of a determination pursuant to subparagraph (9)
thereof, or in the event Employee terminates employment in accordance with
paragraph 16 (c) and the termination is not a result of or based upon the
occurrence of any event described in paragraph 16 (e)(ii).
A "change in control" of Employer for purposes of this
Agreement and
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<PAGE> 9
subparagraph (e) shall mean the occurrence of any of the following events with
respect to Employer (with the term "Employer" being defined for such a change in
control to include any parent holding company): (i) a change in control of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or in response to any other form or
report to the regulatory agencies or governmental authorities having
jurisdiction over Employer or any stock exchange on which Employer's shares are
listed which requires the reporting of a change in control; (ii) any merger,
consolidation or reorganization of Employer in which Employer does not survive;
(iii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition
(in one transaction or a series of transactions) of any assets of Employer
having an aggregate fair market value of fifty percent (50%) of the total value
of the assets of Employer, reflected in the most recent balance sheet of
Employer; (iv) a transaction whereby any "person" (as such term is used in the
Exchange Act or any individual, corporation, partnership, trust or any other
entity) is or becomes the beneficial owner, directly or indirectly, of
securities of Employer representing 25% or more of the combined voting power of
Employer's then outstanding securities; (v) if in any one year period,
individuals who at the beginning of such period constitute the Board of
Directors of Employer cease for any reason to constitute at least a majority
thereof, unless the election, or the nomination for election by Employer's
shareholders, of each new director is approved by a vote of a least
three-quarters of the directors then still in office who were directors at the
beginning of the period; (iv) a majority of the members of the Board of
Directors of Employer in office prior to the happening of any event determines
in its sole discretion that as a result of such event there has been a change in
control.
17. Notices. Any notices to be given hereunder by either party to
the other shall be in writing and may be transmitted by personal delivery or by
U.S. mail, registered or certified, postage prepaid with return receipt
requested. Mailed notices shall be addressed to the parties at the addresses
listed as follows:
Employer: Principal place of business
Employee: Principal place of business as shown in Employer's
Personnel Records and Employee's personal file.
Each party may change the address for receipt of notices by written notice in
accordance with this paragraph 17. Notices delivered personally shall be deemed
communicated as of the date of actual receipt; mailed notices shall be deemed
communicated as of three (3) days after the date of mailing.
18. Arbitration. All claims, disputes and other matters in
question arising out of or relating to this Agreement or the breach or
interpretation thereof, other than those matters which are to be determined by
the Employer in its sole and absolute discretion, shall be resolved by binding
arbitration before a representative member, selected by the mutual agreement of
the parties, of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"),
9
<PAGE> 10
presently located at 111 Pine Street, Suite 710, in San Francisco, California,
in accordance with the rules and procedures of JAMS then in effect. In the event
JAMS is unable or unwilling to conduct such arbitration, or has discontinued its
business, the parties agree that a representative member, selected by the mutual
agreement of the parties, of the American Arbitration Association ("AAA"),
presently located at 417 Montgomery Street, in San Francisco, California, shall
conduct such binding arbitration in accordance with the rules and procedures of
the AAA then in effect. Notice of the demand for arbitration shall be filed in
writing with the other party to this Agreement and with JAMS (or AAA, if
necessary). In no event shall the demand for arbitration be made after the date
when institution of legal or equitable proceedings based on such claim, dispute
or other matter in question would be barred by the applicable statute of
limitations. Any award rendered by JAMS or AAA shall be final and binding upon
the parties, and as applicable, their respective heirs, beneficiaries, legal
representatives, agents, successors and assigns, and may be entered in any court
having jurisdiction thereof. The obligation of the parties to arbitrate pursuant
to this clause shall be specifically enforceable in accordance with, and shall
be conducted consistently with, the provisions of Title 9 of Part 3 of the
California Code of Civil Procedure. Any arbitration hereunder shall be conducted
in Gilroy, California, unless otherwise agreed to by the parties.
19. Attorneys' Fees and Costs. In the event of litigation, arbitration
or any other action or proceeding between the parties to interpret or enforce
this Agreement or any part thereof or otherwise arising out of or relating to
this Agreement, the prevailing party shall be entitled to recover its costs
related to any such action or proceeding and its reasonable fees of attorneys,
accountants and expert witnesses incurred by such party in connection with any
such action or proceeding. The prevailing party shall be deemed to be the party
which obtains substantially the relief sought by final resolution, compromise or
settlement, or as may otherwise be determined by order of a court of competent
jurisdiction in the event of litigation, an award or decision of one or more
arbitrators in the event of arbitration, or a decision of a comparable official
in the event of any other action or proceeding. Every obligation to indemnify
under this Agreement includes the obligation to pay reasonable fees of
attorneys, accountants and expert witnesses incurred by the indemnified party in
connection with matters subject to indemnification.
20. Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties with respect to the
employment of Employee by Employer and contains all of the covenants and
agreements between the parties with respect to the employment of Employee by
Employer. Each party to this Agreement acknowledges that no other
representations, inducements, promises, or agreements, oral or otherwise, have
been made by any party, or anyone acting on behalf of any party, which are not
set forth herein, and that no other agreement, statement, or promise not
contained in this Agreement shall be valid or binding on either party.
21. Modifications. Any modification of this Agreement will be
effective only if it is in writing and signed by a party or its authorized
representative.
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<PAGE> 11
22. Waiver. The failure of either party to insist on strict compliance
with any of the terms, provisions, covenants, or conditions of this Agreement by
the other party shall not be deemed a waiver of any term, provision, covenant,
or condition, individually or in the aggregate, unless such waiver is in
writing, nor shall any waiver or relinquishment of any right or power at any one
time or times be deemed a waiver or relinquishment of that right or power for
all or any other times.
23. Partial Invalidity. If any provision in this Agreement is held by
a court of competent jurisdiction to be invalid, void, or unenforceable, the
remaining provisions shall nevertheless continue in full force and effect
without being impaired or invalidated in any way.
24. Interpretation. This Agreement shall be construed without regard to
the party responsible for the preparation of the Agreement and shall be deemed
to have been prepared jointly by the parties. Any ambiguity or uncertainty
existing in this Agreement shall not be interpreted against either party, but
according to the application of other rules of contract interpretation, if an
ambiguity or uncertainty exists.
25. Governing Law and Venue. The laws of the State of California, other
than those laws denominated choice of law rules, shall govern the validity,
construction and effect of this Agreement. Any action which in any way involves
the rights, duties and obligations of the parties hereunder shall be brought in
the courts of the State of California and venue for any action or proceeding
shall be in Santa Clara County or in the United States District Court for the
Northern District of California, and the parties hereby submit to the personal
jurisdiction of said courts.
26. Payments Due Deceased Employee. If Employee dies prior to the
expiration of the term of his employment, any payments that may be due Employee
from Employer under this Agreement as of the date of death shall be paid to
Employee's executors, administrators, heirs, personal representatives,
successors, or assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement consisting
of eleven pages in the City of Gilroy, County of Santa Clara, State of
California as of the date set forth above.
EMPLOYER: EMPLOYEE:
SOUTH VALLEY NATIONAL BANK
By:/s/ By:/s/
----------------------- -------------------------
Roger C. Knopf Brad L. Smith
11
<PAGE> 12
[ADD NOTARIAL ACKNOWLEDGEMENT]
12
<PAGE> 1
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of March 28, 1996 by and
between SOUTH VALLEY NATIONAL BANK, a national banking association ("Employer"),
and Richard L. Conniff ("Employee").
RECITALS
WHEREAS, Employer and Employee desire to enter into an agreement for
the purposes of engaging the services of Employee by reason of his experience,
training and ability in the commercial banking industry;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the Employer and Employee agree as follows:
AGREEMENT
1. Term of Employment. Employer employs Employee and Employee hereby
accepts employment with Employer, upon the terms and conditions hereinafter set
forth, for a period of two (2) years from the date hereof, and on each
anniversary date thereafter, the term of this Agreement shall be deemed
automatically extended for an additional one (1) year term, subject to the
termination provisions of paragraph 16.
2. Duties and Obligations of Employee. Employee shall serve as the
Senior Vice President and Chief Financial Officer of Employer and shall perform
the customary duties of such office in the commercial banking industry as may
from time to time be reasonably requested of him by the Board of Directors of
Employer in addition to the following:
(a) Participating in community affairs which are beneficial
to the Employer;
(b) Maintaining a good relationship with shareholders and the
Boards of Directors of Employer, its parent holding company and affiliates
thereof; and
(c) Maintaining a good relationship with regulatory agencies
and governmental authorities having jurisdiction over Employer, its parent
holding company and affiliates thereof.
3. Devotion to Employer's Business.
(a) Employee shall devote his full business time, ability, and
attention to the business of Employer during the term of this Agreement and
shall not during the term of this Agreement, without the prior written consent
of Employer's Board of Directors, engage in any other business activities,
duties, or pursuits whatsoever, or directly or indirectly render
<PAGE> 2
any services of a business, commercial, or professional nature to any other
person or organization, whether for compensation or otherwise, which are in
conflict with Employer's business. However, the expenditure of reasonable
amounts of time for educational, charitable, or professional activities shall
not be deemed a breach of this Agreement if those activities do not materially
interfere with the services required of Employee under this Agreement. Nothing
in this Agreement shall be interpreted to prohibit Employee from making passive
personal investments. However, Employee shall not directly or indirectly
acquire, hold, or retain any material interest in any business competing with or
similar in nature to the business of Employer.
(b) Employee agrees to conduct himself at all times with due
regard to public conventions and morals. Employee further agrees not to do or
commit any act that will reasonably tend to shock or offend the community, or to
prejudice Employer or the banking industry in general.
(c) Employee hereby represents and agrees that the services to
be performed under the terms of this Agreement are of a special, unique,
unusual, extraordinary, and intellectual character that gives them a peculiar
value, the loss of which cannot be reasonably or adequately compensated in
damages in an action at law. Employee therefore expressly agrees that Employer,
in addition to any other rights or remedies that Employer may possess, shall be
entitled to injunctive and other equitable relief to prevent or remedy a breach
of this Agreement by Employee.
4. Noncompetition by Employee. Employee shall not, during the term of
this Agreement, directly or indirectly, either as an employee, employer,
consultant, agent, principal, stockholder, officer, director, or in any other
individual or representative capacity, engage or participate in any competitive
banking or financial services business.
5. Indemnification for Negligence or Misconduct. Employee shall
indemnify and hold Employer harmless from all liability for loss, damage, or
injury to persons or property resulting from the gross negligence or intentional
misconduct of the Employee.
6. Disclosure of Information. Employee shall not, either before or
after termination of this Agreement, disclose to anyone any information relating
to Employer or any financial information, trade or business secrets, customer
lists, computer software or other information not otherwise publicly available
concerning the business or operations of Employer. Employee recognizes and
acknowledges that any financial information concerning any of Employer's
customers, as it may exist from time to time, is strictly confidential and is a
valuable, special and unique asset of Employer's business. Employee shall not,
either before or after termination of this Agreement, disclose to anyone said
financial information or any part thereof, for any reason or purpose whatsoever.
This paragraph 6 shall survive the expiration or termination of this Agreement.
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<PAGE> 3
7. Written or Printed Material. All written or printed materials,
notebooks and records used by Employee in performing duties for Employer, other
than Employee's personal notes and diaries, are and shall remain the sole
property of Employer. Upon termination of employment, Employee shall promptly
return all such material (including all copies) to Employer. This paragraph 7
shall survive expiration or termination of this Agreement.
8. Surety Bond. Employee agrees that he will furnish all information
and take any other steps necessary from time to time to enable Employer to
obtain or maintain a fidelity bond conditional on the rendering of a true
account by Employee of all monies, goods, or other property which may come into
the custody, charge, or possession of Employee during the term of his
employment. The surety company issuing the bond and the amount of the bond must
be acceptable to Employer. All premiums on the bond shall be paid by Employer.
If Employee cannot qualify for a surety bond at any time during the term of this
Agreement, Employer shall have the option to terminate this Agreement
immediately without any obligation to pay severance benefits to Employee in
accordance with paragraph 16 (d) of this Agreement.
9. Base Salary. In consideration for the services to be performed
hereunder, Employee shall receive a salary at the rate of One Hundred Thousand
Dollars ($100,000) per annum, payable in installments during the term of this
Agreement of approximately Four Thousand One Hundred Sixty-Six Dollars and
Sixty-Seven Cents ($4,166.67) on the first and fifteenth days of each month,
subject to applicable adjustments for withholding taxes and prorations for any
partial employment period. Employee shall receive such annual adjustments in
salary, if any, as may be determined by Employer's Board of Directors, in its
sole discretion, resulting from the Board of Directors annual review of
Employee's compensation on or about January 1 of each year during the term of
this Agreement.
10. Salary Continuation During Disability. If Employee for any reason
(except as expressly provided below) becomes temporarily or permanently disabled
so that he is unable to perform the duties under this Agreement, Employer agrees
to pay Employee the base salary otherwise payable to Employee pursuant to
paragraph 9 of this Agreement, reduced by the amounts received by Employee from
state disability insurance, or worker's compensation or other similar insurance
benefits through policies provided by Employer, for a period of six (6) months
from the date of disability.
For purposes of this paragraph 10, "disability" shall be defined as
provided in Employer's disability insurance program. Notwithstanding anything
herein to the contrary, Employer shall have no obligation to make payments for a
disability resulting from the deliberate, intentional actions of Employee, such
as, but not limited to, attempted suicide or chemical dependence of Employee.
3
<PAGE> 4
11. Incentive Compensation. Employee shall be entitled to participate
in Employer's Incentive Compensation Plan (the "Plan"), a copy of which is
attached hereto as Exhibit A and incorporated herein by reference, and receive
incentive compensation in accordance with the Plan, subject to the right of the
Board of Directors in its sole discretion to modify the terms and provisions of
the Plan each year during the term of this Agreement in connection with its
review of Employee's performance and Employer's results of operations. Under no
circumstance shall a right to receive incentive compensation exist in favor of
or accrue to or for the benefit of Employee prior to actual receipt of a
distribution, if any, under the Plan.
12. Stock Options. Employer has previously granted stock options to
Employee evidenced by one or more stock option agreements attached hereto as
Exhibit B and incorporated herein by this reference. Employer may, but is not
obligated to, grant additional stock options to Employee in the future which
grants, if any, shall be within the sole discretion of the Board of Directors of
Employer and subject to the terms and provisions of Employer's stock option plan
pursuant to which such grants are effected. Any such grants shall be evidenced
by a stock option agreement entered into between Employer and Employee pursuant
to such stock option plan and a copy of each such stock option agreement shall
be attached to this Agreement as an exhibit. Notwithstanding any provision of
any such stock option plan or any such stock option agreement to the contrary,
no rights of employment shall be conferred upon Employee or result from any such
stock option plan or any stock option agreement entered into between Employer
and Employee. Any employment rights and corresponding duties of Employee
pursuant to his employment by Employer shall be limited to and interpreted
solely in accordance with the terms and provisions of this Agreement.
13. Other Benefits. Employee shall be entitled to those employee
benefits adopted by Employer for all employees of Employer, subject to
applicable qualification requirements and regulatory approval requirements, if
any. Employee shall be further entitled to the following additional benefits
which shall supplement or replace, to the extent duplicative of any part or all
of the general employee benefits, the benefits otherwise provided to Employee:
(a) Vacation. Employee shall be entitled to four (4) weeks
annual vacation leave at his then existing rate of base salary each year during
the term of this Agreement. Employee may be absent from his employment for
vacation as long as such leave is reasonable and does not jeopardize his
responsibilities and duties specified in this Agreement. The length of vacation
should not exceed two (2) weeks without the approval of Employer's executive
committee of the Board of Directors. Accrual of vacation time, if any, shall be
determined in accordance with Employer's personnel policies.
4
<PAGE> 5
(b) Automobile and Insurance. Employer shall pay to
Employee an automobile allowance of Eight Thousand Four Hundred Dollars
($8,400.00) per year during the term of this Agreement, payable at the rate of
Seven Hundred Dollars ($700.00) per month. Employee shall acquire or otherwise
make available for his business and personal use an automobile, suitable to his
position, and (i) maintain it in good condition and repair; (ii) maintain public
liability insurance and property damage insurance policies with insurer(s)
acceptable to Employer and such coverages in such amounts as may be acceptable
to Employer from time to time; and (iii) such policies shall name Employer as an
additional insured, subject to the requirement that Employee's allowance
described above shall be increased in an amount equal to the additional premium
expense, if any, resulting from Employer being named as an additional insured.
Employer may, in its sole discretion, elect to provide and pay for such
insurance policies in lieu of Employee maintaining such policies.
14. Annual Physical Examination. Employer shall pay or reimburse
Employee for the cost of an annual physical examination conducted by a
California licensed physician selected by Employee and reasonably acceptable to
Employer.
15. Business Expenses. Employee shall be reimbursed for all ordinary
and necessary expenses incurred by Employee in connection with his employment.
Employee shall also be reimbursed for reasonable expenses incurred in activities
associated with promoting the business of Employer, including expenses for
entertainment, travel, conventions, educational programs, club memberships and
similar items. Employer will pay for or will reimburse Employee for such
expenses upon presentation by Employee from time to time of receipts or other
appropriate evidence of such expenditures.
16. Termination of Agreement.
(a) Automatic Termination. This Agreement shall terminate
automatically without further act of the parties and immediately upon the
occurrence of any one of the following events, subject to either party's right,
without any obligation whatsoever, to waive an event reasonably susceptible of
waiver, and the obligation of Employer to pay the amounts which would otherwise
be payable to Employee under this Agreement through the end of the month in
which the event occurs, except that only in the event of termination based upon
subparagraphs (1), (4) or (12, to the extent of Employer's breach) below shall
Employee be entitled to receive severance payments based upon automatic
termination pursuant to paragraph 16 (d) of this Agreement:
(1) The occurrence of circumstances that make it
impossible or impractical for Employer to
conduct or continue its business.
(2) The death of Employee.
(3) The loss by Employee of legal capacity.
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<PAGE> 6
(4) The loss by Employer of legal capacity to
contract.
(5) The willful, intentional and material breach
of duty by Employee in the course of his
employment.
(6) The habitual and continued neglect by
Employee of his employment duties and
obligations under this Agreement.
(7) The continuous mental or physical incapacity
of Employee, subject to Employee's rights
under paragraph 10 of this Agreement.
(8) Employee's willful and intentional violation
of any State of California or federal
banking laws, or of the Bylaws, rules,
policies or resolutions of Employer or its
parent holding company, or of the rules or
regulations of the Office of the Comptroller
of the Currency, the Federal Deposit
Insurance Corporation, the Board of
Governors of the Federal Reserve System, or
other regulatory agency or governmental
authority having jurisdiction over Employer
or its parent holding company.
(9) The determination by a state or federal
banking agency or governmental authority
having jurisdiction over Employer that
Employee is not suitable to act in the
capacity for which he is employed by
Employer.
(10) Employee is convicted of any felony or a
crime involving moral turpitude or commits a
fraudulent or dishonest act.
(11) Employee discloses without authority any
secret or confidential information
concerning Employer or takes any action
which Employer's Board of Directors
determines, in its sole discretion and
subject to good faith, fair dealing and
reasonableness, constitutes unfair
competition with or induces any customer to
breach any contract with Employer.
(12) Either party breaches the terms or
provisions of this Agreement.
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<PAGE> 7
(b) Termination by Employer. Employer may, at its election and
in its sole discretion, terminate this Agreement for any reason, or for no
reason, by giving not less than thirty (30) days' prior written notice of
termination to Employee, without prejudice to any other remedy to which Employer
may be entitled either at law, in equity or under this Agreement. Upon such
termination, Employee shall be entitled to receive any employment benefits which
shall have accrued prior to such termination and the severance pay specified in
paragraph 16 (d) below.
(c) Termination by Employee. This Agreement may be terminated
by Employee for any reason, or no reason, by giving not less than thirty (30)
days' prior written notice of termination to Employer. Upon such termination,
all rights and obligations accruing to Employee under this Agreement shall
cease, except that such termination shall not prejudice Employee's rights
regarding employment benefits which shall have accrued prior to such termination
and any other remedy which Employee may have at law, in equity or under this
Agreement, which remedy accrued prior to such termination.
(d) Severance Pay - Termination by Employer. In the event of
termination by Employer pursuant to paragraph 16 (b) or automatic termination
based upon paragraph 16 (a) (1), (4) or (12, to the extent of Employer's breach)
of this Agreement, Employee shall be entitled to receive severance pay at
Employee's rate of salary immediately preceding such termination equal to six
(6) months' salary (in addition to incentive compensation or bonus payments due
Employee, if any), payable in installments bi-monthly on the first and fifteenth
days of each month. Notwithstanding the foregoing, in the event of a "change in
control" as defined in subparagraph (e) below, Employee shall not be entitled to
severance pay pursuant to this subparagraph (d) and any rights of Employee to
severance pay shall be limited to such rights as are specified in subparagraph
(e) below. Employee acknowledges and agrees that severance pay pursuant to this
subparagraph (d) is in lieu of all damages, payments and liabilities on account
of the early termination of this Agreement and the sole and exclusive remedy for
Employee terminated at the will of Employer pursuant to paragraph 16 (b) or
pursuant to certain provisions of paragraph 16 (a) described herein.
(e) Severance Pay - Change in Control. In the event of a
"change in control" as defined herein and within a period of two (2) years
following consummation of such a change in control (i) Employee's employment is
terminated; or (ii) without Employee's consent there occurs (A) any adverse
change in the nature and scope of Employee's position, responsibilities, duties,
salary, benefits or location of employment, or (B) any event which reasonably
constitutes a demotion, significant diminution or constructive termination (by
resignation or otherwise) of Employee's employment, then Employee shall be
entitled to receive severance pay in addition to any bonus or incentive
compensation payments due Employee. Any such severance pay due Employee shall be
in an amount equal to one (1) times Employee's average annual compensation for
the five (5) years immediately preceding the change in control. Employee's
average annual compensation shall be the average of the aggregate compensation
paid by Employer to Employee which was includable in Employee's gross income for
federal income tax purposes for the five (5) tax years ending
7
<PAGE> 8
immediately prior to the change in control divided by the number five (5) or
such shorter period as employee has been employed by Employer.
If all or any portion of the amounts payable to Employee
pursuant to this paragraph 16 (e) alone or together with other payments which
Employee has the right to receive from Employer, constitute "excess parachute
payments" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), that are subject to the excise tax imposed by
Section 4999 of the Code (or similar tax and/or assessment), such amounts
payable hereunder shall be reduced to the extent necessary, after first applying
any similar reduction in payments to be received from any other plan or program
sponsored by Employer from which Employee has a right to receive payments
subject to Sections 280G and 4999 of the Code, including without limitation any
Salary
Continuation Agreement made between Employer and Employee, so as to cause a
reduction of any excise tax pursuant to Section 4999 of the Code to equal
"zero".
Any such severance shall be payable in installments bi-monthly
on the first and fifteenth days of each month. Such severance payment, if any,
shall be in lieu of all damages, payments and liabilities on account of the
events described above for which such severance payment, if any, may be due
Employee and any severance payment rights of Employee under paragraph 16 (d) of
this Agreement. This subparagraph (e) shall be binding upon and inure to the
benefit of the parties and any successors or assigns or employer or any "person"
as defined herein.
Notwithstanding the foregoing, Employee shall not be entitled
to receive nor shall Employer, its successors, assigns or any "person" as
defined herein be obligated to pay severance payments pursuant to this
subparagraph (e) in the event of an occurrence described in paragraph 16,
subparagraphs (5), (6), (8), (10), (11) or (12, to the extent of an Employee
breach), or in the event of a determination pursuant to subparagraph (9)
thereof, or in the event Employee terminates employment in accordance with
paragraph 16 (c) and the termination is not a result of or based upon the
occurrence of any event described in paragraph 16 (e)(ii).
A "change in control" of Employer for purposes of this
Agreement and subparagraph (e) shall mean the occurrence of any of the following
events with respect to Employer (with the term "Employer" being defined for such
a change in control to include any parent holding company): (i) a change in
control of a nature that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or in response to any other form
or report to the regulatory agencies or governmental authorities having
jurisdiction over Employer or any stock exchange on which Employer's shares are
listed which requires the reporting of a change in control; (ii) any merger,
consolidation or reorganization of Employer in which Employer does not survive;
(iii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition
(in one transaction or a series of
8
<PAGE> 9
transactions) of any assets of Employer having an aggregate fair market value of
fifty percent (50%) of the total value of the assets of Employer, reflected in
the most recent balance sheet of Employer; (iv) a transaction whereby any
"person" (as such term is used in the Exchange Act or any individual,
corporation, partnership, trust or any other entity) is or becomes the
beneficial owner, directly or indirectly, of securities of Employer representing
25% or more of the combined voting power of Employer's then outstanding
securities; (v) if in any one year period, individuals who at the beginning of
such period constitute the Board of Directors of Employer cease for any reason
to constitute at least a majority thereof, unless the election, or the
nomination for election by Employer's shareholders, of each new director is
approved by a vote of a least three-quarters of the directors then still in
office who were directors at the beginning of the period; (iv) a majority of the
members of the Board of Directors of Employer in office prior to the happening
of any event determines in its sole discretion that as a result of such event
there has been a change in control.
17. Notices. Any notices to be given hereunder by either party to
the other shall be in writing and may be transmitted by personal delivery or by
U.S. mail, registered or certified, postage prepaid with return receipt
requested. Mailed notices shall be addressed to the parties at the addresses
listed as follows:
Employer: Principal place of business
Employee: Principal place of business as shown in Employer's
Personnel Records and Employee's personal file.
Each party may change the address for receipt of notices by written notice in
accordance with this paragraph 17. Notices delivered personally shall be deemed
communicated as of the date of actual receipt; mailed notices shall be deemed
communicated as of three (3) days after the date of mailing.
18. Arbitration. All claims, disputes and other matters in question
arising out of or relating to this Agreement or the breach or interpretation
thereof, other than those matters which are to be determined by the Employer in
its sole and absolute discretion, shall be resolved by binding arbitration
before a representative member, selected by the mutual agreement of the parties,
of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"), presently
located at 111 Pine Street, Suite 710, in San Francisco, California, in
accordance with the rules and procedures of JAMS then in effect. In the event
JAMS is unable or unwilling to conduct such arbitration, or has discontinued its
business, the parties agree that a representative member, selected by the mutual
agreement of the parties, of the American Arbitration Association ("AAA"),
presently located at 417 Montgomery Street, in San Francisco, California, shall
conduct such binding arbitration in accordance with the rules and procedures of
the AAA then in effect. Notice of the demand for arbitration shall be filed in
writing with the other party to this Agreement and with JAMS (or AAA, if
necessary). In no event shall the demand for arbitration be made after the date
when institution of legal or equitable proceedings based on such claim, dispute
or other matter in question would be
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<PAGE> 10
barred by the applicable statute of limitations. Any award rendered by JAMS or
AAA shall be final and binding upon the parties, and as applicable, their
respective heirs, beneficiaries, legal representatives, agents, successors and
assigns, and may be entered in any court having jurisdiction thereof. The
obligation of the parties to arbitrate pursuant to this clause shall be
specifically enforceable in accordance with, and shall be conducted consistently
with, the provisions of Title 9 of Part 3 of the California Code of Civil
Procedure. Any arbitration hereunder shall be conducted in Gilroy, California,
unless otherwise agreed to by the parties.
19. Attorneys' Fees and Costs. In the event of litigation, arbitration
or any other action or proceeding between the parties to interpret or enforce
this Agreement or any part thereof or otherwise arising out of or relating to
this Agreement, the prevailing party shall be entitled to recover its costs
related to any such action or proceeding and its reasonable fees of attorneys,
accountants and expert witnesses incurred by such party in connection with any
such action or proceeding. The prevailing party shall be deemed to be the party
which obtains substantially the relief sought by final resolution, compromise or
settlement, or as may otherwise be determined by order of a court of competent
jurisdiction in the event of litigation, an award or decision of one or more
arbitrators in the event of arbitration, or a decision of a comparable official
in the event of any other action or proceeding. Every obligation to indemnify
under this Agreement includes the obligation to pay reasonable fees of
attorneys, accountants and expert witnesses incurred by the indemnified party in
connection with matters subject to indemnification.
20. Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties with respect to the
employment of Employee by Employer and contains all of the covenants and
agreements between the parties with respect to the employment of Employee by
Employer. Each party to this Agreement acknowledges that no other
representations, inducements, promises, or agreements, oral or otherwise, have
been made by any party, or anyone acting on behalf of any party, which are not
set forth herein, and that no other agreement, statement, or promise not
contained in this Agreement shall be valid or binding on either party.
21. Modifications. Any modification of this Agreement will be
effective only if it is in writing and signed by a party or its authorized
representative.
22. Waiver. The failure of either party to insist on strict compliance
with any of the terms, provisions, covenants, or conditions of this Agreement by
the other party shall not be deemed a waiver of any term, provision, covenant,
or condition, individually or in the aggregate, unless such waiver is in
writing, nor shall any waiver or relinquishment of any right or power at any one
time or times be deemed a waiver or relinquishment of that right or power for
all or any other times.
23. Partial Invalidity. If any provision in this Agreement is
held by a court of
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<PAGE> 11
competent jurisdiction to be invalid, void, or unenforceable, the remaining
provisions shall nevertheless continue in full force and effect without being
impaired or invalidated in any way.
24. Interpretation. This Agreement shall be construed without regard to
the party responsible for the preparation of the Agreement and shall be deemed
to have been prepared jointly by the parties. Any ambiguity or uncertainty
existing in this Agreement shall not be interpreted against either party, but
according to the application of other rules of contract interpretation, if an
ambiguity or uncertainty exists.
25. Governing Law and Venue. The laws of the State of California, other
than those laws denominated choice of law rules, shall govern the validity,
construction and effect of this Agreement. Any action which in any way involves
the rights, duties and obligations of the parties hereunder shall be brought in
the courts of the State of California and venue for any action or proceeding
shall be in Santa Clara County or in the United States District Court for the
Northern District of California, and the parties hereby submit to the personal
jurisdiction of said courts.
26. Payments Due Deceased Employee. If Employee dies prior to the
expiration of the term of his employment, any payments that may be due Employee
from Employer under this Agreement as of the date of death shall be paid to
Employee's executors, administrators, heirs, personal representatives,
successors, or assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement consisting
of eleven pages in the City of Gilroy, County of Santa Clara, State of
California as of the date set forth above.
EMPLOYER: EMPLOYEE:
SOUTH VALLEY NATIONAL BANK
By:/s/ By:/s/
----------------------- -----------------------
Roger C. Knopf Richard L. Conniff
[ADD NOTARIAL
ACKNOWLEDGEMENT]
11
<PAGE> 1
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of March 28, 1996 by and
between SOUTH VALLEY NATIONAL BANK, a national banking association ("Employer"),
and R. Kurt Michielssen ("Employee").
RECITALS
WHEREAS, Employer and Employee desire to enter into an agreement for
the purposes of engaging the services of Employee by reason of his experience,
training and ability in the commercial banking industry;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the Employer and Employee agree as follows:
AGREEMENT
1. Term of Employment. Employer employs Employee and Employee hereby
accepts employment with Employer, upon the terms and conditions hereinafter set
forth, for a period of two (2) years from the date hereof, and on each
anniversary date thereafter, the term of this Agreement shall be deemed
automatically extended for an additional one (1) year term, subject to the
termination provisions of paragraph 16.
2. Duties and Obligations of Employee. Employee shall serve as the
Senior Vice President and Credit Administrator of Employer and shall perform the
customary duties of such office in the commercial banking industry as may from
time to time be reasonably requested of him by the Board of Directors of
Employer in addition to the following:
(a) Participating in community affairs which are beneficial
to the Employer;
(b) Maintaining a good relationship with shareholders and the
Boards of Directors of Employer, its parent holding company and affiliates
thereof; and
(c) Maintaining a good relationship with regulatory agencies
and governmental authorities having jurisdiction over Employer, its parent
holding company and affiliates thereof.
3. Devotion to Employer's Business.
(a) Employee shall devote his full business time, ability, and
attention to the business of Employer during the term of this Agreement and
shall not during the term of this Agreement, without the prior written consent
of Employer's Board of Directors, engage in any other business activities,
duties, or pursuits whatsoever, or directly or indirectly render any services of
a business, commercial, or professional nature to any other person or
<PAGE> 2
organization, whether for compensation or otherwise, which are in conflict with
Employer's business. However, the expenditure of reasonable amounts of time for
educational, charitable, or professional activities shall not be deemed a breach
of this Agreement if those activities do not materially interfere with the
services required of Employee under this Agreement. Nothing in this Agreement
shall be interpreted to prohibit Employee from making passive personal
investments. However, Employee shall not directly or indirectly acquire, hold,
or retain any material interest in any business competing with or similar in
nature to the business of Employer.
(b) Employee agrees to conduct himself at all times with due
regard to public conventions and morals. Employee further agrees not to do or
commit any act that will reasonably tend to shock or offend the community, or to
prejudice Employer or the banking industry in general.
(c) Employee hereby represents and agrees that the services to
be performed under the terms of this Agreement are of a special, unique,
unusual, extraordinary, and intellectual character that gives them a peculiar
value, the loss of which cannot be reasonably or adequately compensated in
damages in an action at law. Employee therefore expressly agrees that Employer,
in addition to any other rights or remedies that Employer may possess, shall be
entitled to injunctive and other equitable relief to prevent or remedy a breach
of this Agreement by Employee.
4. Noncompetition by Employee. Employee shall not, during the term of
this Agreement, directly or indirectly, either as an employee, employer,
consultant, agent, principal, stockholder, officer, director, or in any other
individual or representative capacity, engage or participate in any competitive
banking or financial services business.
5. Indemnification for Negligence or Misconduct. Employee shall
indemnify and hold Employer harmless from all liability for loss, damage, or
injury to persons or property resulting from the gross negligence or intentional
misconduct of the Employee.
6. Disclosure of Information. Employee shall not, either before or
after termination of this Agreement, disclose to anyone any information relating
to Employer or any financial information, trade or business secrets, customer
lists, computer software or other information not otherwise publicly available
concerning the business or operations of Employer. Employee recognizes and
acknowledges that any financial information concerning any of Employer's
customers, as it may exist from time to time, is strictly confidential and is a
valuable, special and unique asset of Employer's business. Employee shall not,
either before or after termination of this Agreement, disclose to anyone said
financial information or any part thereof, for any reason or purpose whatsoever.
This paragraph 6 shall survive the expiration or termination of this Agreement.
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<PAGE> 3
7. Written or Printed Material. All written or printed materials,
notebooks and records used by Employee in performing duties for Employer, other
than Employee's personal notes and diaries, are and shall remain the sole
property of Employer. Upon termination of employment, Employee shall promptly
return all such material (including all copies) to Employer. This paragraph 7
shall survive expiration or termination of this Agreement.
8. Surety Bond. Employee agrees that he will furnish all information
and take any other steps necessary from time to time to enable Employer to
obtain or maintain a fidelity bond conditional on the rendering of a true
account by Employee of all monies, goods, or other property which may come into
the custody, charge, or possession of Employee during the term of his
employment. The surety company issuing the bond and the amount of the bond must
be acceptable to Employer. All premiums on the bond shall be paid by Employer.
If Employee cannot qualify for a surety bond at any time during the term of this
Agreement, Employer shall have the option to terminate this Agreement
immediately without any obligation to pay severance benefits to Employee in
accordance with paragraph 16 (d) of this Agreement.
9. Base Salary. In consideration for the services to be performed
hereunder, Employee shall receive a salary at the rate of Ninety Thousand
Dollars ($90,000) per annum, payable in installments during the term of this
Agreement of approximately Three Thousand Seven Hundred Fifty Dollars ($3,750)
on the first and fifteenth days of each month, subject to applicable adjustments
for withholding taxes and prorations for any partial employment period. Employee
shall receive such annual adjustments in salary, if any, as may be determined by
Employer's Board of Directors, in its sole discretion, resulting from the Board
of Directors annual review of Employee's compensation on or about January 1 of
each year during the term of this Agreement.
10. Salary Continuation During Disability. If Employee for any reason
(except as expressly provided below) becomes temporarily or permanently disabled
so that he is unable to perform the duties under this Agreement, Employer agrees
to pay Employee the base salary otherwise payable to Employee pursuant to
paragraph 9 of this Agreement, reduced by the amounts received by Employee from
state disability insurance, or worker's compensation or other similar insurance
benefits through policies provided by Employer, for a period of six (6) months
from the date of disability.
For purposes of this paragraph 10, "disability" shall be defined as
provided in Employer's disability insurance program. Notwithstanding anything
herein to the contrary, Employer shall have no obligation to make payments for a
disability resulting from the deliberate, intentional actions of Employee, such
as, but not limited to, attempted suicide or chemical dependence of Employee.
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<PAGE> 4
11. Incentive Compensation. Employee shall be entitled to participate
in Employer's Incentive Compensation Plan (the "Plan"), a copy of which is
attached hereto as Exhibit A and incorporated herein by reference, and receive
incentive compensation in accordance with the Plan, subject to the right of the
Board of Directors in its sole discretion to modify the terms and provisions of
the Plan each year during the term of this Agreement in connection with its
review of Employee's performance and Employer's results of operations. Under no
circumstance shall a right to receive incentive compensation exist in favor of
or accrue to or for the benefit of Employee prior to actual receipt of a
distribution, if any, under the Plan.
12. Stock Options. Employer has previously granted stock options to
Employee evidenced by one or more stock option agreements attached hereto as
Exhibit B and incorporated herein by this reference. Employer may, but is not
obligated to, grant additional stock options to Employee in the future which
grants, if any, shall be within the sole discretion of the Board of Directors of
Employer and subject to the terms and provisions of Employer's stock option plan
pursuant to which such grants are effected. Any such grants shall be evidenced
by a stock option agreement entered into between Employer and Employee pursuant
to such stock option plan and a copy of each such stock option agreement shall
be attached to this Agreement as an exhibit. Notwithstanding any provision of
any such stock option plan or any such stock option agreement to the contrary,
no rights of employment shall be conferred upon Employee or result from any such
stock option plan or any stock option agreement entered into between Employer
and Employee. Any employment rights and corresponding duties of Employee
pursuant to his employment by Employer shall be limited to and interpreted
solely in accordance with the terms and provisions of this Agreement.
13. Other Benefits. Employee shall be entitled to those employee
benefits adopted by Employer for all employees of Employer, subject to
applicable qualification requirements and regulatory approval requirements, if
any. Employee shall be further entitled to the following additional benefits
which shall supplement or replace, to the extent duplicative of any part or all
of the general employee benefits, the benefits otherwise provided to Employee:
(a) Vacation. Employee shall be entitled to four (4) weeks
annual vacation leave at his then existing rate of base salary each year during
the term of this Agreement. Employee may be absent from his employment for
vacation as long as such leave is reasonable and does not jeopardize his
responsibilities and duties specified in this Agreement. The length of vacation
should not exceed two (2) weeks without the approval of Employer's executive
committee of the Board of Directors. Accrual of vacation time, if any, shall be
determined in accordance with Employer's personnel policies.
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<PAGE> 5
(b) Automobile and Insurance. Employer shall pay to
Employee an automobile allowance of Three Thousand Six Hundred Dollars
($3,600.00) per year during the term of this Agreement, payable at the rate of
Three Hundred Dollars ($300.00) per month. Employee shall acquire or otherwise
make available for his business and personal use an automobile, suitable to his
position, and (i) maintain it in good condition and repair; (ii) maintain public
liability insurance and property damage insurance policies with insurer(s)
acceptable to Employer and such coverages in such amounts as may be acceptable
to Employer from time to time; and (iii) such policies shall name Employer as an
additional insured, subject to the requirement that Employee's allowance
described above shall be increased in an amount equal to the additional premium
expense, if any, resulting from Employer being named as an additional insured.
Employer may, in its sole discretion, elect to provide and pay for such
insurance policies in lieu of Employee maintaining such policies.
14. Annual Physical Examination. Employer shall pay or reimburse
Employee for the cost of an annual physical examination conducted by a
California licensed physician selected by Employee and reasonably acceptable to
Employer.
15. Business Expenses. Employee shall be reimbursed for all ordinary
and necessary expenses incurred by Employee in connection with his employment.
Employee shall also be reimbursed for reasonable expenses incurred in activities
associated with promoting the business of Employer, including expenses for
entertainment, travel, conventions, educational programs, club memberships and
similar items. Employer will pay for or will reimburse Employee for such
expenses upon presentation by Employee from time to time of receipts or other
appropriate evidence of such expenditures.
16. Termination of Agreement.
(a) Automatic Termination. This Agreement shall terminate
automatically without further act of the parties and immediately upon the
occurrence of any one of the following events, subject to either party's right,
without any obligation whatsoever, to waive an event reasonably susceptible of
waiver, and the obligation of Employer to pay the amounts which would otherwise
be payable to Employee under this Agreement through the end of the month in
which the event occurs, except that only in the event of termination based upon
subparagraphs (1), (4) or (12, to the extent of Employer's breach) below shall
Employee be entitled to receive severance payments based upon automatic
termination pursuant to paragraph 16 (d) of this Agreement:
(1) The occurrence of circumstances that make it
impossible or impractical for Employer to
conduct or continue its business.
(2) The death of Employee.
(3) The loss by Employee of legal capacity.
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<PAGE> 6
(4) The loss by Employer of legal capacity to
contract.
(5) The willful, intentional and material breach
of duty by Employee in the course of his
employment.
(6) The habitual and continued neglect by
Employee of his employment duties and
obligations under this Agreement.
(7) The continuous mental or physical incapacity
of Employee, subject to Employee's rights
under paragraph 10 of this Agreement.
(8) Employee's willful and intentional violation
of any State of California or federal
banking laws, or of the Bylaws, rules,
policies or resolutions of Employer or its
parent holding company, or of the rules or
regulations of the Office of the Comptroller
of the Currency, the Federal Deposit
Insurance Corporation, the Board of
Governors of the Federal Reserve System, or
other regulatory agency or governmental
authority having jurisdiction over Employer
or its parent holding company.
(9) The determination by a state or federal
banking agency or governmental authority
having jurisdiction over Employer that
Employee is not suitable to act in the
capacity for which he is employed by
Employer.
(10) Employee is convicted of any felony or a
crime involving moral turpitude or commits a
fraudulent or dishonest act.
(11) Employee discloses without authority any
secret or confidential information
concerning Employer or takes any action
which Employer's Board of Directors
determines, in its sole discretion and
subject to good faith, fair dealing and
reasonableness, constitutes unfair
competition with or induces any customer to
breach any contract with Employer.
(12) Either party breaches the terms or
provisions of this Agreement.
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<PAGE> 7
(b) Termination by Employer. Employer may, at its election
and in its sole discretion, terminate this Agreement for any reason, or for no
reason, by giving not less than thirty (30) days' prior written notice of
termination to Employee, without prejudice to any other remedy to which Employer
may be entitled either at law, in equity or under this Agreement. Upon such
termination, Employee shall be entitled to receive any employment benefits which
shall have accrued prior to such termination and the severance pay specified in
paragraph 16 (d) below.
(c) Termination by Employee. This Agreement may be terminated
by Employee for any reason, or no reason, by giving not less than thirty (30)
days' prior written notice of termination to Employer. Upon such termination,
all rights and obligations accruing to Employee under this Agreement shall
cease, except that such termination shall not prejudice Employee's rights
regarding employment benefits which shall have accrued prior to such termination
and any other remedy which Employee may have at law, in equity or under this
Agreement, which remedy accrued prior to such termination.
(d) Severance Pay - Termination by Employer. In the event of
termination by Employer pursuant to paragraph 16 (b) or automatic termination
based upon paragraph 16 (a) (1), (4) or (12, to the extent of Employer's breach)
of this Agreement, Employee shall be entitled to receive severance pay at
Employee's rate of salary immediately preceding such termination equal to six
(6) months' salary (in addition to incentive compensation or bonus payments due
Employee, if any), payable in installments bi-monthly on the first and fifteenth
days of each month. Notwithstanding the foregoing, in the event of a "change in
control" as defined in subparagraph (e) below, Employee shall not be entitled to
severance pay pursuant to this subparagraph (d) and any rights of Employee to
severance pay shall be limited to such rights as are specified in subparagraph
(e) below. Employee acknowledges and agrees that severance pay pursuant to this
subparagraph (d) is in lieu of all damages, payments and liabilities on account
of the early termination of this Agreement and the sole and exclusive remedy for
Employee terminated at the will of Employer pursuant to paragraph 16 (b) or
pursuant to certain provisions of paragraph 16 (a) described herein.
(e) Severance Pay - Change in Control. In the event of a
"change in control" as defined herein and within a period of two (2) years
following consummation of such a change in control (i) Employee's employment is
terminated; or (ii) without Employee's consent there occurs (A) any adverse
change in the nature and scope of Employee's position, responsibilities, duties,
salary, benefits or location of employment, or (B) any event which reasonably
constitutes a demotion, significant diminution or constructive termination (by
resignation or otherwise) of Employee's employment, then Employee shall be
entitled to receive severance pay in addition to any bonus or incentive
compensation payments due Employee. Any such severance pay due Employee shall be
in an amount equal to one (1) times Employee's average annual compensation for
the five (5) years immediately
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<PAGE> 8
preceding the change in control. Employee's average annual compensation shall be
the average of the aggregate compensation paid by Employer to Employee which was
includable in Employee's gross income for federal income tax purposes for the
five (5) tax years ending immediately prior to the change in control divided by
the number five (5) or such shorter period as employee has been employed by
Employer.
If all or any portion of the amounts payable to Employee
pursuant to this paragraph 16 (e) alone or together with other payments which
Employee has the right to receive from Employer, constitute "excess parachute
payments" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), that are subject to the excise tax imposed by
Section 4999 of the Code (or similar tax and/or assessment), such amounts
payable hereunder shall be reduced to the extent necessary, after first applying
any similar reduction in payments to be received from any other plan or program
sponsored by Employer from which Employee has a right to receive payments
subject to Sections 280G and 4999 of the Code, including without limitation any
Salary
Continuation Agreement made between Employer and Employee, so as to cause a
reduction of any excise tax pursuant to Section 4999 of the Code to equal
"zero".
Any such severance shall be payable in installment bi-monthly
on the first and fifteenth days of each month. Such severance payment, if any,
shall be in lieu of all damages, payments and liabilities on account of the
events described above for which such severance payment, if any, may be due
Employee and any severance payment rights of Employee under paragraph 16 (d) of
this Agreement. This subparagraph (e) shall be binding upon and inure to the
benefit of the parties and any successors or assigns or employer or any "person"
as defined herein.
Notwithstanding the foregoing, Employee shall not be entitled
to receive nor shall Employer, its successors, assigns or any "person" as
defined herein be obligated to pay severance payments pursuant to this
subparagraph (e) in the event of an occurrence described in paragraph 16,
subparagraphs (5), (6), (8), (10), (11) or (12, to the extent of an Employee
breach), or in the event of a determination pursuant to subparagraph (9)
thereof, or in the event Employee terminates employment in accordance with
paragraph 16 (c) and the termination is not a result of or based upon the
occurrence of any event described in paragraph 16 (e)(ii).
A "change in control" of Employer for purposes of this
Agreement and subparagraph (e) shall mean the occurrence of any of the following
events with respect to Employer (with the term "Employer" being defined for such
a change in control to include any parent holding company): (i) a change in
control of a nature that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or in response to any other form
or report to the regulatory agencies or governmental authorities having
jurisdiction over Employer or any stock exchange on which Employer's shares are
listed
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<PAGE> 9
which requires the reporting of a change in control; (ii) any merger,
consolidation or reorganization of Employer in which Employer does not survive;
(iii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition
(in one transaction or a series of transactions) of any assets of Employer
having an aggregate fair market value of fifty percent (50%) of the total value
of the assets of Employer, reflected in the most recent balance sheet of
Employer; (iv) a transaction whereby any "person" (as such term is used in the
Exchange Act or any individual, corporation, partnership, trust or any other
entity) is or becomes the beneficial owner, directly or indirectly, of
securities of Employer representing 25% or more of the combined voting power of
Employer's then outstanding securities; (v) if in any one year period,
individuals who at the beginning of such period constitute the Board of
Directors of Employer cease for any reason to constitute at least a majority
thereof, unless the election, or the nomination for election by Employer's
shareholders, of each new director is approved by a vote of a least
three-quarters of the directors then still in office who were directors at the
beginning of the period; (iv) a majority of the members of the Board of
Directors of Employer in office prior to the happening of any event determines
in its sole discretion that as a result of such event there has been a change in
control.
17. Notices. Any notices to be given hereunder by either party to the
other shall be in writing and may be transmitted by personal delivery or by U.S.
mail, registered or certified, postage prepaid with return receipt requested.
Mailed notices shall be addressed to the parties at the addresses listed as
follows:
Employer: Principal place of business
Employee: Principal place of business as shown in Employer's
Personnel Records and Employee's personal file.
Each party may change the address for receipt of notices by written notice in
accordance with this paragraph 17. Notices delivered personally shall be deemed
communicated as of the date of actual receipt; mailed notices shall be deemed
communicated as of three (3) days after the date of mailing.
18. Arbitration. All claims, disputes and other matters in question
arising out of or relating to this Agreement or the breach or interpretation
thereof, other than those matters which are to be determined by the Employer in
its sole and absolute discretion, shall be resolved by binding arbitration
before a representative member, selected by the mutual agreement of the parties,
of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"), presently
located at 111 Pine Street, Suite 710, in San Francisco, California, in
accordance with the rules and procedures of JAMS then in effect. In the event
JAMS is unable or unwilling to conduct such arbitration, or has discontinued its
business, the parties agree that a representative member, selected by the mutual
agreement of the parties, of the American Arbitration Association ("AAA"),
presently located at 417 Montgomery Street, in San Francisco, California, shall
conduct such binding arbitration in accordance with the rules and procedures of
the AAA then in effect. Notice of the demand for arbitration shall be filed in
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<PAGE> 10
writing with the other party to this Agreement and with JAMS (or AAA, if
necessary). In no event shall the demand for arbitration be made after the date
when institution of legal or equitable proceedings based on such claim, dispute
or other matter in question would be barred by the applicable statute of
limitations. Any award rendered by JAMS or AAA shall be final and binding upon
the parties, and as applicable, their respective heirs, beneficiaries, legal
representatives, agents, successors and assigns, and may be entered in any court
having jurisdiction thereof. The obligation of the parties to arbitrate pursuant
to this clause shall be specifically enforceable in accordance with, and shall
be conducted consistently with, the provisions of Title 9 of Part 3 of the
California Code of Civil Procedure. Any arbitration hereunder shall be conducted
in Gilroy, California, unless otherwise agreed to by the parties.
19. Attorneys' Fees and Costs. In the event of litigation, arbitration
or any other action or proceeding between the parties to interpret or enforce
this Agreement or any part thereof or otherwise arising out of or relating to
this Agreement, the prevailing party shall be entitled to recover its costs
related to any such action or proceeding and its reasonable fees of attorneys,
accountants and expert witnesses incurred by such party in connection with any
such action or proceeding. The prevailing party shall be deemed to be the party
which obtains substantially the relief sought by final resolution, compromise or
settlement, or as may otherwise be determined by order of a court of competent
jurisdiction in the event of litigation, an award or decision of one or more
arbitrators in the event of arbitration, or a decision of a comparable official
in the event of any other action or proceeding. Every obligation to indemnify
under this Agreement includes the obligation to pay reasonable fees of
attorneys, accountants and expert witnesses incurred by the indemnified party in
connection with matters subject to indemnification.
20. Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties with respect to the
employment of Employee by Employer and contains all of the covenants and
agreements between the parties with respect to the employment of Employee by
Employer. Each party to this Agreement acknowledges that no other
representations, inducements, promises, or agreements, oral or otherwise, have
been made by any party, or anyone acting on behalf of any party, which are not
set forth herein, and that no other agreement, statement, or promise not
contained in this Agreement shall be valid or binding on either party.
21. Modifications. Any modification of this Agreement will be
effective only if it is in writing and signed by a party or its authorized
representative.
22. Waiver. The failure of either party to insist on strict
compliance with any of the terms, provisions, covenants, or conditions of this
Agreement by the other party shall not be deemed a waiver of any term,
provision, covenant, or condition, individually or in the aggregate, unless such
waiver is in writing, nor shall any waiver or relinquishment of any right or
power at any one time or times be deemed a waiver or relinquishment of that
right or power for all or any other times.
10
<PAGE> 11
23. Partial Invalidity. If any provision in this Agreement is held by
a court ofcompetent jurisdiction to be invalid, void, or unenforceable, the
remaining provisions shall nevertheless continue in full force and effect
without being impaired or invalidated in any way.
24. Interpretation. This Agreement shall be construed without regard to
the party responsible for the preparation of the Agreement and shall be deemed
to have been prepared jointly by the parties. Any ambiguity or uncertainty
existing in this Agreement shall not be interpreted against either party, but
according to the application of other rules of contract interpretation, if an
ambiguity or uncertainty exists.
25. Governing Law and Venue. The laws of the State of California, other
than those laws denominated choice of law rules, shall govern the validity,
construction and effect of this Agreement. Any action which in any way involves
the rights, duties and obligations of the parties hereunder shall be brought in
the courts of the State of California and venue for any action or proceeding
shall be in Santa Clara County or in the United States District Court for the
Northern District of California, and the parties hereby submit to the personal
jurisdiction of said courts.
26. Payments Due Deceased Employee. If Employee dies prior to the
expiration of the term of his employment, any payments that may be due Employee
from Employer under this Agreement as of the date of death shall be paid to
Employee's executors, administrators, heirs, personal representatives,
successors, or assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement consisting
of eleven pages in the City of Gilroy, County of Santa Clara, State of
California as of the date set forth above.
EMPLOYER: EMPLOYEE:
SOUTH VALLEY NATIONAL BANK
By:/s/ By:/s/
----------------------- --------------------------
Roger C. Knopf R. Kurt Michielssen
[ADD NOTARIAL
ACKNOWLEDGEMENT]
11
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<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
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0
0
<COMMON> 13,123
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<INCOME-PRETAX> 752
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<NET-INCOME> 457
<EPS-PRIMARY> .35
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<YIELD-ACTUAL> .91
<LOANS-NON> 1,644
<LOANS-PAST> 177
<LOANS-TROUBLED> 853
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<ALLOWANCE-CLOSE> 1,478
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</TABLE>
