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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 0-17650
FP BANCORP, INC.
(Name of small business issuer in its charter)
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Delaware 33-0018976
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
613 West Valley Parkway
Escondido, California 92025-4929
(Address of principal executive offices) (Zip Code)
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Issuer's telephone number, including area code (760) 741-3312
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to section 12(g) of the Exchange Act: Common
Stock, par value $.001
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /_/
Issuer's revenues for its most recent fiscal year: $24,402,000
The aggregate market value of the voting stock held by nonaffiliates as of
February 14, 1997: $22,119,000
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Proxy Statement for Annual Meeting
of Stockholders to be held on May 27, 1997.
The number of shares outstanding of Common Stock as of March 14, 1997:
2,653,641
Transitional Small Business Disclosure Format (check one): Yes No X
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FP BANCORP, INC.
1996 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
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Page
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PART I
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Item 1. Description of Business ................................................I-1
General Development of Business.......................................I-1
Competition...........................................................I-1
Supervision and Regulation............................................I-2
General.........................................................I-2
Governmental Policies and Legislation...........................I-3
Interstate Banking..............................................I-4
Capital Requirements............................................I-4
Dividends.......................................................I-5
Federal Deposit Insurance Corporation Improvement Act of 1991 ..I-5
Deposit Insurance Assessments...................................I-6
Memorandum of Understanding.....................................I-7
Accounting Standards..................................................I-7
Employees.............................................................I-7
Item 2. Description of Properties...............................................I-8
Item 3. Legal Proceedings.......................................................I-8
Item 4. Submission of Matters to a Vote of Security Holders.....................I-8
PART II
Item 5. Market for Common Equity and Related Stockholder Matters...............II-1
Dividends............................................................II-1
Item 6. Management's Discussion and Analysis...................................II-2
Overview.............................................................II-2
Results of Operations................................................II-3
Net Interest Income............................................II-3
Provision for Loan Losses......................................II-5
Other Operating Income.........................................II-6
Other Operating Expenses.......................................II-6
Income Taxes...................................................II-6
Liquidity and Asset/Liability Management.............................II-6
Cash Flows.....................................................II-7
Liquidity......................................................II-7
Interest Rates.......................................................II-8
Investment Portfolios...............................................II-10
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FP BANCORP, INC.
1996 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
(CONTINUED)
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Page
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Loan Portfolio....................................................II-11
Commercial Loans............................................II-12
Real Estate Loans...........................................II-12
Construction Loans..........................................II-12
Installment Loans...........................................II-12
Loan Maturity and Interest Rate Sensitivity.................II-13
Nonperforming Assets........................................II-13
Allowance for Loan and Lease Losses.........................II-14
Credit Risk Management......................................II-17
Premises and Equipment, Accrued Interest and Other Assets
and Goodwill.....................................................II-17
Deposits..........................................................II-18
Financial Ratios..................................................II-19
Capital Resources.................................................II-20
Item 7. Financial Statements................................................II-21
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ..........................................II-21
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act..................III-1
Item 10. Executive Compensation..............................................III-1
Item 11. Security Ownership of Certain Beneficial Owners and Management .....III-1
Item 12. Certain Relationships and Related Transactions......................III-1
Item 13. Exhibits and Reports on Form 8-K....................................III-1
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
FP Bancorp, Inc. (the "Company"), a Delaware corporation, was organized in
1995 and is registered as a bank holding company under the Bank Holding Company
Act of 1956, as amended. The Company is the successor to FP Bancorp, a
California corporation, organized in 1984. The Company is headquartered in
Escondido, California, a city on the northeast edge of San Diego County,
approximately 35 miles north of downtown San Diego. The Company conducts all of
its business activities through branches of its wholly-owned subsidiary bank,
First Pacific National Bank ("FPNB"), which operates five branches in northern
San Diego County and three branches in southern Riverside County. Unless
otherwise indicated, all references to the business and assets of the Company
include the business and assets of FPNB. The Company's administrative offices
are located at 613 West Valley Parkway, Escondido, California 92025-4929,
telephone (760) 741-3312.
FPNB focuses on providing commercial banking services in northern San Diego
County and southern Riverside County. From the time FPNB was formed, management
has worked to build a reputation for service to businesses and professionals
and, through efforts of its Board of Directors and management, has sought to
maintain an identity as a community-oriented commercial bank.
During 1993, the Company completed the offering (the "Debenture Offering") of
$4,575,000 of its 9% Convertible Subordinated Debentures due December 31, 1997
(the "Debentures"), $3,400,000 of the proceeds of which increased the
capitalization of FPNB in mid-1993. On December 31, 1997, the holders of the
Debentures will receive cash in the principal amount of, or if the conversion
rights are exercised, 100 shares of the Company's common stock, $.001 par value
("Common Stock"), (subject to anti-dilutive adjustments) for each $1,000
principal of Debentures, subject to the limitation that the fair market value of
the shares of Common Stock received by the holder of a Debenture shall not
exceed twice the principal amount of the Debenture.
Pursuant to an Agreement and Plan of Reorganization dated October 12, 1994, as
amended, among FP Bancorp, FPNB and Overland Bank ("Overland"), the Company
agreed to exchange shares of Common Stock, for all of the outstanding shares of
Overland common stock and to merge Overland into FPNB (the "Overland Merger").
The Overland Merger was effective April 1, 1995.
Pursuant to an Agreement and Plan of Reorganization dated January 12, 1996, by
and among FP Bancorp, FPNB, RB Bancorp and its wholly-owned subsidiary, The Bank
of Rancho Bernardo, the Company acquired RB Bancorp and The Bank of Rancho
Bernardo for $7,350,000 in cash and merged The Bank of Rancho Bernardo with and
into FPNB (the "RB Merger"). The RB Merger was effective April 1, 1996.
As of December 31, 1996, the Company had total assets of $308,585,000, total
deposits of $264,521,000 and total stockholders' equity of $20,978,000. Net
earnings for the year ended December 31, 1996 were $4,208,000 as compared to net
earnings of $1,911,000 for the year ended December 31, 1995, and net earnings of
$332,000 for the year ended December 31, 1994.
COMPETITION
In general, the banking business in California is highly competitive with
respect to both loans and deposits and is dominated by major banks with many
offices operating over a wide geographic area. In the Company's primary service
area, major banks dominate the commercial banking industry as a result of
acquisitions of other independent banks in the area in recent years. The Company
competes for deposits and loans with other commercial banks and with nonbank
financial institutions, including savings and loan associations and credit
unions.
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Institutions such as brokerage firms, credit card companies and even retail
establishments offer alternative investment vehicles such as money market funds
and traditional banking services such as check-writing and cash advances on
credit card accounts. Other entities (both public and private) seeking to raise
capital through the issuance and sale of debt or equity securities also
represent a source of competition for the Company with respect to acquisition of
deposits.
Among the advantages certain of these institutions have over the Company are
their ability to finance wide-ranging and effective advertising campaigns, to
access international money markets and to allocate their investment resources to
regions of highest yield and demand. Major banks operating in the Company's
service area offer services, such as international banking and trust services,
which are not offered by FPNB. Also, by virtue of their greater total
capitalization, such banks have substantially higher lending limits than FPNB.
The Company does not have a dependency upon a single customer or industry, the
loss of which would have a material adverse effect. However, some of the
Company's commercial, real estate and construction borrowers are to some extent
dependent on the real estate and construction industries. The Company believes
that the unique services it offers, such as courier service and the high quality
of its customer service and attention, distinguish it from other financial
institutions in its market area. In addition, prompt response to lending
requests is a positive contributing factor to the Company's competitive position
in its area. The accessibility of senior management to customers and local
decision-making also distinguish the Company from other financial institutions.
In order to compete with the other financial institutions in its primary
service area, the Company relies principally upon local promotional activities,
personal contact by its officers, directors, employees and stockholders and
specialized services that it offers to customers. For customers whose loan
demands exceed FPNB's lending limit, the Company attempts to arrange for such
loans on a participation basis with other community banks. The Company also
assists customers in obtaining services not offered directly by FPNB from its
correspondent banks or through third-party providers.
SUPERVISION AND REGULATION
General. The Company is subject to the periodic reporting
requirements of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), which include, but are not limited to, the filing of annual,
quarterly and other reports with the Securities and Exchange Commission (the
"SEC").
The Company is a bank holding company within the meaning of the Bank Holding
Company Act, and is registered as such with and is subject to the supervision of
the Federal Reserve Bank of San Francisco (the "FRB"). Generally, a bank holding
company is required to obtain the approval of the FRB before it may acquire all
or substantially all of the assets of any bank, or ownership or control of the
voting shares of any bank if, after giving effect to such acquisition of shares,
the bank holding company would own or control more than 5% of the voting shares
of such bank. The FRB's approval is also required for the merger or
consolidation of bank holding companies.
The Company is required to file reports with the FRB and provide such
additional information as the FRB may require. The FRB also has the authority to
examine the Company and FPNB, as well as any arrangements between the Company
and FPNB, with the cost of any such examination to be borne by the Company.
Banking subsidiaries of bank holding companies are also subject to certain
restrictions imposed by Federal law in dealings with their holding companies and
other affiliates. Subject to certain restrictions set forth in the Federal
Reserve Act, a bank can loan or extend credit to an affiliate, purchase or
invest in the securities of an affiliate, purchase assets from an affiliate or
issue a guarantee, acceptance or letter of credit on behalf of an affiliate;
provided that the aggregate amount of the above transactions of a bank and its
subsidiaries does not exceed 10% of the capital stock and surplus of the bank on
a per affiliate basis or 20% of the capital stock and surplus of the bank on an
aggregate affiliate basis. In addition, such transactions must be on terms and
conditions that are consistent with safe and sound banking practices and, in
particular, a bank and its subsidiaries generally may not purchase from an
affiliate a low-quality asset, as defined in the Federal Reserve Act. Such
restrictions also prevent a bank
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holding company and its other affiliates from borrowing from a banking
subsidiary of the bank holding company unless the loans are secured by
marketable collateral of designated amounts. Further, the Company and its
subsidiary are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, sale or lease of property or furnishing
of services.
A bank holding company is prohibited from engaging in or acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any
company engaged in nonbanking activities. One of the principal exceptions to
this prohibition is for activities found by the FRB by order or regulation to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto. In making these determinations, the FRB considers whether the
performance of such activities by a bank holding company would offer advantages
to the public which outweigh possible adverse effects.
As a national bank, FPNB is subject to regulation, supervision and regular
examination by the Office of the Comptroller of the Currency ("Comptroller").
Each depositor's account with FPNB is insured by the Federal Deposit Insurance
Corporation (the "FDIC") to the maximum amount permitted by law, which is
currently $100,000 for each insured deposit. FPNB is also subject to certain
regulations promulgated by the FRB and applicable provisions of California law,
insofar as they do not conflict with or are not preempted by Federal banking
law. The Comptroller regulates the number of locations of the branch offices of
a national bank, but may only permit a national bank to maintain branches in
locations and under the same conditions that state banks are permitted to
maintain by state law. California law presently permits a bank to locate a
branch office in any locality in the state. Additionally, California law exempts
banks, including national banks, from California usury law.
The regulations of the FDIC, the Comptroller and the FRB govern most aspects
of the Company's business, including deposit reserve requirements, investments,
loans, certain check clearing activities, issuance of securities, payment of
dividends, branching, deposit interest rate ceilings and numerous other matters.
As a consequence of the extensive regulation of commercial banking activities in
the United States, the Company's business is particularly susceptible to changes
in state and Federal legislation and regulations, which may have the effect of
increasing the cost of doing business, limiting permissible activities or
increasing competition.
Governmental Policies and Legislation. Banking is a business that
depends primarily on rate differentials. In general, the difference between the
interest rates paid by the Company on its deposits and its other borrowings, and
the interest rates received by the Company on loans extended to its customers
and securities held in its portfolio, comprise the major portion of the
Company's net revenues. These rates are highly sensitive to many factors that
are beyond the Company's control. Accordingly, the Company's growth and earnings
are subject to the influence of domestic and foreign economic conditions,
including inflation, recession and unemployment.
The commercial banking business is affected not only by general economic
conditions, but is also influenced by the monetary and fiscal policies of the
Federal government and the policies of regulatory agencies, particularly the
FRB. The FRB implements national monetary policies (with objectives such as
curbing inflation and combating recession) by its open-market operations in U.S.
Government securities, by adjusting the required level of reserves for financial
institutions subject to its reserve requirements and by varying the discount
rates applicable to borrowings by depository institutions. The actions of the
FRB in these areas influence the growth of bank loans, investments and deposits,
and also affect interest rates charged on loans and paid on deposits. The nature
and impact of any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of increasing
the cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of bank holding companies, banks and other financial
institutions are frequently made in Congress, in the California Legislature and
before various bank holding company and bank regulatory agencies. The likelihood
of any major changes and the impact such changes might have are impossible to
predict. Certain of the potentially significant changes which have been enacted
recently by Congress or various regulatory or professional agencies are
discussed below.
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Interstate Banking. On September 29, 1994, President Clinton signed
into law the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act"). The Interstate Banking Act has various
provisions designed to facilitate the acquisition of banks and branching across
state borders. Beginning on September 29, 1995, the FRB is authorized to approve
a bank holding company's application to acquire either control or substantial
assets of a bank located outside the bank holding company's home state,
regardless of whether the acquisition would be prohibited by state law. The
Interstate Banking Act would also permit a bank in one state to merge with
another bank outside its "home state," beginning on June 1, 1997. However, a
state may enact a law after September 29, 1994, but before June 1, 1997,
expressly prohibiting merger transactions with out-of-state banks, provided it
applies equally to all out-of-state banks. Mergers between banks in different
states prior to June 1, 1997 may be permitted if the home state of each bank
involved in the transaction has a law in effect which applies equally to all
out-of-state banks expressly permitting interstate mergers. Acquisitions of
branches and opening of new branches outside the home state of a bank will
continue to be subject to state law restrictions.
On October 2, 1995, the California legislature adopted the Caldera, Weggeland,
and Killea California Interstate Banking and Branching Act of 1995 (the
"California Act"). The California Act expressly permits an out-of-state bank to
acquire an entire California bank by merger or purchase. De novo branching or
acquisition of branches in California by an out-of-state bank continue to be
prohibited. Out-of-state banks are permitted to affiliate with California
institutions and may establish facilities in California (such as loan production
offices) under conditions set forth in the California Act.
Neither the Interstate Banking Act nor the California Act has had a material
effect upon the Company.
Capital Requirements. The FRB, the Comptroller and the FDIC have
adopted risk-based capital adequacy guidelines for bank holding companies and
banks. The risk-based capital adequacy guidelines establish a risk-based
capital ratio based on the overall risk of the entity determined by (i)
assigning weighted risks to each balance sheet asset and certain off-balance
sheet commitments and (ii) adding up all of the weighted risks of all assets and
includable off-balance sheet commitments to obtain the total risk. The
guidelines generally require banks to maintain a total qualifying capital to
weighted risk assets level of 8% (the "Risk-based Capital Ratio"). Of the total
8%, at least 4% of the total qualifying capital to weighted risk assets (the
"Tier 1 Risk-based Capital Ratio") must be Tier 1 or core capital consisting
primarily of equity stock. Tier 2 capital, which is to make up the remainder of
total capital, consists of (i) loan loss allowance, up to 1.25% of weighted risk
assets (ii) mandatory convertible debentures and (iii) other forms of capital.
Qualified preferred capital stock may be considered core capital up to 25% of
all core capital elements.
The FRB, the Comptroller and the FDIC have adopted leverage requirements that
apply in addition to the risk-based capital requirements. Under these
requirements, bank holding companies and banks are required to maintain core
capital of at least 3% of their assets (the "Leverage Ratio"). However, an
institution may be required to maintain core capital of at least 4% or 5%, or
possibly higher, depending upon the activities, risks, rate of growth, and other
factors deemed material by regulatory authorities. As of December 31, 1996, the
Company and FPNB both met all applicable capital requirements imposed by
regulation. See "Item 6. Management's Discussion and Analysis -- Capital
Resources."
The FRB has adopted a policy of requiring each holding company to serve as a
source of financial strength to each of its subsidiary banks. If FPNB were to
experience either significant loan losses or rapid growth in loans or deposits,
or some other event resulting in a depletion or deterioration of capital
accounts were to occur, the Company might be compelled by the FRB to invest
additional capital in an amount sufficient to return FPNB's capital account to a
satisfactory level. Such action could preclude the Company from making payments
on the Debentures or making other expenditures. Such additional investment may
be required at times when, absent the policy of the FRB, the Company would not
be able or willing to provide such additional investment. However, as FPNB's
capital level exceeds Comptroller minimum requirements as of December 31, 1996,
no such action is anticipated.
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Dividends. There are regulatory restrictions on dividend payments by
both FPNB and the Company that may affect the Company's ability to make payments
on the Debentures and pay dividends on its Common Stock. See "Item 5. Market for
Common Equity and Related Stockholder Matters."
Federal Deposit Insurance Corporation Improvement Act of 1991. On
December 19, 1991, President Bush signed into law the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). FDICIA is an omnibus banking
reform bill which added new regulation and made changes in existing regulation
of the operations, procedures and regulatory reporting of insured institutions,
bank holding companies and affiliates. Among other things, FDICIA establishes
five capital categories applicable to insured institutions, each with specific
regulatory consequences. If the appropriate Federal banking agency determines,
after notice and an opportunity for hearing, that an insured institution is in
an unsafe or unsound condition, it may reclassify the institution to the next
lower capital category (other than critically undercapitalized) and require the
submission of a plan to correct the unsafe or unsound condition. The Comptroller
has issued regulations (the "Prompt Corrective Action Regulations") to implement
these provisions. Under the regulations, the categories are:
a. Well Capitalized -- The institution exceeds the required minimum level for
each relevant capital measure. A well capitalized institution is one (i) having
a Risk-based Capital Ratio of 10% or greater, (ii) having a Tier 1 Risk-based
Capital Ratio of 6% or greater, (iii) having a Leverage Ratio of 5% or greater
and (iv) not being subject to any order or written directive to meet and
maintain a specific capital level for any capital measure.
b. Adequately Capitalized -- The institution meets the required minimum level
for each relevant capital measure. No capital distribution may be made that
would result in the institution becoming undercapitalized. An adequately
capitalized institution is one (i) having a Risk-based Capital Ratio of 8% or
greater, (ii) having a Tier 1 Risk-based Capital Ratio of 4% or greater and
(iii) having a Leverage Ratio of 4% or greater or a Leverage Ratio of 3% or
greater if the institution is rated composite 1 under the CAMEL rating system.
c. Undercapitalized -- The institution fails to meet the required minimum
level for any relevant capital measure. An undercapitalized institution is one
(i) having a Risk-based Capital Ratio of less than 8% or (ii) having a Tier 1
Risk-based Capital Ratio of less than 4% or (iii) having a Leverage Ratio of
less than 4%, or if the institution is rated a composite 1 under the CAMEL
rating system, a Leverage Ratio of less than 3%.
The appropriate Federal banking agency must closely monitor an
undercapitalized institution and the institution must submit an acceptable
capital restoration plan. Each company having control over the undercapitalized
institution must provide a limited guarantee that the institution will comply
with its capital restoration plan. Except under limited circumstances consistent
with an accepted capital restoration plan, an undercapitalized institution may
not grow. An undercapitalized institution may not acquire another institution,
establish additional branch offices or engage in any new line of business unless
determined by the appropriate Federal banking agency to be consistent with an
accepted capital restoration plan or the FDIC determines that the proposed
action will further the purpose of prompt corrective action. The appropriate
Federal banking agency may take any action authorized for a significantly
undercapitalized institution if an undercapitalized institution fails to submit
an acceptable capital restoration plan or fails in any material respect to
implement a plan accepted by the agency.
An insured depository institution may not pay a management fee to a bank
holding company controlling that institution or any other person having control
of the institution if, after making the payment, the institution would be
undercapitalized. In addition, an institution cannot make a capital
distribution, such as a dividend or other distribution that is in substance a
distribution of capital to the owners of the institution if following such a
distribution the institution would be undercapitalized. Thus, if payment of such
a management fee or the making of such a distribution would cause FPNB to become
undercapitalized, it could not pay a management fee or dividend to the Company.
d. Significantly Undercapitalized -- The institution is significantly below
the required minimum level for any relevant capital measure. A significantly
undercapitalized institution is one (i) having a Risk-based Capital Ratio of
less than 6% or (ii) having a Tier 1 Risk-based Capital Ratio of less than 3% or
(iii) having a Leverage Ratio of less than 3%.
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e. Critically Undercapitalized -- The institution fails to meet a critical
capital level set by the appropriate Federal banking agency. A critically
undercapitalized institution is one having a ratio of tangible equity to total
assets that is equal to or less than 2%.
As of December 31, 1996, the Company was considered "adequately capitalized"
and FPNB was considered "well capitalized." See "Item 6. Management's Discussion
and Analysis -- Capital Resources."
An institution which is classified as adequately capitalized or higher may not
pay a management fee to its holding company or other controlling person or make
capital distributions which in either case, would cause it to be less than
adequately capitalized.
An institution which is less than adequately capitalized must adopt an
acceptable capital restoration plan, is subject to increased regulatory
oversight, and is increasingly restricted in the scope of its permissible
activities. A critically undercapitalized institution is subject to having a
receiver or conservator appointed to manage its affairs and for loss of its
charter to conduct banking activities.
Deposit Insurance Assessments. FDICIA also requires the FDIC to
implement a risk-based assessment system in which the insurance premium relates
to the probability that the deposit insurance fund will incur a loss and directs
the FDIC to set semi-annual assessments in an amount necessary to increase the
reserve ratio of the Bank Insurance Fund (the "BIF") to at least 1.25% of
insured deposits or a higher percentage as determined to be justified by the
FDIC.
The FDIC has promulgated implementing regulations that base an institution's
risk category partly upon whether the institution is well capitalized ("1"),
adequately capitalized ("2") or less than adequately capitalized ("3"), as
defined under the Prompt Corrective Action Regulations described above. In
addition, each insured depository institution is assigned to one of three
"supervisory subgroups." Subgroup "A" institutions are financially sound
institutions with few minor weaknesses, subgroup "B" institutions demonstrate
weaknesses which, if not corrected, could result in significant deterioration
and subgroup "C" institutions are those as to which there is a substantial
probability that the FDIC will suffer a loss in connection with the institution
unless effective action is taken to correct the areas of weakness. Effective
December 1, 1992 the FDIC began notifying each institution of its assessment
risk classification and rate semi-annually. Prior to June 30, 1995, based on its
capital and supervisory subgroups, each BIF member institution was assigned an
annual FDIC assessment rate of between $0.23 and $0.31 per $100 of deposits.
On November 14, 1995, the FDIC Board of Directors voted to further reduce the
insurance premiums paid on deposits covered by the BIF. Under the new rate
structure, assessment rates were lowered by four cents per $100 of assessable
deposits for all risk categories, subject to the statutory requirement that all
institutions pay at least $2,000 annually for FDIC insurance. The new rate
structure retained the rate spread of from $0.00 to $0.27 per $100 of assessable
deposits between the highest- and lowest-rated institutions. Under the revised
rate structure, FPNB was assessed $33,000 and $1,000 for the first and second
halves, respectively, of 1996.
On September 30, 1996, President Clinton signed into law the Deposit Insurance
Funds Act of 1996, which includes provisions recapitalizing the Savings
Association Insurance Fund ("SAIF"), provides for the eventual merger of the
SAIF with the BIF and reallocates payment of the annual Financing Corp. ("FICO")
bond obligation. Effective January 1, 1997, SAIF members will have the same
risk-based assessment schedule as BIF members. All SAIF and BIF institutions,
including FPNB, will be responsible for sharing the cost of interest payments on
the FICO bonds. The cost will be an annualized charge of 1.3 basis points for
BIF deposits and 6.5 basis points for SAIF deposits.
On November 26, 1996, the FDIC Board of Directors voted to retain the existing
BIF assessment schedule for the first semiannual period of 1997 and to collect
an assessment against BIF-assessable deposits to be paid to FICO. In addition,
the FDIC eliminated the $2,000 minimum annual assessment and authorized the
refund of the
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fourth-quarter minimum assessment of $500 paid by certain BIF-insured
institutions on September 30, 1996. Under the revised rate structure, FPNB was
assessed $27,000 for the first half of 1997.
Memorandum of Understanding. On May 24, 1993, as a result of
supervisory concerns disclosed during the inspection of the Company by the FRB
in December, 1992, the Company entered into a Memorandum of Understanding with
the FRB (the "Memorandum"). The FRB conducted an inspection of FP Bancorp during
February 1996. Based on the results of this examination, the FRB terminated the
Memorandum effective April 18, 1996.
ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("Statement 121"). Statement 121 requires that long-lived assets and certain
identifiable intangibles to be held and used be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In addition, Statement 121 requires that long-lived
assets and certain identified intangibles to be disposed of be reported at the
lower of carrying amount or fair value less costs to sell. Statement 121 must be
adopted for financial statements for fiscal years beginning after December 15,
1995. The adoption of Statement 121 has not had a material impact on the
Company's results of operations or financial position.
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"), which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, Statement 123
also allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net earnings and pro forma net earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in Statement 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of Statement 123.
In June 1996, the FASB issued Statement of Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" ("Statement 125"). Statement 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996 and is to be applied prospectively. This statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. The adoption of Statement 125 is not expected to have a material
impact on the Company.
EMPLOYEES
As of December 31, 1996, the Company employed 155 persons full-time and 43
persons part-time. The Company's employees are not represented by a union or
covered by a collective bargaining agreement. Management believes that, in
general, its employee relations are excellent.
I-7
<PAGE> 11
ITEM 2. DESCRIPTION OF PROPERTIES.
The Company's headquarters are located at 613 West Valley Parkway in the
central financial district of Escondido, California. FPNB leases approximately
16,642 square feet of a three-story professional office building. The primary
office space has a 35-year lease term which commenced July 1, 1984 and provides
for various lease adjustments during its term. FPNB leases the facilities from a
partnership in which three of the members of the Board of Directors of FPNB are
partners. See "Item 12 - Certain Relationships and Related Transactions."
The Valley Center branch, located at 29124 Valley Center Road in Valley
Center, California, consists of a 3,023 square-foot single-story building owned
by FPNB.
The San Marcos branch, located at 879 San Marcos Boulevard in San Marcos,
California, consists of a 10,658 square-foot, free-standing two-story building
owned by FPNB.
FPNB leases its 2,680 square-foot Lake San Marcos branch, located at 1132 San
Marino Drive in the Lake San Marcos community of San Marcos, California, and is
responsible for maintenance of the premises and payment of personal and real
property taxes and utilities.
The Rancho Bernardo branch is located in a 7,398 square-foot building owned
by FPNB. The branch is located at 11717 Bernardo Plaza Court in San Diego,
California.
The Temecula Valley branch is located at 41615 Winchester Road in Temecula,
California and consists of an approximately 10,000 square-foot, two-story
building owned by FPNB.
The Rancho California Road branch is located at 30580 Rancho California Road
in Temecula, California, and consists of approximately 4,524 square feet in a
leased, single-story building.
The Moreno Valley branch of FPNB is located at 24525 Alessandro Boulevard in
Moreno Valley, California, and consists of approximately 6,450 square feet of
leased space.
All of the properties owned or leased by the Company are considered by
management to be well suited for a financial institution and are deemed adequate
to accommodate current needs, plus reasonable future expansion. The Company
maintains comprehensive general liability and casualty loss insurance covering
its properties and activities conducted in or about its properties. The Company
believes such insurance provides adequate protection for liabilities or losses
which might arise out of the ownership and use of such properties.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings other than
nonmaterial proceedings arising in the ordinary course of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
I-8
<PAGE> 12
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since September 18, 1995, the Common Stock has been traded on the Nasdaq
National Market System. The table below presents (i) the high and low bid prices
per share of the Common Stock quoted on the Nasdaq National Market System from
September 18, 1995 through December 31, 1996, (ii) the high and low bid prices
per share of the Common Stock quoted on the Nasdaq SmallCap Market from April
13, 1995 through September 17, 1995, and (iii) the high and low bid prices per
share of the Common Stock as reported by Western Financial Corporation prior to
April 13, 1995. The high and low bid prices of the Common Stock do not include
retail markups, markdowns or commissions and may not represent actual
transactions.
<TABLE>
<CAPTION>
MARKET PRICES
HIGH LOW
---- ---
<S> <C> <C> <C>
1996
Fourth Quarter $12.38 $9.25
Third Quarter $10.00 $8.50
Second Quarter $ 9.50 $8.25
First Quarter $ 9.00 $7.88
1995
Fourth Quarter $ 9.25 $7.88
Third Quarter $ 8.25 $5.38
Second Quarter $ 6.75 $5.13
First Quarter $ 5.75 $5.00
1994
Fourth Quarter $ 6.00 $5.00
Third Quarter $ 5.00 $4.50
Second Quarter $ 5.00 $4.75
First Quarter $ 5.00 $5.00
</TABLE>
As of December 31, 1996, the Company had 1,162 stockholders of record, as
shown on the records of its transfer agent, U.S. Stock Transfer Corporation. The
Company is aware of at least eight securities dealers which currently make a
market in the Common Stock.
DIVIDENDS
The principal source of FP Bancorp, Inc.'s revenues for the payment of
dividends is dividends from FPNB. Generally, the payment of dividends to the
Company by FPNB is limited to FPNB's current year's earnings, as defined in
Federal regulations, plus retained net earnings for the two preceding years.
Payment of dividends in excess of such amount requires prior Federal regulatory
approval. In addition to such limitations on dividend payments, the Comptroller
has authority to prohibit FPNB from paying dividends to FP Bancorp, Inc. if, in
the opinion of the Comptroller and notwithstanding the amount of current year
net earnings and retained net earnings for the two preceding years, the payment
of dividends would constitute an unsafe or unsound practice in light of the
overall financial condition of FPNB.
In addition to the foregoing regulatory restrictions, the Company's ability to
pay dividends is governed by the Delaware General Corporation Law (the "Delaware
Law"). The Delaware Law provides that a Delaware corporation, such as the
Company, may, unless otherwise restricted by its certificate of incorporation,
declare and pay dividends out of any surplus or, if no surplus exists, out of
net profits for the fiscal year in which the dividend is declared and the
preceding fiscal year, or both (provided that the amount of capital of the
corporation following
II-1
<PAGE> 13
the declaration and payment of the dividend is not less than the aggregate
amount of the capital represented by the issued and outstanding stock of all
classes having a preference upon the distribution of assets). The Delaware Law
also provides that a corporation may redeem or repurchase its shares out of
surplus. The ability of a Delaware corporation to pay dividends on or to redeem
or repurchase it shares is dependent on the financial status of the corporation
standing alone and not on a consolidated basis.
No dividends were paid by the Company during 1996, 1995 or 1994. Payment of
stock or cash dividends by the Company in the future will depend upon the
Company's earnings and financial condition and other factors deemed relevant by
the Company, including performance of FPNB and its ability to pay dividends.
FPNB has adopted a policy of approving dividends only in the event that after
payment and for the foreseeable future, FPNB's capital level will not be
adversely affected. The Company has adopted a similar policy with regard to
payment of cash dividends to stockholders. These standards may be greater than
any standard the regulatory agencies may impose. Under these policies, FPNB
would not be able to pay a dividend to the Company and the Company would not be
able to pay a dividend to its stockholders. It is the current intention of
management of the Company to follow a policy of retaining most of the Company's
earnings to increase its capital to support future growth. Accordingly, no
assurance can be given that any dividends will be declared by the Company in the
next few years.
The Debentures were issued under the terms of an Indenture dated November 9,
1992 (the "Indenture"), between the Company and Meridian Trust Company of
California, as Trustee. The Indenture provides that the Company will not (i)
declare or pay any dividend or make any distribution on the Common Stock or to
its stockholders (other than dividends or distributions payable in shares of the
Common Stock) or (ii) purchase, redeem or otherwise acquire or retire for value
any shares of the Common Stock or permit any subsidiary to purchase, redeem or
otherwise acquire or retire for value any shares of the Common Stock, if at the
time of such action, an Event of Default as defined in the Indenture shall have
occurred and be continuing or result therefrom.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
The following is management's discussion and analysis of the financial
condition and results of operations of the Company as of and for the years ended
December 31, 1996, 1995 and 1994. The discussion should be read in conjunction
with the Company's consolidated financial statements and notes thereto. See
"Item 7. Financial Statements."
OVERVIEW
The Company reported net earnings for 1996 of $4,208,000 or $1.42 per share
as compared to net earnings of $1,911,000 or $0.72 per share in 1995. The
increase in net earnings of $2,297,000 or 120.20% was primarily due to (i)
increased income and efficiencies resulting from the acquisition of RB Bancorp,
(ii) a reduction in nonperforming assets, (iii) improved credit quality, (iv)
continued cost control efforts related to noninterest expenses and (v) the
beneficial tax position of the Company during the year. The Company's return on
average assets and return on average stockholders' equity were 1.58% and 22.38%,
respectively, for the year ended December 31, 1996, as compared to .95% and
12.98%, respectively, for the year ended December 31, 1995.
The Company reported net earnings for 1995 of $1,911,000 or $0.72 per share
as compared to net earnings of $332,000 or $0.26 per share in 1994. The increase
in net earnings of $1,579,000 or 475.60% was primarily due to (i) a significant
reduction in nonperforming assets, (ii) improved credit quality, (iii) increased
income and efficiencies resulting from the acquisition of Overland Bank, (iv)
continued cost control efforts related to noninterest expenses and (v) the
beneficial tax position of the Company during the year. The Company's return on
average assets and return on average stockholders' equity were .95% and 12.98%
for the year ended December 31, 1995 as compared to .20% and 4.36% for the year
ended December 31, 1994.
II-2
<PAGE> 14
RESULTS OF OPERATIONS
Net Interest Income. Net interest income, the most significant
component of the Company's net earnings, is the amount by which the interest and
fees generated from loans and other earning assets exceeds the expense
associated with funding those assets. Net interest income depends upon the
difference between the gross interest and fees earned on the Company's loan and
investment portfolios ("interest-earning assets") and the amounts paid on its
deposits and borrowings ("interest-bearing liabilities"), and the relative
amounts and composition of its interest-earning assets and interest-bearing
liabilities. Management has contributed to the profitability and improved
operations of the Company by managing its mix of assets and liabilities to
increase net interest income.
Net interest income increased $3,605,000 or 29.74% to $15,726,000 for the year
ended December 31, 1996 from $12,121,000 for the year ended December 31, 1995.
The rate earned on interest-earning assets in 1996 decreased to 9.51% from 9.80%
in 1995, due the effect of a net decrease in interest rates implemented by the
FRB during those two years. The rate paid on interest-bearing liabilities
remained relatively stable at 3.38% in 1996 and 3.35% in 1995. Average loans
outstanding in 1996 were $184,669,000, which earned interest at a rate of 10.33%
as compared to average loans outstanding of $136,425,000 which earned a rate of
10.89% during 1995. The average amount of all other interest-earning assets,
including primarily investment securities and Federal funds sold, was
$49,184,000 during 1996 which earned interest at a rate of 6.43% as compared to
an average amount of $37,776,000 which earned interest at a rate of 5.89% during
1995. Average interest-bearing liabilities for 1996 were $192,952,000 as
compared to average interest-bearing liabilities of $147,799,000 for the year
ended December 31, 1995.
Net interest income increased $2,548,000 or 26.62%, to $12,121,000 for the
year ended December 31, 1995 from $9,573,000 for the year ended December 31,
1994. The rate earned on interest-earning assets in 1995 increased to 9.80% from
9.06% in 1994. The rate paid on interest-bearing liabilities increased to 3.35%
in 1995 from 2.47% in 1994. These increases were due primarily to higher average
interest rates during 1995 as compared to 1994 as a result of numerous changes
in rates implemented by the FRB during those two years. Average loans
outstanding in 1995 were $136,425,000 which earned interest at the rate of
10.89% as compared to average loans outstanding of $113,053,000 which earned
interest at a rate of 10.05% in 1994. The average amount of all other
interest-earning assets, including primarily investment securities and Federal
funds sold, was $37,776,000 during 1995 which earned interest at a rate of 5.89%
as compared to an average balance of other interest-earning assets of
$27,330,000 which earned interest at a rate of 4.95% during 1994. Average
interest-bearing liabilities for 1995 were $147,799,000 as compared to an
average balance of interest-bearing liabilities of $127,106,000 during 1994.
Net interest income, when expressed as a percentage of average total
interest-earning assets, is referred to as "net interest margin." The Company's
net interest margin for the year ended December 31, 1996 was 6.72% as compared
to 6.96% for the year ended December 31, 1995 and 6.82% for the year ended
December 31, 1994.
II-3
<PAGE> 15
The following table presents the major categories of interest-earning
assets, interest-bearing liabilities and stockholders' equity with corresponding
average balances, related interest income or expense and resulting yields and
rates for the periods indicated.
<TABLE>
<CAPTION>
ANALYSIS OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
YEAR'S ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------------------------------------------------------------------------------
AVERAGE INTEREST RATE AVERAGE INTEREST RATE AVERAGE INTEREST RATE
AMOUNT INCOME/ EARNED/ AMOUNT INCOME/ EARNED/ AMOUNT INCOME/ EARNED/
OUTSTANDING EXPENSE PAID OUTSTANDING EXPENSE PAID OUTSTANDING EXPENSE PAID
----------- ------- ---- ----------- ------- ---- ----------- ------- ----
(1) (1) (1)
--- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans(2)(3) $184,669 $19,082 10.33% $136,425 $14,851 10.89% $113,053 $11,364 10.05%
Taxable investment
securities 39,062 2,650 6.78% 29,995 1,783 5.94% 23,562 1,185 5.03%
Nontaxable investment
securities 0 0 0.00% 0 0 0.00% 741 45 6.07%
Interest-earning
deposits 110 6 5.45% 341 19 5.57% 98 4 4.08%
Federal funds sold 10,012 505 5.04% 7,440 422 5.67% 2,929 120 4.10%
------- ------ ----- ------- ------ ----- ------- ------
Total interest-earning
assets 233,853 22,243 9.51% 174,201 17,075 9.80% 140,383 12,718 9.06%
Other assets:
Cash and due from banks 18,697 14,069 13,023
Other assets, net 13,471 12,670 10,365
-------- -------- --------
Total Assets $266,021 $200,940 $163,771
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Deposits:
Savings and time $84,522 3,862 4.57% $63,068 2,903 4.60% $47,811 1,444 3.02%
Interest-bearing demand
and money market 103,442 2,148 2.08% 80,100 1,564 1.95% 74,695 1,216 1.63%
------- ----- ------ ------- ----- ------ ------- ----- ------
Total interest-bearing
deposits 187,964 6,010 3.20% 143,168 4,467 3.12% 122,506 2,660 2.17%
Debentures, Federal funds
purchased and Securities
sold under agreement to
purchase 4,988 507 10.16% 4,631 487 10.52% 4,600 485 10.54%
------- ----- ------ ------- ----- ------ ------- ----- ------
Total interest-bearing
liabilities 192,952 6,517 3.38% 147,799 4,954 3.35% 127,106 3,145 2.47%
----- ----- -----
Noninterest-bearing
demand deposits 52,920 37,225 27,775
Other liabilities 1,350 1,420 1,278
Stockholders' equity 18,833 14,717 7,763
Receivable from ESOP and
unrealized net gain
(loss) on investment
securities available for
sale (34) (221) (151)
-------- -------- --------
Total Liabilities and
Stockholders' Equity $266,021 $200,940 $163,771
======== ======== ========
Net interest income $15,726 $12,121 $9,573
======= ======= ======
Net interest margin(4) 6.72% 6.96% 6.82%
- ---------------
</TABLE>
(1) Averages are daily averages.
(2) Loan interest income includes accretion of loan fees of $728,000,
$452,000, and $1,249,000 for the years 1996, 1995 and 1994, respectively.
(3) For the purpose of these computations, nonaccrual loans are included in
average loans.
(4) The net interest margin is calculated by dividing net interest income by
average total interest-earning assets.
II-4
<PAGE> 16
As discussed above, the Company's net interest income is affected by the
change in the amount and mix of interest-earning assets and interest-bearing
liabilities, referred to as "volume change," as well as by changes in yields
earned on interest-earning assets and rates paid on deposits and other borrowed
funds, referred to as "rate changes." The following table presents, for the
periods indicated, a summary of changes in interest income and interest expense
for the major categories of interest-earning assets and interest-bearing
liabilities and the amounts of change attributable to variations in volumes and
rates.
RATE/VOLUME ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1996 COMPARED TO 1995 1995 COMPARED TO 1994
INCREASE (DECREASE) INCREASE (DECREASE)
-----------------------------------------------------------------------------
VOLUME RATE NET VOLUME RATE NET
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
Interest earned on interest-earning assets:
Loans(1) ................................ $ 5,254 $(1,023) $ 4,231 $ 2,349 $ 1,138 $ 3,487
Taxable investment
securities ............................ 539 328 867 324 274 598
Nontaxable investment
securities ............................ 0 0 0 (45) 0 (45)
Interest-earning deposits ............... (13) 0 (13) 10 5 15
Federal funds sold ...................... 146 (63) 83 185 117 302
------- ------- ------- ------- ------- -------
Total Interest Earned on
Interest-earning Assets ................. $ 5,926 $ (758) $ 5,168 $ 2,823 $ 1,534 $ 4,357
======= ======= ======= ======= ======= =======
Interest paid on interest-bearing
liabilities:
Interest-bearing deposits:
Savings and time ...................... $ 987 $ (28) $ 959 $ 461 $ 998 $ 1,459
Interest-bearing demand ............... 455 129 584 88 260 348
------- ------- ------- ------- ------- -------
Total interest-bearing deposits ......... 1,442 101 1,543 549 1,258 1,807
Debentures, Federal funds
purchased and securities sold
under agreement to repurchase ......... 0 20 20 3 (1) 2
------- ------- ------- ------- ------- -------
Total Interest Paid on
Interest-bearing Liabilities ............ $ 1,442 $ 121 $ 1,563 $ 552 $ 1,257 $ 1,809
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Nonaccrual loans are included in the loan totals used in the calculation of
this table.
Provision for Loan Losses. The provision for loan losses is based
upon the Company's evaluation of the quality of the loan portfolio, total
outstanding and committed loans, previous loan losses and current and
anticipated economic conditions. In making its evaluation, the Company takes
into account the results of regulatory examinations of FP Bancorp, Inc. and
FPNB, which can be expected to occur at least once each year. The amount of the
provision for loan losses is a charge against earnings. Actual loan losses are
charged against the allowance for loan and lease losses (the "ALLL").
The Company's ALLL is typically maintained at a level deemed adequate to
provide for known and inherent losses in the loan portfolio. No assurance can be
given that unforeseen adverse economic conditions or other circumstances will
not result in increased ALLL provisions in the future. Additionally, regulatory
examiners may require the Company to recognize additions to the ALLL based upon
their judgment about information available to them at the time of their
examinations.
II-5
<PAGE> 17
The provisions for loan losses for the years ended December 31, 1996, 1995 and
1994 were $700,000, $600,000, and $0, respectively. The increases in 1996 and
1995 were a result of the increase in loans during those years. No provision was
recorded during 1994 as a result of a decrease in loan charge-offs, problem
loans, improved credit quality, aggressive collection efforts resulting in
higher recoveries and a revised and improved loan approval and management system
put into place late in 1993.
The ALLL was $3,121,000 or 1.46% of total loans as of December 31, 1996 as
compared to $2,013,000 or 1.40% of total loans as of December 31, 1995. See
"Allowance for Loan and Lease Losses."
Other Operating Income. Total other operating income for the year
ended December 31, 1996 increased $353,000 or 19.55% to $2,159,000 from
$1,806,000 in 1995. The increase was primarily a result of an increase in
service charges and other fees resulting from deposit relationships acquired in
the RB Merger and the Company's internal growth in deposits during the year.
Total other operating income for the year ended December 31, 1995 increased
$492,000 or 37.44% to $1,806,000 from $1,314,000 in 1994. The increase was
primarily a result of an increase in service charges and other fees resulting
from the deposit relationships acquired in the Overland Merger and the Company's
internal growth in deposits during the year.
Other Operating Expenses. Total other operating expenses for the
year ended December 31, 1996 increased $1,655,000 or 13.52% to $13,899,000 from
$12,244,000 for 1995. The largest component of the increase occurred in salaries
and employee benefits, which increased $1,094,000 or 19.82% primarily due to the
acquisition of RB Bancorp and the opening of two new branches during 1996. For
the same reasons, occupancy expense increased $237,000 or 20.36% and furniture
and equipment expense increased $274,000 or 32.70%. Additional amortization of
goodwill in 1996 resulting from the RB Merger was $175,000 or an increase of
218.75% over 1995. Conversely, net other real estate owned ("OREO") expense
decreased by $237,000 or 31.81% due to a significant decrease in OREO balances
during 1996. The FDIC assessment also decreased significantly, from $252,000 to
only $34,000, a decrease of $218,000 or 86.51%, as a result of a restructuring
of FDIC assessment rates effective in 1996. The balance of other noninterest
expenses increased $330,000 or 9.06% as a result of the Company's growth, offset
by continued cost-cutting measures taken during 1996.
Total other operating expenses for the year ended December 31, 1995 increased
$1,689,000 or 16.00% to $12,244,000 from $10,555,000 in 1994. The increase was a
result of the Company's growth accomplished by the Overland Merger, offset by
continued cost-cutting measures in the area of noninterest expenses. Salaries
and employee benefits increased $835,000 or 17.82%, professional services
expense increased $130,000 or 7.60%, and net other real estate owned expense
increased $120,000 or 19.20% for the year ended December 31, 1995 as compared to
the same period in 1994. Conversely, occupancy expense decreased $160,000 or
12.08% and the FDIC assessment decreased $192,000 or 43.24% for the year ended
December 31, 1995 as compared to the same period in 1994. The Company recorded a
loss on the sale of investment securities of $158,000 and amortization of
goodwill of $80,000 during 1995, for which there were no comparable expenses in
1994. The balance of other noninterest expenses increased $718,000 or 40.66%,
primarily in the area of additional promotional activities of the Company and
other operating expenses related to the Company's growth during 1995.
Income Taxes. The Company realized net income tax benefits of
$922,000 and $828,000 for the years ended December 31, 1996 and 1995,
respectively, compared to no income tax benefit or expense for the year ended
December 31, 1994. The net income tax benefit in 1996 consisted of a net
increase of $1,320,000 in the net deferred tax asset which was offset by current
income taxes of $152,000 and a credit to goodwill of $246,000. Management
believes that the realization of the recognized deferred tax asset is more
likely than not, based on the expectation that the Company will generate the
necessary amount of taxable income in future periods.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
Effective asset/liability management includes maintaining adequate liquidity
and minimizing the impact of future interest rate changes on net interest
income. The responsibility for monitoring the Company's liquidity and
II-6
<PAGE> 18
the sensitivity of its interest-earning assets and interest-bearing liabilities
lies with the executive committee of FPNB which meets each week to review
liquidity, investment strategies, loan demand and the adequacy of funding
sources.
Cash Flows. The Company uses or is provided with cash flows from its
operating, investing and financing activities. Cash flows of FPNB are primarily
used to fund loans and are provided by the deposits and borrowings of FPNB.
The Company's operating activities for the year ended December 31, 1996
resulted in net cash provided of $5,156,000 primarily due to net earnings of
$4,208,000 adjusted for depreciation and amortization of $1,249,000, a provision
for loan losses of $700,000 and a provision for losses on OREO of $409,000.
These cash flows were offset by a benefit for deferred taxes of $922,000 and an
increase in other assets and other liabilities of $713,000. The Company's
operating activities for the year ended December 31, 1995 resulted in net cash
provided of $2,110,000 primarily due to net earnings of $1,911,000 adjusted for
depreciation and amortization of $943,000, a provision for loan losses of
$600,000 and a provision for losses on OREO of $537,000. These cash flows were
offset by a benefit for deferred taxes of $828,000 and an increase in other
assets and other liabilities of $1,237,000. This compares to net cash provided
of $1,861,000 for the year ended December 31, 1994 primarily due to net earnings
of $332,000 adjusted for depreciation and amortization of $878,000 and a
provision for losses on OREO of $455,000.
The Company's cash flows from investing activities used net cash of
$39,234,000 for the year ended December 31, 1996 compared to net cash provided
of $7,218,000 for the same period in 1995. Cash was used primarily to fund loans
in the amount of $27,886,000 and for net investment securities purchases in the
amount of $18,736,000. In addition, net cash of $5,302,000 was acquired in the
RB Bancorp Merger and proceeds from the sale of OREO during the year were
$2,464,000. The Company's cash flows from investing activities provided net cash
of $7,218,000 for the year ended December 31, 1995 compared to net cash used of
$4,053,000 for the same period in 1994. The significant increase in net cash
provided by investing activities was due to cash acquired from the Overland
Merger of $5,366,000, a decrease in loans outstanding of $1,705,000, and
proceeds from the sale of OREO of $6,107,000, offset by a net increase from the
purchase of and proceeds from the sale of investment securities available for
sale of $9,782,000.
Net cash provided by financing activities for the year ended December 31, 1996
was $40,704,000 as compared to net cash used of $2,662,000 for the year ended
December 31, 1995. The net increase in interest-bearing and noninterest-bearing
deposits was $23,937,000 and there was an increase in Federal funds purchased
and other borrowings of $16,572,000 during 1996. Net cash used in financing
activities for the year ended December 31, 1995 was $2,662,000 compared to net
cash used of $727,000 for the same period in 1994. The net cash used in 1995 was
a result of a decrease in Federal funds purchased of $2,800,000.
Liquidity. The objective of liquidity management is to maintain a
balance between sources and uses of funds in such a way that the cash
requirements of customers for loans and deposit withdrawals are met in the most
economical manner. Management of FPNB monitors its liquidity position
continuously in relation to trends of loans and deposits for short-term as well
as long-term requirements. Liquid assets are monitored on a daily basis to
assure maximum utilization. Management of FPNB also manages its liquidity
requirements by maintaining an adequate level of readily marketable assets and
access to short-term funding sources. This is primarily accomplished through
investing in obligations of U.S. Government agencies, various low-risk
mortgage-backed securities and overnight Federal funds sold.
The Company defines liquid assets as cash and due from banks, overnight
Federal funds sold, interest-earning deposits, and investment securities
available for sale. The Company's ratios of liquid assets to deposits and
short-term borrowings was 25.00% as of December 31, 1996 as compared to 23.63%
as of December 31, 1995 and 12.17% as of December 31, 1994. The Company's ratios
of liquid assets to deposits and short-term borrowings increased to 23.63% as of
December 31, 1995 from 12.17% as of December 31, 1994 as a result of liquid
assets acquired in the Overland Merger and the reclassification of $8,450,000
from investment securities held to maturity
II-7
<PAGE> 19
to investment securities available for sale on December 31, 1995, in accordance
with a one-time provision allowed by the FASB under Statement 115. See
"Investment Portfolios."
The Company's overall liquidity position is enhanced by a sizable
concentration of total deposits less certificates of deposit of $100,000 or more
("Core Deposits") which management believes provides a stable and relatively
inexpensive funding base. Average Core Deposits totaled $216,928,000 or 90.05%
of average deposits as of December 31, 1996 compared to $165,176,000 or 91.56%
of average deposits as of December 31, 1995 and $141,027,000 or 93.84% of
average deposits as of December 31, 1994.
Other than the investment securities portfolios (see "Investment Portfolios"),
the Company sells excess funds as overnight Federal funds sold to provide an
immediate source of liquidity. There were no Federal funds sold as of December
31, 1996. Federal funds sold were $2,000,000 as of December 31, 1995 and there
were no Federal funds sold as of December 31, 1994.
The level of deposits may fluctuate significantly due to seasonal business
cycles of depository customers. Similarly, the level of demand for loans may
vary significantly and at any given time may increase or decrease substantially.
However, unlike the level of deposits, management has more direct control over
lending activities and maintains the level of those activities according to the
amounts of available funds.
As of December 31, 1996, FPNB had lines of credit in the amount of $7,000,000
from correspondent banks which are renewable annually. FPNB also had a credit
line with the Federal Home Loan Bank, which would allow FPNB to borrow up to
$11,000,000. In addition, FPNB had a $10,000,000 reverse repurchase agreement
line with an investment broker, of which $4,950,000 was outstanding as of
December 31, 1996. The availability of the lines of credit, as well as
adjustments in deposit programs, provides for liquidity in the event that the
level of deposits should fall abnormally low. These sources provide that funding
thereof may be withdrawn depending upon the financial strength of FPNB.
FP Bancorp's operations consist primarily of regulatory reporting, raising
capital and planning business strategies. In recent years, FP Bancorp's primary
source of liquidity has been the proceeds from two private offerings completed
in November of 1994, which raised net proceeds of approximately $3,034,000 (the
"Private Offerings"). FP Bancorp's current liquidity is sufficient to permit it
to operate as it has in the past, including full coverage of interest payments
on the Debentures. A dividend from FPNB would be received by FP Bancorp in the
event that cash payments to holders of Debentures is required and cash available
at FP Bancorp is not sufficient to cover such payments. See "Capital Resources."
INTEREST RATES
While no single measure can completely identify the impact of changes in
interest rates on net interest income, one gauge of interest rate sensitivity is
to measure, over a variety of time periods, the differences in the amounts of
the Company's rate-sensitive assets and rate-sensitive liabilities. These
differences or "gaps" provide an indication of the extent to which net interest
income may be affected by future changes in interest rates. A "positive gap"
exists when rate-sensitive assets exceed rate-sensitive liabilities and
indicates that a greater volume of assets than liabilities will reprice during a
given period. This mismatch may enhance earnings in a rising interest rate
environment and may inhibit earnings in a declining interest rate environment.
Conversely, when rate-sensitive liabilities exceed rate-sensitive assets,
referred to as a "negative gap," it indicates that a greater volume of
liabilities than assets will reprice during the period. In this case, a rising
interest rate environment may inhibit earnings and a declining interest rate
environment may enhance earnings. The cumulative one-year contractual gap as of
December 31, 1996 was $(59,491,000), representing (21.79%) of interest-earning
assets.
II-8
<PAGE> 20
The following table presents the Company's contractual gap position as of
December 31, 1996.
CONTRACTUAL GAP POSITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
IMMEDIATELY
ADJUSTABLE 1 DAY
OR 1 DAY THROUGH 4 THROUGH 7 THROUGH OVER 12
MATURITY 3 MONTHS 6 MONTHS 12 MONTHS MONTHS TOTAL
-------- -------- -------- --------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Investments available for sale ............ $ 0 $ 0 $ 0 $ 0 $ 47,405 $ 47,405
Investments held to maturity .............. 0 0 0 0 9,279 9,279
Loans(1)
Installment ............................. 5,402 10 26 311 6,622 12,371
Real estate equity lines of credit ...... 9,626 0 0 0 0 9,626
Long-term real estate ................... 4,678 0 0 0 1,073 5,751
Other ................................... 126,389 4,647 3,251 8,728 45,539 188,554
-------- -------- -------- -------- -------- --------
Total interest-earning assets ............... $146,095 $ 4,657 $ 3,277 $ 9,039 $109,918 272,986
======== ======== ======== ======== ========
Other noninterest-earning assets ............ 35,599
--------
Total Assets ................................ $308,585
========
LIABILITIES
Interest-bearing liabilities:
Demand deposits ........................... $115,100 $ 0 $ 0 $ 0 $ 0 $115,100
Savings accounts .......................... 17,366 0 0 0 0 17,366
Certificates of deposit ................... 1,320 31,402 22,285 13,759 3,748 72,514
Debentures ................................ 0 0 0 4,575 0 4,575
Federal funds purchased and securities sold
under agreement to repurchase ........... 0 16,752 0 0 0 16,752
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities .......... $133,786 $ 48,154 $ 22,285 $ 18,334 $ 3,748 226,307
======== ======== ======== ======== ========
Noninterest-bearing deposits ................ 59,541
Other liabilities ........................... 1,759
Stockholders' equity ........................ 20,978
--------
Total Liabilities & Stockholders'
Equity .................................... $308,585
========
Interest rate sensitivity gap ............... $ 12,309 $(43,497) $(19,008) $ (9,295) $106,170
Cumulative interest rate
sensitivity gap ........................... $ 12,309 $(31,188) $(50,196) $(59,491) $ 46,679
Cumulative interest rate sensitivity gap
as a percent of interest-earning assets ... 4.51% (11.42%) (18.39%) (21.79%) 17.10%
</TABLE>
- ---------------
(1) Loan balances include nonaccrual loans of $1,374,000 as of December 31,
1996.
The Company actively manages its interest rate gap position. The objectives
of interest rate risk management are to control exposure of net interest income
to risks associated with interest rate movements, achieve consistent growth in
net interest income, and profit from favorable market opportunities. The Company
manages its rate gap position by adjusting the repricing characteristics of its
assets and liabilities. However, even with perfectly matched repricing of assets
and liabilities, interest rate risk cannot be avoided entirely. Interest rate
risk remains in the form of prepayment risk of assets or liabilities and risks
related to differences in the timing and indices for interest rate adjustments
for assets and liabilities with adjustable interest rates.
II-9
<PAGE> 21
INVESTMENT PORTFOLIOS
The Company invests funds not used for capital expenditures or lending
purposes in U.S. Government agency bonds, step up bonds, and mortgage-backed
securities, and may also purchase tax-exempt municipal bonds or certificates of
deposit. Obligations of U.S. Government agencies include Treasury notes,
callable or noncallable agency bonds and step up bonds which have no risk as to
loss of principal. Mortgage-backed securities include collateralized mortgage
obligations and mortgage-backed security pools with balloon principal payments.
The collateralized mortgage obligations in the Company's investment securities
portfolios are "low risk" as defined by applicable bank regulations and are
diverse as to collateral and interest rates of the underlying mortgages. The
mortgage-backed securities are diverse as to interest rates and guarantors.
Investment maturities range from less than one year to over ten years for U.S.
Government agency bonds, step up bonds and mortgage-backed securities.
Investment securities available for sale as of December 31, 1996 were
$47,405,000, an increase of $19,824,000 or 71.88% from $27,581,000 as of
December 31, 1995. The increase was primarily due to $43,244,000 in purchases,
offset by the sale of $21,702,000 in securities and maturities of $4,504,000.
Investment securities held to maturity increased to $9,279,000 as of December
31, 1996 from $7,753,000 as of December 31, 1995, an increase of $1,526,000 or
19.68%, primarily due to purchases of $1,997,000 offset by maturities of
$446,000.
In November 1995, the FASB issued a special report called "A Guide to
Implementation of Statement 115 in Accounting for Certain Investments in Debt
and Equity Securities" (the "Guide"). In accordance with the provisions of the
Guide, the Company elected to reclassify certain of its investment securities
from held to maturity to available for sale. On December 31, 1995, the Company
reclassified $8,450,000 from investment securities held to maturity to
investment securities available for sale.
Investment securities available for sale as of December 31, 1995 were
$27,581,000, an increase of $19,389,000 or 236.68% from $8,192,000 as of
December 31, 1994. The increase was primarily due to $8,450,000 of securities
reclassified from investment securities held to maturity to investment
securities available for sale, $24,859,000 in purchases, $3,814,000 acquired
through the Overland Merger and an increase in the unrealized gain of $799,000,
offset by the sale of $15,077,000 in securities and maturities of $3,215,000.
The table below presents the composition of the Company's investment
portfolios as of the dates indicated.
INVESTMENT PORTFOLIOS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1996 1995 1994
------------------ ------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ----- --------- ----- --------- ------
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Obligations of U.S. Government
agencies.............................. $ 9,989 $10,062 $11,285 $11,379 $3,127 $2,956
Step up bonds........................... 0 0 0 0 2,606 2,435
Mortgage-backed securities ............. 35,223 35,256 15,472 15,662 2,629 2,456
Equity bank stock ...................... 2,087 2,087 540 540 345 345
------- ------- ------- ------- ------ ------
Total Available for Sale ............... $47,299 $47,405 $27,297 $27,581 $8,707 $8,192
======= ======= ======= ======= ====== ======
HELD TO MATURITY:
Obligations of U.S. Government
agencies.............................. $1,000 $ 995 $ 0 $ 0 $ 5,601 $ 5,146
Step up bonds........................... 997 997 0 0 2,001 1,941
Mortgage-backed securities ............. 7,079 6,978 7,549 7,441 7,863 7,130
Corporate notes......................... 203 211 204 218 0 0
------ ------ ------ ------ ------- -------
Total Held to Maturity ................. $9,279 $9,181 $7,753 $7,659 $15,465 $14,217
====== ====== ====== ====== ======= =======
</TABLE>
II-10
<PAGE> 22
The following table presents the maturity distribution based on fair value or
amortized cost of the investment portfolios as of the dates indicated.
INVESTMENT PORTFOLIOS -- MATURITY DISTRIBUTION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
FAIR
VALUE YIELD
----- -----
<S> <C> <C>
AVAILABLE FOR SALE:
Obligations of U.S. Government agencies:
Five years through ten years ......... $ 9,055 7.55%
Over ten years ....................... 1,007 8.00%
Mortgage-backed securities ............. 35,256 7.69%
Equity bank stock(1) ................... 2,087 6.00%
-------
Total Available for Sale ............... $47,405
=======
HELD TO MATURITY:
Obligations of U.S. Government agencies:
After five years through ten years ... $ 995 7.04%
Over ten years ....................... 997 6.53%
Mortgage-backed securities ............. 6,978 5.65%
Corporate notes:
After one year through five years .... 211 8.01%
-------
Total Held to Maturity ................. $ 9,181
=======
</TABLE>
- ---------------
(1) Equity bank stock has no maturity.
LOAN PORTFOLIO
The Company's net loans were $210,876,000 as of December 31, 1996, an increase
of $68,946,000 or 48.58% from $141,930,000 as of December 31, 1995. The RB
Merger accounted for $42,498,000 of the increase. In October 1996, the Company
purchased $6,800,000 of net real estate loans in a note pool purchase. The
balance of the increase was attributable to a net increase in new loan fundings
of $19,648,000 or 13.84% during the year.
The Company's ratio of net loans to total deposits was 79.72% as of December
31, 1996. Typically, the Company maintains a ratio of loans to total deposits of
between 70% and 85%. The loan portfolio primarily consists of commercial and
real estate loans (including real estate term loans, construction loans and
other loans secured by real estate). However, the Company adjusts its mix of
lending and the terms of its loan programs according to market conditions and
other factors. As presented in the table below, the mix of loans within the
portfolio has changed from December 31, 1995 to December 31, 1996 with an
increase in the percentage of construction loans in the portfolio as a result of
the RB Merger. The Company's loans are typically made to businesses and
individuals located within the Company's market area, most of whom have account
relationships with FPNB. There is no concentration of loans exceeding 10% of
total loans which is not disclosed in the categories presented below. The
Company has not made any loans to foreign governments, banks, businesses or
individuals. Commercial, real estate and construction loans in the Company's
portfolio are primarily variable rate loans and have little interest rate risk.
II-11
<PAGE> 23
The table below presents the composition of the Company's loan portfolio as of
the dates indicated.
LOAN PORTFOLIO(1)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial $ 80,894 $ 62,867 $ 60,252 $ 62,629 $ 49,993
Real Estate 108,530 68,448 48,391 43,436 62,175
Construction 14,507 6,204 9,795 6,192 21,707
Installment 12,371 7,515 2,739 4,499 7,639
-------- -------- -------- -------- --------
Total Loans $216,302 $145,034 $121,177 $116,756 $141,514
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Loans are not net of ALLL, deferred loan fees and discounts of $5,426,000,
$3,104,000, $2,994,000, $4,282,000 and $5,393,000 as of December 31, 1996,
1995, 1994, 1993 and 1992, respectively.
Commercial Loans. Commercial loans accounted for 37.40% of the
Company's loan portfolio as of December 31, 1996. Such loans are generally made
to provide operating lines of credit, to finance the purchase of inventory or
equipment, and for other business purposes. Commercial loans are primarily made
at rates that adjust with changes in the prevailing prime interest rate, are
generally made for a maximum term of one year (unless they are term loans), and
generally require interest payments to be made monthly. Typically, loans over
one year require monthly principal and interest payments. The creditworthiness
of the borrower is reviewed, analyzed, and evaluated on a periodic basis. Most
commercial loans are collateralized with business assets such as accounts
receivable, inventory, and equipment. Even with substantial collateralization
such as all the assets of the business and personal guarantees, commercial
lending involves considerable risk of loss in the event of a business downturn
or failure of the business.
Real Estate Loans. Real estate loans accounted for 50.17% of the
Company's loan portfolio as of December 31, 1996. Real estate term lending,
especially lending secured by vacant land, involves risks that real estate
values in general will fall and that the value of the particular real estate
security for a loan will fall. The Company makes commercial and industrial real
estate term loans that are typically secured by a first trust deed. These loans
are generally made for a maximum of five years, typically with a floating
interest rate based on the prevailing prime interest rate, or with a fixed rate
of interest, and with a 15- to 30-year payment amortization. Such loans are
usually made for a maximum of 75% of the appraised value of the collateral.
Construction Loans. Construction loans accounted for 6.71% of the
Company's loan portfolio as of December 31, 1996. Most construction loans are
made to individuals for the purpose of financing the construction of residences
they intend to occupy upon completion of construction. Other construction loans
are primarily made to owners of property who will use the proceeds to build or
develop property for sale upon completion of construction. Construction loans
are generally provided for a maximum of 80% of the appraised value of the
collateral for terms of up to 18 months at floating interest rates based on the
prevailing prime interest rate. Construction loans are provided to customers who
have a demonstrated financial ability to complete the project being financed, a
cash investment in the project, cash flow sufficient to service the debt and
strong financial stability and integrity in the judgment of management. The
borrower is usually prequalified for long-term financing at the time the
construction loan is evaluated. Construction lending differs from other types of
real estate lending because of uncertainties inherent in estimating construction
costs, the length of the construction period, the market for the project upon
completion and, in the case of a property intended for sale or rent, the time
for lease-up or sale. If permanent financing is not obtained by the borrower or
construction is not completed, the risk of default rises. Construction lending
also involves risks that real estate values in general will fall and that the
value of the particular real estate security for a loan will fall.
Installment Loans. Installment loans accounted for 5.72% of the
Company's loan portfolio as of December 31, 1996. The Company's installment
loans are primarily for vehicle and aircraft purchases, home
II-12
<PAGE> 24
improvement and personal loans. Vehicle financing involves the risk that
collateral will decline in value faster than the balance of the loan it secures.
Loan Maturity and Interest Rate Sensitivity. The following table
presents the maturity of commercial, real estate, construction and installment
loans outstanding as of December 31, 1996, indicated according to contract
terms.
LOAN MATURITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WITHIN ONE ONE TO FIVE AFTER FIVE
YEAR YEARS YEARS TOTAL
---- ----- ----- -----
<S> <C> <C> <C> <C>
Commercial ............. $34,670 $24,490 $ 21,734 $ 80,894
Real Estate ............ 23,573 51,584 33,373 108,530
Construction ........... 10,597 1,683 2,227 14,507
Installment ............ 1,791 6,011 4,569 12,371
------- ------- -------- --------
$70,631 $83,768 $ 61,903 $216,302
======= ======= ======== ========
</TABLE>
The following table presents the interest rate sensitivity of loans maturing
after one year as of December 31, 1996.
INTEREST RATE SENSITIVITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
Fixed interest rates.............................. $ 56,466
Variable interest rates .......................... 89,205
--------
Total Loans Maturing After One Year ......... $145,671
========
</TABLE>
Nonperforming Assets. Interest on loans is normally accrued from the
date a disbursement is made and recognized as income as it is accrued.
Generally, the Company reviews any loan on which payment has not been made for
90 days for potential nonaccrual. The loan is examined and the collateral is
reviewed to determine loss potential. If the loan is placed on nonaccrual, any
prior accrued interest which remains unpaid is reversed. Classification of a
loan as nonaccrual does not necessarily mean that the loan will be charged off
in the future. The $1,374,000 of loans classified as nonaccrual on December 31,
1996 primarily consisted of $614,000 in loans secured by real estate and
$675,000 in commercial loans. The balance of the nonaccruals were in installment
and other types of loans. The amount of interest income on nonaccrual and
restructured loans that are deemed to be fully collectable is included in net
earnings or loss for the years ended December 31, 1996, 1995 and 1994 in the
amounts of $65,000, $49,000 and $207,000, respectively.
The Company has established a monitoring system for its loans in order to
identify potential problem loans and to permit the periodic evaluation of
impairment and the adequacy of ALLL in a timely manner. Impaired loans included
in the Company's loan portfolio as of December 31, 1996 and 1995 were $2,506,000
and $1,449,000, respectively, which had aggregate specific related allowance
amounts of $358,000 and $173,000, respectively. The measurement of impairment
may be based on (i) the present value of the expected future cash flows of the
impaired loan discounted at the loan's original effective interest rate, (ii)
the observable market prices of the impaired loan, or (iii) the fair value of
the collateral of a collateral-dependent loan. The amount by which the recorded
investment of the loan exceeds the measure of the impaired loan is recognized by
recording a valuation allowance with a corresponding charge to the ALLL
provision. During 1996 and 1995, the average balances of impaired loans were
$2,489,000 and $2,402,000, respectively. In 1996 and 1995, $65,000 and $81,000,
respectively, of interest was recognized on these loans during the period of
impairment on a cash basis in accordance with Company policy.
As of December 31, 1996, troubled debt restructurings ("TDR's") amounted to
$717,000. The Company has not committed to lend any additional funds to these
borrowers under TDR's, and TDR's are current in accordance
II-13
<PAGE> 25
with their modified terms. Interest recorded on the TDR's was $64,000 for the
year ended December 31, 1996. There were no TDR's as of December 31, 1995.
Loans on nonaccrual amounted to $1,374,000, $735,000 and $2,587,000 as of
December 31, 1996, 1995 and 1994, respectively. Interest income of $111,000,
$52,000 and $122,000 would have been recorded for the years ended December 31,
1996, 1995 and 1994, respectively, if nonaccrual loans had been on a current
basis, in accordance with their original terms. Interest income of $65,000,
$49,000, and 207,000 was recognized on loans subsequently transferred to
nonaccrual status as of December 31, 1996, 1995 and 1994, respectively.
The following table presents information with respect to the Company's past
due loans and the components of nonperforming assets as of the dates indicated.
NONPERFORMING ASSET TRENDS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Loans 90 days or more past due and still accruing
interest ...................................... $ 774 $ 0 $ 6 $ 1,018 $3,773
Loans on nonaccrual .............................. 1,374 735 2,587 6,690 2,890
------ ------ ------ ------- ------
Total nonperforming loans .......................... 2,148 735 2,593 7,708 6,663
Other real estate owned ............................ 1,329 3,139 5,044 5,202 2,555
------ ------ ------ ------- ------
Total Nonperforming Assets .................... $3,477 $3,874 $7,637 $12,910 $9,218
====== ====== ====== ======= ======
Interest income which would have been recorded under
original terms for loans on nonaccrual basis ..... $ 111 $ 52 $ 122 $ 378 $ 194
</TABLE>
Nonperforming assets totaled $3,477,000 or 1.61% of total loans, leases and
OREO as of December 31, 1996, as compared to $3,874,000 or 2.61% as of December
31, 1995. The following table presents the balance of nonperforming assets by
type as of December 31, 1996.
NONPERFORMING ASSETS BY TYPE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMERCIAL REAL ESTATE CONSTRUCTION INSTALLMENT TOTAL
---------- ----------- ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Current .................. $ 667 $ 104 $ 0 $ 3 $ 774
Noncurrent ............... 675 614 $ 0 85 1,374
Other real estate owned .... 428 901 $ 0 0 1,329
------ ------ --- ------ ------
$1,770 $1,619 $ 0 $ 88 $3,477
====== ====== === ====== ======
</TABLE>
Allowance for Loan and Lease Losses. The Company maintains an ALLL
which it considers adequate to cover the risk of losses in the loan portfolio.
The ALLL is based upon management's ongoing evaluation of the quality of the
loan portfolio, total outstanding and committed loans, previous charges against
the allowance and current and anticipated economic conditions. In making its
evaluation, the Company takes into account the results of regulatory
examinations of the Company and FPNB, which can be expected to occur at least
once each year. The Comptroller completed its most recent examinations of FPNB
in August 1996 and September 1995. As a result of the examinations the allowance
was found to be adequate and no additional provision for loan losses was
required. The Company's management believed that as of December 31, 1996 the
allowance was adequate. The amount of the provision for loan losses is a charge
against earnings. Actual loan losses are charged against the ALLL.
The provisions for loan losses for the years ended December 31, 1996 and 1995
were $700,000 and $600,000, respectively. The relative increase in the provision
during 1996 was due to the increase in the loan portfolio during the year and a
significant decrease in charged off loans compared to 1995. The provisions for
loan losses
II-14
<PAGE> 26
for the year ended December 31, 1995 was $600,000 as compared to $0 in 1994. The
increase in 1995 as compared to 1994 resulted from an analysis conducted by
management which deemed it necessary for an addition to the allowance to
adequately cover potential known and inherent risks in the loan portfolio.
The provisions for loan losses for the years ended December 31, 1994, 1993 and
1992 were $0, $3,106,000, and $6,210,000, respectively. Significant provisions
were recorded during 1993 and 1992 primarily to provide for increased potential
loan losses due to the deterioration of local real estate markets.
As of December 31, 1996, the ALLL totaled $3,121,000 or 1.46% of total loans
as compared with $2,013,000 or 1.40% of total loans as of December 31, 1995. As
of December 31, 1996 and 1995, the ALLL was 145.30% and 273.88%, respectively,
of nonperforming loans. The ALLL increased by $1,108,000 as of December 31, 1996
as compared to December 31, 1995, due to the addition of the ALLL recorded as a
result of the RB Merger of $790,000, the ALLL recorded as a result of the
purchase of a real estate note pool of $500,000 and a provision of $700,000 less
net charge-offs of $882,000. As of December 31, 1995, the ALLL totaled
$2,013,000 or 1.40% of total loans as compared with $2,666,000 or 2.20% of total
loans as of December 31, 1994. As of December 31, 1995 and 1994, the ALLL was
273.88% and 102.82%, respectively, of nonperforming loans. The ALLL decreased by
$653,000 as of December 31, 1995 compared to December 31, 1994, due to the
addition of the ALLL recorded as a result of the Overland Merger of $803,000 and
provisions of $600,000 less net charge-offs of $2,056,000. The decrease as of
December 31, 1995 as compared to December 31, 1994 in the ratio of ALLL to total
loans outstanding was due to a reduction in nonperforming loans, in relation to
an increase in total loans of which $30,159,000 were recorded as a result of the
Overland Merger.
Net charge-offs for the Company decreased to $882,000 from $2,056,000 for the
years ended December 31, 1996 and 1995, respectively, primarily due to the
resolution in 1995 of problem loans acquired in the Overland Merger. The
percentages of net charge-offs to average loans for the years ended December 31,
1996 and 1995 were .48% and 1.51%, respectively.
II-15
<PAGE> 27
The following table presents charged-off loans, provisions for loan losses,
recoveries on loans previously charged off, allowance adjustments and the amount
of the ALLL for the dates indicated.
ANALYSIS OF ALLOWANCE FOR LOAN AND LEASE LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.......... $2,013 $2,666 $3,830 $4,793 $3,010
Loan charge-offs:
Commercial............................ 834 501 510 993 1,939
Real estate........................... 58 1,838 853 3,225 2,050
Construction.......................... 460 0 0 0 45
Installment........................... 66 114 98 267 550
------ ------ ------- ------ ------
Total loan charge-offs.................. 1,418 2,453 1,461 4,485 4,584
Less loan recoveries:
Commercial............................ 278 238 154 347 111
Real Estate........................... 212 14 96 27 22
Construction.......................... 10 101 0 0 0
Installment........................... 36 44 47 42 24
------ ------ ------- ------ ------
Total loan recoveries................... 536 397 297 416 157
------ ------ ------- ------ ------
Net loan charge-offs.................. 882 2,056 1,164 4,069 4,427
Provisions for loan losses.............. 700 600 0 3,106 6,210
Allowance adjustment (1)................ 1,290 803 0 0 0
------ ------ ------- ------ -------
Balance at End of Period................ $3,121 $2,013 $2,666 $3,830 $4,793
====== ====== ====== ====== ======
Ratio of net loan charge-offs during the
period to average loans outstanding
for the period......................... 0.48% 1.51% 1.03% 3.16% 2.77%
Ratio of loan recoveries during the
period to charge-offs during the period.. 37.80% 16.18% 20.33% 9.28% 3.42%
</TABLE>
- ---------------
(1) Represents allowance acquired in the RB Merger and a real estate note pool
acquisition in 1996 and the Overland Merger in 1995.
II-16
<PAGE> 28
The following table presents the allocation of the ALLL as of the dates
indicated. Notwithstanding these allocations, the entire allowance for loan
losses is available to absorb charge-offs in any category of loans.
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1996 1995 1994
------------------------ --------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
ALLOWANCE EACH ALLOWANCE EACH ALLOWANCE EACH
FOR LOAN CATEGORY FOR LOAN CATEGORY FOR LOAN CATEGORY
AND LEASE TO TOTAL AND LEASE TO TOTAL AND LEASE TO TOTAL
LOSSES LOANS LOSSES LOANS LOSSES LOANS
---------- ---------- --------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Commercial... $ 978 37.40% $ 626 43.35% $ 643 49.73%
Real Estate.. 1,785 50.17% 1,037 47.19% 1,100 39.93%
Construction. 113 6.71% 71 4.28% 81 8.08%
Installment.. 116 5.72% 84 5.18% 32 2.26%
Unallocated.. 129 N/A 195 N/A 810 N/A
------- ------- ------- ------- ------ -------
Total........ $3,121 100.00% $2,013 100.00% $2,666 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1993 1992
--------------------- ---------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
ALLOWANCE EACH ALLOWANCE EACH
FOR LOAN CATEGORY FOR LOAN CATEGORY
AND LEASE TO TOTAL AND LEASE TO TOTAL
LOSSES LOANS LOSSES LOANS
--------- ---------- --------- --------
<S> <C> <C> <C> <C>
Commercial... $1,668 53.64% $1,710 35.33%
Real Estate.. 1,320 37.20% 1,436 43.94%
Construction. 400 5.30% 612 15.34%
Installment.. 95 3.86% 477 5.39%
Unallocated.. 347 N/A 558 N/A
------- -------
Total...... $3,830 100.00% $4,793 100.00%
====== ====== ====== ======
</TABLE>
Credit Risk Management. The risk of nonpayment of loans is an inherent
aspect of commercial banking. The degree of perceived risk is taken into account
in establishing the structure of, and interest rates and security for, specific
loans and various types of loans. The Company strives to minimize its credit
risk exposure by its credit underwriting standards and loan policies and
procedures. Management continually evaluates the credit risks of such loans and
believes it has provided adequately for the credit risks associated with these
loans. The Company has implemented and expects to continue to implement and
update new policies and procedures to maintain its credit risk management
systems.
PREMISES AND EQUIPMENT, ACCRUED INTEREST AND OTHER ASSETS AND GOODWILL
Premises and equipment, accrued interest and other assets and goodwill were
$16,777,000 as of December 31, 1996, an increase of $4,676,000 or 38.64% from
$12,101,000 as of December 31, 1995. The increase was primarily due to
$3,756,000 of such assets acquired in the RB Merger, including $2,330,000 of
goodwill. In addition, a net deferred tax asset of $1,320,000 was recorded
during 1996. See "Results of Operations -- Income Taxes."
II-17
<PAGE> 29
DEPOSITS
Average deposits were $240,884,000 for the year ended December 31, 1996,
an increase of $60,491,000 or 33.53% from $180,393,000 of average deposits for
the year ended December 31, 1995. Average deposits of $180,393,000 for the year
ended December 31, 1995 had increased $30,112,000 or 20.04% from $150,281,000
for the year ended December 31, 1994. As of December 31, 1996, total deposits
were $264,521,000, representing an increase of $78,857,000 or 42.47% from
$185,664,000 in total deposits as of December 31, 1995. The increase in deposits
during 1996 was primarily due to the $54,920,000 in deposits acquired from RB
Bancorp combined with significant internal growth throughout the other FPNB
branches. As of December 31, 1995, total deposits were $185,664,000,
representing an increase of $39,221,000 or 26.78% from $146,443,000 in total
deposits as of December 31, 1994. The increase in deposits during 1995 was
primarily due to the $39,098,000 in deposits acquired from Overland.
The Company has historically maintained demand deposits of greater than
50% of total deposits, largely due to its strategy of targeting the deposits of
small to medium-sized businesses and professionals and its practice of
encouraging business borrowers to maintain compensating balances. For the year
ended December 31, 1996, average demand deposits were $156,362,000 or 64.91% of
average deposits. For the year ended December 31, 1995, average demand deposits
were $117,325,000 or 65.04% of average deposits. Average noninterest-bearing
demand deposits accounted for 21.97% of average deposits for the year ended
December 31, 1996, 20.64% of average deposits for the year ended December 31,
1995 and 18.48% of average deposits for the year ended December 31, 1994.
Average interest-bearing deposits were $187,964,000 for the year ended
December 31, 1996, representing an increase of $44,796,000 or 31.29% over the
$143,168,000 in average interest-bearing deposits for the year ended December
31, 1995. The increase in average interest-bearing deposits during 1996 was
primarily due to the $43,982,000 of interest-bearing deposits acquired from RB
Bancorp on April 1, 1996, which were outstanding for nine months of the year.
Average interest-bearing deposits were $143,168,000 for the year ended December
31, 1995, representing an increase of $20,662,000 or 16.87% over the
$122,506,000 in average interest-bearing deposits for the year ended December
31, 1994. The increase in average interest-bearing deposits during 1995 was
primarily due to the $29,799,000 of interest-bearing deposits acquired from
Overland on April 1, 1995, which were outstanding for nine months of the year.
See "Net Interest Income."
The Company's ratios of average Core Deposits to average deposits were
90.05%, 91.56% and 93.84%, as of December 31, 1996, 1995 and 1994, respectively.
Substantially all of the certificates of deposit of $100,000 and over are held
by customers who have or have had other business relationships with the Company
and who reside within its market area.
II-18
<PAGE> 30
The following table presents the Company's average deposits and the average
rate paid for each category of deposits for the periods indicated.
AVERAGE DEPOSIT INFORMATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994
---------------------- ------------------- ---------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT OF RATE AMOUNT OF RATE AMOUNT OF RATE
DEPOSITS(1) PAID(2) DEPOSITS(1) PAID(2) DEPOSITS(1) PAID(2)
------------ ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits.......... $ 52,920 N/A $ 37,225 N/A $ 27,775 N/A
Interest-bearing demand
deposits............... 103,442 2.08% 80,100 1.95% 74,695 1.63%
Savings deposits......... 17,689 1.97% 13,898 1.98% 11,864 1.95%
Certificates of deposit:
Under $100,000......... 42,876 5.12% 33,953 5.18% 26,693 3.31%
$100,000 or more....... 23,957 5.50% 15,217 5.72% 9,254 3.56%
--------- -------- -------
Total certificates of
deposit................ 66,833 49,170 35,947
--------- -------- --------
Total Average Deposits... $ 240,884 $180,393 $150,281
========= ======== ========
</TABLE>
- ---------------
(1) Averages are daily averages.
(2) Rates are annualized.
The following table presents the maturity schedule of certificates of
deposit of $100,000 or more as of December 31, 1996.
CERTIFICATES OF DEPOSIT OVER $100,000
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Three months or less....... $16,010
Over three through six months. 6,958
Over six through 12 months.... 3,864
Over 12 months................ 587
-------
Total....................... $27,419
=======
</TABLE>
FINANCIAL RATIOS
The following table presents certain financial ratios for the periods
indicated.
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Return on average total assets(1).. 1.58% 0.95% 0.20%
Return on average equity(1)........ 22.38% 12.98% 4.36%
Dividend payout ratio.............. 0.00% 0.00% 0.00%
Average equity to average total assets(1). 7.08% 7.32% 4.74%
</TABLE>
- ---------------
(1) Averages are daily averages
II-19
<PAGE> 31
CAPITAL RESOURCES
The Company engages in an ongoing assessment of its capital needs in order
to maintain an adequate level of capital to support its growth and protect
depositors. This assessment is based on the Company's evaluation of the capital
needed to effect its business plans and to meet regulatory requirements. The
Company's two sources of capital are internally generated funds and the capital
markets. Historically, the Company relied primarily on internally generated
capital.
On December 31, 1997, the holders of the Debentures will receive cash in the
principal amount, or, if the conversion rights are exercised, 100 shares of
Common Stock (subject to antidilutive adjustments) for each $1,000 principal of
Debentures, reflecting an effective conversion price of $10 per share, subject
to the limitation that the fair market value of the number of shares of Common
Stock received by the holder of a Debenture shall not exceed twice the principal
amount of the Debenture. If the trading price of Common Stock remains above the
$10 conversion price of the Debentures, management of the Company expects that
the majority of the Debentures will be converted, adding to the Company's
capital. However, there is no guarantee that Common Stock will continue to trade
above $10, and if it does not, and the holders of the Debentures choose not to
exercise their conversion rights, FP Bancorp would use available cash to make
payments to the holders of the Debentures. In the event that the amount of cash
available at FP Bancorp is not sufficient to make all required payments to
holders of the Debentures, the Company would receive a dividend from FPNB, which
would cause FPNB's capital to decline. See "Liquidity and Asset/Liability
Management."
In November 1994, the Company completed the Private Offerings, which
increased its capitalization by $3,034,000. The Overland Merger resulted in an
increase in capital of $4,255,000. Management believes its capital resources are
adequate for the foreseeable future. However, no assurance can be given that
unforeseen adverse economic conditions or other circumstances will not result in
increased capital requirements.
The FRB and the Comptroller adopted risk-based capital adequacy guidelines
effective March 15, 1989. These guidelines established a "Risk-based Capital
Ratio" determined by allocating assets and specified off-balance sheet
commitments into weighted categories, with higher levels of capital required for
the activities perceived as representing a greater risk. The guidelines also
require increased capital levels. The ratio of total qualifying capital to
weighted risk assets must equal at least 8%. Of the total 8%, at least 4% of the
total qualifying capital to weighted risk assets must be "Tier 1" or core
capital consisting primarily of equity stock. In addition, the FRB, the
Comptroller and the FDIC adopted Leverage Ratio requirements effective January
1, 1991 which require the Company to maintain a minimum core capital of at least
4% of its assets.
As of December 31, 1996, the Company met all regulatory capital ratio
requirements and was considered "adequately capitalized" in accordance with
FDICIA.
II-20
<PAGE> 32
The following table presents the capital levels and ratios as of December
31, 1996. The Company information is based on the FRB risk-based capital
adequacy rules and leverage requirements.
REGULATORY CAPITAL
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
AMOUNT RATIO
<S> <C> <C>
LEVERAGE RATIOS:
Tier 1 capital.................. $ 16,965 5.54%
Minimum required................ 12,249 4.00%
-------- -----
Excess......................... $ 4,716 1.54%
======== =====
Total Assets(1)....... $306,215
RISK-BASED CAPITAL RATIOS:
Tier 1 capital.................. $ 16,965 7.47%
Minimum required................ 9,088 4.00%
------ -----
Excess......................... $ 7,877 3.47%
====== =====
Total capital................... $ 19,808 8.72%
Minimum required................ 18,175 8.00%
------ -----
Excess......................... $ 1,633 0.72%
======== =====
Total Risk-weighted Assets.. $227,189
</TABLE>
- ---------------
(1) Does not include unrealized gains on investment securities available for
sale, goodwill and discount on loans acquired.
Because the RB Bancorp Merger was a cash purchase, no additional capital was
created as a result of the transaction. Therefore, the Company's and FPNB's
capital ratios decreased in the short term as a result of the RB Bancorp Merger.
FPNB and the Company were both adequately capitalized immediately after the RB
Bancorp Merger.
ITEM 7. FINANCIAL STATEMENTS.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report F-1
Consolidated Balance Sheets at December 31, 1996 and
December 31, 1995 F-2
Consolidated Statements of Earnings for the Years
Ended December 31, 1996, 1995 and 1994 F-3
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
II-21
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
FP Bancorp, Inc.
Escondido, California:
We have audited the accompanying consolidated balance sheets of FP Bancorp,
Inc. and subsidiary (the "Company") as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards required that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FP Bancorp,
Inc. and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
San Diego, California
January 21, 1997
F-1
<PAGE> 34
FP BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------------------
ASSETS 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks (note 3) $ 22,919,000 $ 14,293,000
Federal funds sold - 2,000,000
Investment securities available-for-sale, at fair value (note 4) 47,405,000 27,581,000
Investment securities held-to-maturity, at amortized cost (note 4) 9,279,000 7,753,000
Loans, net of allowance for loan losses of $3,121,000 and $2,013,000
in 1996 and 1995, respectively (note 5) 210,876,000 141,930,000
Other real estate owned, net (note 6) 1,329,000 3,139,000
Premises and equipment, net (note 7) 7,672,000 6,550,000
Goodwill, net (note 2) 3,431,000 1,603,000
Accrued interest and other assets 5,674,000 3,948,000
- -----------------------------------------------------------------------------------------------------------
Total assets $ 308,585,000 $ 208,797,000
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------
Deposits (notes 4 and 8):
Noninterest-bearing $ 59,541,000 $ 41,234,000
Interest-bearing 204,980,000 144,430,000
- -----------------------------------------------------------------------------------------------------------
Total deposits 264,521,000 185,664,000
- -----------------------------------------------------------------------------------------------------------
Federal funds purchased 11,802,000 -
Other borrowings 4,950,000 -
Convertible subordinated debentures (note 9) 4,575,000 4,575,000
Accrued expenses and other liabilities 1,759,000 1,725,000
- -----------------------------------------------------------------------------------------------------------
Total liabilities 287,607,000 191,964,000
- -----------------------------------------------------------------------------------------------------------
Stockholders' equity (notes 12 and 13):
Common stock, par value $.001, authorized 4,000,000 shares;
issued and outstanding 2,653,641 and 2,650,811 shares
in 1996 and 1995, respectively 3,000 3,000
Additional paid-in capital 24,571,000 24,556,000
Accumulated deficit (3,702,000) (7,910,000)
Receivable from ESOP (note 14) - (100,000)
Unrealized net gains on investment securities
available-for-sale (note 4) 106,000 284,000
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 20,978,000 16,833,000
- -----------------------------------------------------------------------------------------------------------
Commitments, contingencies and subsequent events
(notes 14,15,16,17,18 and 19)
Total liabilities and stockholders' equity $ 308,585,000 $ 208,797,000
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 35
FP BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Years ended December 31,
- --------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans (note 5) $ 19,082,000 $ 14,851,000 $11,364,000
Federal funds sold 505,000 422,000 120,000
Interest-earning deposits 6,000 19,000 4,000
Investment securities (note 4):
Taxable 2,650,000 1,783,000 1,185,000
Exempt from Federal income tax - - 45,000
- --------------------------------------------------------------------------------------------
Total interest income 22,243,000 17,075,000 12,718,000
- --------------------------------------------------------------------------------------------
Interest expense:
Deposits (note 8) 6,010,000 4,467,000 2,660,000
Other (note 9) 507,000 487,000 485,000
- --------------------------------------------------------------------------------------------
Total interest expense 6,517,000 4,954,000 3,145,000
- --------------------------------------------------------------------------------------------
Net interest income 15,726,000 12,121,000 9,573,000
Provision for loan losses (note 5) 700,000 600,000 -
- --------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 15,026,000 11,521,000 9,573,000
- --------------------------------------------------------------------------------------------
Other operating income:
Service charges 1,743,000 1,449,000 993,000
Other 416,000 357,000 321,000
- --------------------------------------------------------------------------------------------
Total other operating income 2,159,000 1,806,000 1,314,000
- --------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 6,615,000 5,521,000 4,686,000
Professional services 1,907,000 1,840,000 1,710,000
Occupancy, net 1,401,000 1,164,000 1,324,000
Furniture and equipment 1,112,000 838,000 667,000
Other real estate owned, net 508,000 745,000 625,000
Office supplies 572,000 384,000 310,000
Promotional 487,000 361,000 206,000
FDIC assessment 34,000 252,000 444,000
Loss on sale of investment securities 147,000 158,000 -
Amortization of goodwill 255,000 80,000 -
Other 861,000 901,000 583,000
- --------------------------------------------------------------------------------------------
Total other operating expenses 13,899,000 12,244,000 10,555,000
- --------------------------------------------------------------------------------------------
Earnings before income tax benefit 3,286,000 1,083,000 332,000
Income tax benefit (note 11) (922,000) (828,000) -
- --------------------------------------------------------------------------------------------
Net earnings $ 4,208,000 $ 1,911,000 $ 332,000
============================================================================================
Primary earnings per share $1.54 $.77 $.26
============================================================================================
Fully diluted earnings per share $1.42 $.72 $.26
============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 36
FP BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended December 31,
- -------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock:
Balance at beginning of year
(2,650,811, 1,821,879 and 1,213,479 shares,
respectively) $ 3,000 $ 2,000 $ 1,000
Private offering issuances, net (608,400 shares) - - 1,000
Common stock issued in merger (826,132 shares) - 1,000 -
- -------------------------------------------------------------------------------------------------------------
Balance at end of year
(2,653,641, 2,650,811 and 1,821,879 shares,
respectively) 3,000 3,000 2,000
- -------------------------------------------------------------------------------------------------------------
Additional Paid-in Capital:
Balance at beginning of year 24,556,000 20,287,000 17,254,000
Private offering issuances, net - - 3,033,000
Exercise of stock options 15,000 15,000 -
Common stock issued in merger - 4,254,000 -
- -------------------------------------------------------------------------------------------------------------
Balance at end of year 24,571,000 24,556,000 20,287,000
- -------------------------------------------------------------------------------------------------------------
Accumulated Deficit:
Balance at beginning of year (7,910,000) (9,821,000) (10,153,000)
Net earnings 4,208,000 1,911,000 332,000
- -------------------------------------------------------------------------------------------------------------
Balance at end of year (3,702,000) (7,910,000) (9,821,000)
- -------------------------------------------------------------------------------------------------------------
Receivable from ESOP:
Balance at beginning of year (100,000) (133,000) (167,000)
Payments from ESOP 100,000 33,000 34,000
- -------------------------------------------------------------------------------------------------------------
Balance at end of year - (100,000) (133,000)
- -------------------------------------------------------------------------------------------------------------
Unrealized Net Gains (Losses) on
Investment Securities Available-for-sale:
Balance at beginning of year 284,000 (515,000) -
Change in net unrealized gains (losses) on investment
securities available-for-sale (178,000) 799,000 (515,000)
- -------------------------------------------------------------------------------------------------------------
Balance at end of year 106,000 284,000 (515,000)
- -------------------------------------------------------------------------------------------------------------
Total $ 20,978,000 $ 16,833,000 $ 9,820,000
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 37
FP BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
- -------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 4,208,000 $ 1,911,000 $ 332,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,249,000 943,000 878,000
Benefit for deferred taxes (922,000) (828,000) -
Provision for loan losses 700,000 600,000 -
Provision for losses on other real
estate owned 409,000 537,000 455,000
Gain on sale of other real estate owned (17,000) (213,000) (81,000)
Loss (gain) on sale of investment
securities available-for-sale 147,000 158,000 (18,000)
(Increase) decrease in other assets and
other liabilities (713,000) (1,237,000) 419,000
Increase (decrease) in deferred loan
origination fees 95,000 239,000 (124,000)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,156,000 2,110,000 1,861,000
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
(Increase) decrease in loans outstanding (27,886,000) 1,705,000 (8,909,000)
Proceeds from sale of other real
estate owned 2,464,000 6,107,000 2,648,000
Net maturities of interest-earning
deposits 495,000 1,853,000 887,000
Maturities of investment securities
available-for-sale 4,504,000 3,215,000 1,789,000
Maturities of investment
securities held-to-maturity 446,000 1,274,000 365,000
Purchase of investment
securities available-for-sale (43,244,000) (24,859,000) (1,000,000)
Purchase of investment securities
held-to-maturity (1,997,000) (1,871,000) (1,859,000)
Proceeds from sale of investment securities
available-for-sale 21,555,000 15,077,000 2,198,000
Payments from ESOP 100,000 33,000 34,000
Net capital expenditures for premises
and equipment (973,000) (682,000) (206,000)
Net cash acquired in merger 5,302,000 5,366,000 -
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities (39,234,000) 7,218,000 (4,053,000)
- -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in interest-bearing
deposits 16,568,000 (3,784,000) (7,843,000)
Net increase in noninterest-bearing
deposits 7,369,000 3,907,000 1,282,000
Increase (decrease) in Federal funds
purchased and other borrowings 16,752,000 (2,800,000) 2,800,000
Proceeds from exercise of stock options 15,000 15,000 -
Net proceeds from private offering - - 3,034,000
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 40,704,000 (2,662,000) (727,000)
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 6,626,000 6,666,000 (2,919,000)
Cash and cash equivalents at beginning of
period 16,293,000 9,627,000 12,546,000
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of
period $ 22,919,000 $ 16,293,000 $ 9,627,000
=============================================================================================================
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $ 6,565,000 $ 4,781,000 $ 2,788,000
Income taxes $ 43,000 $ 72,000 $ -
=============================================================================================================
Supplemental disclosure of noncash
investing and financing activities:
Transfer from loans to other real estate owned $ 737,000 $ 2,951,000 $ 4,524,000
=============================================================================================================
Loans to facilitate sale of other real estate owned $ 94,000 $ 62,000 $ 1,200,000
=============================================================================================================
Common stock issued in merger $ - $ 4,255,000 $ -
=============================================================================================================
Transfer from other real estate owned to
bank premises $ - $ - $ 460,000
=============================================================================================================
Transfer of investment securities from
held-to-maturity to available-for-sale $ - $ 8,450,000 $ 11,792,000
=============================================================================================================
Change in net unrealized gains (losses) on investment
securities available-for-sale $ (178,000) $ 799,000 $ (515,000)
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 38
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of FP Bancorp, Inc. ("FP Bancorp") and its
subsidiary (collectively, the "Company") conform to generally accepted
accounting principles and to general practice within the banking industry. The
following is a description of the more significant of the policies.
(a) Principles of Consolidation:
The consolidated financial statements include the accounts of FP Bancorp and its
wholly-owned subsidiary, First Pacific National Bank ("FPNB"). All material
intercompany accounts and transactions have been eliminated in the consolidated
financial statements. The parent company financial statements are presented
using the equity method of accounting (note 20).
The Company's consolidated financial statements as of and for the year ended
December 31, 1996 include combined operations with RB Bancorp and its
wholly-owned subsidiary for the nine-month period from April 1, 1996 through
December 31, 1996 (note 2).
The Company's consolidated financial statements as of and for the year ended
December 31, 1995 include combined operations with Overland Bank ("Overland")
for the nine-month period from April 1, 1995 through December 31, 1995 (note 2).
(b) Cash and Cash Equivalents:
For purposes of the statements of cash flows, cash and cash equivalents consist
of cash on hand, due from banks and Federal funds sold. Generally, Federal funds
are purchased and sold for one-day periods.
(c) Investment Securities:
Management determines the appropriate classification of securities at the time
of purchase. If management has the intent and the Company has the ability at
time of purchase to hold securities until maturity, they are classified as
held-to-maturity. Investment securities held-to-maturity are stated at cost,
adjusted for amortization of premiums and accretion of discounts over the period
to maturity of the related security using the interest method. Securities to be
held for indefinite periods of time, but not necessarily to be held-to-maturity
or on a long-term basis are classified as available-for-sale and carried at fair
value with unrealized gains or losses reported as a separate component of
stockholders' equity, net of applicable income taxes. Realized gains or losses
on the sale of securities available-for-sale, if any, are determined using the
amortized cost of the specific securities sold. Securities available-for-sale
include securities that management intends to use as part of its asset/liability
management strategy and that may be sold in response to changes in interest
rates, prepayment risk and other related factors. Securities are individually
evaluated for appropriate classification, when acquired; consequently, similar
types of securities may be classified differently depending on factors existing
at the time of purchase.
(d) Loans:
Interest on loans is accrued as earned. The accrual of interest on loans is
discontinued when, in management's judgment, a reasonable doubt exists as to the
collectability of such interest in the normal course of business. Nonaccrual
loans that become current as to both principal and interest can be returned to
accrual status subject to appropriate management approval.
Nonrefundable fees and related direct costs associated with the origination or
purchase of loans are deferred and netted against outstanding loan balances. Net
deferred fees and costs are recognized in interest income over the terms of the
loans using the interest method. The amortization of loan fees is discontinued
on nonaccrual loans.
Loan discounts and premiums acquired are accreted or amortized into interest
income as an adjustment of yield over the terms of the loans using the interest
method.
F-6
<PAGE> 39
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) Allowance for Loan Losses:
An allowance for loan losses is maintained at a level deemed appropriate by
management to adequately provide for known and inherent risks in the loan
portfolio and other extensions of credit, including off-balance sheet credit
extensions. The allowance is based upon a continuing review of the portfolio,
past loan loss experience, current economic conditions which may affect the
borrowers' ability to pay, and the underlying collateral value of the loans.
Loans which are deemed to be uncollectible are charged off and deducted from the
allowance. The provision for loan losses and recoveries on loans previously
charged off are added to the allowance.
Effective January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("Statement 114") and Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" ("Statement 118") on a prospective basis. Under the provisions of
Statement 114, a loan is considered impaired when it is probable that a creditor
will be unable to collect all amounts due according to the contractual terms of
the loan agreement. Statement 114 defines methods of measuring impairment and,
if the measure of the impaired loan is less than the recorded investment in the
loan, it requires a creditor to create a valuation allowance with a
corresponding charge to the provision for loan losses. Statement 118 amends
Statement 114 to allow a creditor to use existing methods for recognizing
interest income on impaired loans. In addition, Statement 118 amends certain
disclosure requirements of Statement 114. The adoption of Statements 114 and 118
had no material effect on the Company's financial condition or results of
operations.
(f) Other Real Estate Owned:
Real estate acquired by foreclosure is recorded at fair value. Fair value is
based on current appraisals less estimated selling costs. Write-downs to the
fair value at the time of acquisition of the real estate are made by a charge to
the allowance for loan losses, if necessary. Any subsequent write-downs are
charged against operating expenses and recognized as a valuation allowance.
Operating expenses of such properties, net of related income, and gains and
losses on their disposition are included in other expenses.
(g) Premises and Equipment:
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is charged to operating expense using the
straight-line method over the estimated useful lives of the assets, which range
from three to forty years. Leasehold improvements are capitalized and amortized
to operating expense over the term of the respective lease or the estimated
useful life of the improvement, whichever is shorter. Expenditures for
maintenance and repairs are charged to expense as incurred.
(h) Goodwill:
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over the expected periods
to be benefited, generally twelve to fifteen years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
(i) Debenture Costs:
Debenture costs are amortized over the term of the debenture using the interest
method.
F-7
<PAGE> 40
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(j) Income Taxes:
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(k) Earnings Per Share:
Primary earnings per share is computed by dividing net earnings by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period. Stock options are considered to be common stock
equivalents and are included in the primary net earnings per share calculation
for that period unless the effect is determined to be antidilutive. The weighted
average numbers of shares used for the primary earnings per share calculations
were 2,724,000, 2,483,000 and 1,262,000 in 1996, 1995 and 1994, respectively.
Fully diluted earnings per share is computed by dividing net earnings (adjusted
for interest expense on the convertible subordinated debentures and unamortized
debenture costs) by the weighted average number of shares of common stock,
common stock equivalents and other potentially dilutive securities. The
subordinated convertible debentures are considered to be other potentially
dilutive securities and are included in the earnings per share calculations
unless the effect is determined to be antidilutive. The weighted average numbers
of shares used for the fully diluted earnings per share calculations were
3,206,000, 3,019,000 and 1,269,000 in 1996, 1995 and 1994, respectively.
(l) Use of Estimates:
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(m) Stock Options:
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees", and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"), which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, Statement 123
also allows entities to continue to apply the provisions of APB No. 25 and
provide pro forma net earnings and pro forma net earnings per share disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in Statement 123 had been applied. The Company
has elected to continue to apply the provisions of APB No. 25 and provide the
pro forma disclosure provisions of Statement 123.
(n) New Accounting Standards:
In June 1996, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities" ("Statement 125"). Statement
125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996 and is to be
applied prospectively. This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings.
F-8
<PAGE> 41
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Management of the Company does not expect that adoption of Statement 125 will
have a material impact on the Company's financial position, results of
operations or liquidity.
(o) Reclassifications:
Certain 1995 and 1994 amounts have been reclassified to conform to the
presentation used in 1996.
2) MERGERS AND ACQUISITIONS
(a) Overland Bank:
On April 1, 1995, the Company completed the merger of Overland into FPNB (the
"Overland Merger") for a net purchase price of $5,446,000, including acquisition
costs of $1,191,000. The acquisition was recorded using the purchase method of
accounting. Under this method of accounting, the purchase price was allocated to
the respective assets acquired with a fair value of $43,419,000 and liabilities
assumed with a fair value of $39,656,000 at the date of the purchase
transaction. The excess of the purchase price over the fair value of the net
assets acquired was recorded as goodwill. Pursuant to the merger agreement, all
of the outstanding shares of Overland common stock were converted into newly
issued shares of Company common stock. The number of shares of Company common
stock issued upon the conversion of each share of Overland common stock was
.1006 shares, resulting in the issuance of 826,132 shares of Company common
stock.
(b) RB Bancorp:
On April 1, 1996, the Company completed the merger of RB Bancorp and its
wholly-owned subsidiary, The Bank of Rancho Bernardo, with and into FPNB. The
acquisition was recorded using the purchase method of accounting. Under this
method of accounting, the purchase price was allocated to the respective assets
acquired with a fair value of $60,572,000 and liabilities assumed with a fair
value of $55,552,000 at the date of the purchase transaction. The excess of the
purchase price over the fair value of the net assets acquired was recorded as
goodwill, including $257,000 in acquisition costs. Pursuant to the merger
agreement, shareholders of RB Bancorp received $7,350,000 in cash for the
exchange of all outstanding RB Bancorp shares. The amount of consideration was
determined by negotiations between the Company and RB Bancorp.
The unaudited consolidated information below indicates on a pro forma basis the
results of operations if RB Bancorp had been acquired by the Company as of
January 1, 1995 and if Overland had been acquired by the Company on January 1,
1994.
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
Net interest income $ 16,438,000 $ 15,756,000
Net earnings $ 4,266,000 $ 2,461,000
Primary earnings per share $1.57 $.99
Fully diluted earnings per share $1.44 $.90
</TABLE>
3) RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company is required to maintain reserve balances with the Federal Reserve
Bank. The average amount held at the Federal Reserve Bank for the year ended
December 31, 1996 was approximately $2,716,000.
F-9
<PAGE> 42
4) INVESTMENT SECURITIES
a) Investment Securities Available-for-sale:
Mortgage-backed securities are fully guaranteed by the U.S. government. The
amortized cost, gross unrealized gains, gross unrealized losses and fair value
of investment securities available-for-sale as of December 31, 1996 and 1995
were as follows:
<TABLE>
<CAPTION>
1996
- ------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government agencies $ 9,989,000 $ 73,000 $ - $10,062,000
Mortgage-backed securities 35,223,000 169,000 (136,000) 35,256,000
Equity bank stock 2,087,000 - - 2,087,000
- ------------------------------------------------------------------------------------------
Total $47,299,000 $242,000 $(136,000) $47,405,000
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
1995
- -----------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government agencies $11,285,000 $139,000 $(45,000) $11,379,000
Mortgage-backed securities 15,472,000 208,000 (18,000) 15,662,000
Equity bank stock 540,000 - - 540,000
- -----------------------------------------------------------------------------------------
Total $27,297,000 $347,000 $(63,000) $27,581,000
=========================================================================================
</TABLE>
The maturity distribution based on the amortized cost and fair value (excluding
equity bank stock) of investment securities available-for-sale as of December
31, 1996 by contractual maturity is shown below. Mortgage-backed securities have
contractual terms to maturity, but require periodic payments to reduce
principal. In addition, expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Maturity Distribution
- ------------------------------------------------------------------------
Amortized
Cost Fair Value
- ------------------------------------------------------------------------
Due after five years through ten years $ 8,989,000 $ 9,055,000
Over ten years 1,000,000 1,007,000
- ------------------------------------------------------------------------
9,989,000 10,062,000
Mortgage-backed securities 35,223,000 35,256,000
- ------------------------------------------------------------------------
Total $45,212,000 $45,318,000
========================================================================
Investment securities available-for-sale with a principal balance of $22,568,000
and $4,246,000 were pledged as security for public deposits and other purposes
as required by various statutes and agreements as of December 31, 1996 and 1995,
respectively. Proceeds from the sale of investment securities available-for-sale
during 1996 and 1995 were $21,555,000 and $15,077,000, respectively. Gross
losses of ($147,000) and ($158,000), respectively, were realized on those sales.
Cost was determined in computing the realized loss using the specific
identification method.
F-10
<PAGE> 43
4) INVESTMENT SECURITIES (CONTINUED)
b) Investment Securities Held-to-maturity:
Mortgage-backed securities are fully guaranteed by the U.S. government. The
amortized cost, gross unrealized gains and losses and fair value of investment
securities held-to-maturity as of December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996
- ------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government agencies $1,000,000 $ - $ (5,000) $ 995,000
Step up notes 997,000 - - 997,000
Mortgage-backed securities 7,079,000 - (101,000) 6,978,000
Corporate notes 203,000 8,000 - 211,000
- ------------------------------------------------------------------------------------------------------
Total $9,279,000 $ 8,000 $ (106,000) $9,181,000
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1995
- ---------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities $7,549,000 $ - $(108,000) $7,441,000
Corporate notes 204,000 14,000 - 218,000
- ---------------------------------------------------------------------------------------
Total $7,753,000 $14,000 $(108,000) $7,659,000
=======================================================================================
</TABLE>
The maturity distribution based on amortized cost and fair value of investment
securities held-to-maturity as of December 31, 1996 by contractual maturity is
shown below. Mortgage-backed securities have contractual terms to maturity, but
require periodic payments to reduce principal. In addition, expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Maturity Distribution
- -----------------------------------------------------------------------
Amortized Cost Fair Value
- -----------------------------------------------------------------------
<S> <C> <C>
Due after one year through five years $ 203,000 $ 211,000
Due after five years through ten years 1,000,000 995,000
Over ten years 997,000 997,000
Mortgage-backed securities 7,079,000 6,978,000
- -----------------------------------------------------------------------
Total $9,279,000 $9,181,000
======================================================================
</TABLE>
Investment securities held-to-maturity with a principal amount of $6,089,000 and
$4,063,000 were pledged as security for public deposits and other purposes as
required by various statutes and agreements as of December 31, 1996 and 1995,
respectively. There were no sales of investment securities held-to-maturity
during 1996, 1995 or 1994.
c) Interest Income on Investment Securities:
The following table presents interest income on investment securities for the
years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Securities Available-for-sale $2,182,000 $ 915,000 $ 373,000
Investment Securities Held-to-maturity 468,000 868,000 857,000
- ----------------------------------------------------------------------------------------
Total $2,650,000 $1,783,000 $1,230,000
========================================================================================
</TABLE>
F-11
<PAGE> 44
4) INVESTMENT SECURITIES (CONTINUED)
d) Portfolio Reclassification:
In November 1995, the FASB issued a special report called "A Guide to
Implementation of Statement 115 in Accounting for Certain Investments in Debt
and Equity Securities"(the "Guide"). In accordance with the provisions of the
Guide, the Company elected to reclassify certain of its investment securities
from held-to-maturity to available-for-sale. On December 31, 1995, the Company
reclassified $8,450,000 from investment securities held-to-maturity to
investment securities available-for-sale.
e) Derivatives:
The Company has had only limited involvement in derivative financial instruments
and does not use them for trading purposes. They are used to manage interest
rate risk in the balance sheet and enhance earnings in the investment portfolio.
The Company has invested in U.S. government agency "step up" bonds, which
provide a higher initial yield than U.S. Treasury bonds or straight agency
bonds. In return for the higher yield, the issuer reserves the right to call the
bond at a given date prior to maturity. If the issuer does not exercise this
"call option", the coupon rate of the bond will "step up" to a contractually
agreed upon rate. Step up bonds mitigate interest rate risk through the exercise
of the call option or, in a rising rate environment, through the increase in
coupon rates. Step up bonds have no risk of loss of principal, and as such are
considered by management to be low risk derivative investments.
There were no derivatives included in investment securities available-for-sale
as of December 31, 1996. Derivatives included in investment securities
held-to-maturity were $997,000 as of December 31, 1996. There were no
derivatives included in investment securities available-for-sale and investment
securities held-to-maturity as of December 31, 1995.
5) LOANS
Loans were comprised of the following as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------
<S> <C> <C>
Commercial $ 80,894,000 $ 62,867,000
Real estate 108,530,000 68,448,000
Construction 14,507,000 6,204,000
Installment 12,371,000 7,515,000
- ------------------------------------------------------------------
Total loans 216,302,000 145,034,000
Less allowance for loan losses 3,121,000 2,013,000
Less deferred loan fees 662,000 567,000
Less discount 1,643,000 524,000
- ------------------------------------------------------------------
Net loans $210,876,000 $141,930,000
==================================================================
</TABLE>
The Company's loan portfolio consists primarily of loans to borrowers within San
Diego County and Southern Riverside County. Although the Company seeks to avoid
undue concentrations of loans to a single industry or based upon a single class
of collateral, real estate and real estate associated businesses are among the
principal industries in the Company's market area and, as a result, the
Company's loan and collateral portfolios are to some degree concentrated in
those industries. The Company evaluates each credit on an individual basis and
determines collateral requirements accordingly. When real estate is taken as
collateral, advances are generally limited to a certain percentage of the
appraised value of the collateral at the time the loan is made, depending on the
type of loan, the underlying property and other factors.
The maturity distribution of the loan portfolio as of December 31, 1996 was as
follows:
<TABLE>
<S> <C>
Within one year $ 70,631,000
One to five years 83,768,000
After five years 61,903,000
- ------------------------------------
Total $216,302,000
====================================
</TABLE>
F-12
<PAGE> 45
5) LOANS (CONTINUED)
The sensitivity of loans to changes in interest rates as of December 31, 1996
was as follows:
<TABLE>
<S> <C>
Fixed rate loans $ 70,207,000
Variable rate loans 146,095,000
- ------------------------------------
Total $216,302,000
====================================
</TABLE>
The Company has established a monitoring system for its loans in order to
identify potential problem loans and to permit the periodic evaluation of
impairment and the adequacy of the allowance for loan losses in a timely manner.
Impaired loans included in the Company's loan portfolio as of December 31, 1996
and 1995 were $2,506,000 and $1,449,000, respectively, which had an aggregate
specific related allowance amounts of $358,000 and $173,000, respectively. The
measurement of impairment may be based on (i) the present value of the expected
future cash flows of the impaired loan discounted at the loan's original
effective interest rate, (ii) the observable market prices of the impaired loan
or (iii) the fair value of the collateral of a collateral-dependent loan. The
amount by which the recorded investment of the loan exceeds the measure of the
impaired loan is recognized by recording a valuation allowance with a
corresponding charge to the provision for loan losses. During 1996 and 1995, the
average balances of impaired loans were $2,489,000 and $2,402,000, respectively.
During 1996 and 1995, respectively, $65,000 and $81,000 of interest was
recognized on these loans during the period of impairment on a cash basis in
accordance with Company policy.
As of December 31, 1996, troubled debt restructurings ("TDR's") amounted to
$717,000. The Company has not committed to lend any additional funds to those
borrowers under TDR's, and TDR's are current in accordance with their modified
terms. Interest recorded on the TDR's was $64,000 for the year ended December
31, 1996. There were no TDR's as of December 31, 1995.
A summary of the activity in the allowance for loan losses, which includes
provisions for impaired loans, for the years ended December 31, 1996, 1995 and
1994 was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance as of beginning of year $ 2,013,000 $ 2,666,000 $ 3,830,000
Provision charged to expense 700,000 600,000 -
Allowance acquired 1,290,000 803,000 -
Loan charge-offs (1,418,000) (2,453,000) (1,461,000)
Loan recoveries 536,000 397,000 297,000
- ------------------------------------------------------------------------------------
Balance as of end of year $ 3,121,000 $ 2,013,000 $ 2,666,000
====================================================================================
</TABLE>
The allowance for loan losses is subjective and may be adjusted in the future
because of changes in economic conditions and the repayment abilities of the
borrowers. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance. These
agencies may require the Company to recognize additions to the allowance based
on their judgments related to information available to them at the time of their
examinations.
Loans on nonaccrual amounted to $1,374,000, $735,000 and $2,587,000 as of
December 31, 1996, 1995 and 1994, respectively. Interest income of $111,000,
$52,000 and $122,000 would have been recorded for the years ended December 31,
1996, 1995 and 1994, respectively, if nonaccrual loans had been on a current
basis, in accordance with their original terms. Interest income of $65,000,
$49,000, and $207,000 was recognized on loans subsequently transferred to
nonaccrual status as of December 31, 1996, 1995 and 1994, respectively.
In the normal course of business, the Company has made loans to certain
directors, executive officers and their affiliates under terms consistent with
their general lending policies. An analysis of this activity during 1996 is
summarized as follows:
<TABLE>
<S> <C>
Loan balances as of December 31, 1995 $4,270,000
Additions 5,287,000
Collections (3,909,000)
- -----------------------------------------------------
Loan balances as of December 31, 1996 $5,648,000
=====================================================
</TABLE>
F-13
<PAGE> 46
5) LOANS (CONTINUED)
The Company has also extended additional commitments to these directors,
executive officers and their affiliates totaling approximately $1,795,000 as of
December 31, 1996.
6) OTHER REAL ESTATE OWNED
Other real estate owned was comprised of the following as of December 31, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
Real estate acquired through settlement
of loans $2,214,000 $4,019,000
Less allowance for possible losses 885,000 880,000
- -----------------------------------------------------------------------
Total $1,329,000 $3,139,000
=======================================================================
</TABLE>
A summary of the changes in the allowance for possible losses on other real
estate owned for the years ended December 31, 1996, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance as of beginning of year $ 880,000 $ 808,000 $ 820,000
Provision charged to expense 409,000 537,000 455,000
Charge-offs (404,000) (465,000) (467,000)
- ------------------------------------------------------------------------------
Balance as of end of year $ 885,000 $ 880,000 $ 808,000
==============================================================================
</TABLE>
7) PREMISES AND EQUIPMENT
Premises and equipment were comprised of the following as December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------
<S> <C> <C>
Land $ 2,049,000 $ 2,103,000
Premises 3,726,000 3,087,000
Furniture, fixtures and equipment 5,804,000 4,444,000
Leasehold improvements 1,286,000 1,236,000
- -------------------------------------------------------------------
12,865,000 10,870,000
Less accumulated depreciation
and amortization 5,193,000 4,320,000
- -------------------------------------------------------------------
Total $ 7,672,000 $ 6,550,000
===================================================================
</TABLE>
8) DEPOSITS
Interest-bearing deposits were comprised of the following as of December 31,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
Interest-bearing demand deposits $ 54,695,000 $ 38,317,000
Money market deposits 60,405,000 41,138,000
Savings deposits 17,366,000 14,732,000
Time deposits under $100,000 45,095,000 33,110,000
Time deposits of $100,000 or more 27,419,000 17,133,000
- ---------------------------------------------------------------------
Total interest-bearing deposits $204,980,000 $144,430,000
=====================================================================
</TABLE>
F-14
<PAGE> 47
8) DEPOSITS (CONTINUED)
The maturity distribution of time deposits of $100,000 or more as of December
31, 1996 was as follows:
<TABLE>
<S> <C>
Three months or less $16,010,000
Over three through six months 6,958,000
Over six through twelve months 3,864,000
Over twelve months 587,000
- -----------------------------------------------
Total $27,419,000
===============================================
</TABLE>
Interest expense on deposits was comprised of the following for the years ended
December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-bearing demand deposits $ 459,000 $ 354,000 $ 340,000
Money market deposits 1,689,000 1,211,000 877,000
Savings deposits 348,000 275,000 231,000
Time deposits under $100,000 2,191,000 1,747,000 884,000
Time deposits of $100,000 or more 1,323,000 880,000 328,000
- ----------------------------------------------------------------------------------
Total interest expense on deposits $6,010,000 $4,467,000 $2,660,000
==================================================================================
</TABLE>
9) CONVERTIBLE SUBORDINATED DEBENTURES
During 1993, the Company completed the sale of $4,575,000 of 9% convertible
subordinated debentures due December 31, 1997 (the "Debentures"). On December
31, 1997, the holders of the Debentures will receive cash in the principal
amount, or, if the conversion rights are exercised, 100 shares of FP Bancorp's
common stock (subject to antidilutive adjustments) for each $1,000 principal of
Debentures, subject to the limitation that the fair market value of the number
of shares of common stock received by the holder of a Debenture shall not exceed
twice the principal amount of the Debenture. FP Bancorp invested $3,400,000 of
the proceeds in FPNB, used approximately $618,000 to provide a reserve for the
payment of interest on the Debentures through January 1, 1995, paid expenses of
the offering and other items, and kept the remaining proceeds available for
general corporate purposes including payment of interest on the Debentures.
10) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("Statement 107"), requires that the Company
disclose estimated fair values for its financial instruments. The following
summary presents a description of the methodologies and assumptions used to
determine such amounts.
Cash and Due From Banks and Federal Funds Sold
The carrying amount is assumed to be the fair value because of the liquidity of
these instruments.
Investment Securities
Fair values are based on quoted market prices available as of the balance sheet
date. If a quoted market price is not available, fair value is estimated using
quoted market prices for similar securities.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type and further segmented into fixed
and adjustable rate interest terms and by credit risk categories.
F-15
<PAGE> 48
10) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair value of fixed rate loans and nonperforming or adversely classified
adjustable rate loans is calculated by discounting scheduled cash flows through
the estimated maturity using estimated market discount rates that reflect the
credit and interest rate risk inherent in the loans. The discount rates used for
performing fixed rate loans are the Company's current offer rates for comparable
instruments with similar terms.
The fair value of performing adjustable rate loans is estimated to be carrying
value. These loans reprice frequently at market rates and the credit risk is not
considered to be greater than normal.
Deposits
Under Statement 107, the fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings and NOW accounts, and money market
and checking accounts, is equal to the amount payable on demand as of December
31, 1996 and 1995. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities. No
value has been assigned to the Company's long-term relationships with its
deposit customers (core deposit intangible) since it is not a financial
instrument as defined under Statement 107.
Federal Funds Purchased and Other Borrowings
The carrying amount is assumed to be the fair value because of the liquidity of
these instruments.
Convertible Subordinated Debentures
The fair value of Debentures is estimated based on the amount of discounted
future cash flows through estimated maturity using estimated market discount
rates based on current borrowing rates for similar debt instruments.
Commitments to Extend Credit, Standby Letters of Credit and Financial Guarantees
Written.
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. The fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties.
Limitations
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a portion of the Company's
financial instruments, fair value estimates are based on what management
believes to be conservative judgments regarding expected future cash flows,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates. Since the fair value is estimated as of December 31, 1996 and
1995, the amounts that will actually be realized or paid at settlement or
maturity of the instruments could be significantly different.
F-16
<PAGE> 49
10) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair values of the Company's financial instruments as of December 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------------------------------------------
Fair Value Fair Value
Carrying Amount Estimates Carrying Amount Estimates
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 22,919,000 $ 22,919,000 $ 14,293,000 $ 14,293,000
Federal funds sold - - 2,000,000 2,000,000
Investment securities available-for-sale 47,405,000 47,405,000 27,581,000 27,581,000
Investment securities held-to-maturity 9,279,000 9,181,000 7,753,000 7,659,000
Loans, net 210,876,000 209,035,000 141,930,000 139,384,000
Financial liabilities:
Deposits 264,521,000 264,688,000 185,664,000 185,835,000
Federal funds purchased and
other borrowings 16,752,000 16,752,000 - -
Convertible subordinated debentures 4,575,000 4,575,000 4,575,000 4,575,000
</TABLE>
<TABLE>
<CAPTION>
Fair Value Fair Value
Contract Amount Estimates Contract Amount Estimates
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Off-balance sheet financial instruments:
Commitments to extend credit $51,310,000 $1,026,000 $34,142,000 $629,000
Standby letters of credit 3,269,000 65,000 4,334,000 87,000
</TABLE>
11) INCOME TAXES
The components of income taxes for the year ended December 31, 1996, 1995 and
1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 145,000 $ 21,000 $ -
State 7,000 2,000 -
- ---------------------------------------------------------------------------
Total current 152,000 23,000 -
- ---------------------------------------------------------------------------
Deferred:
Federal 733,000 513,000 -
State 240,000 165,000 -
- ---------------------------------------------------------------------------
Total deferred 973,000 678,000 -
- ---------------------------------------------------------------------------
Change in valuation allowance (2,293,000) (1,578,000) -
Tax credited to goodwill 246,000 49,000 -
- ---------------------------------------------------------------------------
Income tax benefit $ (922,000) $ (828,000) $ -
===========================================================================
</TABLE>
F-17
<PAGE> 50
11) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities as of December 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Plant and equipment, principally due to
differences in depreciation $ 352,000 $ 254,000
Nonaccrual interest recognized as
income for taxes but not for books 46,000 75,000
OREO property, principally due to
differences in valuation of property 281,000 174,000
Charitable contributions not deducted for tax - 34,000
Net operating loss carryforwards 3,564,000 4,323,000
Alternative minimum and other tax
credit carryforwards 355,000 289,000
Other - 155,000
- ----------------------------------------------------------------------------------
Total gross deferred tax assets 4,598,000 5,304,000
Less: valuation allowance (1,933,000) (4,226,000)
- ----------------------------------------------------------------------------------
Net deferred tax assets $ 2,665,000 $ 1,078,000
==================================================================================
Deferred tax liabilities:
Allowance for loan losses, due to
differences in computation of loan debts $ (151,000) $ (178,000)
Deferred loan costs (294,000) -
- ----------------------------------------------------------------------------------
Net deferred tax liability $ (445,000) $ (178,000)
==================================================================================
</TABLE>
A reconciliation of total income taxes (benefit) for the years ended December
31, 1996, 1995 and 1994 to the amount computed by applying the applicable
statutory Federal income tax rate of 34% to earnings before income taxes
follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed expected income taxes $ 1,117,000 $ 368,000 $ 113,000
Tax exempt income - - (13,000)
Decrease in valuation allowance (2,293,000) (1,578,000) (298,000)
Benefit of operating loss carryforward, not recognized - - 167,000
State taxes, net of Federal benefit 163,000 110,000 -
Adjustment of prior year estimated liability - 19,000 -
Recognition of acquired tax benefits previously included
in valuation allowance 246,000 49,000 -
Other (155,000) 204,000 31,000
- -----------------------------------------------------------------------------------------------------------
Total income tax benefit $ (922,000) $ (828,000) $ -
===========================================================================================================
</TABLE>
Accumulated deferred income tax benefits included in accrued interest and other
assets in the consolidated balance sheets were $2,220,000 and $900,000 as of
December 31, 1996 and 1995, respectively. As of December 31, 1996, the Company
has net operating loss carryforwards for Federal and state income tax purposes
of $8,206,000 and $6,845,000, respectively, which are available to offset future
taxable income, if any, through 2010 and 2000, respectively. In addition, the
Company has alternative minimum and other tax credit carryforwards of
approximately $355,000 which are available to reduce future Federal regular
income taxes, if any, over an indefinite period.
The 1996 net change in the deferred tax asset valuation allowance was a decrease
of $2,293,000 consisting of a decrease of $1,234,000 relating to a favorable
reassessment of earnings expectations and a decrease of $973,000 relating to
current year activity. The remaining valuation allowance of $1,933,000 as of
December 31, 1996 relates to Federal and state tax carryforwards of acquired
institutions. Management believes that the realization of the recognized net
deferred tax asset of $2,220,000 is more likely than not, based on the
expectation that the Company will generate the necessary amount of taxable
income in future periods.
F-18
<PAGE> 51
12) COMMON STOCK
On November 22, 1994, the Company completed two private offerings of the
Company's common stock (the "Private Offerings"). After deducting the direct
costs of approximately $99,000, the private offerings generated $3,034,000 in
additional capital for FP Bancorp.
13) STOCK OPTIONS
The Company has a stock option plan approved in 1988 (the "1988 Plan") which
provides for the granting of options for up to 90,090 shares of common stock to
employees for a price not less than the fair market value of the stock at the
date of grant. In November 1993, the Board of Directors approved an increase in
the number of shares available under the 1988 Plan to 250,000 shares and in May
1994, the increase was approved by the stockholders. In March 1996, the Board of
Directors approved an increase in the number of shares available under the 1988
Plan to 500,000 shares and in May 1996, the increase was approved by the
stockholders. The plan provides for nonqualified and incentive stock options for
employees and nonemployee directors. Shares under the employee options become
exercisable at a rate of 20% or 33 1/3% annually. Shares under the nonemployee
director options are exercisable immediately following the effective date of the
grant. The terms of the options range from five to ten years from the date the
options are granted. Options are granted at a price equal to the fair market
value of the shares as of the date of grant. Options to purchase 230,224 shares
were available for grant as of December 31, 1996.
The Company applies APB No. 25 in accounting for the 1988 Plan and, accordingly,
no compensation cost has been recognized for its stock options in the
consolidated financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under Statement
No. 123, the Company's net earnings would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Net earnings, as reported $4,208,000 $1,911,000
Pro forma net earnings $3,914,000 $1,911,000
Primary earnings per share, as reported $1.54 $0.77
Pro forma primary earnings per share $1.44 $0.77
Fully diluted earnings per share, as reported $1.42 $0.72
Pro forma fully diluted earnings per share $1.33 $0.72
</TABLE>
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions for 1996:
risk-free interest rates equal to comparable U.S. Treasury rates at each grant
date; dividend yield of zero; expected lives of six years; and volatility of
23.5%. The weighted average fair value of stock options granted in 1996 was
$3.43. Pro forma net earnings reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under Statement No. 123 is not reflected in the pro forma net earnings amounts
presented above because compensation cost is reflected over the options' vesting
period and compensation cost for options granted prior to January 1, 1995 is not
considered.
F-19
<PAGE> 52
13) STOCK OPTIONS (CONTINUED)
The following is a summary of transactions under the 1988 Stock Option Plans
which occurred during 1996 and 1995:
<TABLE>
<CAPTION>
1988 Plan
- ---------------------------------------------------------------------
Number of Weighted Average
Shares Exercise Price
- ---------------------------------------------------------------------
<S> <C> <C>
Outstanding as of December 31, 1994 155,776 $5.15
Exercised (2,800) $5.15
- ---------------------------------------------------------------------
Outstanding as of December 31, 1995 152,976 $5.15
Granted 114,000 $8.74
Exercised (2,850) $5.15
- ---------------------------------------------------------------------
Outstanding as of December 31, 1996 264,126 $6.70
- ---------------------------------------------------------------------
Exercisable as of:
December 31, 1996 217,658 $6.33
December 31, 1995 104,628 $5.15
- ---------------------------------------------------------------------
</TABLE>
As of December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options were $5.15 to $9.25 and 7.53
years, respectively.
14) EMPLOYEE STOCK OWNERSHIP PLAN
Prior to 1996, the Company sponsored the FP Bancorp Employee Stock Ownership
Plan (the "ESOP"). The amount of annual contributions to the ESOP were at the
discretion of the Company's Board of Directors. There were no contributions
under the ESOP in 1996. Contributions under the ESOP amounted to $143,000 and
$46,000 in 1995 and 1994, respectively.
The ESOP was designed to enable eligible employees, as defined in the plan
document, to participate in the growth and prosperity of the Company through
stock ownership. To fund the ESOP, the Company borrowed $500,000 and loaned the
proceeds to the ESOP. The ESOP used most of the proceeds to purchase 19,048
shares of newly issued stock of the Company. The Company's receivable from the
ESOP was $100,000 as of December 31, 1995. The receivable from ESOP was repaid
during 1996.
On January 23, 1996, the Board of Directors of the Company approved the
termination of the ESOP pending approval of the Internal Revenue Service, which
was received effective April 1, 1996. Upon termination of the ESOP, all
participants became fully vested in their assets. ESOP termination costs have
been paid by the Company.
15) 401(K) SAVINGS PLAN
Effective January 1, 1994, FPNB implemented the First Pacific National Bank
401(k) Savings Plan (the "Plan"). The Plan is a defined contribution plan
covering full-time and part-time employees who have completed six full months of
employment with FPNB. Temporary employees are excluded from Plan participation.
The Plan is subject to the provisions of the Employee Retirement Income Security
Act of 1974 ("ERISA").
The Trustee and Administrator of the Plan is Union Bank of California ("Union
Bank"). The Plan provides for participant-directed accounts which allow
participants to allocate their account balances to the following Union Bank
investment funds: Stepstone Stable Value Income Fund, Stepstone Balanced Fund
and Stepstone Value Momentum Fund. A fourth fund, Fidelity's Contrafund, is also
offered. The participants of the Plan may also allocate up to 50% of their
deferral to an investment in FP Bancorp common stock.
F-20
<PAGE> 53
15) 401(K) Savings Plan (CONTINUED)
Participants' accounts are credited or debited with investment earnings or
losses at the end of each calendar quarter. FPNB contributed $138,000 and
$80,000 as discretionary contributions for the years ended December 31, 1996 and
1995, respectively. The contribution in 1996 was a match based on 50% of a
participant's first 6% of salary withholdings. The 1995 contribution was a match
based on 50% of a participant's first 4% of salary withholdings.
16) LEASE COMMITMENTS
The Company leases certain of its banking and administrative facilities from a
partnership whose partners include several members of the Company's Board of
Directors. As of December 31, 1996, minimum rental payments due primarily to
these related partnerships under operating leases having initial or remaining
noncancelable lease terms in excess of one year were as follows:
<TABLE>
<CAPTION>
Operating leases Other
with related parties operating leases
- -------------------------------------------------------------------------
<S> <C> <C>
1997 $ 300,000 $ 230,000
1998 301,000 233,000
1999 278,000 233,000
2000 238,000 233,000
2001 196,000 167,000
Thereafter 2,958,000 266,000
- -------------------------------------------------------------------------
Total minimum lease payments $4,271,000 $1,360,000
=========================================================================
</TABLE>
During 1996, 1995 and 1994 rent expense totaled $532,000, $431,000 and $474,000,
respectively. There are no contingent rental payments applicable to any of the
leases. Most of the leases provide that the Company pay taxes, maintenance,
insurance and certain other operating expenses applicable to the leased premises
in addition to the monthly minimum payments. Management expects that in the
normal course of business, leases that expire will be renewed or replaced by
other leases.
17) COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers. The
financial instruments include commitments to extend credit, standby letters of
credit and financial guarantees. Those instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the consolidated
balance sheets. The contract or notional amounts of those instruments reflect
the extent of involvement the Company has in particular classes of financial
instruments.
Commitments to extend credit amounting to $51,310,000 were outstanding as of
December 31, 1996. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
Standby letters of credit and financial guarantees amounting to $3,269,000 were
outstanding as of December 31, 1996. Standby letters of credit and financial
guarantees are conditional commitments issued by FPNB to guarantee the
performance of a customer to a third party. Those guarantees are primarily
issued to support private borrowing arrangements. Most guarantees will expire
within one year.
The Company generally requires collateral or other security to support financial
instruments with credit risk. Management does not anticipate that any material
loss will result from the outstanding commitments to extend credit, standby
letters of credit and financial guarantees.
F-21
<PAGE> 54
17) COMMITMENTS AND CONTINGENCIES (CONTINUED)
As of December 31, 1996, FPNB had lines of credit in the amount of $7,000,000
from correspondent banks which are renewable annually. FPNB also had a credit
line with the Federal Home Loan Bank, which would allow FPNB to borrow up to
$11,000,000. In addition, FPNB had a $10,000,000 reverse repurchase agreement
with an investment broker. The availability of the lines of credit, as well as
adjustments in deposit programs, provides for liquidity in the event that the
level of deposits should fall abnormally low. These sources provide that funding
thereof may be withdrawn depending upon the financial strength of FPNB.
Because of the nature of its activities, the Company is at all times subject to
pending and threatened legal actions which arise out of the normal course of its
business. In the opinion of management, based in part upon opinions of legal
counsel, the disposition of all litigation will not have a material effect on
the Company.
18) REGULATORY MATTERS
The Federal Deposit Insurance Corporation Improvement Act of 1992 ("FDICIA") was
signed into law on December 19, 1992. Regulations implementing the prompt
corrective action provisions of FDICIA became effective on December 19, 1993.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well-capitalized", "adequately-capitalized", "undercapitalized",
"significantly undercapitalized" and "critically undercapitalized".
The prompt corrective action regulations define "well-capitalized" as having a
Risk-based Capital Ratio of 10% or greater, having a Tier 1 Risk-based Capital
Ratio of 6% or greater and having a leverage ratio of 5% or greater. Under these
guidelines, as of December 31, 1996, the Company was considered
"adequately-capitalized" and FPNB was considered "well-capitalized".
<TABLE>
<CAPTION>
December 31, 1996
FP Bancorp FPNB
- ------------------------------------------------------------------------------
To be Adequately Capitalized To be Well Capitalized
Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------
Leverage Ratios:
<S> <C> <C> <C> <C>
Tier 1 capital $16,965 5.54% $19,966 6.52%
Minimum required 12,249 4.00% 15,306 5.00%
- ------------------------------------------------------------------------------
Excess $ 4,716 1.54% $ 4,660 1.52%
==============================================================================
Risk-based Capital Ratios:
Tier 1 capital $16,965 7.47% $19,966 8.79%
Minimum required 9,088 4.00% 13,636 6.00%
- ------------------------------------------------------------------------------
Excess $ 7,877 3.47% $ 6,330 2.79%
- ------------------------------------------------------------------------------
Total capital $19,808 8.72% $22,810 10.04%
Minimum required 18,175 8.00% 22,726 10.00%
- ------------------------------------------------------------------------------
Excess $ 1,633 0.72% $ 84 0.04%
==============================================================================
</TABLE>
Under Federal banking law, dividends declared by FPNB in any calendar year may
not, without the approval of the Office of the Comptroller of the Currency (the
"OCC"), exceed its net profit, as defined, for that year combined with its
retained income from the preceding two years. However, in October 1993, the OCC
issued a bulletin to all national banks outlining new guidelines limiting the
circumstances under with national banks may pay dividends even if the banks are
otherwise statutorily authorized to pay dividends. The limitations impose a
requirement or in some cases suggest that prior approval of the OCC should be
obtained before a dividend is paid if a national bank is the subject of
administrative action or the payment could be viewed by the OCC as unsafe or
unsound.
The regulatory restrictions on dividend payments for both FPNB and the Company
may affect the Company's ability to make interest payments on the Debentures
(note 9) and pay dividends on its common stock.
F-22
<PAGE> 55
18) REGULATORY MATTERS (CONTINUED)
On May 24, 1993, as a result of supervisory concerns disclosed during the
inspection of FP Bancorp by the FRB in December, 1992, FP Bancorp entered into a
Memorandum of Understanding with the FRB (the "FP Bancorp Memorandum"). The FP
Bancorp Memorandum required improved supervision of FPNB by FP Bancorp. It also
prohibited certain actions by the Board of Directors of FP Bancorp, including
(i) payment of dividends without at least 15 days prior notice to the FRB, (ii)
incurring additional indebtedness without at least 15 days prior notice to the
FRB and (iii) repurchasing outstanding stock without prior approval of the FRB.
The FRB conducted an examination of FP Bancorp during February 1996. Based on
the results of this examination, the FRB terminated the FP Bancorp Memorandum
effective April 18, 1996.
19) SUBSEQUENT EVENTS
On January 7, 1997, the Company announced that FPNB has received approval from
the OCC for the acquisition of the Wells Fargo Bank Valley Center Branch located
in Valley Center in San Diego County, California. The transaction is expected to
be completed in early 1997.
20) PARENT COMPANY CONDENSED FINANCIAL INFORMATION
FP Bancorp, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31,
ASSETS 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
Cash $ 1,909,000 $ 2,220,000
Investment in subsidiary 23,706,000 19,019,000
Other assets 160,000 480,000
- ----------------------------------------------------------------------------
Total assets $25,775,000 $21,719,000
- ----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------
Accrued expenses and other liabilities $ 222,000 $ 311,000
Convertible subordinated debentures 4,575,000 4,575,000
Stockholders' equity 20,978,000 16,833,000
- ----------------------------------------------------------------------------
Total liabilities and stockholders' equity $25,775,000 $21,719,000
============================================================================
</TABLE>
FP Bancorp, Inc.
Condensed Statements of Earnings
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other income $ 117,000 $ 109,000 $ 24,000
Interest expense (483,000) (483,000) (412,000)
Operating expense (291,000) (531,000) (224,000)
- -------------------------------------------------------------------------------------------------------
Loss before income taxes and equity in undistributed
net earnings of subsidiary (657,000) (905,000) (612,000)
Equity in undistributed net earnings of subsidiary 4,865,000 2,816,000 944,000
- -------------------------------------------------------------------------------------------------------
Net earnings $ 4,208,000 $ 1,911,000 $ 332,000
=======================================================================================================
</TABLE>
F-23
<PAGE> 56
20) PARENT COMPANY CONDENSED FINANCIAL INFORMATION (CONTINUED)
FP Bancorp, Inc.
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $ 4,208,000 $ 1,911,000 $ 332,000
Adjustments to reconcile net earnings to net cash
used in operating activities:
Equity in undistributed net earnings of subsidiary (4,865,000) (2,816,000) (944,000)
Amortization of debenture issuance costs 72,000 72,000 71,000
Net decrease (increase) in other assets 248,000 (155,000) (161,000)
Increase (decrease) in accrued expenses and other liabilities (89,000) 87,000 (84,000)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (426,000) (901,000) (786,000)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Decrease in receivable from ESOP 100,000 33,000 34,000
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 100,000 33,000 34,000
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from private offering - - 3,034,000
Proceeds from exercise of stock options 15,000 15,000 -
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 15,000 15,000 3,034,000
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (311,000) (853,000) 2,282,000
Cash at beginning of year 2,220,000 3,073,000 791,000
- ---------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 1,909,000 $ 2,220,000 $ 3,073,000
===========================================================================================================================
Supplemental disclosure of cash flow information: Cash paid for:
Interest $ 412,000 $ 412,000 $ 412,000
Income taxes $ 33,000 $ 1,000 $ 1,000
===========================================================================================================================
Supplemental disclosure of noncash investing and financing activities:
Change in net unrealized gains (losses) on investment
securities available-for-sale $ (178,000) $ 799,000 $ (515,000)
===========================================================================================================================
Common stock issued in merger - $ 4,255,000 $ -
===========================================================================================================================
</TABLE>
F-24
<PAGE> 57
21) QUARTERLY EARNINGS
The following is a summary of the Company's quarterly earnings:
<TABLE>
<CAPTION>
Three months ended
- --------------------------------------------------------------------------------------------------
1996 December 31 September 30 June 30 March 31
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 6,315,000 $5,874,000 $5,631,000 $4,423,000
Interest expense 1,828,000 1,778,000 1,618,000 1,293,000
Net interest income before
provision for loan losses 4,487,000 4,096,000 4,013,000 3,130,000
Provision for loan losses 150,000 150,000 150,000 250,000
Net interest income after
provision for loan losses 4,337,000 3,946,000 3,863,000 2,880,000
Other operating income 808,000 492,000 483,000 376,000
Other operating expenses 3,798,000 3,474,000 3,816,000 2,811,000
Earnings before income taxes 1,347,000 964,000 530,000 445,000
Net income taxes (benefit) (340,000) 5,000 978,000 279,000
Net earnings 1,007,000 969,000 1,508,000 724,000
Primary earnings per share $ .37 $ .36 $ .55 $ .27
Fully diluted earnings per share $ .32 $ .32 $ .48 $ .22
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Three months ended
- --------------------------------------------------------------------------------------------------
1995 December 31 September 30 June 30 March 31
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 4,573,000 $4,421,000 $4,595,000 $3,486,000
Interest expense 1,338,000 1,298,000 1,269,000 1,049,000
Net interest income before
provision for loan losses 3,235,000 3,123,000 3,326,000 2,437,000
Provision for loan losses 500,000 100,000 - -
Net interest income after
provision for loan losses 2,735,000 3,023,000 3,326,000 2,437,000
Other operating income 471,000 480,000 462,000 393,000
Other operating expenses 3,356,000 3,300,000 3,043,000 2,545,000
Earnings before income taxes (150,000) 203,000 745,000 285,000
Net income tax benefit 606,000 222,000 - -
Net earnings 456,000 425,000 745,000 285,000
Primary earnings per share $ .17 $ .16 $ .28 $ .16
Fully diluted earnings per share $ .15 $ .11 $ .27 $ .16
- --------------------------------------------------------------------------------------------------
</TABLE>
F-25
<PAGE> 58
PART III
The Registrant intends to file with the Securities and Exchange
Commission a definitive proxy statement pursuant to Regulation 14A, which will
involve the election of directors, within 120 days of the end of the fiscal year
covered by this Form 10-KSB (the "Proxy Statement").
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
In response to this item, Registrant hereby incorporates by
reference the "Proposal II--Election of Directors" portion of the Proxy
Statement for the Annual Meeting of Stockholders to be held on May 27, 1997.
ITEM 10. EXECUTIVE COMPENSATION.
In response to this item, Registrant hereby incorporates by
reference the "Director Remuneration, Executive Officers, and Executive
Compensation" subparts of the "Proposal II--Election of Directors" portion of
the Proxy Statement for the Annual Meeting of Stockholders to be held on May 27,
1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
In response to this item, Registrant hereby incorporates by
reference the "Securities Ownership of Officers, Directors and Others" subpart
of the "Proposal II--Election of Directors" portion of the Proxy Statement for
the Annual Meeting of Stockholders to be held on May 27, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In response to this item, Registrant hereby incorporates by
reference the "Certain Transactions" subparts of the "Proposal II--Election of
Directors" portion of the Proxy Statement for the Annual Meeting of Stockholders
to be held on May 27, 1997.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 FP Bancorp, Inc. Certificate of Incorporation and
Amendment (incorporated by reference to Exhibit 3.1 to
report of FP Bancorp on Form 10-KSB for the year ended
December 31, 1994, File Number 0-17650)
3.2 FP Bancorp, Inc. By-laws (incorporated by reference to
Exhibit 3.2 to report of FP Bancorp on Form 10-KSB for the
year ended December 31, 1994, File Number 0-17650)
4.1 Indenture dated November 9, 1992 (including form of
Debenture) (incorporated by reference to Exhibit 4.2 to
the Registration Statement on Form S-2, File Number
33-52086)
4.2 Trust Agreement (incorporated by reference to Exhibit 4.3
to the Registration Statement on Form S-2, File Number
33-52086)
10.1 Escondido National Bank Plaza Lease dated January 4, 1984,
between Grand Avenue Financial Center Partnership and
Escondido National Bank, as Amended
III-1
<PAGE> 59
(Current Principal Offices of FP Bancorp, Inc. and First
Pacific National Bank located at 613 West Valley Parkway,
Escondido, California 92025-4929) (incorporated by
reference to Exhibit 10.1 to the Registration Statement on
Form S-4, File No. 33-87388)
10.2 Amendment to Escondido National Bank Plaza Lease
(incorporated by reference to Exhibit 10.2 to the Form
10-KSB of the Company for the year ended December 31,
1995, File Number 0-17650)
10.3* Amended and Restated 1988 Stock Option Plan of ENB Holding
Company as Amended (incorporated by reference to Exhibit A
to the Company's Proxy Statement for the Annual Meeting of
Stockholders held May 21, 1996)
10.4 Lease Between Lake San Marcos Properties and San Marcos
National Bank dated August 9, 1988 (incorporated by
reference to Exhibit 10.9 to the Registration Statement on
Form S-1, File Number 33-33628)
10.5 Standard Multi-Tenant Lease between Overland Bank and E.
E. Espinas, M.D., trustee of the E. E. Espinas, M.D.,
Inc., Retirement Trust executed August 30, 1977
(incorporated by reference to Exhibit 10.15 to the
Registration Statement on Form S-4, File No. 33-87388)
10.6 Office Building Lease between Overland Bank and AARK/Park
Joint Venture (incorporated by reference to Exhibit 10.14
to the Registration Statement on Form S-4, File No.
33-87388)
10.7 Overland Bank Series A Warrant Agreement (incorporated by
reference to Exhibit 10.16 to the Registration Statement
on Form S-4, File No. 33-87388)
10.8* Employment Agreement Dated March 1, 1993 between Escondido
National Bank, ENB Holding Company and Harvey L.
Williamson (incorporated by reference to Exhibit 10.5 to
the Form 10-KSB of ENB Holding Company for the Year Ended
December 31, 1993, File Number 0-17650)
10.9* Amendment to Employment Agreement dated December 30, 1994
between First Pacific National Bank and Harvey L.
Williamson (incorporated by reference to Exhibit 10.20 to
the Registration Statement on Form S-4, File No. 33-87388)
10.10* Change of Control Agreement between Harvey L. Williamson
and First Pacific National Bank dated January 20, 1994
(incorporated by reference to Exhibit 10.12 to the Form
10-KSB of ENB Holding Company for the Year Ended December
31, 1993, File Number 0-17650)
10.11* Amendment to Change of Control Agreement between Harvey L.
Williamson and First Pacific National Bank dated January
11, 1995 (incorporated by reference to Exhibit 10.17 to
the Registration Statement on Form S-4, File No. 33-87388)
10.12* Change of Control Agreement between Gary W. Deems and
First Pacific National Bank dated January 20, 1994
(incorporated by reference to Exhibit 10.13 to the Form
10-KSB of ENB Holding Company for the Year Ended December
31, 1993, File Number 0-17650)
III-2
<PAGE> 60
10.13* Amendment to Change of Control Agreement between Gary W.
Deems and First Pacific National Bank dated January 11,
1995 (incorporated by reference to Exhibit 10.18 to the
Registration Statement on Form S-4, File No. 33-87388)
10.14* Change of Control Agreement between Michael J. Perdue and
First Pacific National Bank dated January 20, 1994
(incorporated by reference to Exhibit 10.14 to the Form
10-KSB of ENB Holding Company for the Year Ended December
31, 1993, File Number 0-17650)
10.15* Amendment to Change of Control Agreement between Michael
J. Perdue and First Pacific National Bank dated January
11, 1995 (incorporated by reference to Exhibit 10.19 to
the Registration Statement on Form S-4, File No. 33-87388)
10.16* ENB Holding Company Employee Stock Ownership Plan
(incorporated by reference to Exhibit 10.16 to the Form
10-KSB of ENB Holding Company for the Year Ended December
31, 1990, File No. 0-17650)
10.17* 1996 Senior Management Incentive Compensation Plan
(incorporated by reference to Exhibit 10.21 to
Registrant's Annual Report on Form 10-KSB for its fiscal
year ended December 31, 1995)
10.18* 1997 Management Incentive Compensation Plan
10.19 Agreement and Plan of Reorganization by and among FP
Bancorp, Inc., First Pacific National Bank, RB Bancorp and
Bank of Rancho Bernardo dated as of January 12, 1996
(incorporated by reference to Exhibit 10.22 to
Registrant's Annual Report on Form 10-KSB for its fiscal
year ended December 31, 1995)
10.20 Purchase and Assumption Agreement dated as of October 15,
1996, between Wells Fargo Bank, N.A. and First Pacific
National Bank
10.21 Lease between Palomar Village Properties, Inc., a
California corporation, and First Pacific National Bank
dated February 29, 1996
11 Statement re computation of per share earnings
21 FP Bancorp, Inc. Subsidiaries (incorporated by reference
to Exhibit 21 to the Form 10-KSB of FP Bancorp for the
year ended December 31, 1994, File Number 0-17650)
23 Consent of KPMG Peat Marwick LLP
24 Power of Attorney (included in signature page)
----------------------------
* Denotes a management contract or compensatory arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the Registrant's
quarter ended December 31, 1996.
III-3
<PAGE> 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 26, 1997 FP BANCORP, INC.
(Registrant)
By: /s/ Harvey L. Williamson
-------------------------------------
Harvey L. Williamson,
President and Chief Executive Officer
Know all men by these presents, that each person whose signature appears
below constitutes and appoints Harvey L. Williamson and Michael J. Perdue, or
either of them, his attorney-in-fact, each with power of substitution for him in
any and all capacities, to sign any amendments to this Annual Report on Form
10-KSB and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, and hereby
ratifies and confirms all that each said attorney-in-fact or his substitute or
substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-KSB has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<S> <C> <C>
/s/ Mark N. Baker Director March 26, 1997
- ---------------------------
Mark N. Baker
/s/ Gary W. Deems Director, Chief Administrative March 26, 1997
Gary W. Deems Officer and Executive Vice
President
/s/ Earle W. Frey, Jr. Director March 26, 1997
- ---------------------------
Earle W. Frey, Jr.
/s/ Robert W. Klemme Director March 26, 1997
- ---------------------------
Robert W. Klemme
/s/ Joseph J. Kuebler Director March 26, 1997
- ---------------------------
Joseph J. Kuebler
/s/ Randall C. Luce Director March 26, 1997
- ---------------------------
Randall C. Luce
/s/ Larry R. Markham Director March 26, 1997
- ---------------------------
Larry R. Markham
/s/ Richard W. McBride Director March 26, 1997
- ---------------------------
Richard W. McBride
</TABLE>
III-4
<PAGE> 62
<TABLE>
<S> <C> <C>
/s/ Michael J. Perdue Director, Chief Financial March 26, 1997
- ---------------------------- Officer and Executive Vice
Michael J. Perdue President (Principal Financial
Officer and Principal
Accounting Officer)
/s/ Richard S. Spanjian Director March 26, 1997
- ----------------------------
Richard S. Spanjian
/s/ Robert M. Spanjian Director March 26, 1997
- ----------------------------
Robert M. Spanjian
/s/ Richard B. Thomas Director March 26, 1997
- ----------------------------
Richard B. Thomas
/s/ Michael W. Wexler Director March 26, 1997
- ----------------------------
Michael W. Wexler
/s/ Harvey L. Williamson Director, Chief Executive March 26, 1997
- ---------------------------- Officer (Principal Executive
Harvey L. Williamson Officer)
</TABLE>
III-5
<PAGE> 63
EXHIBIT LIST
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
3.1 FP Bancorp, Inc. Certificate of Incorporation and Amendment
(incorporated by reference to Exhibit 3.1 to report of FP Bancorp on
Form 10-KSB for the year ended December 31, 1994, File Number 0-17650)
3.2 FP Bancorp, Inc. By-laws (incorporated by reference to Exhibit 3.2 to
report of FP Bancorp on Form 10-KSB for the year ended December 31,
1994, File Number 0-17650)
4.1 Indenture dated November 9, 1992 (including form of Debenture)
(incorporated by reference to Exhibit 4.2 to the Registration Statement
on Form S-2, File Number 33-52086)
4.2 Trust Agreement (incorporated by reference to Exhibit 4.3 to the
Registration Statement on Form S-2, File Number 33-52086)
10.1 Escondido National Bank Plaza Lease dated January 4, 1984, between
Grand Avenue Financial Center Partnership and Escondido National Bank,
as Amended (Current Principal Offices of FP Bancorp, Inc. and First
Pacific National Bank located at 613 West Valley Parkway, Escondido,
California 92025-4929) (incorporated by reference to Exhibit 10.1 to
the Registration Statement on Form S-4, File No. 33-87388)
10.2 Amendment to Escondido National Bank Plaza Lease (incorporated by
reference to Exhibit 10.2 to the Form 10-KSB of the Company for the
year ended December 31, 1995, File Number 0-17650)
10.3* Amended and Restated 1988 Stock Option Plan of ENB Holding Company as
Amended (incorporated by reference to Exhibit A to the Company's Proxy
Statement for the Annual Meeting of Stockholders held May 21, 1996)
10.4 Lease Between Lake San Marcos Properties and San Marcos National Bank
dated August 9, 1988 (incorporated by reference to Exhibit 10.9 to the
Registration Statement on Form S-1, File Number 33-33628)
10.5 Standard Multi-Tenant Lease between Overland Bank and E. E. Espinas,
M.D., trustee of the E. E. Espinas, M.D., Inc., Retirement Trust
executed August 30, 1977 (incorporated by reference to Exhibit 10.15 to
the Registration Statement on Form S-4, File No. 33-87388)
10.6 Office Building Lease between Overland Bank and AARK/Park Joint Venture
(incorporated by reference to Exhibit 10.14 to the Registration
Statement on Form S-4, File No. 33-87388)
10.7 Overland Bank Series A Warrant Agreement (incorporated by reference to
Exhibit 10.16 to the Registration Statement on Form S-4, File No.
33-87388)
10.8* Employment Agreement Dated March 1, 1993 between Escondido National
Bank, ENB Holding Company and Harvey L. Williamson (incorporated by
reference to Exhibit 10.5 to the Form 10-KSB of ENB Holding Company for
the Year Ended December 31, 1993, File Number 0-17650)
</TABLE>
III-6
<PAGE> 64
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
10.9* Amendment to Employment Agreement dated December 30, 1994 between First
Pacific National Bank and Harvey L. Williamson (incorporated by
reference to Exhibit 10.20 to the Registration Statement on Form S-4,
File No. 33-87388)
10.10* Change of Control Agreement between Harvey L. Williamson and First
Pacific National Bank dated January 20, 1994 (incorporated by reference
to Exhibit 10.12 to the Form 10-KSB of ENB Holding Company for the Year
Ended December 31, 1993, File Number 0-17650)
10.11* Amendment to Change of Control Agreement between Harvey L. Williamson
and First Pacific National Bank dated January 11, 1995 (incorporated by
reference to Exhibit 10.17 to the Registration Statement on Form S-4,
File No. 33-87388)
10.12* Change of Control Agreement between Gary W. Deems and First Pacific
National Bank dated January 20, 1994 (incorporated by reference to
Exhibit 10.13 to the Form 10-KSB of ENB Holding Company for the Year
Ended December 31, 1993, File Number 0-17650)
10.13* Amendment to Change of Control Agreement between Gary W. Deems and
First Pacific National Bank dated January 11, 1995 (incorporated by
reference to Exhibit 10.18 to the Registration Statement on Form S-4,
File No. 33-87388)
10.14* Change of Control Agreement between Michael J. Perdue and First Pacific
National Bank dated January 20, 1994 (incorporated by reference to
Exhibit 10.14 to the Form 10-KSB of ENB Holding Company for the Year
Ended December 31, 1993, File Number 0-17650)
10.15* Amendment to Change of Control Agreement between Michael J. Perdue and
First Pacific National Bank dated January 11, 1995 (incorporated by
reference to Exhibit 10.19 to the Registration Statement on Form S-4,
File No. 33-87388)
10.16* ENB Holding Company Employee Stock Ownership Plan (incorporated by
reference to Exhibit 10.16 to the Form 10-KSB of ENB Holding Company
for the Year Ended December 31, 1990, File No.
0-17650)
10.17* 1996 Senior Management Incentive Compensation Plan (incorporated by
reference to Exhibit 10.21 to Registrant's Annual Report on Form 10-KSB
for its fiscal year ended December 31, 1995)
10.18* 1997 Management Incentive Compensation Plan
10.19 Agreement and Plan of Reorganization by and among FP Bancorp, Inc.,
First Pacific National Bank, RB Bancorp and Bank of Rancho Bernardo
dated as of January 12, 1996 (incorporated by reference to Exhibit
10.22 to Registrant's Annual Report on Form 10-KSB for its fiscal year
ended December 31, 1995)
10.20 Purchase and Assumption Agreement dated as of October 15, 1996, between
Wells Fargo Bank, N.A. and First Pacific National Bank
10.21 Lease between Palomar Village Properties, Inc., a California
corporation, and First Pacific National Bank dated February 29, 1996
11 Statement re computation of per share earnings
</TABLE>
III-7
<PAGE> 65
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
21 FP Bancorp, Inc. Subsidiaries (incorporated by reference to Exhibit 21
to the Form 10-KSB of FP Bancorp for the year ended December 31, 1994,
File Number 0-17650)
23 Consent of KPMG Peat Marwick LLP
24 Power of Attorney (included in signature page)
----------------------------
* Denotes a management contract or compensatory arrangement.
</TABLE>
III-8
<PAGE> 1
EXHIBIT 10.18
[LOGO]
FPBancorp
- --------------------------------------------------------------------------------
MANAGEMENT INCENTIVE COMPENSATION PLAN
================================================================================
FIRST PACIFIC NATIONAL BANK
MANAGEMENT INCENTIVE COMPENSATION PLAN
I. OBJECTIVE
The objective of this plan is to provide incentives to those senior
executives of FP Bancorp and First Pacific National Bank who can most
directly impact the profitability, return to shareholders and other
performance criteria of the corporation. The plan is designed to reward
these individuals for attaining and sustaining high levels of performance
and profitability, and for meeting and exceeding the short and long term
goals of the corporation. The Board believes that this plan is desirable
and necessary in order to attract, retain and motivate high quality
executives to manage the corporation.
II. DURATION
This is an annual performance plan. Although it is the company's intention
to offer this plan, or a similar one, on an ongoing basis, there is no
guarantee that it will be extended beyond the current year. All
participants will be notified of any extension, change or termination
prior to the end of the first quarter of the calendar year.
III. PLAN DESCRIPTION
The plan is designed to reward participants based upon the company's
performance versus financial goals established as part of the annual
budget and Strategic Plan.
In order to protect shareholder interests, the plan requires a minimum
return on assets and equity before any incentive award can be paid. As the
returns rise above the minimum thresholds, incentives also rise
accordingly. The award levels will be spelled out in a separate document
prior to the end of the first quarter of the calendar year.
The plan will also identify key benchmark operating ratios that must be
met in order for the plan to pay out in full. These benchmarks may include
the CAMEL rating, efficiency ratio, ratio of non-performing assets to
total assets, ratio of loan loss reserve to non-performing loans and the
delinquency ratio. Failure to achieve any of the benchmarks may result in
the elimination or lowering of the plan award at the discretion of the
Compensation Committee.
IV. PLAN ADMINISTRATION
- --------------------------------------------------------------------------------
Page 1
<PAGE> 2
[LOGO]
FPBancorp
- --------------------------------------------------------------------------------
SENIOR MANAGEMENT INCENTIVE COMPENSATION PLAN
================================================================================
The Compensation Committee of the Board of Directors has the
responsibility for designing and administering the plan. Before the
beginning of each year, the Committee will review and revise the plan, and
establish specific goals and award thresholds. The Committee may adjust
the plan and/or payouts accordingly for extraordinary events during the
year which could affect the plan either positively or negatively.
V. PLAN PARTICIPANTS
Key executives of FP Bancorp and First Pacific National Bank who are
responsible for directing significant management functions within the
company are eligible for participation. Before the beginning of each year,
the Compensation Committee shall review the recommendations of the
company's executive management for participants and award levels.
Participants may be added during the plan year at the discretion of the
Compensation Committee, with their incentive awards prorated accordingly.
VI. PAYMENT SCHEDULE
The company will pay out the incentive awards as soon as practical after
the end of the calendar year and after the company's outside auditors have
reviewed the earnings and award calculations. All participants must be
employed by the company on the final day of the plan year to be included
in the incentive plan payout. Participants leaving the bank voluntarily or
for cause prior to year end will be ineligible for any awards under this
plan.
VII. IMPACT OF MERGERS
In the event the company becomes involved in a merger or acquisition, the
Compensation Committee may, at its discretion, adjust and continue the
plan accordingly.
- --------------------------------------------------------------------------------
Page 2
<PAGE> 3
FIRST PACIFIC NATIONAL BANK
1997 MANAGEMENT INCENTIVE COMPENSATION PLAN SPREADHSHEET
<TABLE>
<CAPTION>
PREMIER SUPER BUDGET
------- ----- ------
1997 ROE 9.52% 14.29% 17.50% 19.00% 21.43%
1997 ROA 0.60% 0.90% 1.10% 1.22% 1.35%
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 INCENTIVE PLAN POOL 0 141,680 236,230 281,280 340,600
% OF ADJUSTED NET INCOME 0% 4.00% 5.50% 6.00% 6.50%
EXECUTIVE MANAGEMENT
- --------------------
Williamson - President/CEO 0 35,893 57,918 71,518 85,200
Perdue - EVP/COO/CLO 0 35,893 57,918 71,518 85,200
Deems - EVP/CAO 0 35,893 57,918 71,518 85,200
- ------- ------- ------- -------
TOTAL POOL 0 107,679 173,754 214,554 255,600
= ======= ======= ======= =======
SENIOR MANAGEMENT
- -----------------
TOTAL POOL 0 24,000 44,100 48,000 60,000
= ======= ======= ======= =======
OTHER KEY MANAGEMENT
& UNALLOCATED
- -------------
TOTAL POOL 0 10,000 18,375 20,486 25,000
= ======= ======= ======= =======
**The unallocated pool is
limited to a maximum of
$25,000.
TOTAL 1997 MANAGEMENT INCENTIVE
COMPENSATION PLAN POOL 0 141,679 236,229 282,968 340,600
= ======= ======= ======= =======
PROJECTED FPNB 1997 NET PROFIT
AT ROE % STATED ABOVE $2,000,000 $3,000,000 $3,675,000 $4,008,000 $4,500,000
========== ========== ========== ========== ==========
</TABLE>
<PAGE> 1
Exhibit 10.20
Page 1
PURCHASE AND ASSUMPTION AGREEMENT
dated as of
October 15, 1996
between
WELLS FARGO BANK, N.A.
and
FIRST PACIFIC NATIONAL BANK
<PAGE> 2
Page 2
List of Schedules
Schedule 1.1(a) Assumed Severance Obligations
Schedule 1.1(b) Branches/Real Properties
Schedule 3.6(a) Form of California Grant Deed
Schedule 3.6(b) Form of Bill of Sale
Schedule 3.6(c) Form of Assignment and Assumption Agreement
Schedule 3.6(d) Form of Assignment of Lease and Assumption
Schedule 3.6(e) Form of Landlord Consent
Schedule 3.6(g) Form of Certificate of Officer, Wells Fargo Bank, National
Association
Schedule 3.7(d) Form of Certificate of Officer [Purchaser]
Schedule 5.4 Tenant Leases
Schedule 5.6 Litigation and Undisclosed Liabilities
Schedule 5.16 Environmental Matters
Schedule 8.1 Outstanding Tax Liabilities
<PAGE> 3
Page 3
This PURCHASE AND ASSUMPTION AGREEMENT, dated as of this 15th day of
October, 1996 (this "Agreement"), is by and between Wells Fargo Bank, N.A.
("Seller") and First Pacific National Bank ("Purchaser").
RECITALS
A. Seller. As of the date hereof, Seller is a national banking
association, organized under the laws of the United States, with its principal
office located in San Francisco, California.
B. Purchaser. Purchaser is a National Banking Association, organized
under the laws of the United States, with its principal office located in
Escondido, California.
C. Purchaser desires to acquire from Seller, and Seller desires to
transfer to Purchaser, certain banking premises and certain deposits and deposit
related loans associated therewith, located in the State of California, all in
accordance with and subject to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
promises and obligations set forth herein, the parties agree as follows:
ARTICLE 1
CERTAIN DEFINITIONS
1.1 Certain Definitions. The terms set forth below are used in this
Agreement with the following meanings:
"Accrued Interest" means, as of any date, (a) with respect to a
Deposit, interest which is accrued on such Deposit to but excluding such date
and not yet posted to the relevant deposit account and (b) with respect to a
Deposit Related Loan, interest which is accrued on such Deposit Related Loan to
but excluding such date and not yet paid.
"ACH Direct Deposit Cut-Off Date" has the meaning set forth in Section
4.3.
"Adjusted Payment Amount" has the meaning set forth in Section 3.3
"Adjustment Date" has the meaning set forth in Section 3.3.
"Affiliate" means, with respect to any person, any other person
directly or indirectly controlling, controlled by or under common control with
such person.
"Agreement" means this Purchase and Assumption Agreement, including all
schedules, exhibits and addenda, each as amended from time to time in accordance
with the terms hereof.
<PAGE> 4
Page 4
"Allocation Statement" has the meaning set forth in Section 3.4(a).
"Asbestos Hazard" means the presence of asbestos in a parcel of Owned
Real Property or the improvements thereon as of the date hereof which, under
applicable laws, must be immediately remediated in order to allow continuation
of the current operation of the Branch within such Owned Real Property using the
current improvements thereon and the cost of such remediation, as reasonably
determined by the Environmental Consultant, shall be more than One Hundred
Thousand Dollars ($100,000).
"Assets" has the meaning set forth in Section 2.1(a).
"Assignment and Assumption Agreement" has the meaning set forth in
Section 3.6(c).
"Assumed Severance Obligations" means those duties, responsibilities,
obligations and liabilities of Seller or of its Affiliates under the severance
and similar plans described in Schedule 1.1(a) to pay severance and provide
benefits to any Branch Employee or Transferred Employee.
"Branch Employees" means, the employees of the Seller working at the
Branches on the Closing Date (including, without limitation, those employees who
on the Closing Date are on family and medical leave, military leave or personal
or pregnancy leave and who are eligible to return to work under Seller's
policies), subject to any transfers permitted pursuant to Section 7.1 and
replacement in the ordinary course of business of employees who may leave
Seller's employ between the date hereof and the Closing Date.
"Branch Leases" means the leases under which Seller leases land and/or
buildings used as Branches, including without limitation ground leases.
"Branches" means each of the branch banking offices of Seller at the
locations identified on Schedule 1.1(b) hereto.
"Burdensome Condition" has the meaning set forth in Section 9.1(a).
"Business Day" means a day on which banks are generally open for
business in California and which is not a Saturday or Sunday.
"Cash on Hand" means, as of any date, all petty cash, vault cash,
teller cash, ATM cash, prepaid postage and cash equivalents held at a Branch.
"Closing" and "Closing Date" refer to the closing of the P&A
Transaction, which is to be held at such time and date as provided in Article 3
hereof.
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"Code" means the Internal Revenue Code of 1986, as amended.
"Deposit Related Loans" means the following loans and only the
following: (i) any consumer loan secured directly by a Deposit being sold (but
not including any credit card line of credit); and (ii) any overdraft loan
linked directly to a Deposit being sold (but not including any credit card
protection relationship). No other loans are being sold.
"Deposit(s)" means deposit liabilities with respect to deposit accounts
booked by Seller at the Branches, as of the close of business of the day prior
to the Closing Date, which constitute "deposits" for purposes of the Federal
Deposit Insurance Act. 12 U.S.C. Section 1813, including collected and
uncollected deposits and Accrued Interest, but excluding: (a) all Excluded
Deposits; (b) deposit liabilities with respect to accounts registered in the
name of a trust for which Seller serves as trustee (other than IRA and Keogh
Account deposit liabilities); (c) deposit liabilities with respect to accounts
booked by Seller at any Branch for which Seller serves as guardian or custodian
(other than IRA and Keogh Account deposit liabilities); and (d) Excluded
IRA/Keogh Account Deposits.
"Draft Closing Statement" means a draft closing statement, prepared by
Seller, as of the close of business of the third (3rd) business day preceding
the Closing Date setting forth an estimated calculation of both the Purchase
Price and the Estimated Payment Amount.
"Encumbrances" means all mortgages, claims, charges, liens,
encumbrances, easements, limitations, restrictions, commitments and security
interests, except for statutory liens securing tax and/or other payments not yet
due, liens incurred in the ordinary course of business, including without
limitation liens in favor of mechanics or materialmen, and such other liens,
charges, security interests or encumbrances as do not materially detract from
the value or materially and adversely affect the use of the properties or assets
subject thereto or affected thereby or which otherwise do not materially impair
the value of or business operations at such properties and except for
obligations pursuant to the California escheat and unclaimed property laws
relating to the Escheat Deposits.
Environmental Consultant has the meaning specified in Section 10.1(b).
"Environmental Hazard" means the presence of any Hazardous Substance in
violation of, and reasonably likely to require material remediation costs under,
applicable Environmental Laws; provided, however, that the definition of
Environmental Hazard shall not include asbestos and asbestos-containing
materials, unless, with respect to any single parcel of Owned Real Property, the
cost of remediation, as reasonably determined by the Environmental Consultant,
shall be more than One Hundred Thousand Dollars ($100,000). Any such
determination shall be based upon a "risk-based approach" of what would be
necessary to obtain the equivalent of a "no further action letter" from the
applicable regulatory agency or agencies with no deed
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restrictions which would adversely affect the commercial use of the parcel of
Owned Real Property.
"Environmental Law" means any Federal or state law, statute, rule,
regulation, code, order, judgment, decree, injunction or agreement with any
Federal or state governmental authority, (x) relating to the protection,
preservation or restoration of the environment (including, without limitation,
air, water vapor, surface water, groundwater, drinking water supply, surface
land, subsurface land, plant and animal life or any other natural resource) or
to human health or safety or (y) the exposure to, or the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of hazardous substances, in each case
as amended and now in effect. Environmental Laws include, without limitation,
the Clean Air Act (42 USC Section 7401 et seq.); the Comprehensive Environmental
Response Compensation and Liability Act (42 USC Sections 9601 et seq.); the
Resource Conservation and Recovery Act (42 USC Section 96901 et seq.); the
Federal Water Pollution Control Act (33 USC Sections 1251 et seq.); the
Occupational Safety and Health Act (29 USC Section 651 et seq.); the California
Porter-Cologne Act (Cal. Water Code Section 13000 et seq.) and the California
Carpenter-Presley-Tanner Hazardous Substance Account Act (Cal. Health & Safety
Code Section Section 25300 et seq.); provided, however, that the definition of
"Environmental Law" shall not include any Federal or state law, statute, rule,
regulation, code, order, judgment, decree, injunction or agreement with any
governmental authority relating to asbestos or asbestos-containing materials.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escheat Deposits" means, as of any date, Deposits and safe deposit box
contents, in each case held on such date at the Branches which become subject to
escheat, in the calendar year in which the Closing occurs, to the State of
California pursuant to applicable escheat and unclaimed property laws.
"Estimated Payment Amount" has the meaning set forth in Section 3.2(a).
"Estimated Purchase Price" means the Purchase Price as set forth on the
Draft Closing Statement.
"Excluded IRA/Keogh Account Deposits" has the meaning set forth in
Section 2.4(c).
"Excluded Deposits" means: (i) all wholesale commercial deposits (i.e.,
with account analysis or cash management services); and (ii) certain business
related deposit liabilities excluded by Seller. All Excluded Deposits have been
previously removed from deposit lists provided to Purchaser.
"FDIA" means the Federal Deposit Insurance Act, as amended.
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"FDIC" means the Federal Deposit Insurance Corporation.
"Federal Funds Rate" on any day means the per annum rate of interest
(rounded upward to the nearest 1/100 of 1%) which is the weighted average of the
rates on overnight federal funds transactions arranged on such day or, if such
day is not a Business Day, the previous Business Day, by federal funds brokers
computed and released by the Federal Reserve Bank of New York (or any successor)
in substantially the same manner as such Federal Reserve Bank currently computes
and releases the weighted average it refers to as the "Federal Funds Effective
Rate" at the date of this Agreement.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System.
"FedWire Direct Deposit Cut-off Date" has the meaning set forth in
Section 4.3.
"Final Closing Statement" means a final closing statement, prepared by
Seller, as of the ninetieth (90th) day following the Closing Date setting forth
both the Purchase Price and the Adjusted Payment Amount.
"Grant Deeds" has the meaning set forth in Section 3.6(a).
"Hazardous Substance" means any substance, whether liquid, solid or gas
(a) listed, identified or designated as hazardous or toxic to a level which
requires remediation under any Environmental Law; (b) which, applying criteria
specified in any Environmental Law, is hazardous or toxic; or (c) the use or
disposal of which is regulated under Environmental Law.
"IRA" means an "individual retirement account" or similar account
created by a trust for the exclusive benefit of an individual or his
beneficiaries in accordance with the provisions of Section 408 of the Code.
"IRS" means the Internal Revenue Service.
"Keogh Account" means an account created by a trust for the benefit of
employees (some or all of whom are owner-employees) and that complies with the
provisions of Section 401 of the Code.
"Landlord Consents" has the meaning set forth in Section 3.6(e).
"Lease Agreement" means a lease entered into pursuant to Section
10.1(c) upon such specific terms and conditions as contemplated by such Section
and such other commercially reasonable terms and conditions as are customary in
a "triple net" lease of a bank branch facility in the State of California.
"Lease Assignment" has the meaning set forth in Section 3.6(d).
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"Liabilities" has the meaning set forth in Section 2.2.
"Loans" means Deposit Related Loans only. No other loans are being
sold.
"Loan Documents" means all documents included in Seller's files with
respect to a Deposit Related Loan, including, without limitation, notes security
agreements, loan agreements, guaranties, and all modifications, waivers and
consents relating to any of the foregoing.
"Loan Value" means with respect to a Deposit Related Loan and as of a
date, the unpaid principal balance of any such Loan plus Accrued Interest
thereon.
"Loss" means the amount of losses, liabilities, damages (including
forgiveness or cancellation of obligations) and expenses (including reasonable
expenses of investigation and reasonable attorneys' fees and expenses in
connection with any action, suit or proceeding) incurred or suffered by the
indemnified party or its Affiliates in connection with the matters described in
Section 12.1, less the amount of the economic benefit (if any) to the
indemnified party or its Affiliates occurring or reasonably anticipated to occur
in connection with any such damage, loss, liability or expense (including Tax
benefits obtainable under applicable law, amounts recovered under insurance
policies net of deductibles, recovery by setoffs or counterclaims, and other
economic benefits).
"Material Adverse Effect" means (a) with respect to Seller, a material
adverse effect on the business or direct economic results of operations of the
Branches, taken as a whole, or on the ability of Seller timely to consummate the
P&A Transaction as contemplated by this Agreement, and (b) with respect to
Purchaser, a material adverse effect on the ability of Purchaser to perform any
of its financial or other obligations under this Agreement, including the
ability of Purchaser timely to consummate the P&A Transaction contemplated by
this Agreement. In determining whether there has occurred a Material Adverse
Effect there shall be excluded the effect of any change in Federal or state
banking laws or regulations, any change in GAAP or regulatory accounting
principles, any adverse change in general economic conditions, including without
limitation the interest rate environment, or in the California depository
institution industry generally.
"OCC" means the Office of the Comptroller of the Currency.
"Order" has the meaning set forth in Section 9.1(b).
"Owned Real Property" means Real Property where Seller owns both the
real property and improvements thereon that are used for Branches.
"P&A Transaction" means the purchase and sale of Assets and the
assumption of Liabilities described in Sections 2.1 and 2.2.
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"Personal Property" means all of the personal property of Seller,
located in the Branches, which is defined on the personal property and fixed
assets list previously provided to Purchaser; provided, no teller terminals or
Wells Fargo signs are being sold. If, prior to the Closing Date, an item of
Personal Property is stolen, destroyed or otherwise lost, such item shall be
excluded form the P&A Transaction, and the term "Personal Property" as used
herein shall exclude such item. If, prior to the Closing Date, an item of
Personal Property is damaged by fire or other casualty, such item, if reasonably
repairable, shall be sold to Purchaser (in accordance with the provisions
hereof) and the insurance proceeds relating to such item shall be assigned to
Purchaser, it being understood that if such item is not reasonably repairable or
is underinsured or uninsured, it shall be excluded from the P&A Transaction.
Personal Property, for purposes of what is being sold hereunder, does not
include any personal property of Seller located in the Real Property which is
not in the branch banking office and is not necessary to the operation of the
branch banking office (e.g., personal property associated with non-branch
banking offices of Seller which may be located in the Real Property).
"Personal Property Leases" means the leases under which Seller leases
certain Personal Property in the Branch. Seller shall cancel all such Personal
Property Leases as of the Closing.
"Purchase Price" has the meaning set forth in Section 2.3.
"Real Property" means the parcels of real property on which the
Branches listed on Schedule 1.1(b) are located, including any improvements and
tenant improvements and trade fixtures thereon, which Schedule indicates whether
or not such real property is Owned Real Property.
"Records" means all paper records and original documents, or where
reasonable and appropriate copies thereof, in Seller's possession that pertain
to and are utilized by Seller to administer, reflect, monitor, evidence or
record information respecting the business or conduct of the Branches (including
transaction tickets through the Closing Date and all records for closed accounts
located in Branches and excluding any other transaction tickets and records for
closed accounts) and all such records and original documents, or where
reasonable and appropriate copies thereof, regarding the Assets, or the
Deposits, or to comply with applicable laws and governmental regulations to
which the Deposits are subject, including but not limited to the California
unclaimed property and escheat laws. Notwithstanding the above, Seller may
provide copies of all Records, except notes and other Loan Documents. Seller is
not required to deliver any data processing or electronic/image type records
commingled with other records of Seller unrelated to the Branches and Seller is
not required to deliver any account history which is prior to forty-five (45)
days prior to Closing. In addition, Seller is not required to deliver any
risk-management information regarding customers, including without limitation
credit-scoring formulas, daylight over draft limits, stop payment or overdraft
history more than forty-five (45) days prior to Closing.
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"Regulatory Approvals" means all approvals, authorizations, waivers or
consents of or notices to any governmental agencies or authorities required for
or in connection with consummation of the P&A Transaction.
"Safe Deposit Agreements" means the agreements relating to safe deposit
boxes located in the Branches.
"Seller's knowledge" or other similar phrases means information that is
actually known to any officer of Seller who holds the title of Senior Vice
President or above and has responsibility with respect to management of
operations conducted at the Branches.
"Tax Returns" means any return or other report required to be filed
with respect to any Tax, including declaration of estimated tax and information
returns.
"Taxes" means any federal, state, local, or foreign taxes, including
but not limited to taxes on or measured by income, estimated income, franchise,
capital stock, employee's withholding, non-resident alien withholding, backup
withholding, social security, occupation, unemployment, disability, value added
taxes, taxes on services, real property, personal property, sales, use, excise,
transfer, gross receipts, inventory and merchandise, business privilege, and
other taxes or governmental fees or charges or amounts required to be withheld
and paid over to any government in respect of any tax or governmental fee or
charge, including any interest, penalties, or additions to tax on the foregoing
whether or not disputed.
"Tenant Leases" means leases or subleases between Seller and tenants,
if any, listed on Schedule 5.4.
"Title Company" has the meaning set forth in Section 3.10(a).
"Title Policy" has the meaning set forth in Section 3.10(b).
"Title Reports" has the meaning set forth in Section 3.10(a).
"Transaction Account" means any account at a Branch in respect of which
deposits therein are withdrawable in practice upon demand or upon which third
party drafts may be drawn by the depositor, including checking account,
negotiable order of withdrawal accounts and money market deposit accounts.
"Transferred Employees" means Branch Employees employed by Purchaser on
and after the Closing Date.
1.2 Accounting Terms. All accounting terms not otherwise defined herein
shall have the respective meanings assigned to them in accordance with
consistently applied generally accepted accounting principles as in effect from
time to time in the
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United States of America ("GAAP").
1.3 Interpretation. The captions or headings in this Agreement are for
convenience of reference only and in no way define, limit or describe the scope
or intent of any provisions or Sections of this Agreement. All references in
this Agreement to particular Articles or Sections are references to the Articles
or Sections of this Agreement, unless some other reference is clearly indicated.
In this Agreement, unless the context otherwise requires, (i) words describing
the singular number shall include the plural and vice versa, (ii) words denoting
any gender shall include all genders and (iii) the word "including" shall mean
"including without limitation." The rule of construction against the draftsman
shall not be applied in interpreting and construing this Agreement.
ARTICLE 2
THE P&A TRANSACTION
2.1 Purchase and Sale of Assets. (a) Subject to the terms and
conditions set forth in this Agreement, at the Closing, Seller shall grant,
sell, convey, assign, transfer and deliver to Purchaser, and Purchaser shall
purchase and accept from Seller, all of Seller's right, title and interest, as
of the Closing Date, in and to the following (collectively, the "Assets"):
(i) Cash on Hand;
(ii) the Owned Real Property;
(iii) the Personal Property; provided, however, no Personal
Property Leases are being sold.
(iv) the Deposit Related Loans, and the servicing rights
related thereto pursuant to Section 2.5.
(v) the Branch Leases and Tenant Leases;
(vi) the Safe Deposit Agreements; and
(vii) the Records
(b) Purchaser understands and agrees that it is purchasing only the
Assets (and assuming only the Liabilities) specified in this Agreement and,
except as may be expressly provided for in this Agreement, Purchaser has no
interest in or right to any other business relationship which Seller may have
with any customer of the Branches, including without limitation: (i) any deposit
account or other service of Seller at any other office of Seller which may be
linked to the Deposits; (ii) any money market account which sweeps from the
Branch to a third party; (iii) any merchant card banking relationship; and/or
(iv) any cash management service (e.g., sweep accounts, cash
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concentrator accounts, controlled disbursement accounts) which Seller may
provide to any customer of the Branches. No credit card relationships are being
sold. No right to the use of any trade name, trademark or service mark, if any,
of Seller, Wells Fargo & Company (parent of Seller) or any of their respective
Affiliates is being sold.
2.2 Assumption of Liabilities. (a) Subject to the terms and conditions
set forth in this Agreement, at the Closing, Purchaser shall assume, pay,
perform and discharge all duties, responsibilities, obligations or liabilities
of Seller (whether accrued, contingent or otherwise) to be discharged,
performed, satisfied or paid on or after the Closing Date, with respect to the
following (collectively, the "Liabilities"):
(i) the Deposits, including the IRA and Keogh Accounts to the
extent contemplated by Section 2.4;
(ii) the Branch Leases, Tenant Leases and Personal Property
Leases;
(iii) the Safe Deposit Agreements; and
(iv) the Assumed Severance Obligations.
(b) Notwithstanding anything to the contrary in this Agreement,
Purchaser shall not assume or be bound by any duties, responsibilities,
obligations or liabilities of Seller, or of any of Seller's Affiliates, of any
kind or nature, known, unknown, contingent or otherwise, other than the
Liabilities.
2.3 Purchase Price. The purchase price ("Purchase Price") for the
Assets shall be the sum of:
(a) An amount equal to 6.260% of the average daily balance (including
Accrued Interest) of the Deposits for the period commencing thirty (30) days
prior to and inclusive of the day prior to the Closing Date and ending on the
day prior to the Closing Date;
(b) The aggregate amount of Cash on Hand as of the Closing Date;
(c) The aggregate net book value of all the Assets, other than Cash on
Hand and Deposit Related Loans, as reflected on the books of Seller as of the
close of business of the month-end day most recently preceding the Closing Date.
(d) The aggregate Loan Value of the Deposit Related Loans as of the
close of business of the day prior to the Closing Date.
Purchaser has, concurrently with Seller's execution of this Agreement, made a
good faith deposit to Seller, as consideration for entering into this Agreement,
in the amount of Seventy-Five Thousand Dollars ($75,000) per branch for each
Branch which is the subject of this Agreement. Such good faith deposit shall be
applied against the
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Purchase Price upon Closing. Such good faith deposit shall be returned to
Purchaser if this Agreement is terminated for a reason other than the default of
Purchaser. If the Closing does not timely occur due to the default of Purchaser,
Seller shall retain such deposit. Such good faith deposit is consideration for
entering into this Agreement, is not intended as liquidated damages and shall
not in any way limit Seller's remedies for a default by Purchaser hereunder. No
interest shall be paid on such good-faith deposit.
2.4 Assumption of IRA and Keogh Account Deposits. (a) With respect to
Deposits in IRAs, Seller will use reasonable efforts and will cooperate with
Purchaser in taking any action reasonably necessary to accomplish either the
appointment of Purchaser as successor custodian or the delegation to Purchaser
(or an Affiliate of Purchaser) of Seller's authority and responsibility as
custodian of all such IRA deposits except self-directed IRA deposits, including,
but not limited to, sending to the depositors thereof appropriate notices,
cooperating with Purchaser (or such Affiliate) in soliciting consents from such
depositors, and filing any appropriate applications with applicable regulatory
authorities. If any such delegation is made to Purchaser (or such Affiliates),
Purchaser (or such Affiliate) will perform all of the duties so delegated and
comply with the terms of Seller's agreement with the depositor of the IRA
deposits affected thereby.
(b) With respect to Deposits in Keogh Accounts, Seller shall cooperate
with Purchaser to invite depositors thereof to direct a transfer of each such
depositor's Keogh Account and the related Deposits to Purchaser (or an Affiliate
of Purchaser), as trustee thereof, and to adopt Purchaser's (or such
Affiliate's) form of Keogh Master Plan as a successor to that of Seller.
Purchaser (or such Affiliate) will assume no Keogh Accounts unless Purchaser (or
such Affiliate) has received the documents necessary for such assumption at or
before the Closing. With respect to any owner of a Keogh Account who does not
adopt Purchaser's (or such Affiliate's) form of Keogh Master Plan, Seller will
use reasonable efforts in order to enable Purchaser (or such Affiliate) to
retain such Keogh Accounts at the Branches.
(c) If, notwithstanding the foregoing, as of the Closing Date,
Purchaser shall be unable to retain deposit liabilities in respect of an IRA or
Keogh Account, such deposit liabilities shall be excluded from Deposits for
purposes of this Agreement and shall constitute "Excluded IRA/Keogh Account
Deposits."
2.5 Sale and Transfer of Servicing and Escrows. The Deposit Related
Loans shall be sold on a servicing released basis. As of the Closing Date, all
rights, obligations, liabilities and responsibilities with respect to the
servicing of such Loans on and after the Closing Date will be assumed by
Purchaser. Seller shall be discharged and indemnified by Purchaser from all
liability with respect to servicing of the Deposit Related Loans on and after
the Closing Date and Purchaser shall be discharged and indemnified by Seller
from all liability with respect to servicing of the Deposit Related Loans prior
to the Closing Date.
ARTICLE 3
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CLOSING PROCEDURE; ADJUSTMENTS
3.1 Closing. (a) The Closing will be held at the offices of Seller at
420 Montgomery Street, San Francisco or such place as may be agreed to by the
parties.
(b) The Closing Date shall be at a date and time as soon as
practicable, which shall be no later than thirty (30) Business Days after
receipt of all Regulatory Approvals unless otherwise agreed to by the parties;
provided, however, in no event shall the closing be later than March 31, 1997.
3.2 Payment at Closing. (a) At Closing, Seller shall pay to Purchaser
the amount by which the aggregate balance (including Accrued Interest) of the
Deposits exceeds the Estimated Purchase Price (the "Estimated Payment Amount")
or, Purchaser shall pay to Seller the amount by which the Estimated Purchase
Price exceeds the aggregate balance (including Accrued Interest) of the
Deposits, each as set forth on the Draft Closing Statement as agreed upon
between Seller and Purchaser.
(b) All payments to be made hereunder by one party to the other shall
be made by wire transfer of immediately available funds (in all cases to an
account specified in writing by Seller or Purchaser, as the case may be, to the
other not later than the third (3rd) Business Day prior to the Closing Date) on
or before 11:00 A.M. local time on the date of payment. If any payment to be
made hereunder on the Closing Date (or any other date) shall not be made on or
before 11:00 A.M. local time on such date, and the amount thereof shall have
been agreed to in writing by the parties at the Closing Date (or such other
payment date), the party responsible therefor may make such payment on or before
11:00 A.M. local time on the next Business Day together with interest thereon at
the Federal Funds Rate applicable from the Closing Date (or such other payment
date) to the date such payment is actually made, which in no event shall be
later than the fifth (5th) business day after such payment was due.
(c) If any instrument of transfer contemplated herein shall be recorded
in any public record before the Closing and thereafter the Closing is not
completed, then at the request of such transferring party the other party will
deliver (or execute and deliver) such instruments and take such other action as
such transferring party shall reasonably request to revoke such purported
transfer.
3.3 Adjustment of Purchase Price. (a) On or before 12:00 noon on the
sixtieth (60th) day following the Closing Date (the "Adjustment Date"), Seller
shall deliver to Purchaser the Final Closing Statement and shall make available
such work papers, schedules and other supporting data as may be reasonably
requested by Purchaser to enable it to verify the amounts set forth in the Final
Closing Statement. The Final Closing Statement shall also set forth the amount
(the "Adjusted Payment Amount") by which the aggregate amount of Deposits
(including Accrued Interest) shown on the Final Closing Statement differs from
the Estimated Purchase Price.
(b) The determination of the Adjusted Payment Amount shall be final and
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binding on the parties hereto unless within thirty (30) days after receipt by
Purchaser of the Final Closing Statement, Purchaser shall notify the Seller in
writing of its disagreement with any amount included therein or omitted
therefrom, in which case, if the parties are unable to resolve the disputed
items within ten (10) Business Days of the receipt by Seller of notice of such
disagreement, such items shall be determined by an independent accounting firm
selected by mutual agreement between Seller and Purchaser; provided, however,
that in the event the fees of such firm as estimated by such firm would exceed
fifty percent (50%) of the net amount in dispute, the parties agree that such
firm will not be engaged by either party and that such net amount in dispute
will be equally apportioned between Seller and Purchaser. Such accounting firm
shall be instructed to resolve the disputed items within ten (10) Business Days
of engagement, to the extent reasonably practicable. The determination of such
accounting firm shall be final and binding on the parties hereto. The fees of
any such accounting firm shall be divided equally between Seller and Purchaser.
(c) On or before 12:00 Noon on the tenth (10th) Business Day after the
Adjustment Date or, in the case of a dispute, the date of the resolution of the
dispute pursuant to subsection 3.3(b) above, Seller shall pay to Purchaser an
amount equal to the amount by which the Adjusted Payment Amount exceeds the
Estimated Payment Amount, plus interest on such excess amount from the Closing
Date to but excluding the payment date, at the Federal Funds Rate or, if the
Estimated Payment Amount exceeds the Adjusted Payment Amount, Purchaser shall
pay to Seller an amount equal to such excess, plus interest from the Closing
Date to but excluding the payment date, at the Federal Funds Rate. Any payments
required by Section 3.5 shall be made contemporaneously with the foregoing
payment.
3.4 Allocation of Purchase Price. (a) Purchaser and Seller agree that
upon final determination of the Purchase Price, the Purchase Price shall be
allocated in a manner as determined by Purchaser subject to Seller's consent
(which consent shall not be unreasonably withheld or delayed), after taking into
account any applicable Treasury Regulations and the fair market value of such
items and to be set forth in a statement, dated the Adjustment Date (the
"Allocation Statement") prepared by Purchaser.
(b) Purchaser and Seller shall report the transaction contemplated by
this Agreement (including income tax reporting requirements imposed pursuant to
Section 1060 of the Code) in accordance with the allocation specified in the
Allocation Statement. In the event any party hereto receives notice of an audit
in respect of the allocation of the Purchase Price specified herein, such party
shall immediately notify the other party in writing as to the date and subject
of such audit.
(c) If any Tax Return filed by Purchaser or Seller relating to the
transactions contemplated hereby is challenged by the taxing authority with
which such Tax Return was filed on the basis of the allocation set forth in the
Allocation Statement, as finally adjusted, the filing party shall assert and
maintain in good faith the validity and correctness of such allocation during
the audit thereof until the issuance by the taxing
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authority of a "30 Day Letter", or a determination of liability equivalent
thereto, to such party; provided, however, that at any time such party shall, in
its sole discretion, have the right to pay, compromise, settle, dispute or
otherwise deal with its alleged tax liability. If such a Tax Return is
challenged as herein described, the party filing such Tax Return shall keep the
other party apprised of its decisions and the current status and progress of all
administrative and judicial proceedings, if any, that are undertaken at the
election of such party.
3.5 Proration; Other Closing Date Adjustments. (a) Except as otherwise
specifically provided in this Agreement, it is the intention of the parties that
Seller will operate the Branches for its own account until 11:59 P.M.,
California time, the day prior to the Closing Date, and that Purchaser shall
operate the Branches, hold the Assets and assume the Liabilities for its own
account on and after the Closing Date. Thus, except as otherwise specifically
provided in this Agreement, items of income and expense, as defined herein,
shall be prorated as of 11:59 P.M., California time, the day prior to the
Closing Date, and settled between Seller and Purchaser on the Closing Date,
whether or not such adjustment would normally be made as of such time. Items of
proration will be handled at Closing as an adjustment to the Purchase Price
unless otherwise agreed by the parties hereto.
(b) For purposes of this Agreement, items of proration and other
adjustments shall include, without limitation: (i) rental payments and security
deposits under the Branch Leases and the Tenant Leases; (ii) sales and use taxes
and personal and real property taxes and assessments; (iii) FDIC deposit
insurance assessments; (iv) wages, salaries and employee benefits and expenses;
(v) trustee or custodian fees on IRA and Keogh Accounts; (vi) adjustments
reflecting exclusions from the Personal Property as provided for in the
definition thereof; and (vii) other prepaid expenses and items and accrued but
unpaid liabilities, as of the close of business on the day prior to the Closing
Date. Safe deposit rental payments previously received by Seller shall not be
prorated.
3.6 Seller Deliveries. At the Closing, Seller shall deliver to
Purchaser:
(a) Grant deeds, in substantially the form of Schedule 3.6(a), pursuant
to which the Owned Real Property shall be transferred to Purchaser "AS IS",
"WHERE IS" and with all faults (the "Grant Deeds");
(b) A bill of sale, in substantially the form of Schedule 3.6(b),
pursuant to which the Personal Property shall be transferred to Purchaser "AS
IS", "WHERE IS" and with all faults;
(c) An assignment and assumption agreement, in substantially the form
of Schedule 3.6(c), with respect to the Liabilities (the "Assignment and
Assumption Agreement");
(d) Lease assignment and assumption agreements in substantially the
form of Schedule 3.6(d), with respect to each of the Branch Leases (the "Lease
Assignments");
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(e) Subject to the provisions of Section 7.4, such consents of
landlords under the Branch Leases, as shall be required pursuant to the terms of
such Branch Leases, to the assignment of the Branch Leases to Purchaser in
substantially the form of Schedule 3.6(e) (the "Landlord Consents");
(f) Subject to the provisions of Section 7.4, such consents as shall be
required pursuant to the terms of the Tenant Leases and the Personal Property
Leases in connection with the assignments thereof to Purchaser;
(g) An Officer's Certificate in substantially the form of Schedule
3.6(g);
(h) An opinion of Seller's counsel, dated the Closing Date, in form and
substance reasonably satisfactory to Purchaser substantially to the effect that:
(i) Seller is a national banking association, duly organized
and validly existing under the laws of the United States, with all
requisite corporate power and authority to execute, deliver and perform
this Agreement;
(ii) all Regulatory Approvals required to have been obtained
by Seller or its Affiliates have been obtained and are in full force
and effect; and
(iii) this Agreement has been duly authorized, executed and
delivered by Seller and (assuming due authorization, execution and
delivery by Purchaser) is a valid and legally binding obligation of
Seller enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfers, reorganization, moratorium and
similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles;
(i) The Draft Closing Statement;
(j) Seller's resignation as trustee or custodian, as applicable, with
respect to each IRA or Keogh Account included in the Deposits and designation of
Purchaser as successor trustee or custodian with respect thereto as contemplated
by Section 2.4;
(k) All documentation required to exempt Seller from the withholding
requirement of Section 1445 of the Code, consisting of an affidavit from Seller
to Purchaser under penalty of perjury that Seller is not a foreign person and
providing Seller's U.S. taxpayer identification number; and
(l) Such other documents as the parties determine are reasonably
necessary to consummate the P&A Transaction as contemplated hereby.
3.7 Purchaser Deliveries. At the Closing, Purchaser shall deliver to
Seller:
(a) The Assignment and Assumption Agreement;
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(b) Purchaser's acceptance of its appointment as successor trustee or
custodian, as applicable, of the IRA and Keogh Accounts included in the Deposits
and assumption of the fiduciary obligations of the trustee or custodian with
respect thereto, as contemplated by Section 2.4;
(c) The Lease Assignments and, as contemplated by Section 7.4, such
other instruments and documents as any landlord under a Branch Lease may
reasonably require as necessary or desirable for providing for the assumption by
Purchaser of a Branch Lease, each such instrument and document in the form and
substance reasonably satisfactory to the parties and dated as of the Closing
Date;
(d) An Officer's Certificate in the form of Schedule 3.7(d) attached
hereto;
(e) An opinion of Purchaser's counsel, dated the Closing Date, in form
and substance reasonably satisfactory to Seller, substantially to the effect
that:
(i) Purchaser is a National Banking Association, duly
organized and validly existing under the laws of the United States,
with all requisite corporate power and authority to execute, deliver
and perform this Agreement;
(ii) all Regulatory Approvals required to have been obtained
by Purchaser or its Affiliates have been obtained and are in full force
and effect; and
(iii) this Agreement has been duly authorized, executed and
delivered by Purchaser and (assuming due authorization, execution and
delivery by Seller) is a valid and legally binding obligation of
Purchaser enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium
and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles; and
(f) Such other documents as the parties determine are reasonably
necessary to consummate the P&A Transaction as contemplated hereby.
3.8 Delivery of the Loan Documents. (a) In connection with the sale
hereunder, as soon as is reasonably practicable after the Closing Date, Seller
shall deliver to Purchaser or its designee the Loan Documents actually in the
possession of Seller. Seller makes no representation or warranty to Purchaser
regarding the condition of the Loan Documents or any single document included
therein, or Seller's interest in any collateral securing any Deposit Related
Loan, except as specifically set forth herein. Seller shall have no
responsibility or liability for the Loan Documents from and after the time such
files are delivered by Seller to an independent third party for shipment to
Purchaser, the cost of which shall be the sole responsibility of Purchaser.
(b) Promptly upon the execution of this Agreement, Purchaser shall
provide
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Seller the exact name to which the Deposit Related Loans are to be endorsed, or
whether any Deposit Related Loans should be endorsed in blank. Seller will use
its best efforts to complete such endorsements and deliver the Loan Documents
within ninety (90) days after Closing; provided, however, with respect to
specific Loan Documents, Seller may require additional time to effectively
transfer title thereto and Purchaser shall not hold Seller liable for any
reasonable delays in the delivery of such Loan Documents. Purchaser further
acknowledges and agrees that Seller may execute or endorse any Loan Document by
way of facsimile signature.
3.9 Owned Real Property Filings. On or prior to the Closing Date,
Seller shall file or record, or cause to be filed or recorded, any and all
documents (including, without limitation, deeds) necessary in order that the
legal and equitable title to Owned Real Property shall be duly vested in
Purchaser as of the Closing Date. Any expenses or documentary transfer taxes
with respect to such filings shall be borne by Seller or Purchaser in accordance
with the escrow agent's determination of the local custom in the county in which
the filing is being made; provided, however, that if it is determined that (i)
the custom is to split such expenses or documentary transfer taxes or (ii) there
is no discernible custom, any such expenses or documentary transfer taxes shall
be split evenly between Seller and Purchaser.
3.10 Title Policies. (a) Purchaser has previously been provided by
Seller, at its own expense, a preliminary title report (the "Title Reports") for
all the Owned Real Property issued by Chicago Title Company (the "Title
Company"), Purchaser has had an opportunity to review such Title Reports and
Purchaser hereby approves the condition of title with respect to all the Owned
Real Property being purchased hereunder.
(b) Purchaser shall, at its own expense, obtain as of the Closing Date
a CLTA title insurance policy from the Title Company (a "Title Policy") with
respect to all the Owned Real Property. Seller will cooperate with Purchaser in
assisting Purchaser to obtain (at Purchaser's expense) such Title Policies,
including without limitation only such endorsements as may be reasonably
necessary to insure that such Owned Real Property is free and clear of any
Encumbrance not shown on the Title Reports which would materially and adversely
affect the value or marketability of title thereto.
ARTICLE 4
TRANSITIONAL MATTERS
4.1 Transitional Arrangements. Seller and Purchaser agree to cooperate
and to proceed as follows to effect the transfer of account record
responsibility for the Branches:
(a) Not later than thirty (30) days after the signing of this
Agreement, Seller will meet with Purchaser to investigate, confirm and agree
upon mutually acceptable
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transaction settlement procedures and specifications, files, procedures and
schedules, for the transfer of account record responsibility; provided, however
it being understood and agreed that Seller is not obligated under this Agreement
to provide Purchaser any system conversion files regarding the Assets and
Liabilities other than a standard format conversion tape (i.e., not one which is
specifically formatted for Purchaser's systems specifications); and provided,
further, that Seller is not obligated to provide Purchaser with any information
regarding Seller's relationship with the customers outside of the Branch (e.g.,
other customer products, house-holding information).
(b) Not later than sixty (60) days after the date of this Agreement,
Seller shall provide Purchaser with a hard copy listing of all applicable
Check/Savings/Signatures that Seller has for the Deposits and related special
instructions.
4.2 Customers. (a) Not later than thirty (30) days prior to the Closing
Date (unless earlier required by law),
(i) Seller will notify the holders of Deposits to be
transferred on the Closing Date that, subject to the terms and
conditions of this Agreement, Purchaser will be assuming liability for
such Deposits;
(ii) each of Seller and Purchaser shall provide, or join in
providing where appropriate, all notices to customers of the Branches
and other persons that Seller or Purchaser, as the case may be, is
required to give under applicable law or the terms of any other
agreement between Seller and any customer in connection with the
transactions contemplated hereby; and
(iii) following or concurrently with the notice referred to in
clause (i) above, Purchaser may communicate with and deliver
information, brochures, bulletins and other communications to
depositors and other customers of the Branches concerning the P&A
Transaction and the business of Purchaser. A party proposing to send or
publish any notice or communication pursuant to any paragraph of this
Section 4.2 shall furnish to the other party a copy of the proposed
form of such notice or communication at least five (5) days in advance
of the proposed date of the first mailing, posting, or other
dissemination thereof to customers, and shall not unreasonably refuse
to amend such notice to incorporate any changes that the other such
party proposes as necessary to comply with applicable law. All costs
and expenses of any notice or communication sent or published by
Purchaser or Seller shall be the responsibility of the party sending
such notice or communication and all costs and expenses of any joint
notice or communication shall be shared equally by Seller and
Purchaser. As soon as reasonably practicable and in any event within
fourteen (14) days of the date hereof, Seller shall provide to
Purchaser a report of the names and addresses of the owners of the
Deposits and the lessees of the safe deposit boxes in connection with
the mailing of such materials, which report shall be current as of the
date hereof.
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(b) Following the giving of any notice described in paragraph (a)
above, Purchaser and Seller shall deliver to each new customer at any of the
Branches such notice or notices as may be reasonably necessary to notify such
new customers of Purchaser's pending assumption of liability for the Deposits
and to comply with applicable law. The cost of such notices shall be paid by
Purchaser. At any time after the receipt of all Regulatory Approvals (except for
the expiration of statutory waiting periods), within five (5) Business Days
following any request by Purchaser, Seller will provide Purchaser with account
information, including complete mailing addresses for each of the depositors of
the Deposits as of a recent date, and upon reasonable request shall provide an
updated version of such records; provided, however, that Seller shall not be
obligated to provide such updated records more than twice.
(c) Notwithstanding the provisions of Section 7.6, neither Purchaser
nor Seller shall object to the use, by depositors of the Deposits, of payment
orders issued to or ordered by such depositors on or prior to the Closing Date,
which payment orders bear the name, or any logo, trademark, service mark, trade
name or the proprietary mark of Wells Fargo Bank or any of its Affiliates.
4.3 Direct Deposits. Seller will use all reasonable efforts to transfer
to Purchaser on the Closing Date all of those automated clearing house and
FedWire direct deposit arrangements related (by agreement or other standing
arrangement) to Deposits. As soon as practicable after the receipt of all
Regulatory Approvals (except for the expiration of statutory waiting periods),
Seller will deliver to Purchaser a listing in a format mutually agreed upon by
the parties of all such direct deposit records which Seller, in the exercise of
all reasonable efforts, is able to identify. On each Business Day for a period
of four (4) months following the Closing, in the case of automated clearing
house direct deposits to accounts containing Deposits (the final Business Day of
such period being the "ACH Direct Deposit Cut-Off Date"), Seller shall, as soon
as practicable, but in any event no less than twice daily and no later than 4:00
A.M., California time, of each Business Day for same day settlement, and no
later than 6:00 P.M., California time, of each Business Day for settlement on
the following Business Day, remit and transfer to Purchaser all ACH direct
deposits intended for accounts constituting Deposits. On each Business Day, for
a period of thirty (30) days following the Closing Date, in the case of feeder
direct deposits to accounts constituting Deposits (the final Business Day of
such period being the "FedWire Direct Deposit Cut-Off Date"), Seller shall, as
soon practicable, but in any event, no later then 12:00 noon, California time,
of each Business Day following the date of receipt thereof, remit and transfer
to Purchaser all FedWire direct deposits intended for accounts constituting
Deposits. Compensation for ACH direct deposits or FedWire direct deposits not
forwarded to Purchaser on the same Business Day as that on which Seller has
received such deposits will be handled in accordance with the rules established
by the United States Council on International Banking. After the applicable
Direct Deposit Cut-Off Date, Seller may discontinue accepting and forwarding
automated clearing house and FedWire entries and funds and return such direct
deposits to the originators marked "Account Closed." Seller shall not be liable
for any overdrafts that may thereby be created. Purchaser and Seller shall agree
on a reasonable period of time prior to the
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Closing during which Seller will no longer be obligated to accept new direct
deposit arrangements related to the Branches. At the time of each Direct Deposit
Cut-off Date, Purchaser will provide automated clearing housing originators with
account numbers relating to Deposits.
4.4 Direct Debit. As soon as practicable after the receipt of all
Regulatory Approvals (except for the expiration of statutory waiting periods),
and after the notice provided in Section 4.2(a), Purchaser will send appropriate
notice to all customers having accounts constituting Deposits the terms of which
provide for direct debit of such accounts by third parties, instructing such
customers concerning transfer of customer direct debit authorizations from
Seller to Purchaser. Seller shall cooperate in soliciting the transfer of such
authorizations. Such notice shall be in a form agreed to by the parties. For a
period of four (4) months following the Closing Date, Seller shall as soon as
practicable, but in any event, no less than twice daily and no later than 4:00
A.M., California time, of each Business Day for same day settlement, and no
later than 6:00 P.M., California time, of each Business Day for settlement on
the following Business Day, forward to Purchaser all direct debits on accounts
constituting Deposits. Thereafter, Seller may discontinue forwarding such
entries and return them to the originators marked "Account Closed." Purchaser
and Seller shall agree on a reasonable period of time prior to the Closing
during which Seller will not longer be obligated to accept new direct debit
arrangements related to the Branches. On the Closing Date, Purchaser will
provide automated clearing house originators of such direct debits with account
numbers.
4.5 Escheat Deposits. As soon as practicable after the Closing Date,
Seller will deliver to Purchaser a data processing record identifying all
Escheat Deposits that have been transferred to Purchaser. Thereafter, Purchaser
shall be solely responsible for the proper reporting and transmission to the
State of California of such Escheat Deposits.
4.6 Maintenance of Records. Through the Closing Date, Seller will
maintain the Records relating to the Assets and Liabilities in the same manner
and with the same care that the Records have been maintained prior to the
execution of this Agreement. Purchaser may, at its own expense, make such copies
of and excerpts from the Records as it may deem desirable. All Records, whether
held by Purchaser or Seller, shall be maintained for such periods as are
required by law, unless the parties shall, applicable law permitting, agree in
writing to a different period. From and after the Closing Date, each of the
parties shall permit the other reasonable access to any applicable Records in
its possession relating to matters arising on or before the Closing Date and
reasonably necessary in connection with any claim, action, litigation or other
proceeding involving the party requesting access to such Records or in
connection with any legal obligation owed by such party to any present or former
depositor or other customer.
4.7 Interest Reporting and Withholding. (a) Unless otherwise agreed to
by the parties, Seller will report to applicable taxing authorities and holders
of Deposits,
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with respect to the period from January 1 of the year in which the Closing
occurs through the Closing Date, all interest (including for purposes hereof
dividends and other distributions with respect to money market accounts)
credited to, withheld from and any early withdrawal penalties imposed upon the
Deposits. Purchaser will report to the applicable taxing authorities and holders
of Deposits, with respect to all periods from the day after the Closing Date,
all such interest credited to, withheld from and early withdrawal penalties
imposed upon such Deposits. Any amounts required by any governmental agencies to
be withheld from any of the Deposits through the Closing Date will be withheld
by Seller in accordance with applicable law or appropriate notice from any
governmental agency and will be remitted by Seller to the appropriate agency on
or prior to the applicable due date. Any such withholding required to be made
subsequent to the Closing Date shall be withheld by Purchaser in accordance with
applicable law or the appropriate notice from any governmental agency and will
be remitted by Purchaser to the appropriate agency on or prior to the applicable
due date. Promptly after the Closing Date, but in no event later than the date
Purchaser is obligated to remit such amounts to the applicable governmental
agency, Seller will pay to Purchaser that portion of any sums theretofore
withheld by Seller from any Deposits which are required to be remitted by
Purchaser pursuant to the foregoing and shall directly remit to the applicable
governmental agency that portion of any such sums which are required to be
remitted by Seller.
(b) Unless otherwise agreed by the parties, Seller shall be responsible
for delivering to payees all IRS notices with respect to information reporting
and tax identification numbers required to be delivered through the Closing Date
with respect to the Deposits, and Purchaser shall be responsible for delivering
to payees all such notices required to be delivered following the Closing Date
with respect to the Deposits. Purchaser and Seller shall, prior to the Closing
Date, consult and Seller shall take reasonable actions as are necessary to
permit Purchaser timely to deliver such IRS notices required to be delivered
following the Closing Date.
(c) Unless otherwise agreed by the parties, Seller will make all
required reports to applicable Tax authorities and to obligors on the Deposit
Related Loans purchased on the Closing Date, with respect to the period from
January 1 of the year in which the Closing occurs through the Closing Date,
concerning all interest and points received by the Seller. Purchaser will make
all required reports to applicable Tax authorities and to obligors on the
Deposit Related Loans purchased on the Closing Date, with respect to all periods
from the day after the Closing Date, concerning all such interest and points
received.
4.8 Negotiable Instruments. Seller will remove any supply of Seller's
money orders, official checks, gift checks, travelers' checks or any other
negotiable instruments located at each of the Branches on the Closing Date.
4.9 ATM/Debit Cards. Seller will provide Purchaser with a list of ATM
access/debit cards issued by Seller to depositors of any Deposits, and a record
thereof in a format reasonably agreed to by the parties containing all addresses
therefor, as
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soon as practicable after the receipt of all Regulatory Approvals (except for
the expiration of any statutory waiting periods). At or promptly after the
Closing, Seller will provide Purchaser with a revised record through the
Closing. In instances where a depositor of a Deposit made an assertion of error
regarding an account constituting Deposits pursuant to the Electronic Funds
Transfer Act and Federal Reserve Board Regulation E, and Seller, prior to the
Closing, recredited the disputed amount to the relevant account during the
conduct of the error investigation, Purchaser agrees to comply with a written
request from Seller to debit such account in a stated amount and remit such
amount to Seller, to the extent of the balance of funds available in the
accounts. Seller agrees to indemnify Purchaser for any claims or losses that
Purchaser may incur as a result of complying with such request from Seller.
Seller will not be required to disclose to Purchaser customers' PINs or
algorithms or logic used to generate PINs. Purchaser shall reissue ATM
access/debit cards to depositors of any Deposits prior to the Closing Date,
which cards shall be effective as of the Closing Date. Seller agrees to settle
any and all ATM transactions effected on or before the Closing Date, but
processed after the Closing Date, as soon as practicable. Purchaser and Seller
agree to remit the total net balance of such transactions to Seller or
Purchaser, as the case may be, on the same date the transactions are settled.
4.10 Leasing of Personal Property. Seller shall cancel or terminate any
Personal Property Leases as of the Closing Date.
4.11 Handling of Certain Items. (a) As soon as practicable after the
Closing Date, Purchaser shall mail to each depositor in respect of a Transaction
Account (i) a letter approved by Seller requesting that such depositor promptly
cease writing Seller's drafts against such Transaction Account and (ii) new
drafts which such depositor may draw upon Purchaser for the purpose of effecting
transactions with respect to such Transaction Accounts. The parties hereto shall
use their best efforts to develop procedures which cause Seller's drafts against
Transaction Accounts which are received after the Closing Date to be cleared
through Purchaser's then-current clearing procedures. During the ninety (90) day
period after the Closing Date, if it is not possible to clear Transaction
Account drafts through Purchaser's then-current clearing procedures, Seller
shall forward to Purchaser as soon as practicable but in no event more than
three (3) Business Days after receipt all Transaction Account drafts drawn
against Transaction Accounts. Seller shall have no obligation to pay such
forwarded Transaction Account drafts. Upon the expiration of such ninety (90)
day period, Seller shall cease forwarding drafts against Transaction Accounts.
Purchaser and Seller will agree upon a reasonable market rate compensation to be
paid to Seller for its processing of the drafts during the ninety (90) day
period following the Closing Date.
(b) Any items that were credited for deposit to or cashed against a
Deposit prior to the Closing and are returned unpaid on or within sixty (60)
days after the Closing Date ("Returned Items") will be handled as set forth
herein. If Seller's bank account is charged for the Returned Item, Seller shall
forward such Returned Item to Purchaser. If upon Purchaser's receipt of such
Returned Item there are sufficient funds in the Deposit to which such Returned
Item was credited or any other Deposit
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transferred at the Closing standing in the name of the party liable for such
Returned Item, Purchaser will debit any or all of such Deposits an amount equal
in the aggregate to the Returned Item, and shall repay that amount to Seller. If
there are not sufficient funds in the Deposit because of Purchaser's failure to
honor holds placed on such Deposit, Purchaser shall repay the amount of the
Returned Item to Seller. Any items that were credited for deposit to or cashed
against an account at the Branches to be transferred at the Closing prior to the
Closing and are returned unpaid more than sixty (60) days after the Closing will
be the responsibility of Purchaser, except that for a period of eighteen (18)
months after the Closing checks drawn on the United States Treasury, checks
issued by state governments and municipalities and checks returned for
endorsement irregularities will be the responsibility of Seller.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Purchaser as follows:
5.1 Corporate Organization and Authority. As of the date hereof, Seller
is a national banking association, duly organized and validly existing in good
standing under the laws of the United States of America and has the requisite
power and authority to conduct the business now being conducted at the Branches.
Seller has the requisite corporate power and authority and has taken all
corporate action necessary in order to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. This Agreement is a valid and
binding agreement of Seller enforceable in accordance with its terms subject, as
to enforcement, to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles.
5.2 No Conflicts. The execution, delivery and performance of this
Agreement by Seller does not, and will not, (i) violate any provision of its
charter or by-laws or (ii) violate or constitute a breach of, or default under,
any law, rule, regulation, judgment, decree, ruling or order of any court,
government or governmental agency to which Seller is subject or under any
agreement or instrument of Seller, or to which Seller is subject or by which
Seller is otherwise bound, which violation, breach, contravention or default
referred to in this clause (ii), individually or in the aggregate, would have a
Material Adverse Effect (assuming the receipt of any required consents of
lessors under the Branch Leases and Personal Property Leases). Seller has all
material licenses, franchises, permits, certificates of public convenience,
orders and other authorizations of all federal, state and local governments and
governmental authorities necessary for the lawful conduct of its business at
each of the Branches as now conducted and all such licenses, franchises,
permits, certificates of public convenience, orders and other authorizations,
are valid and in good standing and, to Sellers' knowledge, are not subject to
any suspension, modification or revocation or proceedings related thereto.
5.3 Approvals and Consents. Other than the Regulatory Approvals or as
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otherwise disclosed in writing to Purchaser by Seller prior to the date hereof,
no notices, reports or other filings are required to be made by Seller with, nor
are any consents, registrations, approvals, permits or authorizations required
to be obtained by Seller from, any governmental or regulatory authorities of the
United States or the several States in connection with the execution and
delivery of this Agreement by Seller and the consummation of the transactions
contemplated hereby by Seller, the failure to make or obtain any or all of
which, individually or in the aggregate, would have a Material Adverse Effect.
5.4 Tenants. Except for the tenants listed on Schedule 5.4 attached
hereto, there are no tenants or other occupants of the Real Property.
5.5 Leases. Each Branch Lease and each Personal Property Lease is the
valid and binding obligation of Seller and, to Seller's knowledge, of each other
party thereto; and there does not exist with respect to Seller's obligations
thereunder, or, to Seller's knowledge, with respect to the obligations of the
lessor thereof, any material default, or event or condition which constitutes
or, after notice or passage of time or both, would constitute a material default
on the part of Seller or the lessor under any such Branch Lease or Personal
Property Lease. As used in the immediately preceding sentence, the term "lessor"
includes any sub-lessor of the property to Seller. Each Branch Lease and each
material Personal Property Lease is current and all rents, expenses and charges
payable by Seller thereunder have been paid or accrued pursuant to the terms
thereof (except for any payments not yet delinquent or as to which the
obligation to make such payment is being contested in good faith). Accurate
copies of each Branch Lease and each material Personal Property Lease have
heretofore been made available to Purchaser.
5.6 Litigation and Undisclosed Liabilities. Except as set forth in
Schedule 5.6, there are no actions, suits or proceedings that have a reasonable
likelihood of an adverse determination pending or, to Seller's knowledge,
threatened against Seller or any of the Branches, or obligations or liabilities
(whether or not accrued, contingent or otherwise) or to Seller's knowledge,
facts or circumstances that could reasonably be expected to result in any claims
against or obligations or liabilities of Seller that, individually or in the
aggregate, would have a Material Adverse Effect.
5.7 Regulatory Matters. (a) Except as previously disclosed in writing
to Purchaser, there are no pending, or to Seller's knowledge threatened,
disputes or controversies between Seller and any federal, state or local
governmental agency or authority that, individually or in the aggregate, would
have a Material Adverse Effect.
(b) Seller is not a party to any written order, decree, agreement or
memorandum or understanding with, or commitment letter or similar submission to,
any federal or state governmental agency or authority charged with the
supervision or regulation of depository institutions, nor has Seller been
advised by any such agency or authority that it is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any
such order, decree, agreement,
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memorandum of understanding, commitment letter of submission, in each case
which, individually or in the aggregate, would have a Material Adverse Effect.
5.9 Compliance With Laws. The banking business of the Branches has been
conducted in compliance with all federal, state and local laws, regulations and
ordinances applicable thereto, except for any failures to comply that would not,
individually or in the aggregate, result in a Material Adverse Effect.
5.10 Loans. (a) An accurate list of the Deposit Related Loans has
previously been delivered to Purchaser. Such list will be updated to include an
accurate list of such Loans as of the Closing Date. With respect to each such
Deposit Related Loan:
(i) Such Loan was solicited and originated in material
compliance with all applicable requirements of federal, state, and
local laws and regulations in effect at the time of such solicitation
and origination; and there was no fraud on the part of the Seller with
respect to the origination of any Loan;
(ii) Each note evidencing a Loan and any related security
instrument constitutes a valid and legally binding obligation of the
obligor thereunder enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfers, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles;
(iii) To Seller's knowledge, no claims or defenses to the
enforcement of such Loan have been asserted and Seller is aware of no
acts or omissions that would give rise to any claim or right of
rescission, setoff, counterclaim or defense by a borrower, obligor,
guarantor or any other person obligated to perform under any related
Loan Documents;
(iv) The security interest in any Deposit account securing any
Loan is a legal, valid and binding obligation enforceable against the
obligor subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles.
(v) All information provided hereunder pertaining to such Loan
is a true and correct reflection of Seller's records regarding such
Loan in all material respects;
(vi) Each Loan was made in compliance with all applicable
usury laws; and
(vii) The terms of the notes have not been altered, modified
or waived in any material respect, except by a written instrument
contained in the Loan Documents.
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5.11 Financial and Deposit Data. To Seller's knowledge, all written
financial and Deposit information regarding the Assets and Liabilities provided
to Purchaser by Seller was accurate in all material respects as of the date
thereof.
5.12 Records. The Records respecting the operations of the Branches and
the Assets and Liabilities accurately reflect in all material respects the net
book value of the Assets and Liabilities being transferred to Purchaser
hereunder. The Records include all information reasonably necessary to service
the Deposits and the Deposit Related Loans on an ongoing basis.
5.13 Title to Assets. Subject to the terms and conditions of this
Agreement, on the Closing Date Purchaser will acquire, good and marketable title
to all of the material Assets, free and clear of any Encumbrances; provided,
however, that this representation does not cover Owned Real Property (with
respect to which Seller has provided a Title Report and Purchaser is to obtain
its own Title Policy pursuant to Section 3.10), Branch Leases or Tenant Leases.
5.14 Branch Leases. The Branch Leases give Seller the right to occupy
the building and land comprising the related Branch. Accurate copies of all
Branch Leases and all attachments, amendments and addenda thereto have
heretofore been made available to Purchaser. To Seller's knowledge, the Branch
Leases constitute valid and legally binding leasehold interests of Seller.
Except as described on Schedule 5.4, there are no leases, subleases,
occupancies, tenancies or rights of first refusal relating to any Branch created
or suffered to exist by Seller or, to Seller's knowledge, created or suffered to
exist by any other person.
5.15 Deposits. All of the Deposit accounts have been administered and,
to Seller's knowledge, originated, in compliance with the documents governing
the relevant type of Deposit account and all applicable laws. The Deposit
accounts are insured by the Bank Insurance Fund of the FDIC up to the current
applicable maximum limits, and no action is pending or, to Seller's knowledge,
threatened by the FDIC with respect to the termination of such insurance.
5.16 Environmental Laws; Hazardous Substances. To Seller's knowledge,
except as disclosed on Schedule 5.16, or as would not, individually or in the
aggregate, have a Material Adverse Effect, each parcel of Real Property:
(a) has been operated by Seller in compliance with all applicable
Environmental Laws;
(b) is not the subject of any pending written notice from any
governmental authority alleging the violation of any applicable Environmental
Laws;
(c) is not currently subject to any court order, administrative order
or decree arising under any Environmental Law;
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(d) has not been used during the period of Seller's ownership or
occupancy of such Real Property for the disposal of Hazardous Substances and is
not contaminated with any Hazardous Substances requiring remediation under any
applicable Environmental Law; and
(e) has not, during the period of Seller's ownership or occupancy of
such Real Property, had any release of Hazardous Substances except as permitted
under applicable Environmental Laws.
For purposes of this Section 5.16, with respect to the parcels which
are subject to Branch Leases and Tenant Leases, "Seller's knowledge" shall mean
that an officer of Seller who holds the title of Senior Vice President or above
and has responsibility with respect to management of operations conducted at the
Branches on such parcels has received actual written notice from the landlord
that any one of the representations in (a) through (e) above is not correct.
5.17 Broker's Fees. Except for Montgomery Securities, no broker has
been employed by or on behalf of Seller in connection with the transactions
contemplated by this Agreement. Seller will pay the fees of Montgomery
Securities.
5.18 Limitations on Representations and Warranties. Notwithstanding
anything to the contrary contained herein Seller makes no representations or
warranties to Purchaser in this Agreement or in any agreement, instrument or
other document executed in connection with any of the transactions contemplated
hereby or provided or prepared pursuant hereto or in connection with any of the
transactions contemplated hereby:
(a) As to title to Owned Real Property or as to the physical condition
(including, without limitation, ability to withstand seismic events) of the
Branches or Personal Property, all of which are being sold "AS IS", "WHERE IS"
and with all faults at the Closing Date; or
(b) As to whether, or the length of time during which, any accounts
will be maintained by the depositors at the Branches after the Closing Date.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to Seller as follows:
6.1 Corporate Organization and Authority. Purchaser is a National
Banking Association duly organized and validly existing under the laws of the
United States and has the requisite power and authority to conduct the business
conducted at the Branches substantially as currently conducted by Seller.
Purchaser has the requisite
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corporate power and authority and has taken all corporate action necessary in
order to execute and deliver this Agreement and to consummate the transactions
contemplated hereby. This Agreement is a valid and binding agreement of
Purchaser enforceable in accordance with its terms subject, as to enforcement,
to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
and to general equity principles.
6.2 No Conflicts. The execution, delivery and performance of this
Agreement by Purchaser does not, and will not, (i) violate any provision of its
charter or by-laws or (ii) violate or constitute a breach of, or default under,
any law, rule, regulation, judgment, decree, ruling or order of any court,
government or governmental agency to which Purchaser is subject or under any
agreement or instrument of Purchaser, or to which Purchaser is subject or by
which Purchaser is otherwise bound, which violation, breach, contravention or
default referred to in this clause (ii), individually or in the aggregate, would
have a Material Adverse Effect.
6.3 Approvals and Consents. Other than the Regulatory Approvals or as
otherwise disclosed in writing to Seller by Purchaser prior to the date hereof,
no notices, reports or other filings are required to be made by Purchaser with,
nor are any consents, registrations, approvals, permits or authorizations
required to be obtained by Purchaser from any governmental or regulatory
authorities of the United States, the several States or any foreign
jurisdictions in connection with the execution and delivery of this Agreement by
Purchaser and the consummation of the transactions contemplated hereby by
Purchaser, the failure to make or obtain any or all of which, individually or in
the aggregate, would have a Material Adverse Effect.
6.4 Regulatory Matters. (a) Except as previously disclosed in writing
to Seller, there are no pending, or to Purchaser's knowledge threatened,
disputes or controversies between Purchaser and any federal, state or local
governmental agency or authority that, individually or in the aggregate, would
have a Material Adverse Effect.
(b) Purchaser is not a party to any written order, decree, agreement or
memorandum of understanding with, or commitment letter or similar submission to,
any federal or state governmental agency or authority charged with the
supervision or regulation of depository institutions, nor has Purchaser been
advised by any such agency or authority that it is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any
such order, decree, agreement, memorandum of understanding, commitment letter or
submission, in each case which, individually or in the aggregate, would have a
Material Adverse Effect.
(c) Purchaser is, and on a pro forma basis giving effect to the P&A
Transaction will be, (i) at least "adequately capitalized", as defined for
purposes of the FDIA, and (ii) in compliance with all capital requirements,
standards and ratios required by each state or federal bank regulator with
jurisdiction over Purchaser, including, without limitation, any such higher
requirements, standard or ratio as shall apply to institutions engaging in the
acquisition of insured institution deposits, assets or
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branches, and no such regulator is likely to, or has indicated that it will,
condition any of the Regulatory Approvals upon an increase in Purchaser's
capital or compliance with any capital requirements, standard or ratio.
(d) Purchaser has no knowledge that it will be required to divest
deposit liabilities, branches, loans or any business or line of business as a
condition to the receipt of any of the Regulatory Approvals.
(e) Each of the subsidiaries or Affiliates of Purchaser that is an
insured depository institution was rated "Satisfactory" or "Outstanding"
following its most recent Community Reinvestment Act examination by the
regulatory agency responsible for its supervision. Purchaser has received no
notice of and has no knowledge of any planned or threatened objection by any
community group to the transactions contemplated hereby.
6.5 Litigation and Undisclosed Liabilities. There are no actions, suits
or proceedings that have a reasonable likelihood of an adverse determination
pending or, to Purchaser's knowledge, threatened against Purchaser, or
obligations or liabilities (whether or not accrued, contingent or otherwise) or,
to Purchaser's knowledge, facts or circumstances that could reasonably be
expected to result in any claims against or obligations or liabilities of
Purchaser that, individually or in the aggregate, would have a Material Adverse
Effect.
6.6 Financing Available. Not later than the Closing Date, Purchaser
will have available sufficient cash or other liquid assets or financing pursuant
to binding agreements or commitments which may be used to fund the P&A
Transaction; and Purchaser's ability to consummate the transactions contemplated
by this Agreement is not contingent on raising any equity capital, obtaining
specific financing thereof, consent of any lender or any other matter.
6.7 Broker's Fees. Purchaser has not employed any broker or finder or
incurred any liability for any brokerage fees, commissions or finder's fees in
connection with the transactions contemplated by this Agreement.
ARTICLE 7
COVENANTS OF THE PARTIES
7.1 Activity in the Ordinary Course. Until the Closing Date, (a)
Seller shall conduct the business of the Branches (including, without
limitation, filling open positions at the Branches and job-posting in the
Branches for open positions at other offices of Seller) in the ordinary and
usual course of business consistent with past practice and giving effect to the
fact that Seller is engaged in certain systems conversions and office closings
arising out of its recent merger with First Interstate Bank, and (b) Seller
shall not, without the prior written consent of Purchaser:
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(i) Increase or agree to increase the salary, remuneration or
compensation of any Branch Employee (or make any material increase or decrease
in the number of such persons, or transfer such persons to or from any Branch)
other than in accordance with Seller's existing customary policies generally
applicable to employees having similar rank or duties, or pay or agree to pay
any uncommitted bonus to any Branch Employee other than regular bonuses granted
in the ordinary course of Seller's business (which bonuses, in any event, shall
be the responsibility of Seller); or, except at the request of such Branch
Employee, transfer any Branch Employee to another branch or office, of Seller or
any of its Affiliates;
(ii) Offer interest rates or terms on any category of deposits at a
Branch except as determined in a manner consistent with Seller's practice with
respect to its branches which are not being sold;
(iii) Transfer to or from any Branch to or from any of Seller's other
operations or branches any material Assets or any Deposits, except (A) in the
ordinary course of business or as contemplated in this Agreement, or (B) upon
the unsolicited request of a depositor or customer;
(iv) Sell, transfer, assign, encumber or otherwise dispose of or enter
into any contract, agreement or understanding to sell, transfer, assign,
encumber or dispose of any of the Assets existing on the date hereof, except in
the ordinary course of business and in an immaterial aggregate amount; provided,
however, that in any event, Seller shall not knowingly take any action that
would create any Encumbrance on any of the Real Property or the Branch Leases;
(v) Make or agree to make any material improvements to the Owned Real
Property, except with respect to commitments for such made on or before the date
of this Agreement (and heretofore disclosed in writing to Purchaser) and normal
maintenance, repair or refurbishing purchased or made in the ordinary course of
business;
(vi) File any application or give any notice to relocate or close any
Branch or relocate or close any Branch;
(vii) Amend, terminate or extend in any material respect any Branch
Lease, Tenant Lease or Personal Property Lease; provided, however, Seller may
extend any Branch Lease, Tenant Lease or Personal Property Lease, in its
reasonable business judgment (including without limitation pursuant to the terms
and conditions of any contractual option to extend in any Branch Lease, Tenant
Lease or Personal Property Lease) if Seller determines such extension is
necessary to deliver the Branch on the Closing Date as a fully operative branch
banking operation.
7.2 Access and Confidentiality. (a) Until the Closing Date, Seller
shall afford to Purchaser and its officers and authorized agents and
representatives reasonable access to the properties, books, records, contracts,
documents, files and other
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information of or relating to the Assets and Liabilities. Purchaser and Seller
each will identify to the other, within ten (10) days after the date hereof, a
selected group of their respective salaried personnel that shall constitute a
"transition group" who will be available to Seller and Purchaser, respectively,
at reasonable times (limited to normal operating hours) to provide information
and assistance in connection with Purchaser's investigation of matters relating
to the Assets and Liabilities. Seller shall cause other personnel to be
reasonably available during normal business hours, to an extent not disruptive
of ongoing operations, for the same purposes. Any investigation pursuant to this
Section 7.2 shall be conducted in such manner as not to interfere unreasonably
with the conduct of the Seller's business. Notwithstanding the foregoing, Seller
shall not be required to provide access to or disclose information where such
access or disclosure would impose an unreasonable burden on Seller, or any
employee of Seller or would violate or prejudice the rights of customers,
jeopardize any attorney-client privilege or contravene any law, rule,
regulation, order, judgment, decree, fiduciary duty or binding agreement entered
into prior to the date of this Agreement. The parties hereto shall make
appropriate substitute disclosure arrangements under circumstances in which the
restrictions of the preceding sentence apply.
(b) EACH PARTY TO THIS AGREEMENT SHALL HOLD, AND SHALL CAUSE ITS
RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, CONSULTANTS AND ADVISORS TO
HOLD, IN STRICT CONFIDENCE, UNLESS DISCLOSURE TO A BANK REGULATORY AUTHORITY IS
NECESSARY OR DESIRABLE IN CONNECTION WITH ANY REGULATORY APPROVAL OR UNLESS
COMPELLED TO DISCLOSE BY JUDICIAL OR ADMINISTRATIVE PROCESS OR, IN THE WRITTEN
OPINION OF ITS COUNSEL, BY OTHER REQUIREMENTS OF LAW OR THE APPLICABLE
REQUIREMENTS OF ANY REGULATORY AGENCY OR RELEVANT STOCK EXCHANGE, ALL NON-PUBLIC
RECORDS, BOOKS, CONTRACTS, INSTRUMENTS, COMPUTER DATA AND OTHER DATA AND
INFORMATION (COLLECTIVELY, "INFORMATION") CONCERNING THE OTHER PARTY (OR, IF
REQUIRED UNDER A CONTRACT WITH A THIRD PARTY, SUCH THIRD PARTY) FURNISHED IT BY
SUCH OTHER PARTY OR ITS REPRESENTATIVES PURSUANT TO THIS AGREEMENT (EXCEPT TO
THE EXTENT THAT SUCH INFORMATION CAN BE SHOWN TO HAVE BEEN (i) PREVIOUSLY KNOWN
BY SUCH PARTY ON A NON-CONFIDENTIAL BASIS, (ii) IN THE PUBLIC DOMAIN THROUGH NO
FAULT OF SUCH PARTY OR (iii) LATER LAWFULLY ACQUIRED FROM OTHER SOURCES BY THE
PARTY TO WHICH IT WAS FURNISHED), AND NEITHER PARTY SHALL RELEASE OR DISCLOSE
SUCH INFORMATION TO ANY OTHER PERSON, EXCEPT ITS AUDITORS, ATTORNEYS, FINANCIAL
ADVISORS, BANKERS, OTHER CONSULTANTS AND ADVISORS AND, TO THE EXTENT PERMITTED
ABOVE, TO BANK REGULATORY AUTHORITIES.
7.3 Regulatory Approvals. As soon as practicable after the date of this
Agreement, Purchaser shall prepare and file any applications, notices and
filings required in order to obtain the Regulatory Approvals. Purchaser shall
use all reasonable efforts to obtain each such approval as promptly as
reasonably practicable and, to the extent possible, in order to permit the
Closing to occur not later than March
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31, 1997. Seller will cooperate in connection therewith (including the
furnishing of any information and any reasonable undertaking or commitments
which may be required to obtain the Regulatory Approvals). Each party will
provide the other with copies of any applications and all correspondence
relating thereto prior to filing, other than material filed in connection
therewith under a claim of confidentiality.
7.4 Consents. Seller agrees to use reasonable commercial efforts (such
efforts not to include making payments to third parties) to obtain from lessors
and any other parties to any Branch Leases or Personal Property Leases any
required consents to the assignment of the Branch Leases and Personal Property
Leases to Purchaser on the Closing Date; provided, however, the Seller shall not
be obligated to incur any monetary obligations or expenditures to the parties
whose consent is required in connection with the utilization of its reasonable
efforts to obtain any such required consents. If any such required consent
cannot be obtained, notwithstanding any other provision hereof, the Assets and
Liabilities associated with the subject Branch, other than any such Branch Lease
or any Personal Property Lease or as to which consent cannot be obtained, shall
nevertheless be transferred to Purchaser at the Closing and the parties shall
negotiate in good faith and Seller and Purchaser shall use reasonable efforts
(such efforts not to include making payments to third parties) to make
alternative arrangements reasonably satisfactory to Seller and Purchaser. In the
event Seller does not obtain consent from the lessors and any other parties to
any Branch Lease or Personal Property Lease, Seller shall not be obligated to
deliver physical possession of the subject Branch or the personal property
subject to such Personal Property Lease to Purchaser at the Closing.
7.5 Efforts to Consummate; Further Assurances. (a) Purchaser and Seller
agree to use all reasonable efforts to satisfy or cause to be satisfied as soon
as practicable their respective obligations hereunder and the conditions
precedent to the Closing.
(b) Seller will duly execute and deliver such assignments, bills of
sale, deeds, acknowledgments and other instruments of conveyance and transfer as
shall at any time be necessary or appropriate to vest in Purchaser the full
legal and equitable title to the Assets.
(c) On and after the Closing Date, each party will promptly deliver to
the other all mail and other communications properly addressable or deliverable
to the other as a consequence of the P&A Transaction; and without limitation of
the foregoing, on and after the Closing Date, Seller shall promptly forward any
mail, communications or other material relating to the Deposits or the Assets
transferred on the Closing Date, including, but not limited to, that portion of
any IRS "B" tapes that relates to such Deposits, to such employees of Purchaser
at such addresses as may from time to time be specified by Purchaser in writing.
(d) The costs incurred by a party in performing its obligations to the
other (x) under Sections 7.5(a) and (c) shall be borne by the initial recipient
and (y) otherwise
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under this Section 7.5 shall be borne by Purchaser. Seller will cooperate with
Purchaser to minimize the costs referred to in clause (y).
7.6 Solicitation. (a) Until the Closing Date and for an additional six
(6) months following the Closing Date, Seller agrees that it will not solicit
deposits (but may solicit loans or other business) from or to persons or
entities who were depositors at the Branches on the date hereof by personal
contact, by telephone, by facsimile, by mail or other similar solicitation, or
in any other way except for general solicitations and solicitations that are not
directed primarily to persons or entities who were depositors of the Branches on
the date hereof; provided, however, that Seller may solicit depositors who as of
the date of this Agreement have existing accounts originating at branches or
other offices of Seller or its Affiliates other than the Branches pursuant to
solicitations which arise from their status as a customer at such other branches
or offices; and provided, further, that Seller may solicit major or statewide
depositors (such as, for example, a company with more than one location or the
state government or any agency or instrumentality thereof) without restriction
hereunder.
(b) Prior to the Closing Date, Purchaser agrees that it will not
attempt to solicit Branch customers through advertising nor transact its
business in a way which would induce such Branch customers to close any account
and open accounts directly with Purchaser or would otherwise result in a
transfer of all or a portion of an existing account from Seller to Purchaser or
to any other financial institution. Notwithstanding the foregoing sentence,
Purchaser and its Affiliates shall be permitted to: (i) engage in advertising,
solicitations or marketing campaigns not primarily directed to or targeted at
such Branch customers; (ii) engage in lending, deposit, safe deposit, trust or
other financial services relationships existing as of the date hereof which such
Branch customers through other branch offices of Purchaser; (iii) respond to
unsolicited inquiries by such Branch customers with respect to banking or other
financial services; and (iv) provide notices or communications relating to the
transactions contemplated hereby in accordance with the provisions hereof.
7.7 Insurance. Seller will maintain in effect until the Closing Date
all casualty and public liabilities policies relating to the Branches and
maintained by Seller on the date hereof or procure comparable replacement
policies and maintain such replacement policies in effect until the Closing
Date.
7.8 No Servicing and Maintenance Contracts. Except for the Personal
Property Leases, no existing contracts of Seller with respect to the service,
maintenance and physical operation of the Branches will be assumed at the
Closing by Purchaser. All such service and maintenance shall be provided by
Purchaser, subsequent to the Closing, pursuant to its own contracts.
ARTICLE 8
TAXES AND EMPLOYEE BENEFITS
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8.1 Tax Representations. Seller represents and warrants to Purchaser as
follows:
(a) Except as set forth in Schedule 8.1, all Tax Returns with respect
to the Assets or income therefrom, the Liabilities or payments in respect
thereof or the operation of the Branches, that are required to be filed (taking
into account any extension of time within which to file) before the Closing
Date, have been or will be duly filed, and all Taxes shown to be due on such Tax
Returns have been or will be paid in full.
(b) With respect to the Deposits, Seller is in compliance with the Code
and regulations thereunder relative to obtaining form depositors of the Deposits
executed IRS Forms W-8 and W-9. With respect to the Deposits opened after
December 31, 1983, Seller has either obtained a properly completed Form W-8 or
W-9 (or a substitute form meeting applicable requirements) or is back-up
withholding on such account.
8.2 Proration of Taxes. Except as otherwise agreed to by the parties,
whenever it is necessary to determine the liability for Taxes for a portion of a
taxable year or period that begins before and ends on or after the Closing Date,
the determination of the Taxes for the portion of the year or period ending on,
and the portion of the year or period beginning on or after, the Closing Date
shall be determined by assuming that the taxable year or period ended at 11:59
P.M. California time on the day prior to the Closing Date.
8.3 Sales and Transfer Taxes. Except as set forth in Section 3.9, all
excise, sales, use and transfer taxes that are payable or that arise as a result
of the consummation of the purchase and sale contemplated by this Agreement
shall be paid by Purchaser and Purchaser shall indemnify and hold Seller
harmless from and against any such taxes.
8.4 Information Returns. At the Closing or as soon thereafter as is
practicable, Seller shall provide Purchaser with a list of all Deposits for
which Seller has not received a properly completed Form W-8 and W-9 (or a
substitute form meeting applicable requirements) or on which Seller is back-up
withholding as of the Closing Date. Seller agrees to indemnify Purchaser in an
amount equal to any penalty and interest imposed upon Purchaser by the IRS which
Purchaser is thereafter required to, and does, pay to the IRS where such penalty
and interest arises out of actions taken or omitted to be taken by Purchaser in
reasonable reliance upon information provided under this Section 8.4 and such
penalty and interest does not result from an act or omission of Purchaser not
made in reasonable reliance upon such information. The term "interest" for
purposes of this Section 8.4 means interest accrued prior to the receipt by
Purchaser of a notice of Penalty from the IRS regarding Forms W-8 or W-9 for the
Deposits. Purchaser shall timely notify Seller of such penalty notice prior to
Purchaser's payment of any penalty or interest. Seller has the right, at its own
expense, to protest such penalty and interest. Purchaser shall cooperate fully
with respect to Seller's protest, including furnishing all relevant information,
records, and
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documents.
8.5 Payment of Amount Due Under Article 8. Any payment by Seller to
Purchaser, or to Seller from Purchaser, under this Article 8 (other than
payments required by Section 8.3) to the extent due at the Closing may be offset
against any payment due the other party at the Closing. All subsequent payments
under this Article 8 shall be made as soon as determinable and shall be made and
bear interest from the date due to the date of payment as provided in Section
3.2(b).
8.6 Assistance and Cooperation. After the Closing Date, each of Seller
and Purchaser shall:
(a) Make available to the other and to any taxing authority as
reasonably requested all relevant information, records, and documents relating
to Taxes with respect to the Assets or income therefrom, the Liabilities or
payments in respect thereof, or the operation of the Branches;
(b) Provide timely notice to the other in writing of any pending or
proposed Tax audits (with copies of all relevant correspondence received from
any Taxing authority in connection with any Tax audit or information request) or
Tax assessments with respect to the Assets or the income therefrom, the
Liabilities or payments in respect thereof, or the operation of the Branches for
taxable periods for which the other may have a liability under this Article 8;
and
(c) The party requesting assistance or cooperation shall bear the other
party's out-of-pocket expenses in complying with such request to the extent that
those expenses are attributable to fees and other costs of unaffiliated third
party service providers.
8.7 Employees. (a) As soon as reasonably practicable and in any event
within thirty (30) days of the date hereof, Seller shall deliver to Purchaser a
true and complete list of all Branch Employees by name, date of hire and
position, as of the date hereof, together with their most recent performance
evaluations, current salaries and other compensation arrangements; provided,
however, that Seller shall not release a performance evaluation without having
first obtained the written consent of the respective Branch Employee. Purchaser
may, at its discretion, interview any and all Branch Employees. Purchaser shall
make employment available to all Branch Employees on the Closing Date upon the
terms and conditions described below. Seller shall promptly inform Purchaser of
any Branch Employee who resigns prior to the Closing Date. On and after the
Closing Date, Branch Employees employed by Purchaser shall be defined as
Transferred Employees for all purposes hereof. Subject to the provisions of this
Section 8.7, Transferred Employees shall be subject to the employment terms,
conditions and rules applicable to other employees of Purchaser. Nothing
contained in this Agreement shall be construed as an employment contract between
Purchaser and any Branch Employee or Transferred Employee.
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(b) Purchaser may interview Branch Employees during normal working
hours. Purchaser shall be solely responsible for any activity in connection with
interviewing Branch Employees. Purchaser indemnifies and holds Seller harmless
from and against any claim, liability, losses, costs or expenses, including
reasonable attorneys' fees, resulting or arising from Purchaser's acts or
omissions in connection with said interviews.
(c) Purchaser shall be responsible for the Assumed Severance
Obligations with respect to all Branch Employees.
(d) Each Transferred Employee shall be provided employment subject to
the following terms and conditions:
(i) Base salary rate shall be at least equivalent to the rate
of base salary paid by Seller to such Transferred Employee as of the
close of business on the day prior to the Closing Date.
(ii) Except as specifically provided herein, Transferred
Employees shall be provided employee benefits that are no less
favorable in the aggregate than those provided to similarly situated
employees of Purchaser. Purchaser shall provide such Transferred
Employee with credit for the Transferred Employee's period of service
with Seller (including any service credited from First Interstate Bank
as a predecessor entity to Seller) towards the calculation of
eligibility for such purposes as vacation, severance and other benefits
and participation and vesting in Purchaser's qualified pension or
profit sharing plan, as such plans may exist (but, except as set forth
in (v) below and for vacation, not for purpose of benefit accruals,
including without limitation, funding of accrued pension or profit
sharing plans for such Transferred Employee with respect to any period
prior to the Closing Date).
(iii) Each Transferred Employee shall be eligible to
participate in the medical, dental or other welfare plans of Purchaser,
as such plans may exist, effective as of the Closing Date and any
pre-existing conditions provisions of such plans shall be waived with
respect to such Transferred Employee; provided, however, that if
Purchaser's relevant health or disability insurance policy or plan has
a pre-existing condition limitation and a Transferred Employee's
condition is being excluded (as a pre-existing condition) under
Seller's plan as of the Closing Date, Purchaser may treat such
condition as a pre-existing condition for the period such condition
would have been treated as a pre-existing condition under Seller's plan
under which such Transferred Employee would have been covered.
(iv) With respect to any Transferred Employee on a short-term
disability or temporary leave of absence, upon conclusion of his or her
short-term disability or temporary leave of absence, subject to the
terms and conditions of the Purchaser's plans and policies and
applicable law, each Transferred Employee on such leave shall receive
the salary and vacation benefits in effect
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when he or she went on leave, shall otherwise be treated as a
Transferred Employee and, to the extent practicable, shall be offered
by Purchaser the same or a substantially equivalent position to his or
her position with Seller prior to having gone on leave.
(v) Until April 1, 1998, each Transferred Employee shall be
eligible for benefits under the severance and similar plans referred to
in Schedule 1.1(a) (the "Assumed Severance Obligations"). After April
1, 1998, each Transferred Employee, who is continuously employed by
Purchaser as of the Closing Date, shall be eligible for benefits under
any severance or similar plans maintained by Purchaser with credit for
the period of years of credited service with Seller towards the
calculation of benefits.
(e) Except as provided herein, Seller shall pay, discharge and be
responsible for (i) all salary and wages, arising out of or relating to the
employment of the Branch Employees before the Closing Date and (ii) any employee
benefits (including, but not limited to, accrued vacation) arising under
Seller's employee benefit plans and employee programs prior to the Closing Date
(but not including any future retiree medical benefits), including benefits with
respect to claims incurred prior to the Closing Date but reported after the
Closing Date. From and after the Closing Date, Purchaser shall pay, discharge
and be responsible for all salary, wages and benefits arising out of or relating
to the employment of the Transferred Employees by Purchaser on and after the
Closing Date, including, without limitation, all claims for welfare benefit
plans incurred on or after the Closing Date. Claims are incurred as of the date
services are provided or disability payments are accrued, notwithstanding when
the injury or illness may have occurred.
(f) To the extent permitted under Purchaser's 401(k) plan, Seller and
Purchaser shall cooperate in arranging for the transfer to Purchaser's 401(k)
plan, as soon as practicable after the Closing Date and in a manner that
satisfies sections 414(l) and 411(d)(6) of the Code, of those accounts held
under Seller's 401(k) plan on behalf of Transferred Employees.
(g) For a period of twelve (12) months following the Closing Date,
Seller shall not solicit any Transferred Employee hired by Purchaser as of the
Closing Date to again become an employee of Seller or any of its Affiliates;
provided, however, that Seller shall not be prohibited from hiring a Transferred
Employee if such Transferred Employee contacts Seller to seek such hiring or
retention, whether in response to general advertising or otherwise. For purposes
of this Section 8.7, the term "Seller" shall include Wells Fargo & Company, a
Delaware corporation and their Affiliates.
8.8 Branch Employee Representations. (a) Seller represents and warrants
to Purchaser, to Seller's knowledge, as follows:
(i) none of the Branch Employees is a member of any labor
union;
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(ii) Seller is not a party to any individual contract, written
or oral, express or implied, for the employment of any Branch Employee,
and Seller is not subject to any collective bargaining arrangement with
respect to any Branch Employee;
(iii) Seller's 401(k) Plan is in compliance in all material
respects with applicable law;
(iv) no liabilities exist or are reasonably expected to exist
under any employee benefit plan of Seller that, individually or in the
aggregate, would have a Material Adverse Effect; and
(v) Seller has not entered into any individual agreement or
otherwise made any individual commitment to any Branch Employee with
respect to continued employment by Purchaser.
(b) Seller shall indemnify and hold Purchaser harmless from and against
any claims, losses, damages or expenses (including attorney's fee) suffered as a
result of any failure to give any notice to its Branch Employees required by the
Worker Adjustment and Retraining Notification Act (the "WARN Act"), provided
such notice is required as a result of action by Seller prior to the Closing
Date.
ARTICLE 9
CONDITIONS TO CLOSING
9.1 Conditions to Obligations of Purchaser. Unless waived in writing by
Purchaser, the obligation of Purchaser to consummate the P&A Transaction is
conditioned upon satisfaction of each of the following conditions:
(a) Regulatory Approvals. All consents, approvals and authorizations
required to be obtained prior to the Closing from governmental and regulatory
authorities in connection with the execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby to be consummated at
the Closing, including the Regulatory Approvals, shall have been made or
obtained, and shall remain in full force and effect, and all waiting periods
applicable to the consummation of the P&A Transaction shall have expired or been
terminated; provided, however, that no Regulatory Approval shall have imposed
any condition or requirement (a "Burdensome Condition") that would (i) result in
any Material Adverse Effect or (ii) require Purchaser to effect any divestiture
that would constitute a substantial portion of the business or properties of the
Branches, taken as a whole.
(b) Orders. No court or governmental authority of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, judgment, decree, injunction or other order (whether
temporary, preliminary or permanent) (any of the foregoing, an "Order") which is
in effect and prohibits or makes
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illegal the consummation of the P&A Transaction or would otherwise result in a
Material Adverse Effect.
(c) Representations and Warranties; Covenants. Each of the
representations and warranties of Seller contained in this Agreement shall be
true in all material respects when made and as of the Closing Date, with the
same effect as though such representations and warranties had been made on and
as of the Closing Date (except that representations and warranties relating to
Assets and Liabilities transferred at the Closing Date shall only be made, and
need only be true in all material respects, on and as of the Closing Date).
Purchaser shall have received at Closing a certificate to that effect dated as
of such Closing Date and executed by the President or any Executive Vice
President of Seller. Each of the covenants and agreements of Seller to be
performed on or prior to the Closing Date shall have been duly performed in all
material respects. Purchaser shall have received at Closing a certificate to
that effect dated as of such Closing Date and executed by the President or any
Executive Vice President of Seller.
Notwithstanding any other provision of this Agreement, if there shall
be a failure of any condition specified in this Section 9.1 to the obligations
of Purchaser in respect of the acquisition of any specific Branch or Branches
the aggregate Deposits of which as of the date hereof shall constitute less than
25% of the Deposits in all of the Branches subject to this Agreement as of the
date hereof, Purchaser nevertheless shall be obligated to consummate the P&A
Transaction but may, upon written notice to Seller, exclude from the transaction
the Branch or Branches in respect of which the failure of condition shall exist,
in which case, appropriate adjustment shall be made in the schedules hereto and
the other documents to be delivered pursuant hereto so as to duly reflect the
deletion of such Branch or Branches from the transactions contemplated hereby
(and, consequently, to the calculation of the Estimated Purchase Price,
Estimated Payment Amount, Purchase Price and Adjusted Payment Amount). If any
Branch is excluded from this Agreement or if Purchaser nevertheless elects to
purchase any Branch which would otherwise be so excluded and such Branch is
transferred to Purchaser at the Closing (subject to Purchaser's rights under
Section 12.1(a)), any event that would otherwise constitute a breach of warranty
or failure of condition in respect of such Branch arising solely from or
relating to the operation of this paragraph shall not constitute a breach of
warranty or failure of condition.
9.2 Conditions to Obligations of Seller. Unless waived in writing by
Seller, the obligation of Seller to consummate the P&A Transaction is
conditioned upon satisfaction of each of the following conditions:
(a) Regulatory Approvals. All consents, approvals and authorizations
required to be obtained prior to the Closing from governmental and regulatory
authorities in connection with the execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby to be consummated at
the Closing, including the Regulatory Approvals, shall have been made or
obtained, and shall remain in full force and effect, and all statutory waiting
periods applicable to the
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consummation of the P&A Transaction shall have expired or been terminated.
(b) Orders. No Order shall be in effect that prohibits or makes illegal
the consummation of the P&A Transaction.
(c) Representations and Warranties; Covenants. Each of the
representations and warranties of Purchaser contained in this Agreement shall be
true in all material respects when made and as of the Closing Date, with the
same effect as though such representations and warranties had been made on and
as of the Closing Date (except that representations and warranties that are made
as of a specific date need be true in all material respects only as of such
date). Seller shall have received at Closing a certificate to that effect dated
as of such Closing Date and executed by the President or any Executive Vice
President of Purchaser. Each of the covenants and agreements of Purchaser to be
performed on or prior to the Closing Date shall have been duly performed in all
material respects. Seller shall have received at Closing a certificate to that
effect dated as of such Closing Date and executed by the President or any
Executive Vice President of Purchaser.
ARTICLE 10
ENVIRONMENTAL MATTERS
10.1 Environmental Matters. (a) Seller has provided to Purchaser and
Purchaser hereby acknowledges receipt of copies of Phase I environmental site
assessments for all Owned Real Property and asbestos reports with respect to all
the Real Property, except for Real Property where the improvements have been
completed after December 31, 1978. Such Phase I environmental site assessments
for all Owned Real Property have been dated (or supplemented) on or after
January 1, 1996.
(b) If such Phase I site assessments and asbestos reports reasonably
indicate the necessity or desirability of further investigation to determine
whether or not an Environmental Hazard or an Asbestos Hazard exists at such Real
Property, Purchaser may elect, not later than thirty (30) days after the signing
of this Agreement, to have Clayton Environmental, Building Analytics, or another
similarly qualified environmental engineer or consultant mutually acceptable to
Purchaser and Seller (the "Environmental Consultant"), to the extent reasonable
and appropriate, conduct Phase II environmental site assessments and additional
asbestos investigations, the cost of which shall be shared equally by the
parties. Any such further investigation or testing shall be conducted in such a
manner so as not to interfere with the normal operation of the Branch(s)
involved. All such Phase II environmental site assessments and additional
asbestos reports shall be treated as information subject to Section 7.2(b) and
shall be completed not less than ninety (90) days after the signing of this
Agreement.
(c) In the event that the Environmental Consultant has discovered an
Environmental Hazard, and/or Asbestos Hazard, during any such Phase II
environmental site assessment at any single parcel of Owned Real Property, the
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remediation of which, in the reasonable judgment of the Environmental
Consultant, is or would be the responsibility of Seller, or Purchaser should it
acquire such Owned Real Property, and will cost $100,000 or more for such single
parcel of Owned Real Property, Purchaser shall lease from Seller such single
parcel of Owned Real Property pursuant to a Lease Agreement that shall provide
as follows:
(i) Such Lease Agreement shall be for a term of two (2) years,
with no obligation or right to renew (it being the intention of Seller
that Purchaser locate an alternative branch site during such two
years), at a rental equal to a fair market rental value;
(ii) Seller may sell such Owned Real Property to any person,
subject to such Lease Agreement, for any price;
(iii) During the term of such Lease Agreement, in the event
that Seller shall deliver to Purchaser a report of a qualified
environmental engineer or consultant certifying that the Environmental
Hazard, and/or Asbestos Hazard, at or on any such leased parcel of
Owned Real Property has been remediated to the extent required under
applicable Environmental Laws, Purchaser shall be required to purchase
such parcel of Owned Real Property at the net book value as of the
close of business of the month-end day most recently preceding the
Closing Date; and
(iv) Other terms and conditions of the Lease Agreement shall
be typical to such branch leases in the market as negotiated between
Seller and Purchaser.
If the remediation cost is less than $100,000 for any single parcel of
Owned Real Property, Purchaser shall acquire such parcel and such cost shall be
borne by Purchaser without indemnity under this Agreement.
(d) Purchaser agrees that it and its Environmental Consultant shall
conduct any Phase II environmental site assessments or other investigations
pursuant to this Section with reasonable care and subject to customary practices
among environmental consultants and engineers, including, without limitation,
following completion thereof, the restoration of any site to the extent
practicable to its condition prior to such site assessment or investigation and
the removal of all monitoring wells.
(e) Any lease of a parcel of Owned Real Property under Section 10.1(c)
shall in no way affect the transfer of any Assets or Liabilities, other than
such parcel of Owned Real Property, to the Purchaser at the Closing.
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ARTICLE 11
TERMINATION
11.1 Termination. This Agreement may be terminated at any time prior to
the Closing Date:
(a) By the mutual written agreement of Purchaser and Seller;
(b) By Seller or Purchaser, in the event of a material breach by the
other of any representation, warranty or agreement contained herein which is not
cured or cannot be cured within thirty (30) days after written notice of such
termination has been delivered to the breaching party; provided, however, that
termination pursuant to this Section 11.1(b) shall not relieve the breaching
party of liability arising out of or related to such breach;
(c) By Seller or Purchaser, in the event that the Closing has not
occurred by March 31, 1997 unless the failure to so consummate by such time is
due to a breach of this Agreement by the party seeking to terminate;
(d) By Seller or Purchaser at any time after the denial or revocation
of any Regulatory Approval or by Purchaser if any such approval has been
obtained which contains a Burdensome Condition; or
(e) By Seller if, at any time prior to the Closing Date, an appropriate
official of any governmental agency or authority whose consent, approval or
authorization is required in order for Purchaser to consummate the transactions
contemplated hereby shall have advised that such authority will not grant such
consent, approval or authorization or will grant the same only subject to a
Burdensome Condition (unless Purchaser shall have waived the condition provided
for in the proviso to Section 9.1(a)), or where there shall be in effect any
Order, or if there shall exist any proceeding which, in Seller's reasonable
judgment, would result in an Order; provided, however, that Purchaser shall have
fifteen (15) days following receipt of notice from Seller to remedy any such
situation or to provide assurances reasonably acceptable to Seller that such
situation will be remedied by the Closing Date.
11.2 Effect of Termination. In the event of termination of this
Agreement and abandonment of the transactions contemplated hereby pursuant to
Section 11.1, no party hereto (or any of its directors, officers, employees,
agents or Affiliates) shall have any liability or further obligation to any
other party, except as provided in Section 7.2(b) and except that nothing herein
will relieve any party from liability for any breach of this Agreement.
ARTICLE 12
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INDEMNIFICATION AND OTHER REMEDIES
12.1 Indemnification. (a) Subject to Section 13.1, Seller shall
indemnify and hold harmless Purchaser and any person directly or indirectly
controlling Purchaser from and against any and all Losses which Purchaser may
suffer, incur or sustain arising out of or attributable to (i) any breach of any
representation or warranty made by Seller in this Agreement, (ii) any material
breach of any covenant or agreement to be performed by Seller pursuant to this
Agreement, (iii) any claim, penalty asserted, legal action or administrative
proceeding based upon any action taken or omitted to be taken by Seller or
conditions existing prior to the Closing Date, relating in any such case to the
operation of the Branches, the Assets or the Liabilities; or (iv) any liability,
obligation or duty of Seller that is not a Liability.
(b) Subject to Section 13.1, Purchaser shall indemnify and hold
harmless Seller and any person directly or indirectly controlling Seller from
and against any and all Losses which Seller may suffer, incur or sustain arising
out of (i) any breach of any representation or warranty made by Purchaser in
this Agreement, (ii) any material breach of any covenant or agreement to be
performed by Purchaser pursuant to this Agreement, including, without
limitation, the covenants contained in Section 10.2 above, or (iii) any claim,
penalty asserted, legal action or administrative proceeding based upon any
action taken or omitted to be taken by Purchaser on or after the Closing Date,
relating in any such case to the operation of the Branches or the Assets, or
(iv) the Liabilities.
(c) To exercise its indemnification rights under this Section 12.1 as a
result of the assertion against it of any claim or potential liability for which
indemnification is provided, the indemnified party shall promptly notify the
indemnifying party of the assertion of such claim, discovery of any such
potential liability or the commencement of any action or proceeding in respect
of which indemnity may be sought hereunder; PROVIDED, HOWEVER, in no event shall
notice of original claim for indemnification under this Agreement be given later
than the expiration of one (1) year from the Closing Date (excluding only claims
related to the covenants in Section 10.2 above). The indemnified party shall
advise the indemnifying party of all facts relating to such assertion within the
knowledge of the indemnified party, and shall afford the indemnifying party the
opportunity, at the indemnifying party's sole cost and expense, to defend
against such claims for liability. In any such action or proceeding, the
indemnified party shall have the right to retain its own counsel, but the fees
and expenses of such counsel shall be at its own expense unless (i) the
indemnifying party and the indemnified party mutually agree to the retention of
such counsel or (ii) the named parties to any such suit, action, or proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party, and in the reasonable judgment of the indemnified party,
representation of the indemnifying party and the indemnified party by the same
counsel would be inadvisable due to actual or potential differing defenses or
conflicts of interests between them.
(d) The indemnified party shall have the right to settle or compromise
any
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claim or liability subject to indemnification under this Section, and to be
indemnified from and against all Losses resulting therefrom, unless the
indemnifying party, within sixty (60) calendar days after receiving written
notice of the claim or liability in accordance with Section 12.1(c) above,
notifies the indemnified party that it intends to defend against such claim or
liability and undertakes such defense, or, if required in a shorter time than
sixty (60) calendar days, the indemnifying party makes the requisite response to
such claim or liability asserted.
(e) Notwithstanding anything to the contrary contained in this
Agreement, an indemnifying party shall not be liable under this Section 12.1 for
any Losses sustained by the indemnified party unless and until the aggregate
amount of all indemnifiable Losses sustained by the indemnified party shall
exceed Twenty-Five Thousand Dollars ($25,000) times the number of Branches being
purchased hereunder, in which event the indemnifying party shall provide
indemnification hereunder in respect of all such indemnifiable Losses in excess
of Twenty-Five Thousand Dollars ($25,000) times the number of Branches being
purchased hereunder, provided, however, that the aggregate amount of
indemnification payments payable pursuant to this Section 12.1, shall in no
event exceed the amount of the Purchase Price. An indemnifying party shall not
be liable under this Section 12.1 for any settlement effected, without its
consent, of any claim or liability or proceeding for which indemnity may be
sought hereunder except in the case of a settlement in an amount which does not
exceed Twenty-Five Thousand Dollars ($25,000) times the number of Branches being
purchased hereunder; provided, however, the provisions of this Section 12.1(e)
shall not apply to Purchaser's obligation to indemnify Seller for a breach of
Purchaser's covenants contained in Section 10.2 above. In no event shall either
party hereto be entitled to consequential or punitive damages or damages for
lost profits in any action relating to the subject matter of this Agreement.
12.2 Purchase Price Adjustment. Any amount paid by Seller or Purchaser
under this Article 12 will be treated as an adjustment to the Purchase Price
unless and to the extent that a "determination" (as defined in Section 1313(a)
of the Code) causes any such amount not to constitute an adjustment to the
Purchase Price for federal Tax purposes.
12.3 Exclusivity. After the Closing, Article 12 will provide the
exclusive remedy for any misrepresentation, breach of warranty, covenant or
other agreement or other claim arising out of this Agreement or the transactions
contemplated hereby.
12.4 AS-IS Sale; Waiver of Warranties. Except as otherwise expressly
set forth in this Agreement, Purchaser acknowledges that the Assets and
Liabilities are being sold and accepted on an "AS-IS-WHERE-IS" basis, and are
being accepted without any representation or warranty. As part of Purchaser's
agreement to purchase and accept the Assets and Liabilities AS-IS-WHERE-IS, and
not as a limitation on such agreement, TO THE FULLEST EXTENT PERMITTED BY LAW,
SELLER HEREBY DISCLAIMS AND PURCHASER HEREBY UNCONDITIONALLY AND IRREVOCABLY
WAIVES AND RELEASES ANY AND ALL ACTUAL OR POTENTIAL RIGHTS
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PURCHASER MIGHT HAVE AGAINST SELLER OR ANY PERSON DIRECTLY OR INDIRECTLY
CONTROLLING SELLER REGARDING ANY FORM OF WARRANTY, EXPRESS OR IMPLIED, OF ANY
KIND OR TYPE, RELATING TO THE ASSETS AND LIABILITIES INCLUDING, BUT NOT LIMITED
TO, THE LOANS AND/OR THE COLLATERAL THEREFOR EXCEPT THOSE SET FORTH IN ARTICLE 5
AND SECTIONS 8.1 AND 8.8. SUCH WAIVER AND RELEASE IS, TO THE FULLEST EXTENT
PERMITTED BY LAW, ABSOLUTE, COMPLETE, TOTAL AND UNLIMITED IN EVERY WAY. SUCH
WAIVER AND RELEASE INCLUDES TO THE FULLEST EXTENT PERMITTED BY LAW, BUT IS NOT
LIMITED TO, A WAIVER AND RELEASE OF EXPRESS WARRANTIES (EXCEPT THOSE SET FORTH
IN ARTICLE 5 AND SECTIONS 8.1 AND 8.8), IMPLIED WARRANTIES, WARRANTIES OF
FITNESS FOR A PARTICULAR USE, WARRANTIES OF MERCHANTABILITY, WARRANTIES OF
HABITABILITY, STRICT LIABILITY RIGHTS AND CLAIMS OF EVERY KIND AND TYPE,
INCLUDING BUT NOT LIMITED TO CLAIMS REGARDING DEFECTS WHICH WERE NOT OR ARE NOT
DISCOVERABLE, ALL OTHER EXTANT OR LATER CREATED OR CONCEIVED OF STRICT LIABILITY
OR STRICT LIABILITY TYPE CLAIMS AND RIGHTS.
ARTICLE 13
MISCELLANEOUS
13.1 Survival. (a) The parties' respective representations and
warranties contained in this Agreement shall survive until the first anniversary
of the Closing Date, and thereafter neither party may claim any Loss in relation
to a breach thereof. The agreements and covenants contained in this Agreement
shall not survive the Closing except to the extent expressly set forth herein.
(b) No claim based on any breach of any representation or warranty
shall be valid or made unless written notice with respect thereto is given to
Seller in accordance with this Agreement on or before the date specified in
Section 12.1(c); provided, however, that the provisions of this Section shall
not apply to claims based on Purchaser's breach of Section 10.2 above.
13.2 Assignment. Neither this Agreement nor any of the rights,
interests or obligations of either party may be assigned by either of the
parties hereto without the prior written consent of the other party, and any
purported assignment in contravention of this Section 13.2 shall be void.
13.3 Binding Effect. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
13.4 Public Notice. Prior to the Closing Date, neither Purchaser nor
Seller shall directly or indirectly make or cause to be made any press release
for general circulation, public announcement or disclosure or issue any notice
or general
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communication to employees with respect to any of the transactions contemplated
hereby without the prior written consent of the other party (which consent shall
not be unreasonably withheld or delayed). Purchaser agrees that, without
Seller's prior written consent, it shall not release or disclose any of the
terms or conditions of the transactions contemplated herein to any other person.
Notwithstanding the foregoing, each party may make such public disclosure as, in
the opinion of its counsel, may be required by law or as necessary to obtain the
Regulatory Approvals.
13.5 Notices. All notices, requests, demands, consents and other
communications given or required to be given under this Agreement and under the
related documents shall be in writing and delivered to the applicable party at
the address indicated below:
If to Seller, to: Wells Fargo Bank, National Association
420 Montgomery Street
San Francisco, CA 94104
Attention: Guy Rounsaville, Jr., Esq.
Executive Vice President,
Chief Counsel & Secretary
Fax: (415) 975-7151
If to Purchaser, to: First Pacific National Bank
613 West Valley Parkway
Escondido, CA 92025
Attention: Gary W. Deems
Fax: (619) 741-7381
or, as to each party at such other address as shall be designated by such party
in a written notice to the other party complying as to delivery with the terms
of this Section. Any notices shall be in writing, including telegraphic or
facsimile communication, and may be sent by registered or certified mail, return
receipt requested, postage prepaid, or by fax, or by overnight delivery service.
Notice shall be effective upon actual receipt thereof.
13.6 Expenses. Except as expressly provided otherwise in this
Agreement, each party shall bear any and all costs and expenses which it incurs,
or which may be incurred on its behalf, in connection with the preparation of
this Agreement and consummation of the transactions described herein, and the
expenses, fees, and costs necessary for any approvals of the appropriate
regulatory authorities.
13.7 Governing Law. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of California applicable to contracts
made and to be performed entirely within such State.
13.8 Entire Agreement; Amendments. (a) This Agreement contains the
entire understanding of and all agreements between the parties hereto with
respect to the
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subject matter hereof and supersedes any prior or contemporaneous agreement or
understanding, oral or written, pertaining to any such matters which agreements
or understandings shall be of no force or effect for any purpose; provided,
however, that the terms of any confidentiality agreement between the parties
hereto previously entered into, to the extent not inconsistent with any
provisions of this Agreement, shall continue to apply.
(b) This Agreement may not be amended or supplemented in any manner
except by mutual agreement of the parties and as set forth in a writing signed
by the parties hereto or their respective successors in interest. The waiver of
any breach of any provision under this Agreement by any party shall not be
deemed to be a waiver of any preceding or subsequent breach under this
Agreement. No such waiver shall be effective unless in writing.
13.9 Third Party Beneficiaries. This Agreement shall not benefit or
create any right or cause of action in or on behalf of any person other than
Seller and Purchaser.
13.10 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
13.11 Headings. The headings used in this Agreement are inserted for
purposes of convenience of reference only and shall not limit or define the
meaning of any provisions of this Agreement.
13.12 Consent to Jurisdiction; Waiver of Jury Trial. (a) EACH PARTY
HERETO HEREBY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF
CALIFORNIA AND THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF
CALIFORNIA, AS WELL AS TO THE JURISDICTION OF ALL COURTS FROM WHICH AN APPEAL
MAY BE TAKEN OR OTHER REVIEW SOUGHT FROM THE AFORESAID COURTS, FOR THE PURPOSE
OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF SUCH PARTY'S OBLIGATIONS
UNDER OR WITH RESPECT TO THIS AGREEMENT OR ANY OF THE AGREEMENTS, INSTRUMENTS OR
DOCUMENTS CONTEMPLATED HEREBY, AND, TO THE EXTENT IT LAWFULLY MAY DO SO,
EXPRESSLY WAIVES ANY AND ALL OBJECTIONS IT MAY HAVE AS TO VENUE IN ANY OF SUCH
COURTS.
(b) EACH PARTY HERETO HEREBY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN ANY WAY CONCERNED WITH
THIS AGREEMENT OR ANY OF THE AGREEMENTS, INSTRUMENTS OR DOCUMENTS CONTEMPLATED
HEREBY. NO PARTY HERETO, NOR ANY ASSIGNEE OR SUCCESSOR OF A PARTY HERETO, SHALL
SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER
LITIGATION PROCEDURE BASED UPON, OR ARISING OUT OF, THIS AGREEMENT OR ANY OF THE
AGREEMENTS, INSTRUMENTS OR DOCUMENTS CONTEMPLATED HEREBY. NO PARTY WILL SEEK TO
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CONSOLIDATE ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER
ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OR
THIS SECTION HAVE BEEN FULLY CONSIDERED BY THE PARTIES HERETO, AND THE
PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NO PARTY HAS IN ANY WAY AGREED
WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS SECTION WILL
NOT BE FULLY ENFORCED IN ALL INSTANCES.
13.13 Severability. If any provision of this Agreement, as applied to
any party or circumstance, shall be judged by a court of competent jurisdiction
to be void, invalid or unenforceable, the same shall in no way effect any other
provision of this Agreement, the application of any such provision and any other
circumstances or the validity or enforceability of the other provisions of this
Agreement.
13.14 Legal Action. If either Seller or Purchaser shall institute any
legal action to enforce this Agreement or any provision hereof, it is agreed
that the prevailing party shall be entitled to collect reasonable attorneys fees
and costs incurred in connection therewith.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the date and year first above
written.
<PAGE> 52
Page 52
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By:
Name:
Title:
By:
Name:
Title:
PURCHASER
By:
Name:
Title:
By:
Name:
Title:
<PAGE> 53
Page 53
SCHEDULE 1.1(a)
Assumed Severance Obligations
1. First Interstate Bancorp Broad-Based Change in Control Severance Pay
Plan.
2. First Interstate Bancorp Middle Management Change in Control
Severance Pay Plan.
3. Wells Fargo & Company Separation Pay Plan.
<PAGE> 54
Page 54
SCHEDULE 1.1(b)
Branches/Real Properties
<TABLE>
<CAPTION>
BRANCH NAME BRANCH ADDRESS CITY LEASE/OWN
----------- -------------- ---- ---------
<S> <C> <C> <C>
Valley Center 29124 Valley Center Rd. Valley Center Owned
</TABLE>
<PAGE> 55
Page 55
SCHEDULE 1.1(c)
(DELETED)
<PAGE> 56
Page 56
SCHEDULE 1.1(d)
(DELETED)
<PAGE> 57
Page 57
SCHEDULE 3.6(a)
FORM OF CALIFORNIA GRANT DEED
Recording Requested by:
When Recorded Mail to:
DOCUMENTARY TRANSFER TAX $ ________________
( ) COMPUTED ON FULL VALUE OF PROPERTY CONVEYED, OR ( ) COMPUTED ON FULL VALUE
LESS LIENS AND ENCUMBRANCES REMAINING THEREON AT TIME OF SALE.
Signature of declarant or agent determining tax - Firm Name
( ) Unincorporated Area ( ) City of ________________
Assessor's parcel No. ________________
WELLS FARGO BANK, NATIONAL ASSOCIATION with its principal
office located in San Francisco, California, the undersigned grantor, for a
valuable consideration, receipt of which is hereby acknowledged, does hereby
remise, release and forever grant to [NAME OF GRANTEE(S)] a _________________,
with its principal office located in __________________, all of the real
property in the City of ____________________, County of ____________________,
State of California, described in Attachment A hereto.
Date: ___________________ WELLS FARGO BANK, NATIONAL ASSOCIATION
By: _______________________________
Name:
Title:
MAIL TAX STATEMENTS TO GRANTEE
AT ADDRESS ABOVE
<PAGE> 58
Page 58
Attachment A
Property
<PAGE> 59
Page 59
SCHEDULE 3.6(b)
FORM OF BILL OF SALE
BILL OF SALE, dated as of _________________, 1996 by WELLS FARGO BANK,
NATIONAL ASSOCIATION, with its principal office located in San Francisco,
California ("Seller"), to _______________________________________________, with
its principal office located in ___________________________________________,
California ("Purchaser"). Capitalized terms not otherwise defined herein shall
have the same meanings as set forth in the Purchase and Assumption Agreement,
dated as of __________________, 1996 (the "P&A Agreement"), between Seller and
Purchaser, unless the context herein otherwise requires.
W I T N E S S E T H:
WHEREAS, subject to the terms and conditions set forth in the P&A
Agreement, Seller has agreed to transfer to Purchaser the Assets;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Seller does hereby convey, grant,
bargain, sell, transfer, set over, assign, alienate, remise, release, deliver
and confirm unto Purchaser, its successors and assigns, forever, all of Seller's
right, title, interest and claim in and to the Personal Property (including
without limitation, the items described in Attachment A hereto), as of 11:59
P.M., California time, the day prior to the date hereof.
TO HAVE AND TO HOLD all and singular of the foregoing (the "Transferred
Properties") unto Purchaser, its successors and assigns, to its and their own
use and enjoyment forever.
SELLER FURTHER COVENANTS AND AGREES AS FOLLOWS:
1. This instrument shall not constitute an assignment of any covenant,
obligation, liability, contract, agreement, license, lease or commitment
pertaining to the Transferred Properties if an attempted assignment thereof
without the consent of any other party thereto or with an interest therein would
constitute a breach thereof or would materially and adversely affect the rights
of Seller thereunder. If any such consent is not obtained with respect to any
such covenant, obligation, liability, contract, agreement, license, lease or
commitment, or if an attempted assignment with respect thereto would be
ineffective or would impair the rights of Seller thereunder so that Purchaser
would not in fact receive the benefit of all such rights, then Seller, its
successors and assigns, shall act as Purchaser's agent in order to obtain for
Purchaser, its successors and assigns, the benefits thereunder, and Seller will
cooperate with Purchaser in any other reasonable arrangement designed to provide
such benefits for
<PAGE> 60
Page 60
Purchaser.
2. The Transferred Properties are being delivered "AS IS", "WHERE IS"
and with all faults.
3. From time to time, Seller, its successor and assigns, shall execute
and deliver all such further bills of sale, assignments or other instruments of
conveyance and transfer as Purchaser, its successors or assigns, may reasonably
request more effectively to transfer to and vest in Purchaser all of Seller's
interest in the Transferred Properties.
4. This Bill of Sale is made pursuant to the provisions of the P&A
Agreement, and, except as herein otherwise provided, the transfer of property
hereunder is made subject to the terms and provisions of the P&A Agreement.
5. This Agreement shall be governed by and interpreted in accordance
with the laws of the State of California applicable to contracts made and to be
performed entirely within such State.
IN WITNESS WHEREOF, Seller has duly executed and delivered this Bill of
Sale as of the day and year first above written.
WELLS FARGO BANK, NATIONAL ASSOCIATION
By:
-------------------------------------
Name:
Title:
PURCHASER:
By:
-------------------------------------
Name:
Title:
<PAGE> 61
Page 61
Attachment A
Personal Property
[To be provided]
<PAGE> 62
Page 62
SCHEDULE 3.6(c)
FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT
ASSIGNMENT AND ASSUMPTION AGREEMENT, dated as of __________, 1996 (this
"Agreement"), between WELLS FARGO BANK, NATIONAL ASSOCIATION, organized under
the laws of the United States, with its principal office located in San
Francisco, California ("Seller"), and _____________________________, with its
principal office located in ________________________________ ("Purchaser").
Capitalized terms not otherwise defined herein shall have the meanings set forth
in the Purchase and Assumption Agreement, dated as of _____________________,
(the "P&A Agreement"), between Seller and Purchaser, unless the context herein
otherwise requires.
W I T N E S S E T H:
WHEREAS, subject to the terms and conditions set forth in the P&A
Agreement, Seller has agreed to assign, and Purchaser has agreed to assume, the
Liabilities;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Seller hereby sells, assigns, conveys, transfers and delivers, and
Purchaser assumes, without warranty or representation, express or implied, or
recourse to, Seller, except as expressly provided in the P&A Agreement, the
Liabilities, other than the Branch Leases, as set forth in the P&A Agreement.
2. Seller hereby (a) resigns as the trustee or custodian of each
Deposit in an IRA or Keogh Account of which it is the trustee or custodian, and
(b) the extent permitted by the documentation governing such IRA or Keogh
Account, appoints Purchaser as successor trustee or custodian of each such IRA
or Keogh Account, and Purchaser hereby accepts each such trusteeship or
custodianship and assumes all fiduciary obligations with respect thereto.
3. This Agreement shall not constitute an assignment or assumption of
any covenant, fiduciary or other obligation, liability, contract, agreement,
license, lease or commitment pertaining to any Liability if an attempted
assignment or assumption thereof without the consent of any other party thereto
or with an interest therein would constitute a breach thereof or would
materially and adversely affect the rights of Seller thereunder. If any such
consent is not obtained with respect to any such covenant, fiduciary or other
obligation, liability, contract, agreement, license, lease or commitment, or if
an attempted assignment or assumption of any covenant, fiduciary or other
obligation, liability, contract, agreement, license, lease or commitment
pertaining to any Liability would be ineffective or would impair the rights of
Seller thereunder so that
<PAGE> 63
Page 63
Purchaser would not in fact receive the benefit of all such rights, then Seller,
its successors and assigns shall act as Purchaser's agent in order to obtain for
Purchaser, its successors and assigns, the benefits thereunder, and Seller will
cooperate with Purchaser in any other reasonable arrangement designed to provide
such benefits for Purchaser.
4. This Agreement and all of the provisions hereof shall be binding
upon and inure to the benefit of the parties hereto and their respective
permitted successors and permitted assigns; provided, that neither this
Agreement nor any of the rights, interests or obligations of either party may be
assigned by either party hereto without the prior written consent of the other
party, and any purported assignment in contradiction of this Section 4 shall be
void.
5. This Agreement is made pursuant to the provisions of the P&A
Agreement and, except as herein otherwise provided, the assignment and
assumption of any other Liabilities hereunder are made subject to the terms and
provisions of the P&A Agreement.
6. Except as otherwise provided herein, all of the transactions
provided for herein shall be effective as of 11:59 p.m., California time, the
day prior to the date hereof.
7. This Agreement shall be governed by and interpreted in accordance
with the laws of the State of California applicable to contracts made and to be
performed entirely within such State.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the day and year first above written.
<PAGE> 64
Page 64
WELLS FARGO BANK, NATIONAL ASSOCIATION
By:
-------------------------------------
Name:
Title:
[PURCHASER]:
By:
-------------------------------------
Name:
Title:
<PAGE> 65
Page 65
SCHEDULE 3.6(d)
FORM OF ASSIGNMENT OF LEASE AND ASSUMPTION
KNOW THAT WELLS FARGO BANK, NATIONAL ASSOCIATION, a national bank,
organized under the laws of the United States, having its principal office in
San Francisco, California ("Assignor"), in consideration of One Dollar ($1.00)
and other good and valuable consideration paid by
_____________________________________, with its principal office located in
_________________, California ("Assignee"), hereby assigns unto the Assignee all
of Assignor's right, title and interest as tenant under a certain lease more
particularly described on Attachment A hereto, covering premises described on
such attachment and in such Lease (the "Lease").
TO HAVE AND TO HOLD the same unto Assignee, its successors and assigns
from and after 11:59 P.M., California time, the day prior to the date hereof
(the "Effective Time"), subject to the terms, covenants, conditions and
provisions set forth in the Lease.
ASSIGNEE hereby assumes, effective as of the Effective Time, the
performance of all terms, covenants and obligations of the Lease on the part of
Assignor to be performed under the Lease.
IN WITNESS WHEREOF, Assignor and Assignee have executed this Agreement
as of the ____ day of ______________, 1996.
WELLS FARGO BANK, NATIONAL ASSOCIATION
By:
-------------------------------------
Name:
Title:
[ASSIGNEE]:
By:
-------------------------------------
Name:
Title:
<PAGE> 66
Page 66
Attachment A
Lease
<PAGE> 67
Page 67
SCHEDULE 3.6(e)
FORM OF LANDLORD CONSENT
CONSENT, dated as of ________________, 1996, of __________________,
with its principal office located in _______________________ ("Landlord"), in
favor of WELLS FARGO BANK, NATIONAL ASSOCIATION organized under the laws of the
United States, with its principal office located in San Francisco, California
("Seller").
W I T N E S S E T H:
WHEREAS, Landlord is the owner of certain premises and a party to a
certain lease, each described on Attachment A hereto (the "Lease"); and
WHEREAS, Seller desires to assign its entire interest (including,
without limitation, renewal rights, if any) in the Lease to
_____________________, with its principal office located in __________________,
California ("Purchaser"); and
WHEREAS, Seller has requested Landlord's consent to said assignment and
to Purchaser's use of said premises as a banking office and for all other
purposes authorized under the Lease for the balance of the term of the Lease and
Landlord desires to consent to the same for all purposes required under the
Lease.
NOW, THEREFORE,
1. Subject to the limitations set forth below, Landlord hereby consents
to the assignment of the Lease by Seller to Purchaser and to Purchaser's use of
said premises as a banking office and for all other purposes authorized under
the Lease for the balance of the term of the Lease; provided that Purchaser
shall agree to assume all of the obligations of Seller arising under the Lease
from and after the effective date of the assignment.
2. Except for the aforementioned assignment by Seller to Purchaser,
nothing contained herein shall constitute a waiver of the obligation, if any, of
the holder of the leasehold interest created under the Lease to obtain
Landlord's consent to future assignments of the Lease or a sublease of the
premises demised thereunder.
3. Nothing contained herein shall be construed to obligate Seller to
assign the Lease to Purchaser, it being understood and acknowledged by Landlord
that the execution and delivery of this Consent is in anticipation of said
assignment, which may or may not be effected. If said assignment shall be
effected, Seller or Purchaser shall promptly provide to Landlord a fully
executed counterpart of said assignment and notify Landlord of the effective
date thereof.
<PAGE> 68
Page 68
4. Landlord acknowledges and certifies that, except for the conditions
contained herein, all conditions set forth in the Lease, if any, to the
effectiveness of the aforementioned assignment or to the consent of Landlord
contained herein have been either waived by Landlord or satisfied.
IN WITNESS WHEREOF, the undersigned has duly executed and delivered
this instrument as of the day and year first above written.
[LANDLORD]
By:
---------------------------------
Name:
Title:
<PAGE> 69
Page 69
Attachment A
Lease
<PAGE> 70
Page 70
SCHEDULE 3.6(g)
FORM OF CERTIFICATE OF OFFICER
WELLS FARGO BANK, NATIONAL ASSOCIATION
The undersigned, the [title of officer] of WELLS FARGO BANK, NATIONAL
ASSOCIATION, a bank, organized under the laws of the United States of America,
with its principal office located in San Francisco, California ("Seller"),
hereby certifies, to the best of [his] [her] knowledge after reasonable inquiry,
as follows:
1. Each of the representations and warranties made by Seller in the
Purchase and Assumption Agreement, dated as of _____________, 1996, (the "P&A
Agreement"), between Seller and _________________________________, with its
principal office located in __________________, California, are true in all
material respects, as of the date hereof.
2. Each of the covenants and agreements of Seller to be performed on or
prior to the date hereof have been duly performed in all material respects.
3. Attached hereto are true and correct copies of the resolutions of
the Seller's Board of Directors, dated as of _____________, 1996, authorizing
the execution, delivery and performance of the transactions contemplated by the
P&A Agreement, which resolutions were duly adopted and, as of the date hereof,
remain in full force and effect without amendment or modification.
IN WITNESS WHEREOF, I have hereunto subscribed my name this ____ day of
________________, 1996.
WELLS FARGO BANK, NATIONAL ASSOCIATION
By: ___________________________________
Name:
Title:
<PAGE> 71
Page 71
SCHEDULE 3.7(d)
FORM OF CERTIFICATE OF OFFICER
The undersigned, the [title of officer] of
_________________________________, with its principal office located in
____________________, California ("Purchaser"), hereby certifies, to the best of
[his] [her] knowledge after reasonable inquiry, as follows:
1. Each of the representations and warranties made by Purchaser in the
Purchase and Assumption Agreement, dated as of ____________, 1996 (the "P&A
Agreement"), between Purchaser and Wells Fargo Bank, National Association,
organized under the laws of the United States, with its principal office located
in Los Angeles, California, are true in all material respects, as of the date
hereof (except for representations and warranties that are made as of a specific
date).
2. Each of the covenants and agreements of Purchaser to be performed on
or prior to the date hereof have been duly performed in all material respects.
3. Attached hereto are true and correct copies of the resolutions of
the Purchaser's Board of Directors, dated as of _________________, 1996,
authorizing the execution, delivery and performance of the transactions
contemplated by the P&A Agreement, which resolutions were duly adopted and, as
of the date hereof, remain in full force and effect without amendment or
modification.
IN WITNESS WHEREOF, I have hereunto subscribed my name this ____ day of
________________, 1996.
[PURCHASER]:
By:
-----------------------------------
Name:
Title:
<PAGE> 72
Page 72
SCHEDULE 5.4
Tenant Leases
PROP. # PROPERTY NAME SUB-TENANT NAME SQ. LEASE
FT. EXPIRES
- ------- ------------- --------------- --- -------
None.
<PAGE> 73
Page 73
SCHEDULE 5.6
Litigation and Undisclosed Liabilities
None.
<PAGE> 74
Page 74
SCHEDULE 5.10(a)(ix)
(DELETED)
<PAGE> 75
Page 75
SCHEDULE 5.10(f)(i)
(DELETED)
<PAGE> 76
Page 76
SCHEDULE 5.16
Environmental Matters
See asbestos reports and Phase I Reports (as updated) previously provided to
Purchaser.
<PAGE> 77
Page 77
SCHEDULE 8.1
Outstanding Tax Liabilities
None.
<PAGE> 1
Exhibit 10.21
LEASE
PALOMAR VILLAGE PROPERTIES, INC.,
a California corporation
as "Lessor"
and
FIRST PACIFIC NATIONAL BANK,
as "Lessee"
February 29, 1996
PALOMAR VILLAGE SHOPPING CENTER
<PAGE> 2
LEASE
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Page
------- ----
<S> <C>
1. Summary of Basic Lease Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Leased Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3. Leased Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4. Minimum Monthly Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5. Additional Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6. Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7. Security Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
8. Promotional Program; Merchant's Association . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
9. Real Property Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
10. Common Areas and Common Area Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
11. Maintenance and Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
12. Alterations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
13. Signs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
14. Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
15. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
16. Compliance with Laws and Regulations; Hazardous Materials . . . . . . . . . . . . . . . . . . . . 22
17. Entry by Lessor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
18. Damage or Destruction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
19. Condemnation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
20. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
21. Assignment and Subletting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
22. Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>
ii
<PAGE> 3
<TABLE>
<CAPTION>
Article Page
------- ----
<S> <C>
23. Surrender and Seller's Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
24. Subordination and Attornment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
25. Estoppel Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
26. Mortgagee Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
27. Employee Parking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
28. Changes to Shopping Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
29. Limitation on Liability of Lessor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
30. Waiver of California Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
31. Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
32. Miscellaneous Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
EXHIBITS
- --------
A Site Plan of Shopping Center
B Legal Description of Leased Premises
C Acknowledgement of Commencement
D Rules and Regulations
E Sign Criteria
</TABLE>
iii
<PAGE> 4
LEASE
ARTICLE 1
SUMMARY OF BASIC LEASE TERMS
THIS LEASE ("Lease") is made and entered into effective this ___ day
of February, 1996 ("Effective Date").
1.1 Parties and Addresses: Lessor:
Palomar Village Properties, Inc.
P.O. Box 642
Rancho Santa Fe, California 92067
("Lessor")
With a Copy to:
Lowry & Associates
27349 Jefferson Avenue, Suite 102
Temecula, California 92590
Telephone: (909) 676-4131
Lessee:
First Pacific National Bank
c/o Gary W. Deems
Executive Vice President
P.O. Box 460579
Escondido, California 92046
Telephone: (619) 739-6502
("Lessee")
Real Estate Management Company:
Lowry & Associates
27349 Jefferson Avenue, Suite 102
Temecula, California 92590
1.2 Rent Payment: Palomar Village Properties, Inc.
c/o Lowry & Associates
27349 Jefferson Avenue, Suite 214
Temecula, California 92590
Telephone: (909) 676-4131
1
- ------------- -----------
Lessor's Lessee's
Initials Initials
<PAGE> 5
1.3 Leased (A) Name and Location of Shopping Center:
Premises: Palomar Village Shopping Center
Rancho California Road and Margarita Road
Temecula, California 92590
(B) Land: The real property and
improvements located thereon
including, without limitation, the
parking lot, landscaping, sidewalks,
utility installations and related
improvements located thereon
(exclusive of the Building), as
shown on Exhibit "A" hereto and
legally described on Exhibit "B"
hereto; 30580 Rancho California
Road, Temecula, California 92590
("Land").
(C) Building: Floor area of the Building
located on the Land: Approximately
4,524 net rentable square feet
("Building").
(D) Definition of Leased Premises: The
Land and Building shall collectively
be referred to herein as the "Leased
Premises."
1.4 Use: The Leased Premises shall be used for the
operation of a banking financial institution,
and for all related purposes, and for no
other purpose except as expressly set forth
in this Lease.
1.5 Lease Term: Five (5) Lease Years, with three (3) options
to extend for five (5) Lease Years each
("Lease Term").
1.6 Rent: Minimum Monthly Rent:
Five Thousand Six Hundred Fifty Five Dollars
and 00/100 cents ($5,655.00) per month,
subject to adjustment as set forth in Section
4.2 hereof ("Minimum Monthly Rent").
1.7 Security Deposit: Five Thousand Six Hundred Fifty Five Dollars
and 00/100 cents ($5,655.00) ("Security
Deposit")
1.8 Declaration of Restrictions:
Date of Recordation: November 16, 1989;
Document No. 402070
2
- ------------- -----------
Lessor's Lessee's
Initials Initials
<PAGE> 6
1.9 Contents: This Lease consists of:
(A) Pages 1 through 38
(B) Articles 1 through 32
(D) Sections 1.1 through 32.22
(C) Exhibits:
A -- Site Plan of Shopping Center
B -- Legal Description of Leased
Premises
C -- Acknowledgement of
Commencement
D -- Rules and Regulations
E -- Sign Criteria
1.9 Brokers: (A) For Lessor:
Mr. David Lowry
Ms. Michelle Schierberl
Grubb and Ellis
27349 Jefferson Avenue,
Suite 102
Temecula, California 92590
Telephone: (909) 676-4131
(B) For Lessee:
None.
1.10 Index: The "Index" as used in this Lease shall mean the
Bureau of Labor of Statistics Consumer Price Index,
Subgroup "All Urban Consumers," as published by the U.
S. Department of Labor for the Los Angeles-Long
Beach-Anaheim Metropolitan Area (1982-84 = 100)
("Index"). If at any time there shall not exist the
Index in the format recited herein, Lessor shall
substitute any official index published by the Bureau
of Labor Statistics, or successor or similar
governmental agency, as may then be in existence and
shall, in Lessor's opinion, be most nearly equivalent
thereto ("Index").
The above terms are incorporated in this Lease as indicated above and
referenced herein.
This Article 1 is intended to supplement and/or summarize the
provisions set forth in the balance of the Lease. If there is any conflict
between any provisions contained in this Article 1 and the balance of the
Lease, the terms and conditions contained in the balance of the Lease shall
govern.
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ARTICLE 2
LEASED PREMISES
2.1 Leased Premises; Demise. In consideration of the rents to be
paid and the covenants and agreements to be performed by Lessee hereunder,
Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the
Leased Premises for the Lease Term, at the rent and upon the terms and
conditions set forth in this Lease. The Palomar Village Shopping Center is
located generally at the northwest intersection of Rancho California Road and
Margarita Road, in the City of Temecula, County of Riverside, State of
California (the "Shopping Center"). The Leased Premises are delineated on the
site plan attached hereto as Exhibit "A" and are more particularly described on
Exhibit "B" hereto.
2.2 Covenants, Conditions and Restrictions. The parties agree
that this Lease is subject to the effect of (a) any covenants, conditions,
restrictions, easements, mortgages or deeds of trust, rights of way of record,
and any other matters or documents of record, including, without limitation,
the Declaration of Restrictions referenced in Section 1.8 hereof, as the same
may be amended from time to time (the "Declaration"); (b) any zoning laws of
the city, county and state where the Shopping Center is situated; and (c)
general and special taxes not delinquent. Lessee agrees that as to its
leasehold estate, Lessee and all persons in possession or holding under Lessee,
will conform to and will not violate the terms of the Declaration. This Lease
is subordinate to the Declaration and any amendment or modifications thereto.
2.3 ATM License Agreement. The parties acknowledge and agree that
this Lease is subject to that certain ATM License Agreement, dated February
___, 1996, entered into by and between Wells Fargo Bank, as the lessor, and
Lessor as the lessee, a copy of which has previously been delivered by Lessor
to Lessee ("ATM License Agreement"). Lessee hereby agrees to perform all of
Lessor's obligations under the ATM License Agreement and agrees to indemnify,
defend and hold harmless Lessor from any claims, liabilities, causes of action,
damages, judgments, costs, fees and expenses (including reasonable attorneys'
fees) arising in connection with Lessee's failure to perform such obligations.
ARTICLE 3
LEASE TERM
3.1 Lease Term.
(a) Effective Date. Subject to the provisions of Section
3.1(b) below, on the Effective Date, this Lease shall be in full force and
effect and all terms and conditions of this Lease shall apply. On the
Effective Date, Lessor shall deliver the Leased Premises to Lessee in its
current "AS IS" condition. By execution hereof,
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Lessee hereby accepts the Leased Premises in its present "AS IS" condition as
of the Effective Date. Without limiting the foregoing, Lessor has no
obligation to make any repair or undertake any renovation of or other
improvements to the Leased Premises, and Lessor makes no representation or
warranty with respect to the condition of the Leased Premises or its fitness or
availability for any particular use, and Lessor shall not be liable for any
latent or patent defect therein.
(b) Rent Commencement Date. The term of this Lease and
Lessee's obligation to pay Minimum Monthly Rent and Additional Rent, as such
terms are hereafter defined, shall commence on the earlier to occur of the
following: (i) the date upon which Lessee opens the Leased Premises to the
public for business; or (ii) April 15, 1996 ("Rent Commencement Date"), and
shall continue thereafter for a period of five (5) Lease Years ("Initial
Term"), subject to Lessee's right to extend pursuant to the options set forth
in Section 3.3 below.
(c) Fixturization. Commencing upon the Effective Date of
this Lease, Lessee shall have the right to enter upon the Leased Premises and,
at Lessee's sole cost and expense, proceed with due diligence to substantially
complete all Alterations, as hereinafter defined, and install all trade
fixtures, furnishings, equipment and other personal property ("Furnishings"),
as are reasonably required to operate the Leased Premises for the use
designated in this Lease, subject to the satisfaction of, and compliance with,
the provisions contained in Article 12 below.
3.2 Acknowledgement of Commencement. Upon the Rent Commencement
Date, Lessee shall execute and deliver to Lessor a written acknowledgement in
the form attached hereto as Exhibit "C," and incorporated herein by reference
("Acknowledgement of Commencement").
3.3 Options to Extend. Lessor hereby grants to Lessee the right
and option to extend the Initial Term upon the terms and conditions set forth
in this Section 3.3. Provided Lessee is not in default under any of the
provisions of this Lease at the time of exercise of each of the Extension
Options, as said term is hereafter defined, or at the time of commencement of
the Extended Term, as said term is hereafter defined, Lessee shall have the
right to extend the Initial Term for three (3) separate, successive terms of
five (5) Lease Years each (separately "First Extension Option," "Second
Extension Option," and "Third Extension Option," respectively, and collectively
"Extension Options"), upon the same terms and conditions as stated herein,
except that the Minimum Monthly Rent shall be adjusted as set forth in Section
4.2 hereof. The Lease Term applicable to each of the Extension Options is
herein referred to as the "First Extended Term," the "Second Extended Term,"
and the "Third Extended Term," respectively, and collectively as the "Extended
Term." Following the exercise of each of the Extension Options pursuant to
this Section 3.3, all references in this Lease to the "Lease Term" shall refer
to the Initial Term as extended by such First Extended Term, the Second
Extended Term, and the Third Extended Term, as applicable.
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(a) Notice of Exercise. Lessee may exercise an Extension
Option by giving written notice of exercise to Lessor not less than six (6)
months and not more than twelve (12) months prior to the expiration of the
Initial Term hereof, or the then current Extended Term, as applicable. Time is
expressly declared to be of the essence with regard to Lessee's exercise of each
of the Extension Options. Lessee may only exercise one (1) Extension Option
pursuant to each election. In the event Lessee fails to timely exercise an
Extension Option pursuant to this Section 3.3(a), all subsequent Extension
Options shall immediately become null and void.
(b) Minimum Monthly Rent -- First Extended Term. In the
event Lessee exercises the First Extension Option, the amount of Minimum
Monthly Rent payable by Lessee to Lessor during the First Extended Term is set
forth in Section 4.2 hereof.
(c) Minimum Monthly Rent -- Second Extended Term/Third
Extended Term. In the event Lessee exercises either, or both, the Second
Extension Option and the Third Extension Option, the Minimum Monthly Rent
payable by Lessee to Lessor during the Second Extended Term and Third Extended
Term, as applicable, shall be adjusted to equal the Fair Market Rent, as
hereinafter defined, for the Leased Premises as of the date of the commencement
of both the Second Extended Term and Third Extended Term, as applicable,
pursuant to the procedures hereinafter set forth. The term "Fair Market Rent"
means the Minimum Monthly Rent payable for the Leased Premises based upon the
following factors applicable to the Leased Premises or any comparable premises:
(i) rental charges being charged for comparable premises in the same
geographical location; (ii) the relative locations of the comparable premises;
(iii) improvements or allowances provided for improvements, or improvements to
be provided; (iv) rental adjustments, if any, or rental concessions; (v)
services and utilities provided or to be provided; (vi) use limitations or
restrictions; (vii) any other relevant lease terms or conditions.
In no event, however, shall the Fair Market Rent be less than the
Minimum Monthly Rent in effect immediately prior to the commencement of both
the Second Extended Term and the Third Extended Term, as applicable. The Fair
Market Rent evaluation may include provisions for further rent adjustments
during the Second Extended Term and the Third Extended Term, as applicable,
provided, such adjustments are commonly required in the marketplace for similar
types of leases.
(d) Determination of Fair Market Rent. Upon the exercise
of either, or both, the Second Extension Option and the Third Extension Option,
and included within the notice of exercise, Lessee shall notify Lessor of its
opinion of Fair Market Rent payable during the Extended Term for which the
Extension Option is exercised. Lessor shall notify Lessee ("Lessor's Value
Notice") within thirty (30) days after receipt of Lessee's Notice of Exercise
of Lessor's approval or disapproval of Lessee's opinion of
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the Fair Market Rent. In the event Lessor and Lessee are unable, after
exercising good faith efforts, to agree upon the Fair Market Rent payable by
Lessee to Lessor during either the Second Extended Term or the Third Extended
Term, as applicable, the respective Extension Option, Lessee's prior exercise
of such Extension Option, together with any unexercised Extension Options,
shall be null and void and of no further force or effect.
(e) Options Are Personal. The Extension Options granted
herein are personal to the Lessee, and notwithstanding anything to the contrary
contained in this Lease, the Extension Options are assignable or transferable
only in accordance with the provisions contained in Article 21 hereof. Lessor
grants the rights contained herein to Lessee in consideration of Lessee's
strict compliance with the provisions hereof, including, without limitation,
the manner of exercise of the Extension Options.
3.4 Anchor Tenant. In the event that Parcel 10 of the Shopping
Center, as more particularly described on the site plan attached hereto as
Exhibit "B" and incorporated herein by reference (occupied by Lucky's
Supermarket on the Effective Date of this Lease), is vacant for a period of
eighteen (18) or more consecutive calendar months during the Term ('Vacancy
Period"), and Lessor has not otherwise entered into a new lease with a new
anchor tenant to occupy Parcel 10 prior to the expiration of the Vacancy
Period, provided Lessee is not in default under this Lease, Lessee shall have
the right to terminate this Lease upon the terms and conditions set forth
herein ("Termination Right"). In the event Lessee desires to exercise its
Termination Right, Lessee must: (a) deliver to Lessor written notice of
exercise of the Termination Right on or before the expiration of thirty (30)
calendar days following the expiration of the Vacancy Period; and (b) in
conjunction with the delivery of the written notice of exercise of the
Termination Right described above, deliver to Lessor the amount of the Minimum
Monthly Rent which would have been payable by Lessee to Lessor pursuant to
Section 4.2 hereof (had Lessee not exercised the Termination Right), for the
twelve (12) month period immediately following the effective date of
termination of the Lease, together with all other amounts owing by Lessee to
Lessor pursuant to this Lease through the effective date of termination of this
Lease. In the event Lessee satisfies the conditions precedent for the exercise
of the Termination Right as described above, the effective date of termination
of this Lease shall be the date specified in Lessee's written notice provided,
however, in no event shall such date be prior to the expiration of thirty (30)
calendar days following the expiration of the Vacancy Period.
ARTICLE 4
MINIMUM MONTHLY RENT
4.1 Payment. During the time period commencing on the Rent
Commencement Date and continuing throughout the Lease Term, Lessee shall pay to
Lessor at the address specified in Section 1.2 hereof, or at such other place
as Lessor
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may otherwise designate in writing from time to time, "Minimum Monthly Rent"
for the Leased Premises, in the amount specified in Section 1.6 hereof, subject
to adjustment in accordance with the "Rent Adjustment Schedule" set forth in
Section 4.2 hereof. Minimum Monthly Rent shall be payable by Lessee to Lessor
in advance on the first day of each month during the Lease Term. If the Rent
Commencement Date occurs on a day other than the first day of the month,
Minimum Monthly Rent for such month shall be prorated and shall be payable by
Lessee to Lessor on the Rent Commencement Date. All payments of Minimum
Monthly Rent shall be in lawful money of the United States, and shall be
payable without deduction, offset, counter-claim, prior notice or demand.
4.2 Rent Adjustment Schedule. The amount of Minimum Monthly Rent
payable by Lessee to Lessor shall be automatically increased without prior
notice or demand, in accordance with the following schedule ("Rent Adjustment
Schedule"). For all purposes under this Lease, the term "Lease Year" shall
mean the twelve (12) month period beginning with the Rent Commencement Date and
each consecutive twelve (12) month period thereafter during the Lease Term:
<TABLE>
<CAPTION>
LEASE YEAR MINIMUM MONTHLY RENT
---------- --------------------
<S> <C>
1 $5,655.00
2 $6,107.40
3 $6,559.80
4-5 $7,012.20
6-10 $7,328.88
(First Extended Term) Subject to an Index Adjustment, as
hereinafter, defined, in accordance with
the provisions of Section 4.3 below.)
11-15 (Fair Market Rent determined in
(Second Extended Term) accordance with the provisions of
Section 3.3(c) hereof.)
16-20 (Fair Market Rent determined in
(Third Extended Term) accordance with the provisions of
Section 3.3(c) hereof.)
</TABLE>
4.3 Index Adjustment. In the event Lessee exercises the First
Extension Option and, if applicable, the Second Extension Option, the amount of
Minimum
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Monthly Rent payable by Lessee to Lessor shall be increased annually commencing
as of the end of the sixth (6th) Lease year during the Lease Term ("Adjustment
Date"). The increase in the amount of Minimum Monthly Rent shall be based upon
the increase in the Index. On each Adjustment Date, the Minimum Monthly Rent
shall be increased by a percentage equal to the percentage increase in the most
recent Index in publication prior to the Adjustment Date over the most recent
Index in publication prior to the previous Adjustment Date. In no event,
however, shall the Minimum Monthly Rent be increased less than two and one-half
percent (2.5%) or more than seven percent (7%) over the Minimum Monthly Rent in
effect prior to the applicable Adjustment Date. Lessor shall give written
notice to Lessee specifying the increase in the amount of Minimum Monthly Rent
and the manner in which such increase was calculated by Lessor. Lessor's
notice may be given after the effective date of any such increase by virtue of
the fact that the Index for the appropriate month may be unavailable on such
effective date, or for other reasons. In such event, Lessee shall pay Minimum
Monthly Rent in the amount applicable to the previous Lease Year until such
time as Lessor delivers to Lessee its written notice. Upon receipt of such
written notice, Lessee shall pay to Lessor, within ten (10) days after the date
of receipt of such notice, the total amount of the adjustment to Minimum
Monthly Rent for the months elapsed between the effective date of the increase
and the date of receipt of Lessor's notice ("Index Adjustment").
ARTICLE 5
ADDITIONAL RENT
5.1 Additional Rent. All charges and other monetary sums payable
by Lessee to Lessor pursuant to this Lease, other than Minimum Monthly Rent,
are referred to as "Additional Rent." Unless this Lease expressly provides
otherwise, all Additional Rent shall be paid by Lessee to Lessor concurrently
with the payment of the next installment of Minimum Monthly Rent. All
references in this Lease to the term "rent" shall mean Minimum Monthly Rent,
Additional Rent and any other monetary obligation payable by Lessee to Lessor
pursuant to this Lease.
5.2 Late Charges. Lessee acknowledges that late payment by Lessee
to Lessor of rent or any other payment due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of such costs being
extremely difficult and impractical to fix. Such costs include, without
limitation, processing and accounting charges, and late charges that may be
imposed on Lessor by the terms of any encumbrance and note secured by any
encumbrance covering the Leased Premises. Therefore, if any installment of
rent is not received by Lessor within ten (10) calendar days from the date when
such payment was due, Lessee shall pay to Lessor, as a late charge, an
additional sum of five percent (5%) of such rent or other charge. The parties
agree that this late charge represents a fair and reasonable estimate of the
cost that Lessor will incur by reason of late payment by Lessee. Acceptance of
any late charge
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shall not constitute a waiver of Lessee's default with respect to the overdue
amount, or prevent Lessor from exercising any other rights or remedies
available to Lessor.
5.3 Interest. Any amount due from Lessee to Lessor under this
Lease (exclusive of any late charges that may be owing pursuant to Section 5.2
hereof), which is not paid within ten (10) calendar days from the date such
payment was due, shall bear interest at the rate of ten percent (10%) per annum
or the maximum rate allowable by law, whichever is less, from the date
originally due until paid.
5.4 Accord and Satisfaction. No payment by Lessee or receipt by
Lessor of a lesser amount of Minimum Monthly Rent, Additional Rent or any rent
due hereunder, shall be deemed to be other than on account of the earliest due
rent or payment, nor shall any endorsement or statement on any check or any
letter accompanying any such check or payment be deemed an accord and
satisfaction, and Lessor may accept such check or payment without prejudice to
Lessor's right to recover the balance of such rent or payment or pursue any
other remedy available in this Lease, at law or in equity. Lessor may accept
any partial payment from Lessee without invalidation of any contractual notice
required to be given herein (to the extent such contractual notice is required)
and without invalidation of any notice required to be given pursuant to
California Code of Civil Procedure Section 1161, et seq., or of any successor
statute thereto.
ARTICLE 6
USE
6.1 Permitted Use. As an express and material consideration to
Lessor for entering into this Lease, Lessee agrees that the Leased Premises
shall be used for the purpose specified in Section 1.4 hereof and for no other
purpose. Lessee shall not use, or permit the Leased Premises, or any part
thereof, to be used, for any purpose or purposes other than the purpose stated
hereinabove, without the prior written consent of Lessor, which consent shall
not be unreasonably withheld or delayed. Without in any way limiting Lessor's
right to refuse to give such consent for any other reason or reasons, Lessor
reserves the right to refuse to give such consent, and Lessee agrees that it
would not be commercially unreasonable to withhold consent, if in Lessor's
reasonable business judgement such proposed new use would (a) violate any
restriction or exclusive right given in, or be contrary to, any lease in the
Shopping Center; (b) violate any restriction contained in the Declaration; (c)
increase the risk of the use, release or mishandling of Hazardous Materials; or
(d) result in a decrease in the amount of rent reasonably expected to be paid
to Lessor hereunder.
6.2 Exclusivity. During the Term of this Lease, and provided
Lessee is not in default under this Lease, Lessor shall not enter into a lease
agreement or approve any proposed sublease agreement which would entitle any
person or entity to operate a federal or state chartered, full service retail
bank facility during the Term of this Lease.
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6.3 Compliance with Laws. Lessee shall, at its own cost and
expense, promptly and properly comply with all existing orders, laws and lawful
requirements whatsoever of all governmental entities relating to the operation
of Lessee's business on the Leased Premises during the Lease Term. Lessee
shall have the right to contest or review by legal procedure, at its own
expense, any such orders, laws and lawful requirements, provided that Lessor's
title to the Leased Premises is not by any means subjected to forfeiture. Any
such proceedings shall be conducted promptly and shall include, if Lessee so
decides, appropriate appeal. Whenever such requirements become final after a
contest, Lessee shall within a reasonable time comply therewith.
6.4 Abandonment. Lessee shall not vacate nor abandon the Leased
Premises at any time during the Lease Term, nor permit the Leased Premises to
remain unoccupied for a period longer than six (6) consecutive months during
the Lease Term. If Lessee shall abandon, vacate or surrender the Leased
Premises, or be dispossessed by process of law, or otherwise, in addition to
any other rights and remedies available to Lessor, any personal property
belonging to Lessee and remaining on the Leased Premises after such six (6)
month period shall, at the option of Lessor, be deemed abandoned.
ARTICLE 7
SECURITY DEPOSIT
7.1 Payment on Lease Execution. On the Effective Date, Lessee
shall pay to Lessor the sum specified in Section 1.7 hereof ("Security
Deposit"). In the event Lessee fails to pay any item of rent when due
hereunder or otherwise defaults with respect to any other covenant or
obligation of Lessee under this Lease, in addition to any other rights and
remedies of Lessor pursuant to this Lease, Lessor may use or retain all or any
part of the Security Deposit for the payment of rent or other charges in
default or for the payment of any other sum to which Lessor may become
obligated by reason of Lessee's default, or to compensate Lessor for any loss
or damage which Lessor may suffer thereby. Lessor may retain such portion of
the Security Deposit as it reasonably deems necessary to restore or clean the
Leased Premises following vacation by Lessee. The Security Deposit is not
characterized as rent until and unless so applied in respect of a default by
Lessee.
7.2 Restoration of Security Deposit. If Lessor elects to use or
apply all or any portion of the Security Deposit as provided in Section 7.1
hereof, within ten (10) days after receipt by Lessee of written demand
therefor, Lessee shall pay to Lessor in cash an amount equal to that portion of
the Security Deposit used or applied by Lessor, and Lessee's failure to so do
shall be a material breach of this Lease.
7.3 Nature of Security Deposit. Lessor's obligation with respect
to the Security Deposit is that of a debtor and not a trustee. Consequently,
all such sums held
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as the Security Deposit may be commingled with other funds of Lessor, and no
interest shall accrue thereon. In the event of the sale of all or any portion
of the Leased Premises, Lessor shall pay over to Lessor's successor in interest
the sums held as a Security Deposit and notify Lessee in writing, setting forth
the details of such transfer including, the successor's name and address. Upon
such written notification, Lessee shall have no further claim against Lessor
with respect to said Security Deposit and hereby waives all rights against
Lessor in that regard.
ARTICLE 8
PROMOTIONAL PROGRAM; MERCHANT'S ASSOCIATION
8.1 Lessor's Program. Lessor, at Lessor's election, may conduct,
or cause to be conducted from time to time, an advertising, promotional and
public relations program for the general purpose of furthering the interest of
all tenants in the Shopping Center. In the event Lessor elects to conduct such
a program, Lessor shall determine in its sole discretion the composition and
manner of implementation of such program. In the event Lessor elects to
implement such a program, each month Lessee shall pay to Lessor, as Additional
Rent, Lessee's proportionate share of the costs of such program, but in no
event shall Lessee's proportionate share of such costs be more than Two
Thousand Five Hundred Dollars ($2,500.00) per Lease Year. Lessee's
proportionate share shall be determined based upon an allocation formula
approved by Lessor. Lessee's contribution to such program shall be paid by
Lessee to Lessor on a monthly basis, or in such other intervals specified in
Lessor's written notice. Lessor, in its sole discretion, may elect to
terminate such program at any time and refund all unexpended proceeds.
In the event Lessor does incur such promotional expenses chargeable to
Lessee, Lessor shall provide Lessee with an itemization of all promotional
expenses incurred and a computation of Lessee's proportionate share of the
costs of such program.
8.2 Merchant's Association. Notwithstanding the provisions of
Section 8.1, Lessee hereby agrees to and shall become a member of any
Merchants' Association of the tenants and/or occupants of the Shopping Center,
whether such Merchants' Association exists at the Rent Commencement Date of
this Lease or shall be subsequently formed. Lessee shall maintain its
membership in good standing throughout the Lease Term. Lessee hereby agrees to
abide by the by-laws, rules and regulations of such Merchants' Association, and
further agrees to pay within ten (10) days from receipt of a billing therefor,
Lessee's proportionate share of the promotional and other expenses of such
Merchants' Association which are allocable to the lessees of the Shopping
Center in accordance with the Merchants' Association by-laws from time to time
in force and effect. Lessee acknowledges and agrees that Lessor, its
employees, servants or agents, shall have no liability for any acts or failure
to act of the Merchants' Association, and Lessee shall not assert any claim for
injury or damages
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against Lessor by reason of any injury or damages to person, property or
business suffered by Lessee as a result of any act or failure to act, promotion
or other activity of the Merchants' Association.
ARTICLE 9
REAL PROPERTY TAXES
9.1 Payment and Definition. Commencing as of the Rent
Commencement Date and continuing thereafter throughout the Lease Term, Lessee
shall pay directly to Lessor, in installments as set forth in Section 9.5
hereof, all Real Property Taxes arising under this Section 9.1. "Real Property
Taxes" as used in this Lease shall include all real property taxes and
assessments, special or general, improvement bonds, special district
obligations or bonds, or other taxes or assessments applicable to the Leased
Premises and any other assessments, levies, fees or charges, general and
special, ordinary and extraordinary, unforeseen and foreseen (including fees
in-lieu of any tax or assessment) that are assessed, levied, charged,
confirmed, or imposed by any public authority upon the Leased Premises,
together with all increases thereto, whether the increases result from an
increased rate and/or valuation levied or assessed against the Leased Premises,
or otherwise. "Real Property Taxes" also shall include, without limitation,
any tax, assessment, excise, surcharge, fee, levy, penalty, bond or similar
imposition (hereinafter collectively referred to as "impositions") on Lessor's
right to rent from the Leased Premises or as against Lessor's business of
leasing the Leased Premises. Notwithstanding the foregoing, nothing contained
in this Lease will require Lessee to pay any income, profits or revenue tax or
charge on the net income of Lessor.
9.2 Right to Contest Real Property Taxes. Lessee, at its sole
cost and expense, shall have the right, at any time, to seek a reduction in the
assessed valuation of the Leased Premises or to contest any Real Property Taxes
that are to be paid by Lessee. Notwithstanding the foregoing, Lessee must
continue to pay directly to Lessor all Real Property Taxes arising under Section
9.1 hereof, and Lessor shall credit any and all overpayments of Real Property
Taxes resulting from a final determination in favor of Lessee in accordance with
the provisions contained in Section 9.5 hereof.
Lessor shall not be required to join in any proceeding or contest
brought by Lessee unless the provisions of any law require that the proceeding
or contest be brought by or in the name of Lessor or any owner of the Leased
Premises. In that case, Lessor shall join in the proceeding or contest to
permit it to be brought in Lessor's name as long as Lessor is not required to
bear any cost.
9.3 Assessments. With respect to any general or special
assessments which may be levied upon or against the Leased Premises or which
may be evidenced by improvements or other bonds, and which may be paid in
annual or semi-annual installments, only the current amount of such
installment, pro rated for any partial year,
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and statutory interest, shall be included within the computation of Real
Property Taxes for which Lessee is responsible hereunder.
9.4 Substitute and Additional Taxes. Lessee shall not be required
to pay any municipal, county, state or federal income or franchise taxes of
Lessor, or any municipal, county, state, or federal estate, succession,
inheritance, or transfer taxes of Lessor. If at any time the State of
California or any political subdivision of the state, including any county,
city, public corporation, district, or any other political entity or public
corporation of this state, levies or assesses against Lessor a tax, fee, or
excise on the (a) rents, (b) square footage of the Leased Premises, (c) act of
entering into this Lease, or (d) occupancy of the Leased Premises by Lessee, or
levies or assesses against Lessor any other tax, fee or excise, however
described, including, without limitation, a so-called value-added tax, as a
direct substitution in whole or in part for, or in addition to, any Real
Property Taxes, Lessee shall pay that tax, fee or excise, in accordance with
the provisions of Sections 9.1 and 9.5 hereof. Lessee's share of any such tax,
fee or excise shall be substantially the same as Lessee's share of Real
Property Taxes as provided in this Lease.
9.5 Estimated Payments. Lessor shall estimate the amount of Real
Property Taxes next due and collect from Lessee as Additional Rent the amount
of Lessee's estimated tax obligation. Lessee shall pay such estimated payments
to Lessor in equal monthly installments, in advance, concurrently with the
payment of Minimum Monthly Rent. On an annual basis, Lessor shall provide
Lessee with a reconciliation of Lessee's account with respect to such estimated
tax payments. In the event it is established upon such reconciliation that
Lessee has not paid sufficient amount in estimated tax payments to cover
Lessee's share for the year in question, Lessee shall pay to Lessor the full
amount of any such deficit within ten (10) days of date of billing. If it is
established that Lessee has made an overpayment of its tax obligation upon such
reconciliation, Lessee shall receive, at Lessor's option, either a credit
applicable to the next ensuing estimated tax payments, or a credit to a tax
reserve account to be held by Lessor for application to sums due in respect of
reassessment or escape assessments applicable to the period in question, but
yet to be billed.
9.6 Personal Property Taxes. Lessee shall pay prior to
delinquency all taxes assessed against and levied upon all Furnishings of
Lessee contained on the Leased Premises. When possible, Lessee shall cause
such Furnishings to be assessed and billed separately from the real property of
Lessor. If any of Lessee's Furnishings shall be assessed with Lessor's real
property, Lessee shall pay Lessor the amount of all such personal property
taxes attributable to Lessee within ten (10) days after receipt of a written
statement setting forth the personal property taxes applicable to Lessee's
property.
ARTICLE 10
COMMON AREAS AND COMMON AREA COSTS
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10.1 Definition of Common Area. The term "Common Areas" as used
herein means all areas and facilities within the exterior boundaries of the
Shopping Center (inclusive of the Leased Premises), that are provided and
designated by Lessor from time to time for the general use and convenience of
Lessee and of other tenants of Lessor having the common use of such areas, and
their respective authorized representatives and invitees. Common Areas
include, without limitation, all driveways, roadways, parking areas, sidewalks,
signs, lighting, Common Utility Facilities, as said term is hereinafter
defined, landscaped areas located within the Shopping Center (inclusive of the
Leased Premises), all as generally depicted on the Site Plan of the Shopping
Center attached hereto as Exhibit "A."
10.2 Maintenance of Common Areas. The parties hereby acknowledge
that the Common Areas are currently maintained by the "Manager" of the Shopping
Center (who is currently Lessor), as designated in the Declaration. As the
Manager, Lessor shall, consistent with the Declaration, maintain the Common
Areas, establish and enforce reasonable rules and regulations concerning such
areas, close any of the Common Areas to whatever extent required in the opinion
of Lessor's counsel to prevent a dedication of any of the Common Areas or the
accrual of any rights of any person or of the public to the Common Areas, close
temporarily any of the Common Areas for maintenance purposes, and make changes
to the Common Areas including, without limitation, changes in the location of
driveways, entrances, exits, vehicular parking spaces, parking areas, the
designation of areas for the exclusive use of others, the direction of the flow
of traffic or construction of additional buildings thereupon. Lessor reserves
the right to maintain the Common Area as set forth in this Section 10.2 without
providing prior notice to Lessee. In connection with the performance by Lessor
of its maintenance activities pursuant to this Article 10, Lessor agrees to use
best efforts to minimize any obstruction, interference or blockage of the
Leased Premises. Lessee hereby acknowledges that Lessor, in its capacity as
Manager or otherwise, is under no obligation to provide security for the Common
Areas but may do so at its option.
10.3 Payment by Lessee. Within ten (10) days of receiving a bill
therefor from Lessor, Lessee shall pay to Lessor, as Additional Rent, its
proportionate share of Common Area Costs, as hereinafter defined, which arise
or accrue during the Lease Term. Lessee's proportionate share shall be the
percentage amount (which is currently 3.3%) applicable to the Leased Premises
as set forth in Article IV, Section 5(e) of the Declaration, as the same may be
modified from time to time. Lessor may bill Lessee estimated charges in
accordance with Section 10.5 hereof. Notwithstanding the foregoing, Lessee's
proportionate share as to certain expenses included in Common Area Costs may be
calculated differently to yield a higher percentage share for Lessee as to
certain expenses in the event Lessor permits other tenants or other occupants
in the Shopping Center to incur such expenses directly rather than have Lessor
incur the expense in common for the Shopping Center. In any case where Lessee,
with Lessor's
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consent, incurs such expenses directly, Lessee's proportionate share of Common
Area Costs will be calculated specially so that expenses of the same character
which are incurred by Lessor for the benefit of other tenants or other
occupants of the Shopping Center shall not be prorated to Lessee. Nothing
herein shall imply that Lessor will permit Lessee or any other tenant or
occupant of the Shopping Center to incur Common Area Costs. Any such
permission shall be in the sole discretion of Lessor, which Lessor may grant or
withhold in its arbitrary judgment.
10.4 Definition of Common Area Costs. Common Area Costs shall
include, without limitation, all reasonable sums expended and costs incurred in
connection with the Common Areas for (a) maintenance, landscaping, pest
control, lighting, cleaning, trash removal for the Common Areas, painting,
restriping, repaving, resurfacing, sweeping, security, fire protection,
sprinkler and irrigation systems, maintenance and repair of sidewalks, curbs
and signs including, without limitation, all sums payable pursuant to that
certain Lease, dated March 1, 1989, by and between Bedford Development Company
and the Metropolitan Water District of Southern California, as the same may be
amended or modified from time to time; (b) operating, managing, policing,
insuring, repairing and maintaining the Common Areas including, without
limitation, an administrative fee equal to fifteen percent (15%) of such Common
Area Costs; (c) operating, insuring, repairing, replacing and maintaining the
"Common Utility Facilities" defined to include, but not limited to, sanitary
sewer lines and systems, gas lines and systems, water lines and systems, fire
protection lines and systems, electric power, telephone and communication main
lines and systems, storm drainage and retention facilities and all other
utility main lines and systems not exclusively serving the premises of any
specific tenant; (d) parking charges, surcharges and other levies, assessments,
or any other costs imposed or assessed by any local, state or federal
government agencies in connection with the use of the parking facilities and/or
the Common Utility Facilities; (e) depreciation and maintenance on operating
machinery and equipment (if owned) and rental paid for such machinery and
equipment (if rented) which machinery and equipment is used solely for the
operation and maintenance of the Common Areas; and (g) public liability and
property damage insurance on the Common Areas and Common Utility Facilities,
fire with extended coverage insurance with vandalism and malicious mischief
endorsements with, at Lessor's option, earthquake damage and/or hazardous waste
endorsements and any additional coverages required pursuant to Article 15
hereof. Common Area Costs shall also include a portion of all "capital costs"
representing any costs of capital improvements made by Lessor to the Common
Areas for the purpose of reducing recurring expenses or utility costs and from
which Lessee can expect a reasonable benefit, or that are mandated or required
by any governmental law, ordinance, regulation or mandate, not applicable to
the Shopping Center at the time of the original construction. The portion
thereof to be included each year in Common Area Costs shall be that fraction
allocable to the calendar year in question calculated by amortizing the cost
over the reasonable useful life of such improvement, as determined by Lessor,
with interest on the unamortized balance at ten percent (10%) per annum, or
such higher rate as may have
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been paid by Lessor for funds borrowed for the purpose of constructing or
installing such improvements, but in no event to exceed the highest rate
permissible by law.
10.5 Estimated Payments. Lessor shall have the right, at its
option, to estimate Lessee's proportionate share of Common Area Costs due in
the future from Lessee and to collect from Lessee on a monthly basis, as
Additional Rent, the amount of Lessee's estimated proportionate share of such
Common Area Costs. In such a case, Lessee shall pay such estimated payments to
Lessor in equal monthly installments, in advance, concurrently with the payment
of Minimum Monthly Rent. Lessor shall provide Lessee with an itemization of
all Common Area Costs incurred together with a reconciliation of Lessee's
account at least annually, and if such reconciliation shall indicate that
Lessee's account is insufficient to satisfy Lessee's proportionate share of
Common Area Costs for the period estimated, Lessee shall immediately pay to
Lessor any deficiency. Any excess in such account indicated by the
reconciliation shall be credited to Lessee's account to reduce the estimated
payments for the next ensuing period.
ARTICLE 11
MAINTENANCE AND REPAIRS
11.1 Obligations of Lessee. Commencing as of the Effective Date
and throughout the Lease Term hereof, Lessee shall, at Lessee's sole cost and
expense, maintain in good operating condition and repair the Leased Premises
and all portions thereof, and all appurtenances thereto, including, without
limitation, all interior and exterior portions of the Building, all
Furnishings, plumbing, heating, air conditioning, ventilating, electrical,
lighting, floor and floor coverings, the roof, interior and exterior walls,
ceiling, window and window coverings, glass, doors, mechanical equipment and
utilities. Lessee shall promptly and diligently repair, restore or replace all
or any part of the Leased Premises in order to comply with this Section 11.1,
including performing all ordinary and extraordinary, and foreseen and
unforeseen repairs and painting and cosmetic repairs, removing graffiti and
restoring damage caused by vandalism. Additionally, during the Lease Term,
Lessee shall maintain the Leased Premises in a neat, clean and sanitary
condition, free from rubbish and dirt. Lessee shall be responsible for the
removal of all trash and other refuse from the Leased Premises. All of
Lessee's maintenance obligations, as set forth in this Section 11.1, shall be
performed in accordance with all applicable laws, rules, ordinances, orders and
regulations of the following agencies or entities claiming jurisdiction over
the Leased Premises: (a) federal, state, county, municipal and other
governmental agencies or bodies; (b) the insurance underwriting board or
insurance inspection bureau; and (c) all insurance companies insuring all or
any part of the Leased Premises or the Shopping Center.
11.2 Service Contracts. During the Lease Term, Lessee shall, at
Lessee's sole cost and expense, procure and maintain contracts, with copies to
Lessor, in customary
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form and substance, and with contractors approved by Lessor, for the
inspection, maintenance and service of the following equipment and
improvements, if any, located on the Leased Premises: (i) heating, air
conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure
vessels, (iii) fire sprinkler and/or stand pipe and hose or other automatic
fire extinguishing systems, including fire alarm and/or smoke detection, and
(iv) roof covering and drain maintenance.
11.3 Lessor's Obligations. Upon receipt of written notice of the
need for such repairs, Lessor shall, at Lessor's expense, keep the foundations,
exterior roof and structural aspects of the Leased Premises in good operating
condition and repair. Lessor shall not, however, be obligated to paint the
exterior surface of the exterior walls or maintain the windows, doors or plate
glass or the interior surface of exterior walls. Lessor shall not have any
obligation to make any repairs until Lessor receives written notice of the need
for such repairs. It is the intention of Lessor and Lessee that the terms of
this Lease govern the respective obligations of the Parties as to maintenance
and repair of the Leased Premises. The provisions of this Section 11.3 shall
not apply in the event of any damage or destruction to the Leased Premises as
described in Article 18 hereof, in which event the obligations of Lessor shall
be governed by the provisions of such Article.
11.4 Lessor's Rights. If Lessee fails to perform Lessee's
obligations under Sections 11.1 or 11.2 hereof, or under any other section of
this Lease, Lessor may, at its option (but shall not be required to), enter
upon the Leased Premises after ten (10) days prior written notice to Lessee
(except in the case of an emergency, in which no notice shall be required),
perform any of Lessee's obligations on Lessee's behalf, and the cost thereof,
together with interest thereon at maximum rate then allowable by law, shall
become due and payable as Additional Rent to Lessor, together with Lessee's
next rent installment.
11.5 Lessee's Waiver. Except as provided in Section 11.3 hereof,
Lessor has no obligation, in any manner whatsoever, to maintain or repair the
Leased Premises or any portion thereof (including any Furnishings therein).
Lessee hereby waives the right to make repairs at Lessor's expense under
provisions of Section 1941 and 1942 of the Civil Code of California. Lessee's
obligations under this Section 11.5 shall survive the termination of this Lease
for any reason whatsoever.
ARTICLE 12
ALTERATIONS
12.1 Consent of Lessor; Ownership. Lessee shall not make, or
suffer to be made, any alterations, additions or installations to the Leased
Premises, or any part thereof (collectively "Alterations"), without the prior
written consent of Lessor, which consent shall not be unreasonably withheld.
For purposes of this Lease, there shall be excluded from the definition of
"Alterations" the installation, relocation, replacement or
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removal of any items of Furnishings of Lessee. Any Alterations to the Leased
Premises shall upon expiration or earlier termination of this Lease become a
part of the realty and belong to Lessor. Except as otherwise provided in this
Lease, upon the expiration or earlier termination of this Lease, Lessee shall
have the right to remove its Furnishings placed upon the Leased Premises
provided that Lessee restores the Leased Premises as indicated below.
12.2 Requirements. Any Alterations performed by Lessee shall be
subject to strict conformity with the following requirements:
(a) All Alterations shall be at the sole cost and expense
of Lessee.
(b) Prior to commencement of any Alterations, Lessee
shall submit to Lessor detailed plans and specifications, including working
drawings (hereinafter referred to as "Plans"), of the proposed Alterations,
which Plans shall be subject to the approval of Lessor, which approval shall
not be unreasonably withheld or delayed. Unless disapproved in writing by
Lessor within ten (10) days following Lessor's receipt of the Plans, Lessor
shall be deemed to have approved the same.
(c) Following approval of the Plans by Lessor, Lessee
shall give Lessor at least ten (10) days prior written notice of commencement
of work in the Leased Premises so that Lessor may post notices of
non-responsibility in or upon the Leased Premises as provided by law.
(d) No Alterations shall be commenced without Lessee
having previously obtained all appropriate permits and approvals required by
and of governmental agencies.
(e) All Alterations shall be performed in a skillful and
workmanlike manner, consistent with the best practices and standards of the
construction industry, and pursued with diligence in accordance with the Plans
previously approved by Lessor and in full accord with all applicable laws and
ordinances.
(f) Lessee shall only employ contractors licensed by the
State of California to construct such Alterations.
(g) Lessee shall take out and maintain so-called
"builder's risk," "course of construction insurance" and general liability
insurance insuring the Leased Premises during the period of construction, in
form and amounts satisfactory to Lessor, and shall take out and maintain the
other insurance that is required by Article 15 of this Lease. The insurance
required herein shall comply with the provisions of Article 15 of this Lease.
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(h) The Alterations must be performed in a manner such
that they will not interfere with the quiet enjoyment of the other lessees or
occupants in the Shopping Center.
(i) No Alterations shall be commenced without Lessee
having previously obtained, at Lessee's own cost and expense, completion and
lien performance and indemnity bonds satisfactory to Lessor for such
Alterations.
Notwithstanding the foregoing, in the event any proposed Alterations
involve the expenditure of less than Fifty Thousand Dollars ($50,000.00) in any
one transaction, or less than One Hundred Thousand Dollars ($100,000.00) in a
series of related transactions within any six (6) month period, provided such
Alterations do not involve any structural changes to the Building and/or
changes to the mechanical systems of the Building, the requirements of Sections
12.2(b) and (i) need not be satisfied by Lessee with respect to such
Alterations.
12.3 Liens. Lessee shall keep the Leased Premises and the Shopping
Center in which the Leased Premises are situated, free from any liens arising
out of any work performed, materials furnished or obligations incurred by
Lessee. In the event a mechanic's or other lien is filed against the Leased
Premises or the Shopping Center as a result of a claim arising through Lessee,
Lessor may demand that Lessee furnish to Lessor a surety bond satisfactory to
Lessor in an amount equal to the amount of the contested lien claim or demand,
indemnifying Lessor against liability for the same and holding the property
free from the effect of such lien or claim. Such bond must be posted within
ten (10) days following notice from Lessor. In the event Lessee fails to post
such bond within such ten (10) day period, in addition to any other rights and
remedies available to Lessor, Lessor may secure such bond, and Lessee shall pay
to Lessor, as Additional Rent, the cost of such bond.
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ARTICLE 13
SIGNS
13.1 Restrictions. Subject to any additional restrictions
contained in the Declaration, Lessee shall not place or permit to be placed on
the Leased Premises or in any other location within the Shopping Center any
exterior sign, advertisement, decoration marquee, awning, canopy, decoration,
lettering or any other item of any kind (individually "Sign" or collectively
"Signs"), without the prior written consent of Lessor, which Lessor reserves
the right to withhold in its sole judgment. Lessee, upon request of Lessor,
shall immediately remove any such Sign which, in the opinion of Lessor, is
objectionable or offensive, and if Lessee fails so to do Lessor may enter upon
the Leased Premises and remove the same. At the expiration or earlier
termination of this Lease, Lessee shall remove all his Signs and all damage
caused by removal shall be repaired at Lessee's expense. All Signs shall be
maintained by Lessee at its own expense. Except for approved Signs, Lessee
shall not use any advertising or promotional medium which may be heard or
experienced outside of the Leased Premises (such as search lights, barkers or
loudspeakers). Lessee shall not distribute handbills or circulars to patrons
of the Shopping Center or to cars in the parking lots, nor engage in any
similar form of direct advertising in the Shopping Center. The initial sign
criteria for the Shopping Center (which Lessor may change from time to time, in
Lessor's sole discretion) are attached hereto as Exhibit "E," and are
incorporated herein by reference.
Notwithstanding the foregoing, Lessee shall have the right, at
Lessee's sole cost and expense, to: (a) place not more than four (4)
identification Signs on the exterior of the Building; and (b) place one (1)
identification sign on the main monument signage for the Shopping Center
located on Margarita Road; provided, however: (i) all such Signs shall be
consistent and harmonious with the materials, color, texture, size, shape,
height, location and design of the Shopping Center and comparable Signs located
in the Shopping Center; (ii) all such Signs shall satisfy the Sign Criteria for
the Shopping Center attached hereto as Exhibit "E"; (iii) all such Signs shall
satisfy the restrictions contained in the Declaration; and (iv) all such Signs
shall be approved by Lessor in accordance with the provisions of this Section
13.1.
ARTICLE 14
UTILITIES
14.1 Payment by Lessee. Commencing as of the Effective Date hereof
and throughout the Lease Term, Lessee shall pay all charges (including any
connection or hook-up fees or similar charges), for water, gas, heat, sewer,
power, telephone services and any other utility supplied to or consumed in or
on the Leased Premises. Lessee shall also arrange for refuse, garbage or trash
pick-up for the Leased Premises and all costs, fees and expenses incurred in
connection therewith shall be borne by Lessee. Lessee shall not allow refuse,
garbage or trash to accumulate outside of the Leased
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Premises except on the day of scheduled scavenger pick-up services, and then
only in areas designated for that purpose by Lessor. Lessor shall not be
responsible or liable for any interruption in utility services, nor shall such
interruption affect the continuation or validity of this Lease.
14.2 Separate Meters. Lessor reserves the right to install, at
Lessee's sole cost and expense, separate meter or any utility servicing the
Leased Premises for which a meter is not presently installed, in which event
Lessee shall make payments, when due, directly to the utility involved.
14.3 Joint Meters. If any utility services are not separately
metered to Lessee, Lessee shall pay to Lessor, as Additional Rent, a proportion
to be determined by Lessor of all charges jointly metered with other leased
premises or occupants in the Shopping Center. All payments to Lessor in
respect thereof shall be due within ten (10) days after receipt of the billing
by Lessee.
ARTICLE 15
INSURANCE
15.1 Insurance Coverage by Lessor. Pursuant to the Declaration,
the Manager is obligated to maintain a policy or policies of insurance
protecting against public liability and property damage insurance with respect
to the Common Areas in an amount not less than Three Million Dollars
($3,000,000) combined single limit for both bodily injury and property damage.
All costs incurred by the Manager for maintenance of the policy or
policies of insurance pursuant to this Section 15.1 shall be included in
"Common Area Costs" pursuant to Section 10.4 hereof, and shall be payable by
Lessee to Lessor in accordance with the provisions of Section 10.3 hereof.
15.2 Insurance Coverage by Lessee.
(a) Fire and Extended Coverage Insurance -- Building.
From the Effective Date hereof and throughout the Lease Term, Lessee shall
maintain in force and effect a policy or policies of insurance, in the name of
Lessor, protecting against fire and other perils normally included in extended
or all-risk coverage insurance including vandalism, malicious mischief,
sprinkler leakage, plate glass coverage and an earthquake endorsement (to the
extent such earthquake endorsement is available at commercially reasonable
rates and generally required by lessors of similarly leased premises in the
same geographic region), to the extent of the full replacement value of the
Building and other improvements comprising the Leased Premises, which policy or
policies shall name Lessor and Lessor's lenders as additional insureds, with
losses payable to Lessor or Lessor's lenders.
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(b) Liability Insurance. From the Effective Date hereof
and throughout the Lease Term, Lessee shall maintain worker's compensation
insurance and comprehensive public liability insurance with respect to the
Leased Premises, all liabilities and obligations assumed or undertaken by
Lessee pursuant to this Lease, adequate to protect Lessor as Lessor shall
reasonably determine. All insurance policies (excluding worker's compensation)
shall name as an additional insured Lessor and its lenders, and shall expressly
provide that the interest of Lessor therein shall not be affected by any breach
by Lessee of any policy provisions. Initially, such policy of liability
insurance shall be in an amount not less than One Million Dollars ($1,000,000)
combined single limit for both bodily injury and property damage. The amounts
of such public liability insurance shall be increased from time to time, as
Lessor may reasonably determine, provided such increases shall be consistent
with industry standards.
(c) Lessee's Property Insurance. From the Effective Date
hereof and throughout the Lease Term, Lessee shall maintain in force and effect
a policy or policies of all risk contents insurance, with respect to Lessee's
Furnishings located in the Leased Premises and all Alterations to the Leased
Premises made by Lessee to the extent of their full replacement value. From
the Effective Date hereof and throughout the Lease Term, the proceeds of any
such policy or policies of contents insurance shall be used solely for the
repair or replacement of the property so insured.
(d) General Provisions. All insurance policies required
hereunder shall be obtained upon an "occurrence" basis and not as "claims made"
policies. All public liability, property damage, and other liability policies
of Lessee shall be written as primary policies, not contributing with and not
in excess of coverage which Lessor may carry. With regard to the policies
described in Sections 15.2(b) and (c) above, all such policies shall contain a
provision that Lessor, and its lenders, although additional insureds, shall
nevertheless be named as loss payees and be entitled to recover under said
policies for any loss occasioned to it, its employees, agents, contractors,
invitees and licensees by reason of the negligence of Lessee, its employees,
agents, contractors, invitees and licensees. Lessee shall furnish Lessor with
a certificate of insurance with attached endorsements with respect to all such
policies prior to Lessee's entry into the Leased Premises. Such policies shall
be secured from insurance companies with a Best's rating of A or better and
provide by endorsement that they may not be canceled or altered without at
least ten (10) days' prior written notice delivered by the insurer to Lessor
and its lenders.
(e) Notwithstanding any contrary provision hereof, Lessee
may self-insure any of its insurance coverage obligations as set forth in
Sections 15.2(b) and (c) hereof, so long as Tenant's net worth is in excess of
Sixteen Million Dollars ($16,000,000.00), as evidenced by recent audited
financial statements provided to Lessor by Lessee's accountants, as computed in
accordance with generally-accepted accounting principles. Prior to Lessee's
electing to self-insure (Lessee does not
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presently self-insure), it must provide Lessor with written notice thereof
accompanied by copies of its most recent audited financial statements, which
information shall be provided to Lessor on an annual basis. At any time that
Lessee's net worth falls below the above required amount, Lessee must promptly
obtain the necessary insurance policies required hereunder.
15.3 Waiver of Subrogation. Lessor and Lessee hereby release and
relieve each other from liability and waive all right to recover against each
other for any loss or damage arising out of or incident to the perils covered
under their respective policies of insurance, which perils occur in, on or
about the Premises, due to the negligence of Lessor or Lessee or their
respective agents, employees, contractors and/or invitees. Lessor and Lessee
shall, upon obtaining the policies of insurance required under this Lease, give
notice to their respective insurance carrier(s) that the foregoing mutual
waiver of subrogation is contained in this Lease, and shall provide to the
other appropriate endorsements of such waiver from the insurers.
15.4 Hazardous Uses. Should any use of the Leased Premises by
Lessee, or any acts done in conjunction therewith, increase the rate of
insurance above that for the least hazardous retail use in the Shopping Center,
said increased premium costs shall be borne exclusively by Lessee. Lessee
shall not engage in any activities or permit to be kept, used, or sold in or
about the Leased Premises, any article which may be prohibited by the standard
form of fire insurance policies. Lessee shall, at its sole cost and expense,
comply with any and all requirements pertaining to the Leased Premises or any
insurance organization or company, necessary for the maintenance of reasonable
fire and public liability insurance covering the Leased Premises and
appurtenances.
ARTICLE 16
COMPLIANCE WITH LAWS AND REGULATIONS; HAZARDOUS MATERIALS
16.1 Lessee's Obligations. Lessee, shall, at its sole cost and
expense, comply with all of the requirements of all municipal, state and
federal authorities now in force, or which may hereafter be in force,
pertaining to the construction, operation and management of the Leased Premises
and/or the Common Areas, and shall faithfully observe in the use of the Leased
Premises all municipal ordinances and state and federal statutes now in force
or which may hereafter be in force. The judgment of any court of competent
jurisdiction, or the admission of Lessee in any action or proceeding against
Lessee, whether Lessor be a party thereto or not, that any such ordinance or
statute pertaining to the Leased Premises has been violated, shall be
conclusive of that fact as between Lessor and Lessee.
16.2 Condition of Leased Premises. Lessee hereby accepts the
Leased Premises in its current "AS IS" condition existing as of the Effective
Date, without any representations or warranties of any kind by Lessor, and
subject to all applicable
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zoning, municipal, county and state law, ordinances, rules, regulations,
orders, restrictions of record, and requirements in effect during the Lease
Term.
16.3 Hazardous Materials.
(a) Lessee shall not cause or permit the presence, use,
generation, release, discharge, storage, disposal or transportation of any
"Hazardous Materials" on, under, in, about, to or from the Leased Premises
and/or the Shopping Center; provided that the presence or use of Hazardous
Materials (a) in products required for the prudent and ordinary management and
operation of the Leased Premises; and (b) held and used strictly in accordance
with (i) all applicable federal, state or local laws, regulations or orders,
(ii) guidelines issued by any national or regional board of insurance
underwriters, and (iii) prudent standards of practice, shall not be deemed in
violation of this provision.
(b) As used herein, the term "Hazardous Materials" shall
mean any hazardous or toxic substances, materials or waste, pollutants or
contaminants, as defined, listed or regulated by any federal, state, county or
local law, regulation or order or by common law decision, including, without
limitation, (i) trichloroethylene, tetrachloroethylene, perchloroethylene and
other chlorinated solvents, (ii) petroleum products or by-products, (iii)
asbestos, and (iv) polychlorinated biphenyls.
(c) If Lessee's use of the Leased Premises may involve
the storage and/or use of Hazardous Materials as defined herein, Lessee, in
addition to its covenants defined above, further covenants, agrees, warrants
and represents that it will comply with all laws, rules, regulations, court
decisions, municipal codes and ordinances regulating such storage and/or use of
Hazardous Materials, including without limitation Chapter 6.95 of the
California Health and Safety Code; and to permit Lessor to monitor such
compliance, without the assumption of any liability by Lessor nor any
obligation of Lessor to so monitor, Lessee covenants and agrees to provide to
and/or permit Lessor:
(i) To review and approve prior to submission to
any governmental agency all applications with respect to the handling, storage
and/or use of Hazardous Materials in, on or about the Leased Premises,
including without limitation, applications to the County Hazardous Materials
Management Division ("HMMD") and/or to Air Pollution Control District ("APCD"),
and after such submission to provide Lessor with a copy of all responses,
notices, comments or other communications with said governmental agencies; and
(ii) To receive and review a copy of all completed
and approved "Business Plans," as defined by the statues, and all updates,
renewals or replacement
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"Business Plans" when submitted and all responses, notices, comments or
communications with any governmental agencies regarding same; and
(iii) To receive and review a copy of all notices,
reports, comments or communications relating to any governmental inspection,
complaint, investigation or other matter relating to Lessee's storage, handling
or use of Hazardous Materials at, on, in or about the Leased Premises;
(iv) To receive and review a copy of any and all
EPA numbers, County Health Department permits, APCD permits, contracts with
certified hazardous waste handlers (and all credentials and certifications of
such handlers), and all schedules for delivery, pick-up and disposal of
Hazardous Materials to or from the Leased Premises;
(v) To immediately notify Lessor of any leaks,
spills, emissions, release or suspected release of any Hazardous Materials at,
on, in, under, above or about the Leased Premises from any cause or source
whatsoever; and
(vi) To receive and review a copy of all records
of every nature that are required by law, regulations, ordinance or court order
to be maintained by Lessee with respect to the storage, handling or use of any
Hazardous Materials at, on, in, under, above or about the Leased Premises.
(d) Lessee shall exonerate, indemnify, pay and protect,
defend (with counsel reasonably approved by Lessor) and save Lessor, and its
directors, trustees, beneficiaries, officers, shareholders, partners,
employees, agents, and invitees and of those of the other tenants of the
Shopping Center (collectively the "Related Parties"), harmless from and against
any claims (including, without limitation, third party claims for personal
injury or real or personal property damage), actions, administrative
proceedings (including informal proceedings), judgments, damages, punitive
damages, penalties, fines, costs, taxes, assessments, liabilities (including
sums paid in settlements of claims), interest or losses, including reasonable
attorneys' fees and expenses (including any such fees and expenses incurred in
enforcing this Lease or collecting any sums due hereunder), consultant fees,
and expert fees, together with all other costs and expenses of any kind or
nature (collectively the "Costs") that arise directly or indirectly in
connection with the presence, suspected presence, release or suspected release
of any Hazardous Materials in or into the air, soil, ground water, surface
water or improvements at, on, about, under or within the Shopping Center, or
any portion thereof, or elsewhere in connection with the transportation of
Hazardous Materials to or from the Shopping Center by or on behalf of Lessee or
with respect to the Leased Premises. The indemnification provided in this
Section shall specifically apply to and include claims or actions brought by or
on behalf of employees of Lessee. In the event that any of the related parties
shall suffer or incur any such costs, Lessee shall pay to Lessor or such
related parties, the total of all such Costs suffered or
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incurred upon demand therefor. Without limiting the generality of the
foregoing, the indemnification provided herein shall specifically cover Costs
including, without limitation, capital, operating and maintenance costs,
incurred in connection with any investigation or monitoring of site conditions,
any clean-up, containment, remedial, removal or restoration work required or
performed by any federal, state or local governmental agency or political
subdivision or performed by any nongovernmental entity or person because of the
presence, suspected presence, release or suspected release of any Hazardous
Materials in or into the air, soil, ground water, surface water or improvements
at, on, about, under or within the Shopping Center (or any portion thereof), or
elsewhere in connection with the transportation of Hazardous Materials to or
from the Shopping Center and any claims of third parties for loss or damage due
to such Hazardous Materials. This indemnification shall survive the
termination of this Lease and shall be binding upon the Lessee and its
successors in interest whenever such threat. claim or cause of action may
arise. Lessee expressly waives any defense concerning laches or the statute of
limitations, constructive eviction or rent abatement with respect to such
claims.
16.4 Waste or Nuisance. Lessee shall not commit, or suffer to be
committed any waste upon the Leased Premises, or any nuisance, or other act of
thing which may disturb the quiet enjoyment of any other tenant or occupant of
the Shopping Center in which the Leased Premises are located.
16.5 Indemnity. Lessee agrees to indemnify, defend, protect and
hold harmless Lessor, its directors, officers, employees, partners, and agents
from and against any and all losses, claims, demands, actions, damages (whether
direct or consequential), penalties, liabilities, costs and expenses, including
all attorneys' fees and legal expenses, arising out of any violation or alleged
violation of any of the laws or regulations referred to in this Article 16, or
breach of any of the provisions of this Article 16.
16.6 Survival After Lease Termination. Lessee's obligations under
Sections 16.1, 16.2, 16.3, 16.4, 16.5 and 16.6 shall survive the termination of
this Lease for any reason whatsoever.
ARTICLE 17
ENTRY BY LESSOR
17.1 Rights of Lessor. From the Effective Date hereof and
throughout the Lease Term, Lessor and its authorized representatives shall have
the right to enter the Leased Premises, accompanied by Lessee or Lessee's
representative, upon reasonable notice, to determine whether the Lessee is
complying with its maintenance and repair obligations set forth in Article 11
hereof, to show the Leased Premises to prospective brokers or buyers, for the
purpose of placing upon the Common Areas any usual or ordinary "for sale"
signs, posting notices of nonresponsibility, and for any other
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reasonable purpose without any rebate of rent and without any liability to
Lessee for any loss of occupation or quiet enjoyment of the Leased Premises
thereby occasioned. Notwithstanding the foregoing, Lessor shall have the right
to use any and all means which Lessor may deem proper in an emergency, to
obtain entry to the Leased Premises and such entry obtained by Lessor shall not
under any circumstances be construed or deemed to be a forcible or unlawful
entry into, or a detainer of the Leased Premises. Lessee shall permit Lessor,
at any time within ninety (90) days prior to the expiration of the Lease Term,
to place upon the Leased Premises one (1) ordinary "to let" or "to lease" sign.
ARTICLE 18
DAMAGE OR DESTRUCTION
18.1 Repair and Reconstruction After Insured Damage. In the event
the whole or any part of the Leased Premises shall be partially or wholly
damaged or destroyed by fire or other casualty required to be insured
hereunder, such destruction or damage shall not operate to terminate this
Lease, but this Lease shall continue in full force and effect, except as
otherwise provided in this Lease. In such a case, Lessor shall make available
to Lessee all insurance proceeds received by Lessor (net of any costs
reasonably incurred by Lessor in recovering such insurance proceeds) as a
result of such damage or destruction, and Lessee shall, at Lessee's cost and
expense, immediately thereafter repair such damage or destruction and restore
Leased Premises to as near the condition as existed prior to the damage or
destruction. In connection with the foregoing, Lessee shall, at Lessee's sole
cost and expense, also repair, restore and/or replace all Furnishings and
Alterations located and/or installed on the Leased Premises prior to such
damage or destruction. In no event shall Lessee be entitled to any abatement
or reduction in rent during such period of repair or reconstruction.
18.2 Repair and Reconstruction After Uninsured Damage. In the
event the Leased Premises shall be damaged or destroyed by a casualty not
required to be insured against hereunder to the extent of twenty five percent
(25%) or more of the insurable value of the Leased Premises, Lessee may, at its
option, elect to terminate this Lease. In the event the Leased Premises shall
be damaged or destroyed by a casualty not required to be insured against
hereunder to the extent of less than twenty five percent (25%) of the insurable
value of the Leased Premises, Lessor shall make available to Lessor all
insurance proceeds received by Lessor (net of any costs reasonably incurred by
Lessor in recovering such insurance proceeds) as a result of such damage or
destruction, and Lessee shall, at Lessee's cost and expense, immediately
thereafter repair such damage or destruction and restore the Leased Premises to
as near the condition as existed prior to the damage or destruction. In no
event shall Lessee be entitled to any abatement or reduction in rent during
such period of repair or reconstruction.
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18.3 Damage Near End of Term. Notwithstanding the provisions of
Sections 18.1 and 18.2 hereof, in the event the Leased Premises shall be
partially or wholly damaged or destroyed, Lessee shall be under no obligation
to, but may (at Lessee's sole discretion), repair such damage or destruction
and restore the Leased Premises during the final Lease Year if: (1) the cost of
such restoration exceeds twenty five percent (25%) or more the then full
replacement value of all the Leased Premises; or (2) the damage or destruction
is uninsured and is not required to be insured under the provisions of this
Lease; or (3) Lessee is substantially prevented from carrying on its business
and operations at a level of at least seventy five percent (75%) of the level
of business and operations preceding such damage or destruction; or (4) such
damage or destruction cannot be repaired so as to permit resumption of Lessee's
business and operations, within ninety (90) calendar days of such damage or
destruction to substantially the same level of such business and operation
prior to such damage or destruction. In such event, notwithstanding any
provision in this Lease to the contrary, Lessee may, at its option, elect to
terminate this Lease.
18.4 Election to Terminate. In the event Lessee elects to
terminate this Lease pursuant to the provisions of Section 18.2 or 18.3 above,
then Lessee may exercise its right to terminate subject to the following
conditions: (1) said right to terminate must be exercised by written notice
from Lessee to Lessor within sixty (60) days of such damage or destruction; (2)
Lessee shall continue to perform all its obligations hereunder until the
effective date of such termination; and (3) Lessee shall pay to Lessor all
insurance proceeds received or to be received by Lessee.
18.5 Waiver. Subject to the provisions of Section 18.4 hereof,
Lessee hereby waives all statutory or common law rights of termination in
respect to any partial or complete damage or destruction concerning the Leased
Premises. Without limiting the foregoing, Lessee hereby waives the provisions
of Section 1932(2) and 1934(4) of the California Civil Code.
ARTICLE 19
CONDEMNATION
19.1 Definitions.
(a) "Condemnation" means (i) the exercise of any
governmental power, whether by legal proceedings or otherwise, by a condemnor
and/or (ii) a voluntary sale or transfer by Lessor to any condemnor, either
under the threat of condemnation or while legal proceedings for condemnation
are pending.
(b) "Date of Taking" means the date the condemnor has the
right to possession of the property being condemned.
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(c) "Award" means all compensation, sums or anything of
value awarded, paid or received on a total or partial condemnation.
(d) "Condemnor" means any public or quasi-public
authority, or private corporation or individual, having the power of
condemnation.
19.2 Total Taking. If the Leased Premises are totally taken by
condemnation, this Lease shall terminate on the Date of Taking.
19.3 Partial Taking.
(a) If, during the Lease Term, more than five percent
(5%) of the floor area of the Building is taken by Condemnation, or the number
of full-sized automobile parking spaces within the parking lot of the Leased
Premises is reduced by thirty percent (30%) or more as a result of such
Condemnation, this Lease shall, at the option of Lessee, cease and terminate as
of the Date of Taking. Such option to terminate shall be exercisable by Lessee
by giving written notice to Lessor within thirty (30) calendar days after the
Date of Taking, which notice shall provide for a termination date (the
"Termination Date") no sooner than the Date of Taking and not later than ninety
(90) calendar days after the Date of Taking. In such a case, Lessee shall pay
rent up to the Termination Date and Lessor shall refund any rent payments as
shall have been paid in advance which cover a period subsequent to the
Termination Date.
(b) In the event that any portion of the Leased Premises
shall be taken by Condemnation, and this Lease is not terminated thereby, then
(i) the Leased Premises shall be reduced by the number of square feet taken,
and the Minimum Monthly Rent shall thereafter be reduced proportionately; and
(ii) Lessor shall be entitled to receive the condemnation proceeds attributable
to the improvements taken, together with any damages paid by the condemning
authority for the cost of repairs, alterations and reconstruction of the
remaining improvements.
(c) Nothing herein contained shall prevent Lessor and
Lessee from prosecuting claims in any condemnation proceedings for the value of
their respective interests. Subject to the provisions of Subsection (b),
above, Lessor shall be entitled to the condemnation award attributable to the
real property and Lessee for the taking of its Furnishings, Alterations,
leasehold estate, loss of business or other award not related to the interests
of Lessor.
ARTICLE 20
INDEMNIFICATION
20.1 Lessee's Indemnity. Lessee does hereby indemnify,
defend and hold Lessor, its shareholders, officers, directors, employees,
agents, contractors, invitees and licensees, harmless from and against any and
all suits, actions, damages,
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claims, liability and expense in connection with loss by reason of injury to
person or property from whatever cause, arising from or out of any occurrence
in, upon, at or from the Leased Premises, or by the occupancy or use by Lessee
of the Leased Premises or any part thereof, or occasioned wholly or in part by
any act or omission of Lessee, its agents, contractors, employees, servants,
invitees, licensees, or concessionaires, including without limitation acts or
omissions relating to the Leased Premises and Common Areas within the Shopping
Center, except for acts, omissions or occurrences resulting from the gross
negligence or intentional misconduct of Lessor, its shareholders, officers,
directors, employees, agents and contractors.
20.2 Release of Lessor. Lessor shall not be responsible or liable at
any time for any loss or damage to Lessee's merchandise, inventory, Furnishings
or to Lessee's business, including without limitation, any loss or damage to
either the person or property of Lessee or loss of profits or otherwise that may
be occasioned by or through the acts or omissions of persons occupying other
space in the Shopping Center, or their invitees, except for acts, omissions or
occurrences resulting from the gross negligence or intentional misconduct of
Lessor, its shareholders, officers, directors, employees, agents and
contractors. Lessee shall store its property in and shall use and enjoy the
Leased Premises and the Common Area of the Shopping Center at its own risk, and
Lessee hereby releases Lessor, is employees, agents, contractors, partners,
invitees, and licensees, to the fullest extent permitted by law, from all claims
of every kind, including without limitation, leakage of any nature, resulting in
loss of life, personal or bodily injury, or property damage, except for acts,
omissions or occurrences resulting from the gross negligence or intentional
misconduct of Lessor, its shareholders, officers, directors, employees, agents
and contractors.
20.3 Notice of Loss. Lessee shall give prompt notice to Lessor in
case of fire or accidents or other losses in, to or on the Leased Premises or
the Common Area Improvements, as well as of any defects therein.
20.4 Survival After Lease Termination. Lessee's and Lessor's
obligations under Sections 20.1, 20.2, 20.3 and 20.4 shall survive the
termination of this Lease for any reason whatsoever.
ARTICLE 21
ASSIGNMENT AND SUBLETTING
21.1 Lease is Personal. The purpose of this Lease is to transfer
possession of the Leased Premises to Lessee for Lessee's use in return for
certain benefits, including rent to be paid to the Lessor. Lessee's right to
assign or sublet as stated in this Article 21 is subsidiary and incidental to
the underlying purpose of this Lease. Lessee acknowledges and agrees that it
has entered into this Lease in order to acquire the Leased Premises for its own
personal use and not for the purpose of obtaining the right to convey the
leasehold to others.
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21.2 "Transfer of the Leased Premises" Defined. The terms
"Transfer of the Leased Premises" or "Transfer" as used herein shall include
any assignment of all or any part this Lease (including assignment by operation
of law), the subletting of all or any part the Leased Premises or transfer of
possession, or right of possession or contingent right of possession of all or
any portion of the Leased Premises including, without limitation, concession,
mortgage, devise, hypothecation, agency, franchise or management agreement, or
to suffer any other person the agents and servants of Lessee excepted), to
occupy or use the said Leased Premises or any portion thereof. If Lessee is a
corporation which is not deemed a public corporation, or is an unincorporated
association or partnership, or Lessee consists of more than one party, the
transfer, assignment or hypothecation of any stock or equity interest in such
corporation, association, partnership or other ownership interest, whether in
one transaction or in a series of transactions, in the aggregate in excess of
fifty percent (50%) of the total interests in such entity, shall be deemed a
Transfer of the Leased Premises.
21.3 No Transfer Without Consent. Lessee shall not suffer a
Transfer of the Leased Premises or any interest therein, or any part thereof,
or any right or privilege appurtenant thereto without the prior written consent
of Lessor, which consent shall not be unreasonably withheld. A consent by
Lessor to one Transfer of the Leased Premises shall not be deemed to be a
consent to any subsequent Transfer of the Leased Premises. Any Transfer of the
Leased Premises without such consent shall be void, and shall, at the option of
Lessor, terminate this Lease.
21.4 When Consent Withheld. Without in any way limiting Lessor's
right to refuse to give consent to any proposed Transfer of the Leased Premises
for any other reason or reasons, Lessor reserves the right to refuse to give
such consent, and Lessee agrees that it would not be commercially unreasonable
to withhold consent, if in Lessor's reasonable business judgement the proposed
Transfer of the Leased Premises would (a) violate any restriction or exclusive
right given in, or be contrary to, any lease in the Shopping Center; (b)
violate any restriction contained in the Declaration; or (c) increase the risk
of the use, release or mishandling of Hazardous Materials. Lessor shall
require a reasonable payment, including attorneys' fees, to cover its handling
charges for each assignment or sublease it is requested to approve.
21.5 Effect of Transfer. If Lessor consents to a Transfer, the
following conditions shall apply:
(a) Each and every covenant, condition or obligation
imposed upon Lessee by this Lease and each and every right, remedy or benefit
afforded Lessor by this Lease shall not be impaired or diminished as a result
of such Transfer.
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(b) No Transfer, whether or not consent of Lessor is
required hereunder, shall relieve Lessee of it primary obligation to pay the
rent and to perform all other obligations to be performed by Lessee hereunder.
The acceptance of rent by Lessor from any person shall not be deemed to be a
waiver by Lessor of any provision of this Lease or to be a consent to any
Transfer of the Leased Premises.
(c) If Lessor consents to a sublease, such sublease shall
not exceed beyond the expiration of the Lease Term, to include any and all
Extended Terms.
(d) No Transfer shall be valid and no transferee shall
take possession of the Leased Premises or any part thereof unless, within ten
(10) days after the execution of the documentary evidence thereof, Lessee shall
deliver to Lessor an agreement which provides that (i) the transferee assumes
Lessee's obligations for the payment of rent and for the full and faithful
observance and performance of the covenants, terms and conditions contained
herein, and (ii) such transferee will, at Lessor's election, attorn directly to
Lessor in the event Lessee's Lease is terminated for any reason on the terms
set forth in the instrument of transfer.
ARTICLE 22
DEFAULT
22.1 Definition. The occurrence of any of the following shall
constitute a material default and breach of this Lease by Lessee:
(a) Any failure by Lessee to pay Minimum Monthly Rent,
Additional Rent or any other rent payment required to be made by Lessee
hereunder when due.
(b) The abandonment or vacation of the Leased Premises by
Lessee in violation of Section 6.4 hereof;
(c) A failure by Lessee to observe and perform any other
provision of this Lease to be observed and performed by Lessee, other than
those obligations specified in Sections 22.1(a) and 22.1(b) above, where such
failure continues for ten (10) days after the date of written notice thereof by
Lessor to Lessee; provided, however, that if the nature of the default is such
that the same cannot reasonably be cured within the ten (10) day period
allowed, Lessee shall not be deemed to be in default if Lessee shall, within
such ten (10) day period, commence to cure and thereafter diligently prosecute
the same to completion;
(d) The occurrence of a Bankruptcy Event, as said term is
defined in Section 31.1 hereof;
(e) Any two (2) failures by Lessee to observe and perform
any provision of this Lease during any twelve (12) month period of the Lease
Term, as such
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may be extended, shall constitute, at the option of Lessor, a separate and
noncurable default.
22.2 Remedies Upon Default. In the event of any default by Lessee,
then in addition to any other remedies available to Lessor herein or at law or
in equity, Lessor shall have the following rights and remedies:
(a) Reenter; Recovery of Rent; Reletting.
(1) In the event of the vacation or abandonment
of the Leased Premises by Lessee, or in the event that Lessor shall elect to
reenter the Leased Premises as provided in Section 22.3 below, or shall take
possession of the Leased Premises pursuant to legal proceeding or pursuant to
any notice provided by law, so long as Lessor does not elect to terminate this
Lease as provided in Section 22.2(b) below, Lessor may from time to time,
without terminating this Lease, either recover all rent as it becomes due or
relet the Leased Premises or any part thereof for such terms and at such rental
or rentals and upon such other terms and conditions as Lessor in its sole
discretion, may deem advisable and, in connection therewith, Lessor shall also
have the right to make any alterations and repairs to the Leased Premises.
(2) In the event that Lessor shall elect to so
relet, then rentals received by Lessor from such reletting shall be applied:
first, to the payment of any indebtedness other than rent due hereunder from
Lessee to Lessor; second, to the payment of any cost of such reletting; third,
to the payment of the cost of any alterations and repairs to the Leased
Premises; fourth, to the payment of rent due and unpaid hereunder; and the
residue, if any, shall be held by Lessor and applied in payment of future rent
as the same may become due and payable hereunder. Should that portion of such
rentals received from such reletting during any month which is applied by the
payment of rent hereunder, be less than the rent payable during the month by
Lessee hereunder, then Lessee shall pay such deficiency to Lessor immediately
upon demand therefor by Lessor. Such deficiency shall be calculated and paid
monthly. Lessee shall also pay to Lessor as soon as ascertained, any costs and
expenses incurred by Lessor in such reletting or in making such alterations and
repairs not covered by the rentals received from such subletting.
(3) No reentry or taking possession of the Leased
Premises or any other action under this Section 22.2(a) shall be construed as
an election to terminate this Lease unless a written notice of such intention
be given to Lessee or unless the termination thereof be decreed by a court of
competent jurisdiction. Notwithstanding any reletting without terminating by
Lessor because of any default by Lessee, Lessor may at any time after such
reletting elect to terminate this Lease for any such default.
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(b) Terminate Lease. Lessor, either as an alternative or
subsequent to exercising the remedies set forth in Section 22.2(a) hereof, may
terminate Lessee's right to possession of the Leased Premises by and upon
delivery to Lessee of written notice of termination. Lessor may then
immediately re-enter the Leased Premises and take possession thereof pursuant
to legal proceedings and remove all persons and property from the Leased
Premises. Such property may be removed and stored in a public warehouse or
elsewhere at the cost of and for the account of Lessee. No notice of
termination shall be necessary in the event Lessee has abandoned the Leased
Premises. In the event that Lessor shall elect to so terminate Lessee's right
of possession, then Lessor may recover from Lessee:
(1) The worth at the time of award of any unpaid
rent which had been earned at the time of such termination; plus
(2) The worth at the time of award of the amount
by which the unpaid rent which would have been earned after termination until
the time of award exceeds the amount of such rental loss Lessee proves could
have been reasonably avoided; plus
(3) The worth at the time of award of the amount
by which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rent loss that Lessee proves could be reasonably
avoided; plus
(4) Any other amount necessary to compensate
Lessor for all the detriment proximately caused by Lessee's failure to perform
its obligations under this Lease or which in the ordinary course of events
would be likely to result therefrom including, without limitation, expenses of
reletting, attorneys' fees, costs of alterations and repairs, recording fees,
filing fees and any other expenses customarily resulting from obtaining
possession of the Leased Premises and re-leasing; and
(5) At Lessor's election, such other amounts in
addition to or in lieu of the foregoing as may be permitted from time to time
by applicable law.
As used in Sections 22.2(b)(1) and 22.2(b)(2) above, the "worth at the
time of award" is computed by allowing interest at the rate of ten percent
(10%) per annum. As used in Section 22.2(a)(3) above, the "worth at the time
of award" is computed by discounting such amount at the rate of the Federal
Reserve Bank of San Francisco at the time of the award plus one percent (1%).
22.3 Reentry; Personal Property.
(a) In the event of any default by Lessee, Lessor shall
also have the right with or without terminating this Lease, to reenter the
Leased Premises and remove all persons and property from the Leased Premises;
such property may be removed
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and stored in a public warehouse or elsewhere at the cost of and for the
account of Lessee.
(b) In the event of default, all of Lessee's Furnishings
and Alterations, shall remain upon the Leased Premises and in that event, and
continuing during the length of such default, Lessor shall have the sole right
to take exclusive possession of such property and to use it, rent or charge
free, until all defaults are cured or, at Lessor's option, at any time during
the Lease Term, to require Lessee to forthwith remove such property. The
rights stated herein are in addition to Lessor's rights described in Section
22.2 hereof.
22.4 Lessor's Rights Cumulative. All of Lessor's rights and
remedies shall be cumulative and the exercise of one shall not preclude the
exercise of any other or of any right, priority or remedy allowed or provided
for by law or in equity. In addition to all rights and remedies herein set
forth, Lessor shall have all rights and remedies now or hereafter provided by
applicable law, including those contained in California Civil Code Section
1951.4. Lessee hereby waives trial by jury. If Lessor commences any summary
proceedings or an action for nonpayment of rent, Lessee shall not interpose any
non-mandatory counterclaim of any nature or description in any such proceedings
or action. Nothing in this Article 25 shall be deemed to affect or limit
Lessor's or Lessee's right to defense and indemnification for liability or
liabilities arising in whole or in part prior to the termination of this Lease
for personal injuries or property damage under the indemnification clause or
clauses contained in this Lease. In addition to the other remedies provided
for in this Lease, Lessor shall be entitled to injunctive relief in case of the
violation, or attempted or threatened violation, of any covenant, agreement,
condition or provision of this Lease and to a decree compelling performance of
any covenant, agreement, condition or provision of this Lease and to any other
remedy allowed to Lessor hereunder, at law or in equity.
22.5 Lessee's Default. In the event Lessee shall default in the
payment of any costs, charges, expenses or impositions to be paid by Lessee or
in the performance of any act or condition to be performed by Lessee, Lessor
may, after ten (10) calendar days' written notice to Lessee (or such shorter
period as may be appropriate in an emergency), at Lessor's sole discretion (but
shall not be required to) pay such charge or perform such act without in any
way waiving Lessor's rights against Lessee for Lessee's failure so to do and
without in any way assuming any obligations of Lessee. Lessee shall reimburse
Lessor upon Lessor's written request therefor, any amounts so paid by Lessor,
together with interest from the date of payment by Lessor until repayment by
Lessee at the rate set forth in Section 5.3 hereof.
22.6 No Waiver. Efforts by Lessor to mitigate the damages caused
by Lessee's default in this Lease shall not constitute a waiver of Lessor's
right to recover damages hereunder, nor shall Lessor have any obligation to
mitigate damages hereunder.
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22.7 Curing Defaults. Should Lessee fail to repair, maintain,
and/or service the Leased Premises, or any part of contents thereof at any time
or times, or perform any other obligations imposed by this Lease or otherwise,
then after having given Lessee reasonable notice of the failure or failures and
a reasonable opportunity, which in no case shall exceed ten (10) calendar days
to remedy the failure, Lessor may perform or contract for the performance of
the repair, maintenance, or other Lessee obligation, and Lessee shall pay
Lessor for all direct and indirect costs incurred in connection therewith
within ten (10) calendar days of receiving a bill therefor from Lessor.
22.8 Cumulative Remedies. The various rights, options, election
powers, and remedies of Lessor contained in this Article 22 and elsewhere in
this Lease shall be construed as cumulative and no one of them exclusive of any
others or of any legal or equitable remedy which Lessor might otherwise have in
the event of breach or default, and the exercise of one right or remedy by
Lessor shall not in any way impair its right to any other right or remedy.
ARTICLE 23
SURRENDER AND LESSOR'S LIEN
23.1 Surrender and Removal of Furnishings. Upon the expiration of
or earlier termination of this Lease, Lessee shall surrender the Leased
Premises in good operating condition and repair and in a clean and sanitary
condition, free of rubble and broom cleaned. Subject to the provisions of
Section 22.3(a), Lessee agrees that upon the expiration of or earlier
termination of this Lease, Lessee shall remove all Furnishings which it has the
right to ownership pursuant to the terms of this Lease and Lessee shall repair
any damage to the Leased Premises occasioned by the removal of Lessee's
Furnishings. If Lessee fails to remove such Furnishings, Lessor may remove and
store the same under any applicable law or procedure.
23.2 Lessor's Lien. Lessee hereby grants to Lessor a lien upon and
security interests in all Furnishings of every kind now or hereafter to be
placed or installed in or on the Leased Premises and agrees that in the event
of any default on the part of Lessee, Lessor shall have all the rights and
remedies afforded the secured party by the chapter on "Default" of Division 9
of the Uniform Commercial Code of the state in which the Leased Premises are
located and may, in connection therewith, also (a) enter on the Leased Premises
to assemble and take possession of the collateral, (b) require Lessee to
assemble the collateral and make its possession available to Lessor at the
Leased Premises, and (c) enter the Leased Premises, render the collateral, if
equipment, unusable and dispose of it in a manner provided by the Uniform
Commercial Code of the state in which the Leased Premises are located.
ARTICLE 24
SUBORDINATION AND ATTORNMENT
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24.1 Subordination. Lessor shall have the right to require Lessee
to subordinate this Lease to any ground lease, deed of trust, or mortgage
encumbering the Leased Premises, any advances made on the security thereof, and
any renewals, modifications, consolidations, replacements or extensions
thereof, whenever made or recorded.
24.2 Attornment By Lessee. In the event of the sale or assignment
of Lessor's interest in the real property which constitutes the Leased
Premises, or in the event any proceedings are brought for foreclosure, or in
the event of the exercise of the power of sale under any mortgage or deed of
trust made by Lessor covering the Leased Premises, Lessor shall be relieved of
any continuing obligations under this Lease and Lessee shall attorn to the
purchaser or assignee upon any such foreclosure or sale or assignment and
recognize such purchaser or assignee as Lessor under this Lease, providing the
purchaser or assignee assumes all of Lessor's obligations under the Lease and
fully recognizes all of Lessee's rights herein.
24.3 Subordination of Lease to Certain Agreements with Third
Parties. Lessee hereby subordinates its rights hereunder to the Declaration or
any other operation, maintenance and reciprocal easement agreements, or any
amendments thereto, for access and parking between Lessor and the owner(s) of
any property located within or adjacent to the Shopping Center whenever, in the
reasonable discretion of Lessor, it is determined that any such agreement would
be beneficial to the use and operation of the Shopping Center.
24.4 Execution of Documents. Lessee, upon request of any party in
interest, shall execute promptly such instruments and certificates, to carry
out the intent of this Article 24. If, within ten (10) days after the date of
a written request by Lessor to execute such instruments, Lessee shall not have
executed the same, Lessee shall be deemed to have irrevocably appointed Lessor
as attorney-in-fact for Lessee with full power and authority to execute and
deliver in the name of Lessee any such instruments, certificates and/or
documents.
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ARTICLE 25
ESTOPPEL CERTIFICATES
25.1 Estoppel Certificates.
(a) Upon Lessor's written request, Lessee shall execute,
acknowledge and deliver to Lessor a written statement certifying: (i) that none
of the terms or provisions of this Lease have been changed (or if they have
been changed, stating how they have been changed); (ii) that this Lease has not
been cancelled or terminated; (iii) the last date of payment of the Minimum
Monthly Rent and other charges and the time period covered by such payment; and
(iv) that Lessor is not in default under this Lease (or, if Lessor is claimed
to be in default, stating why). Lessee shall deliver such statement to Lessor
within ten (10) days after Lessor's request. Any such statement by Lessee may
be given by Lessor to any prospective purchaser or encumbrancer of the Leased
Premises. Such purchaser or encumbrancer may rely conclusively upon such
statement as true and correct.
(b) If Lessee does not deliver such statement to Lessor
within such ten (10) day period, Lessee irrevocably constitutes and appoints
Lessor as its special attorney-in-fact to execute and deliver the certificate
to any third party. Further, Lessor, and any prospective purchaser or
encumbrancer may conclusively presume and rely upon the following facts: (i)
that the terms and provisions of this Lease have not been changed except as
otherwise represented by Lessor; (ii) that this Lease has not been cancelled or
terminated except as otherwise represented by Lessor; (iii) that not more than
one month's Minimum Monthly Rent or other charges have been paid in advance;
and (iv) that Lessor is not in default under this Lease. In such event, Lessee
shall be estopped from denying the truth of such facts.
(c) Upon Lessee's written request, Lessor shall, execute,
acknowledge and deliver to Lessee a written statement certifying: (i) that none
of the terms or provisions of this Lease have been changed (or if they have
been changed, stating how they have been changed); (ii) that this Lease has not
been cancelled or terminated; (iii) the last date of payment of the Minimum
Monthly Rent and other charges and the time period covered by such payment; and
(iv) that Lessee is not in default under this Lease (or, if Lessee is claimed
to be in default, stating why). Lessee shall deliver such statement to Lessor
within ten (10) days after Lessor's request. Any such statement by Lessor may
be given by Lessor to any prospective encumbrancer of the Leased Premises.
Such encumbrancer may rely conclusively upon such statement as true and
correct.
(d) If Lessor does not deliver such statement to Lessee
within such ten (10) day period, Lessor irrevocably constitutes and appoints
Lessee as its special attorney-in-fact to execute and deliver the certificate
to any third party. Further, Lessee, and any prospective encumbrancer may
conclusively presume and rely upon the
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following facts: (i) that the terms and provisions of this Lease have not been
changed except as otherwise represented by Lessee; (ii) that this Lease has not
been cancelled or terminated except as otherwise represented by Lessee; (iii)
that not more than one month's Minimum Monthly Rent or other charges have been
paid in advance; and (iv) that Lessee is not in default under this Lease. In
such event, Lessor shall be estopped from denying the truth of such facts.
25.2 Financing. If Lessor desires to finance or refinance the
Leased Premises, and/or the Shopping Center, or any portion thereof, Lessee
hereby agrees to deliver to any lender designated by Lessor such financial
statements of Lessee as may be reasonably required by such lender. Such
statements shall include the past two (2) years' financial statement of Lessee.
All such financial statements shall be received by Lessor in confidence and
shall be used only for the purposes herein set forth.
ARTICLE 26
MORTGAGEE PROTECTION
26.1 Notice and Right to Cure Default. Lessee agrees to give any
mortgagee(s) and/or trust deed holders, by registered mail, a copy of any
notice of default served upon Lessor, provided that prior to such notice,
Lessee has been notified, in writing (by way of Notice of Assignment of Rents
and Leases, or otherwise), of the address of such mortgagees and/or trust deed
holders. Lessee further agrees that if Lessor shall have failed to cure such
default within the time provided for in this Lease, then the mortgagees and/or
trust deed holders shall have an additional thirty (30) days within which to
cure such default or if such default cannot be cured within that time, then
such additional time as may be necessary if within such thirty (30) days, any
mortgagee and/or trust deed holder has commenced and is diligently pursuing the
remedies necessary to cure such default (including but not limited to
commencement of foreclosure proceedings, if necessary to effect such cure), in
which event this Lease shall not be terminated while such remedies are being so
diligently pursued.
ARTICLE 27
EMPLOYEE PARKING
27.1 Designated Areas. Lessor shall have the right, by written
notice to Lessee, to require employees of Lessee to only park in designated
parking spaces located on the Land and not in parking spaces located in the
balance of the Shopping Center.
ARTICLE 28
CHANGES TO SHOPPING CENTER
28.1 Changes to Shopping Center. Lessor reserves the right, at any
time and from time to time during the Lease Term, to remodel, expand, contract,
add, delete,
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multi-deck or otherwise alter or change any portion or portions of the entire
Shopping Center without the consent of Lessee. Notwithstanding the foregoing,
Lessor hereby agrees not to hereafter construct or install any improvements in
or to the Shopping Center which would substantially limit access of customers
to the Leased Premises. The foregoing restriction shall not be applicable to
any Alterations, modifications or improvements which Lessor is obligated to
construct or install pursuant to any law, statute or regulation or pursuant to
any order, decree, directive, mandate or requirement of any governmental or
quasi-governmental agency having jurisdiction over the Shopping Center or
relevant portions thereof. The foregoing restriction shall also not be
applicable to any temporary obstruction, interference or blockage arising from
construction and/or maintenance and repair activities provided, to the extent
Lessor is performing such construction and/or maintenance and repair
activities, Lessor will use best efforts to minimize any such obstruction,
interference or blockage arising therefrom. Without limiting the foregoing,
Lessor shall have the right to modify the location, shape, size, design or any
other component of the Shopping Center, including the Common Areas, and any
such modification shall, as of its completion, be deemed to be part of the
Shopping Center as described in this Lease. Lessor makes no warranties or
representations as to the present occupants or occupancy level of the Shopping
Center, or of future occupancy commitments. Lessee waives any duty or
obligation, express or implied, on the part of Lessor to keep the Shopping
Center leased or occupied in whole or in part or for any specific purpose or
use.
28.2 Easement and Licenses. Lessor reserves unto itself, and
Lessee hereby grants to Lessor, such licenses, easements and other rights in,
over or under the Leased Premises or any portion thereof as shall be required
for the construction, installation, repair, replacement and/or maintenance of
structural supports and members, mains, conduits, pipes or other facilities
that serve the Shopping Center, or any part thereof, as the same may be altered
as provided for in Section 28.1 above, including without limitation, the
premises of any occupant, provided, however, that Lessor shall pay for any such
alterations required on the Leased Premises as a result of any such exercise,
occupancy, use or enjoyment of any such license, easement or other right, and
provided further, that in connection with the exercise, occupancy under or
enjoyment of any such license or easement, Lessor shall use best efforts to
minimize any interference with Lessee's use, occupancy or enjoyment of the
Premises as contemplated by this Lease.
ARTICLE 29
LIMITATION ON LIABILITY OF LESSOR
29.1 Limited Liability. In the event of default, breach, or
violation by Lessor (which term includes Lessor's shareholders, officers,
directors, employees, agents or representatives), of any Lessor's obligations
under this Lease, Lessor's liability to Lessee shall be limited to its
ownership interest in the Leased Premises (or its interest in the Shopping
Center, if applicable), or the proceeds of a public sale of such interest
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pursuant to foreclosure of a judgment against Lessor. Lessor may, at its
option, and among its other alternatives, relieve itself of all liability under
this Lease by conveying the Leased Premises to Lessee. Notwithstanding any
such conveyance, Lessee's leasehold and ownership interest shall not merge.
ARTICLE 30
WAIVER OF CALIFORNIA CODE
30.1 Waiver of California Code Sections by Lessee. Except as
otherwise more specifically set forth in this Lease, Lessee waives (for itself
and all persons claiming under Lessee) the provisions of Civil Code Section
1932(2) and 1933(4) with respect to the destruction of the Leased Premises, and
Civil Code Section 1941 and 1942 with respect to Lessor's repair duties and
Lessee's right to repair.
ARTICLE 31
BANKRUPTCY
31.1 Bankruptcy Events. If at any time during the Lease Term there
shall be filed by or against Lessee in any court pursuant to any statute either
on the United States or of any State a petition in bankruptcy or insolvency or
for reorganization or for the appointment of a receiver or trustee of all or a
portion of Lessee's property, or if a receiver or trustee takes possession of
any of the assets of Lessee, or if the leasehold interest herein passes to a
receiver, or if Lessee makes an assignment for the benefit of creditors or
petitions for or enters into an arrangement (any of which are referred to
herein as "a Bankruptcy Event"), then the following provisions shall apply:
(a) At all events any receiver or trustee in bankruptcy
or Lessee as debtor in possession ("debtor"), shall either expressly assume or
reject this Lease within sixty (60) days following the entry of any "Order for
Relief."
(b) In the event of an assumption of the Lease by a
debtor, receiver, or trustee, such debtor, receiver, or trustee shall
immediately after such assumption (1) cure any default or provided adequate
assurances that defaults will be promptly cured; and (2) compensate Lessor for
actual pecuniary loss or provided adequate assurances that compensation will be
make for actual pecuniary loss; and (3) provide adequate assurance of future
performance.
For purposes of this Section 31.1(b), adequate assurance of future
performance of all obligations under this Lease shall include, but is not
limited to:
(i) written assurance that rent and any other
consideration due under the Lease shall first be paid before any other of
Lessee's costs of operation of its business in the Leased Premises are paid;
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(ii) written agreement that assumption of this
Lease will not cause a breach of any provision hereof including, but not
limited to, any provision relating to use or exclusivity in this or any other
Lease, or agreement relating to the Leased Premises, or if such a breach is
caused, the debtor, receiver or trustee will indemnify Lessor against such loss
(including costs of suit and attorney's fees), occasioned by such breach;
(c) Where a default exist under the Lease, the party
assuming the Lease may not require Lessor to provide services or supplies
incidental to the Lease before its assumption by such trustee or debtor, unless
Lessor is compensated under the terms of the Lease for such services and
supplies provided before the assumption of such Lease.
(d) The debtor, receiver, or trustee may only assign this
Lease if adequate assurance of future performance by the assignee is provided,
whether or not there has been a default under the Lease. Any consideration
paid by any assignee in excess of the rental reserved by the Lease shall be the
sole property of, and paid to, Lessor. Upon assignment by the debtor or
trustee the obligations of the Lease shall be deemed to have been assumed and
the assumptor shall execute an assignment agreement on request of Lessor.
(e) Lessor shall be entitled to the fair market value for
the Leased Premises and the services provided by Lessor (but in no event less
than the rental reserved in the Lease) subsequent to the commencement of a
bankruptcy event.
(f) Lessor specifically reserves any and all remedies
available to Lessor in Article 22 hereof or at law or in equity in respect of a
bankruptcy event by Lessee to the extent such remedies are permitted by law.
ARTICLE 32
MISCELLANEOUS PROVISIONS
32.1 Captions. The captions of this Lease are for convenience only
and are not a part of this Lease and do not in any way limit or amplify the
terms and provisions of this Lease.
32.2 Number and Gender. Whenever the singular number is used in
this Lease and when required by the context, the same shall include the
plural, the plural shall include the singular, and the masculine gender shall
include the feminine and neuter genders, and the word "person" shall include
corporation, firm or association. If there be more than one Lessee, the
obligations imposed under this Lease upon Lessee, shall be joint and several.
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32.3 Modifications. This instrument contains all of the
agreements, conditions and representations made between the parties to this
Lease and may not be modified orally or in any other manner than by an
agreement in writing signed by all of the parties to this Lease.
32.4 Brokers. Lessee hereby warrants and represents that it has
not dealt with any real estate broker or agent in connection with the
negotiation and/or execution of this Lease. Lessee hereby agrees to and shall
indemnify, defend and hold harmless Lessor from any and all claims,
liabilities, causes of action, damages, including attorneys' fees and costs,
arising out of any claims or causes of action that may be asserted against
Lessor by any broker, finder or other person with whom Lessee has purportedly
dealt in connection with the negotiation and/or execution of this Lease.
32.5 Severability. The invalidity of any provision of this Lease,
as determined by a Court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
32.6 No Offer. The preparation and submission of a draft of this
Lease by either party to the other shall not constitute an offer nor shall
either party be bound to any terms of this Lease or the entirety of the Lease
itself until both parties have fully executed a final document and an original
signature document has been received by both parties. Until such time as
described in the previous sentence, either party is free to terminate
negotiations with no obligation to the other.
32.7 Disputed Sums. Under the terms of this Lease, numerous
charges are and may be due from Lessee to Lessor including, without limitation,
Common Area Costs, real estates taxes, insurance reimbursement and other items
of a similar nature including advances made by Lessor in respect of Lessee's
default at Lessor's option. In event that at time during the Lease Term there
is a bona fide dispute between the parties as to the amount due for any of such
charges claimed by Lessor to be due, the amount demanded by Lessor shall be
paid by Lessee until the resolution of the dispute between the parties or by
litigation. Failure by Lessee to pay the disputed sums until resolution shall
constitute a default under the terms of the Lease.
32.8 Lessee's Remedies. Notwithstanding anything to the contrary
contained in this Lease, if any provision of this Lease expressly or impliedly
obligates Lessor not to unreasonably withhold its consent or approval, an
action for declaratory judgment or specific performance will be Lessee's sole
right and remedy in any dispute as to whether Lessor has breached such
obligation.
32.9 Light, Air and View. Except as otherwise specifically set
forth in this Lease, no diminution of light, air or view by any structure which
may hereafter be erected (whether or not by Lessor), shall entitle Lessee to
any reduction of rent, result
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in any liability of Lessor to Lessee, or in any other way affect this Lease or
Lessee's obligations hereunder.
32.10 Public Transportation Information. Lessee shall establish and
maintain during the Lease Term a policy to encourage maximum use of public
transportation by personnel of Lessee employed on the Leased Premises,
including without limitation the distribution to such employees, and
encouraging use of such facilities, all at Lessee's sole reasonable cost and
expense. Lessee shall comply with all requirements of any local transportation
management ordinance.
32.11 Rules and Regulations. Lessee agrees to comply with all
reasonable rules and regulations adopted and promulgated by Lessor from time to
time and applicable to all tenants in the Shopping Center for the lawful,
orderly, clean, safe, aesthetic, quiet, and beneficial use, operation,
maintenance, management, and enjoyment of the Shopping Center.
32.12 Joint and Several Liability. Should Lessee consist of more
than one person or entity, they shall be jointly and severally liable under
this Lease.
32.13 Surrender of Lease. The voluntary or other surrender of this
Lease by Lessee, or a mutual cancellation thereof, shall not work as a merger,
and shall, at the option of Lessor, terminate all or any existing subleases of
subtenancies, or may, at the option of Lessor, operate as an assignment to it
of any or all such subleases or subtenancies.
32.14 Notices.
(a) Writing. All notices, demands and requests required
or permitted to be given or made under any provision of this Lease shall be in
writing and shall be given or made by personal service or by mailing the same
by registered or certified mail, return receipt requested, postage prepaid, or
by reputable courier which provides written evidence of delivery, addressed to
the respective party at the address set forth in Section 1.1 of this Lease or
at such other address as the party may from time to time designate, by written
notice sent to the other in the manner aforesaid.
(b) Effective Date. Any such notice, demand or request
("notice") shall be deemed given or made on the third (3rd) calendar day after
the date so mailed. Notwithstanding the foregoing, notice given by personal
delivery to the party at its address as aforesaid, shall be deemed given on the
day of which delivery is made. Notice given by a reputable courier service
which provides written evidence of delivery shall be deemed given on the
business day immediately following deposit with the courier service.
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(c) Authorization to Receive. Each person and/or entity
whose signature is affixed to this Lease as Lessee or as guarantor of Lessee's
obligation ("obligor") designates such other obligor their agent for the
purpose of receiving any notice pertaining to this Lease or service of process
in the event of any litigation or dispute arising from any obligation imposed
by this Lease.
32.15 Waiver. The waiver by Lessor of any breach of any Lease
provision shall not be deemed to be a waiver of such Lease provision or any
subsequent breach of the same or any other term, covenant or condition therein
contained. The subsequent acceptance of rent hereunder by Lessor shall not be
deemed to be a waiver of any preceding breach by Lessee of any provision of
this Lease, other than the failure to Lessee to pay the particular rental so
accepted, regardless of Lessor's knowledge of such preceding breach at the time
of acceptance of such rent.
32.16 Holding Over - Month-to-Month Tenancy on Acceptance. If
Lessee should remain in possession of the Leased Premises after the expiration
of the Lease Term, then, upon acceptance of rent by Lessor, such holding over
shall be construed as a tenancy from month to month, subject to all the
conditions, provisions and obligations of this Lease as existed during the last
month of the Lease Term hereof, so far as applicable to a month to month
tenancy, except that the Minimum Monthly Rent shall be equal to one hundred
fifty percent (150%) of the Minimum Monthly Rent payable immediately prior to
the expiration or sooner termination of this Lease.
32.17 Binding Effect. The covenants and conditions herein contained
shall, subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors administrators and assigns of all of the parties hereto;
and all of the parties hereto shall be jointly and severally liable hereunder.
32.18 Time of the Essence. Time is of the essence of this Lease
with respect to teach and every article, section and subsection hereof.
32.19 Effect of Lessor's Conveyance; Release of Lessor. The term
"Lessor" as used in this Lease shall mean the owner of Lessor's estate in and
to the Leased Premises. If, during the Lease Term, Lessor shall sell, transfer
or otherwise dispose of its interest in the Leased Premises or Shopping Center
of which the Leased Premises form a part, or the Leased Premises, then from and
after the effective date of the sale or conveyance, Lessor shall be released
and discharge from any and all obligations and responsibilities under this
Lease, expect those already accrued.
32.20 Calendar Day. Whenever in this Lease a period of time is
measured by one or more days, such reference shall mean calendar days unless
the context requires otherwise.
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32.21 No Recordation. Neither this Lease nor a memorandum of this
Lease may be recorded by Lessee without the prior written consent of Lessor,
which consent may be withheld in the sole and absolute discretion of Lessor.
32.22 Attorneys' Fees.
(a) Actions, Proceedings, Etc. Lessee hereby agrees to
pay, as Additional Rent, all attorney's fees and disbursements, and all other
court costs or expenses of legal proceedings or other legal services which
Lessor may incur to payout by reason of, or in connection with:
(1) any action or proceeding brought by Lessor
wherein Lessor is the prevailing party against Lessee (including arbitration)
on account of any default by Lessee in the observance or performance of any
obligation under this Lease including, but not limited to, matters involving
payment of rent;
(2) any action or proceeding brought by Lessee
against Lessor (or any officer, partner, or employee of Lessor) in which Lessor
is the prevailing party;
In any action or proceeding referred to in subsection (a) above,
Lessee shall be entitled to recover its attorney fees and costs if Lessee is
the prevailing party against Lessor.
(b) Survival. Lessee's obligations under this Section
shall survive the expiration of any other termination of this Lease. This
Section is intended to supplement (and not to limit) other provisions of this
Lease pertaining to indemnities and/or attorney's fees.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease as of
the day and year first written above.
LESSOR:
PALOMAR VILLAGE PROPERTIES, INC.,
a California corporation
By___________________________________
Its__________________________________
LESSEE:
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FIRST PACIFIC NATIONAL BANK
By________________________________
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EXHIBIT "A"
SITE PLAN
PALOMAR VILLAGE CENTER
<PAGE> 53
EXHIBIT "B"
LEGAL DESCRIPTION OF LEASED PREMISES
PARCEL 2 OF PARCEL MAP NO. 23472 AS SHOWN BY PARCEL MAP ON FILE IN BOOK 160,
PAGES 23 THROUGH 29, INCLUSIVE, OF PARCEL MAPS, RECORDS OF RIVERSIDE COUNTY,
CALIFORNIA.
<PAGE> 54
EXHIBIT "C"
ACKNOWLEDGEMENT OF COMMENCEMENT
This Acknowledgement is made as of February ____, 1996, with reference
to that certain Lease (hereinafter the "Lease") dated _________________, by and
between PALOMAR VILLAGE PROPERTIES, INC., a California corporation as "Lessor,
and FIRST PACIFIC NATIONAL BANK, ___________________, as "Lessee," for the
premises legally described as:
PARCEL 2 OF PARCEL MAP NO. 23472 AS SHOWN BY PARCEL MAP ON FILE IN BOOK 160,
PAGES 23 THROUGH 29, INCLUSIVE, OF PARCEL MAPS, RECORDS OF RIVERSIDE COUNTY,
CALIFORNIA.
All capitalized terms used herein without definition shall have the
meaning ascribed to them in the Lease.
The undersigned Lessee hereby confirms the following:
1. That the Lessee accepted possession of the Leased Premises on
February __, 1996, and acknowledges that the Leased Premises are in good order,
condition and repair.
2. That all conditions of the Lease to be performed by Lessor
prerequisite to the full effectiveness of the Lease have been satisfied and
that Lessor has fulfilled all of its duties of an inducement nature.
3. That in accordance with the provisions of Article 3 of the
Lease, the Rent Commencement Date and the date of commencement of the Lease
Term is ___________________________, 1996, and that, unless sooner terminated,
the Lease Term expires on ______________________.
4. That the Lease is in full force and effect and that the same
represents the entire agreement between Lessor and Lessee concerning the Lease.
5. That there are no existing defenses which Lessee has against
the enforcement of said Lease by Lessor, and there exist no offsets or credits
against rent.
6. That the obligation to pay Minimum Monthly Rent is presently
in effect and that all rent obligations on the part of Lessee under said Lease
commenced to accrue on the Rent Commencement Date.
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7. That the undersigned Lessee has not made any prior assignment,
hypothecation or pledge of said Lease or of the rents thereunder.
LESSEE:
By: _______________________________
Its: _______________________________
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EXHIBIT "D"
RULES AND REGULATIONS
Lessee agrees to conform to the reasonable rules and regulations to be
established for the operation of Palomar Village tenants.
<PAGE> 57
EXHIBIT "E"
SIGN CRITERIA
1. Sign Submittals. All Sign submittals shall include the following for
review:
A. All drawings shall be to scale.
B. Each submittal shall indicate the following with regard to
each proposed sign:
(a) the location, height, elevation;
(b) the design, materials, textures and colors;
(c) illumination;
(d) typography, graphics; and
(e) a section indicating installation and fabrication.
2. Criteria for Sign Approval.
A. All signage shall conform to established Sign Criteria as set
forth on this Exhibit "E."
B. Signs shall be harmonious with the materials, color, texture,
size, shape, height, location and design of the Leased
Premises, the Shopping Center and environment with
professional graphic standards.
C. All Signs shall be attached or affixed to the Leased Premises.
No free standing Signs of any kind whatsoever shall be
permitted, with the exception of directional signs.
D. Temporary window signs are allowed if they follow the
following criteria: temporary window signs are those signs
which advertise or promote a special event, such as an
opening, or offering of a new product or service.
(a) Sign graphics of any nature painted directly on a
window shall not be considered a temporary window sign.
(b) A window sign advertising or promoting any product or
service offered on a regular basis or at a regular
price shall not be considered a temporary window sign.
(c) Temporary window signs shall not be illuminated
3. Prohibited Signs. The major external site signage has been developed
to compliment the architectural detailing of structures within Palomar
Village, while
1
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Lessor's Lessee's
Initials Initials
<PAGE> 58
adequately promoting the commercial aspects. A unique, consistent
theme is desired for Palomar Village which serves to unite all sign
types into a system which benefits both visitors and tenants.
Accordingly, in addition to any restrictions contained elsewhere in
this Exhibit "E," and without limiting Lessor's approval rights
pursuant to this Lease, the following types of signs are prohibited:
(a) Any sandwich board, "A" frame sign, or other portable
sign.
(b) Signs which identify or advertise a product or service
which is not available on the Leased Premises.
(c) Any sign placed or displayed on vehicles parked
primarily for the purpose of displaying the sign.
(d) Any shop illumination which, in the opinion of the
Design Review Committee exhibits undue glare.
(e) Unless otherwise permitted by the City of Temecula or
other applicable governmental authority, banners,
pennants or temporary signs displayed on the Leased
Premises or in the parking area.
(f) Sign cans of any kind.
(g) Signs which are not permissible under applicable laws,
statutes, regulations or restrictions.
2
- ------------- -----------
Lessor's Lessee's
Initials Initials
<PAGE> 1
Exhibit 11
Statement re: Computation of Per Share Earnings
Primary earnings per share is computed by dividing net earnings by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period. Stock options are considered to be common stock
equivalents and are included in the primary earnings per share calculation for
that period unless the effect is determined to be antidilutive. Net earnings
for the years ended December 31, 1996, 1995 and 1994 were $4,208,000,
$1,911,000 and $332,000, respectively. The weighted average numbers of shares
used for the primary earnings per share calculations were 2,724,000, 2,483,000
and 1,262,000 in 1996, 1995 and 1994, respectively.
In the calculation of fully diluted earnings per share, net earnings is
adjusted by adding back the interest expense on the Debentures and deducting
the amount of unamortized debt issuance costs as of the beginning of each
period that the Debentures are dilutive. The adjusted net earnings is then
divided by the weighted average number of shares of common stock, common stock
equivalents and other potentially dilutive securities. The Debentures are
considered to be other potentially dilutive securities and are included in the
earnings per share calculations unless the effect is determined to be
antidilutive. The adjusted net earnings used for the fully diluted earnings per
share calculations were $4,543,000, $2,175,000 and $332,000, respectively, for
the years ended December 31, 1996, 1995 and 1994. The weighted average numbers
of shares used for the fully diluted earnings per share calculations were
3,206,000, 3,019,000 and 1,269,000 in 1996, 1995 and 1994, respectively.
<PAGE> 1
EXHIBIT 23
Independent Auditors' Consent
The Board of Directors
FP Bancorp, Inc.:
We consent to incorporation by reference in the registration statement (No.
33-32788) on Form S-8 of FP Bancorp, Inc. of our report dated January 21, 1997,
relating to the consolidated balance sheets of FP Bancorp, Inc. and subsidiary
(the "Company") as of December 31, 1996 and 1995, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1996, which report appears in
the December 31, 1996 annual report on Form 10-KSB of FP Bancorp, Inc.
KPMG Peat Marwick LLP
San Diego, California
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 22,919,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47,405,000
<INVESTMENTS-CARRYING> 9,279,000
<INVESTMENTS-MARKET> 9,181,000
<LOANS> 213,997,000
<ALLOWANCE> 3,121,000
<TOTAL-ASSETS> 308,585,000
<DEPOSITS> 264,521,000
<SHORT-TERM> 16,752,000
<LIABILITIES-OTHER> 1,759,000
<LONG-TERM> 4,575,000
<COMMON> 3,000
0
0
<OTHER-SE> 20,975,000
<TOTAL-LIABILITIES-AND-EQUITY> 308,585,000
<INTEREST-LOAN> 19,082,000
<INTEREST-INVEST> 2,650,000
<INTEREST-OTHER> 511,000
<INTEREST-TOTAL> 22,243,000
<INTEREST-DEPOSIT> 6,010,000
<INTEREST-EXPENSE> 6,517,000
<INTEREST-INCOME-NET> 15,726,000
<LOAN-LOSSES> 700,000
<SECURITIES-GAINS> (147,000)
<EXPENSE-OTHER> 13,752,000
<INCOME-PRETAX> 3,286,000
<INCOME-PRE-EXTRAORDINARY> 3,286,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,208,000
<EPS-PRIMARY> 1.54
<EPS-DILUTED> 1.42
<YIELD-ACTUAL> 6.72
<LOANS-NON> 1,374,000
<LOANS-PAST> 774,000
<LOANS-TROUBLED> 717,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,013,000
<CHARGE-OFFS> (1,418,000)
<RECOVERIES> 536,000
<ALLOWANCE-CLOSE> 3,121,000
<ALLOWANCE-DOMESTIC> 3,121,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
