FORM 10-KSB
U.S. Securities and Exchange Commission
Washington, D.C. 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the Fiscal Year Ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from___________to__________
Commission File Number 2-91196(1)
NORTHERN EMPIRE BANCSHARES
----------------------------------------------
(Name of small business issuer in its charter)
CALIFORNIA 94-2830529
(State of Incorporation) (I.R.S. Employer Identification Number)
801 Fourth Street
Santa Rosa, California 95404
(Address of principal executive offices)
(707) 579-2265
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: NONE
Check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the 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____.
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of 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. [X]
State issuer's revenues for its most recent fiscal year. $22,048,000
State the aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such stock, as of a
specified date within the past 60 days. $46,053,000, as of February 28,
1998.
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: 1,567,765
shares of common stock as of February 28, 1998.
DOCUMENTS INCORPORATED BY REFERENCE:
Not Applicable.
Transitional Small Business Disclosure Format: Yes No [X]
(1) Registrant filed a registration statement, on Form S-1, under File
Number 2-91196, and the Post Effective Amendment No. 8 to the
registration
statement was declared effective on November 23, 1988.
TABLE OF CONTENTS
Part I
Item 1. Description of Business 3
Business of the Bank 3
Employees 5
Supervision and Regulation 5
Item 2. Description of Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Part II
Item 5. Market for Common Equity and Related Stockholder Matters 17
Item 6. Management's Discussion and Analysis or Plan
of Operations 19
Item 7. Financial Statements 42
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 68
Part III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 69
Item 10. Executive Compensation 70
Item 11. Security Ownership of Certain Beneficial Owners and
Management 71
Item 12. Certain Relationships and Related Transactions 72
Item 13. Exhibits, Financial and Reports on Form 8-K 73
PART 1
ITEM 1.
DESCRIPTION OF BUSINESS
Northern Empire Bancshares (the "Corporation") was incorporated as a
California corporation on June 8, 1982 for the purpose of becoming a
bank holding company of Sonoma National Bank (the "Bank"). The
Corporation's executive offices are located at 801 Fourth Street, Santa
Rosa, California, and its telephone number is (707) 579-2265.
The Corporation's sole subsidiary is the Bank and its activities are the
commercial banking activities engaged in through the Bank and some
lending. As a bank holding company, the Corporation may in the future
invest in additional banking subsidiaries or in those non-banking
subsidiaries which are permissible for a bank holding company, subject
to the required approvals of the Federal Reserve Board. See,
"Supervision and Regulation." However, the Corporation has no present
plans to make any such additional investments and there can be no
assurance that it will do so in the future.
BUSINESS OF THE BANK
The Bank was organized as a national banking association on March 27,
1984 and commenced operations on January 25, 1985. It currently has
three banking offices: the main office located at 801 Fourth Street, in
the central business district of Santa Rosa, California, a branch office
located in the Oakmont area of Santa Rosa, approximately 5 miles east of
the main office, and a branch in Windsor, approximately 5 miles north of
the main office.
As a national bank, the Bank is subject to supervision, regulation and
regular examination by the Comptroller of the Currency ("Comptroller").
The deposits of the Bank are insured by the Bank Insurance Fund, which
is administered by the Federal Deposit Insurance Corporation. The Bank
is a member of the Federal Reserve System and, as such, is subject to
applicable provisions of the Federal Reserve Act and the regulations
thereunder. See, "Supervision and Regulation."
DESCRIPTION OF BUSINESS
The Bank engages in the general commercial banking business. It accepts
checking and savings deposits, offers money market deposit accounts and
certificates of deposit, makes secured and unsecured commercial and
other installment and term loans, and offers other customary banking
services. The Bank makes commercial loans guaranteed by the SBA, which
may be sold in the secondary market. The Bank does not offer trust
services directly, and does not presently intend to do so, but offers
such services, where requested, through its correspondent banks.
Within the Loan Department is a specialized group of SBA lenders. SBA
loans are funded by the Bank and then the Bank may, at its option, sell
the portion of the loan guaranteed by the SBA (generally 70% to 90% of
the total loan amount, depending on the purpose and term of the loan).
When a SBA loan is sold, the Bank retains the unguaranteed portion of
that loan and the right to service the loan. Income from loan sales is
recorded in non-interest income. See, "Management's Discussion and
Analysis or Plan of Operations, Non-Interest Income." The Bank is
designated as a "Preferred Lender" by the SBA. This means that it may
fund a loan without the prior approval of the SBA. Certification as a
Preferred Lender gives the Bank a competitive advantage, as it is able
to provide a quick response to loan applications.
The Bank offers investment services through PrimeVest Financial
Services, Inc ("PrimeVest"). PrimeVest provides full-service stock and
bond brokerage services. The Bank's investment program is administered
by a Bank employee who is also a licensed registered representative with
PrimeVest. This program has been well received by the Bank's customers
and has brought new customers to the Bank.
MARKET AREA
The Bank's primary market area and the source of most of its loan
business is Sonoma and Marin Counties. The Bank has increased its
lending territory for loans made under the programs of the Small
Business Administration ("SBA"). The Bank has SBA loan production
facilities in Phoenix, Arizona and San Francisco and Sacramento,
California. The primary market area for deposit business is Sonoma
County.
COMPETITION
The banking business in California generally, and specifically in the
market area served by the Bank, is highly competitive with respect to
both loans and deposits, and is dominated by major banks which have
offices operating throughout California. Among the advantages such
major banks have over the Bank are their ability to finance wide-ranging
advertising campaigns and to allocate their investment assets to regions
of highest yield and demand. In addition, many of the major banks
operating in the Bank's service area offer specialized services, such as
trust and international banking services, which the Bank does not offer
directly. By virtue of their greater total capitalization, the major
banks also have substantially higher lending limits than the Bank has.
The Bank competes for loans and deposits with these major banks, as well
as with other independent banks, savings and loan associations, credit
unions, mortgage companies, insurance companies and other lending
institutions. The entry of other independent banks in the Bank's
service area may adversely affect the Bank's ability to compete.
Savings and loans, credit unions and money market funds have provided
significant competition for banks with respect to deposits. Other
entities, both governmental and private, seeking to raise capital
through the issuance and sale of debt or equity securities, also provide
competition for the Bank in the acquisition of deposits. The trend of
federal and state legislation has significantly increased competition
between banks and other financial institutions for both loans and
deposits and is expected to continue to do so in the future.
At present, there are approximately 114 banking offices and offices of
savings and loan associations in the Sonoma County market area,
including offices of major chain banks, of smaller independent banks and
savings and loan associations. The Bank attempts to compete by offering
personalized and specialized services to its customers. The Bank's
promotional activities emphasize the advantages of doing business with a
locally owned, independent institution attuned to the particular needs
of the community.
The Bank has experienced increased competition from major banks and
local community banks in making SBA loans, especially in California.
Most of our local SBA competitors also have Preferred Lender status from
the SBA, and they often offer more attractive rates on SBA loans than
the Bank can. We expect this trend to continue. There can be no
assurance that the Bank will continue to increase its SBA loan portfolio
or continue to make a significant number of SBA loans.
FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" as defined in section
27A of the Securities Act of 1933, as amended, and section 21E of the
Securities Exchange Act of 1934, as amended, which includes statements
such as projections, plans and objectives and assumptions about the
future, and such forward looking statements are subject to the safe
harbor created by these sections. Many factors could cause the actual
results, amounts or events to differ materially from those the
Corporation expects to achieve or occur, such as changes in competition,
market interest rates, economic conditions and regulations. Although
the Corporation has based its plans and projections on certain
assumptions, there can be no assurances that its assumptions will be
correct, or that its plans and projections can be achieved.
STATISTICAL INFORMATION
Certain statistical information concerning the Bank and the Corporation
is provided at "Item 6-Management's Discussion and Analysis or Plan of
Operation".
EMPLOYEES
At December 31, 1997 the Bank had 67 full-time and 10 part-time
employees.
SUPERVISION AND REGULATION
THE CORPORATION
The Corporation is a bank holding company registered under the Bank
Holding Company Act of 1956 and is subject to the supervision of the
Board of Governors of the Federal Reserve System ("Board"). As a bank
holding company, the Corporation must obtain the approval of the Board
before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if, after
giving effect to such acquisition of shares, the Corporation would own
or control more than 5% of the voting shares of such bank. With certain
limited exceptions, the Corporation is prohibited from engaging in or
acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company engaged in non-banking activities, unless
the Federal Reserve Board determines that such activities are so closely
related to banking as to be a proper incident thereof.
The Board has the authority to examine the Corporation periodically.
During 1997, the Board adopted a policy for risk-focused supervision of
small bank holding companies that do not engage in significant non-
banking activities. The focus of examinations under the new policy will
focus on whether the Corporation has in place systems to manage the
risks it takes on in its business. In analyzing risk, the Board will
look at the financial condition of the Corporation and the Bank,
management, compliance with laws and regulations, inter-company
transactions and any new or contemplated activities.
The Corporation and any subsidiary which it may acquire or organize in
the future are deemed to be affiliates of the Bank within the meaning
set forth in the Federal Reserve Act and are subject to that Act. This
means, for example, that there are limitations on loans by the Bank to
affiliates, on investments by the Bank in any affiliate's stock and on
the Bank's taking any affiliate's stock as collateral for loans to any
borrower. All affiliate transactions must satisfy certain limitations
and otherwise be on terms and conditions that are consistent with safe
and sound banking practices. In this regard, the Bank generally may not
purchase from any affiliate a low-quality asset (as that term is defined
in the Federal Reserve Act). Also, transactions by the Bank with an
affiliate must be on substantially the same terms as would be available
for non-affiliates.
The Corporation and its subsidiary are also subject to certain
restrictions with respect to engaging in the underwriting, public sale
and distribution of securities.
The Corporation and the Bank are prohibited from engaging in certain
tie-in arrangements in connection with the extension of credit. For
example, the Bank generally may not extend credit on the condition that
the customer obtain some additional service from the Bank or the
Corporation, or refrain from obtaining such service from a competitor.
THE BANK
As a national banking association, the Bank is subject to the National
Bank Act and to supervision, regulation and regular examination by the
Comptroller of the Currency ("Comptroller"). It is also a member of the
Federal Reserve System and, as such, is subject to applicable provisions
of the Federal Reserve Act and regulations issued pursuant thereto. The
deposits of the Bank are insured up to the maximum legal limits by the
Bank Insurance Fund ("BIF"), which is managed by the Federal Deposit
Insurance Corporation ("FDIC"), and the Bank is therefore subject to
applicable provisions of the Federal Deposit Insurance Act and
regulations of the FDIC. The statutes and regulations administered by
these agencies govern most aspects of the Bank's business, including
required reserves against deposits, loans, investments, dividends, and
the establishment of new branches and other banking facilities.
(a) Supervision and Examinations.
Federal law mandates frequent examinations of all banks, with the costs
of examinations to be assessed against the bank being examined. In the
case of the Bank, its primary regulator is the Comptroller. In 1994,
the Comptroller started using streamlined examination procedures for
small community banks that are considered by the regulators to be
"noncomplex". The Comptroller has indicated that it expects most banks
with under $100 million in assets to qualify, and that some banks having
between $100 million to $1 billion in assets will also be considered
small and noncomplex.
In 1996, the OCC issued a community bank risk-assessment system, which
consists of examination procedures that focus on the various types of
risks that national banks face. The OCC now measures each individual
bank's exposure to certain risks, assesses the controls the bank has
adopted in response to the risks it faces and the measures it takes to
monitor those risks. The OCC evaluates nine categories of risk: credit,
interest rate, liquidity, price, foreign exchange, transaction,
compliance strategic and reputation. These nine risks are measured and
the direction of the risk is also analyzed.
The Bank was examined by the OCC using their noncomplex procedures as of
December 31, 1997. These new procedures resulted in a less detailed
review which focused on higher risk areas. The examination was
completed in less time then previous reviews. There can be no assurance
that the Bank will continue to be considered noncomplex for future
examinations.
The FDIC has "back up" enforcement power over the Bank under Federal
law. The FDIC may recommend and, in the absence of response by an
institution's primary regulator, undertake enforcement action against
any insured financial institution. Such "back up" enforcement action is
permissible if ordered by the Board of Directors of the FDIC only upon a
showing that an insured financial institution's conduct poses a risk to
its insurance fund.
The Federal banking regulatory agencies have substantial enforcement
powers over the depository institutions that they regulate. Civil and
criminal penalties may be imposed on such institutions and persons
associated with those institutions for violations of any law or
regulation. The penalties can be up to $ 5,000 per day that a violation
continues when the violation is unintentional, or up to $1 million per
day that a violation continues when the violation is willful. The amount
of the penalty also depends on whether the violation is part of a
pattern or causes a loss to the financial institution.
(b) Prompt Corrective Action.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires the banking agencies to take corrective action
against certain financial institutions, based upon the financial
institutions' compliance with the various capital measurements. The
capital requirements and the definitions of the various measures of
capital are described below under the heading "Capital Regulations and
Dividends." The following chart sets forth the various categories of
capital compliance. In order to be considered in the well or adequately
capitalized categories, a financial institution must meet all the
requirements for that category. An institution will be considered
undercapitalized or significantly or critically undercapitalized if it
meets any of the requirements for that category.
Tier 1
Ratio Category Total Risk-Based Risk-Based Leverage
- -------------- ---------------- ---------- --------
Well Capitalized* 10% or above 6% or above 5% or above
Adequately Capitalized 8% or above 4% or above 4% or above**
Undercapitalized Less than 8% Less than 4% Less than 4%
Significantly
Undercapitalized Less than 6% Less than 3% Less than 3%
Critically
Undercapitalized - - 2% or less
* In addition, the institution must not be subject to any written
capital order or directive to meet and maintain a specific capital
level.
** 3% instead of 4% if the institution has the highest rating under
the CAMEL rating system.
FDICIA also permits the banking agencies essentially to downgrade an
institution to the next lower category (but not into the category of
critically undercapitalized) if it determines that the institution is in
an unsafe or unsound condition, or is engaging in an unsafe or unsound
practice. An institution that has received a less-than-satisfactory
rating in its most recent examination report for assets, management,
earnings or liquidity may be deemed to be engaged in an unsafe and
unsound practice. Except for a finding based on a less-than-
satisfactory rating, the institution is entitled to prior written notice
and an opportunity to respond to its regulator's finding that it is in
an unsafe or unsound condition or is engaging in such practices.
Based on its capital position at December 31, 1997, the Bank is
considered well capitalized.
As noted above, an undercapitalized financial institution is subject to
certain corrective action by the appropriate agency, depending on the
category it falls into. All undercapitalized institutions are required
to submit a capital plan within 45 days after the institution becomes
undercapitalized. Also, such an institution's asset growth is
restricted and it must obtain the prior approval of its federal
regulator before it acquires any company, sets up any new branch or
engages in any new line of business. The banking agency is required to
monitor closely the condition of the bank and its compliance with its
plan, and to review periodically the plan and the supervisory
restrictions on the bank to assure they are appropriate. In addition,
the regulator is authorized by statute to take certain corrective
actions and order certain limitations on the bank's activities if
necessary to carry out the purposes of the statute.
If an institution is categorized as being significantly
undercapitalized, or is undercapitalized and fails to submit a capital
plan, its banking regulator is required to take increasingly severe
enforcement actions against such institution. The regulator must
require recapitalization through a sale of stock or a merger, restrict
affiliate transactions and restrict the interest rates the bank may
offer on deposits, (unless it finds that doing so would not further the
purpose of the section). In addition, such an institution may not pay a
bonus to a senior executive officer or increase the pay of any executive
officer without the prior written approval of its federal regulator.
An institution that is critically undercapitalized is subject to
mandatory restrictions that are even more severe, and seizure within
time limits designated by statute. In general, the federal regulator is
required to seize an institution within 90 days of its becoming
critically undercapitalized, unless the regulator can document that
another course of action will better achieve the purposes of this
section. The FDIC is required to restrict the activities of a
critically undercapitalized institution, beyond the degree of
limitations specified above for institutions that are significantly
undercapitalized.
(c) Brokered Deposits.
FDICIA places limits on brokered deposits and extends the limits to any
bank that is not "well capitalized" or is notified that it is in
"troubled condition." Previously, the limitations applied only to
troubled banks. A well capitalized institution (which generally
includes an institution that is considered well capitalized for purposes
of the prompt corrective action regulations discussed above) may still
accept brokered deposits without restriction, unless it has been
informed by its appropriate Federal regulatory agency that it is in
"troubled condition." All other insured depository institutions are
prohibited from accepting brokered deposits unless a waiver is obtained
from the FDIC. If a waiver is obtained, the interest paid on such
deposits may not exceed the rate paid for deposits in its normal market
area, or the national rate as determined in the FDIC's regulation.
If a depository institution solicits deposits by offering interest rates
significantly higher than rates being offered in its market area, it is
deemed under FDICIA to be a deposit broker. Therefore, depending on its
capital category, it may be prohibited from such practice, or need a
prior waiver from the FDIC in order to offer such rates. The FDIC's
regulations specify that an institution that is not well capitalized may
offer rates that exceed the prevailing effective rates offered in the
normal market area only if the institution obtains a waiver, but the
institution may not offer rates more than 75 basis points above such
prevailing rates.
The Bank is at this time considered well capitalized and not in a
"troubled condition," and it is not, therefore, subject to the brokered
deposit limitations.
(d) Risk-Based Deposit Insurance Assessments.
In addition, FDICIA required the FDIC to develop and implement a system
to account for risks attributable to different categories and
concentrations of assets and liabilities in assessing deposit insurance
premiums. The FDIC adopted a risk-assessment system effective January
1, 1994. Under this system, each bank's deposit insurance premium
assessment is calculated based on the level of risk that the Bank
Insurance Fund will incur a loss if that bank fails and the amount of
the loss if such failure occurs. This requirement, along with the
increased emphasis on exceeding capital measures, may cause banks such
as the Bank to adjust their asset mix in order to affect their deposit
insurance premium and their ability to engage in activities.
CAPITAL REGULATIONS AND DIVIDENDS
The Board requires member banks and bank holding companies to maintain
adequate capital and has adopted capital leverage guidelines for
evaluating the capital adequacy of bank holding companies. The
Comptroller has also adopted a similar minimum leverage regulation,
requiring national banks to maintain at least a minimum capital to asset
ratio. The Board's guidelines and the Comptroller's regulations require
the banks and bank holding companies subject to them to achieve and
maintain a Tier 1 capital to total asset ratio of at least three percent
(3.0%) to five percent (5.0%), depending on the condition and rate of
growth of the bank or holding company. Tier 1 or core capital is
defined to consist primarily of common equity, retained earnings, and
certain qualified perpetual preferred stock. These minimum leverage
ratio requirements limit the ability of the banking industry, including
the Corporation and the Bank, to leverage assets.
The Federal Reserve Board also uses risk-based capital guidelines to
evaluate the capital adequacy of member banks and bank holding
companies. Under these guidelines, assets are categorized according to
risk and the various categories are assigned risk weightings. Assets
considered to present less risk than others require allocation of less
capital. In addition, off-balance sheet and contingent liabilities and
commitments must be categorized and included as assets for this purpose.
Under these guidelines, the Corporation is required to maintain total
capital of at least 8.00% of risk-adjusted assets, and half of that
minimum total capital must consist of Tier 1 capital as defined above.
The Comptroller has also adopted risk-based capital guidelines
applicable to national banks, such as the Bank, that are similar to the
Federal Reserve's risk-based capital guidelines. At this time, the Bank
is required to maintain total capital of at least 8.00% of risk-adjusted
assets.
The capital totals of the Corporation and the Bank, as of December 31,
1997, exceeded the amounts of capital required under the regulatory
guidelines. The following table shows the capital of the Corporation
and the Bank, as a percentage of assets, and the capital which they are
required to maintain under the capital regulations, as of December 31,
1997:
Corporation Bank
Leverage capital ratio 7.4% 7.3%
Required leverage capital ratio 3.0 - 5.0* 3.0 - 5.0*
Total risk-based capital ratio 11.0 10.8
Required total risk-based capital ratio 8.0 8.0
Tier 1 risk-based capital ratio 9.7 9.6
Required tier 1 risk-based capital ratio 4.0 4.0
* Determined based on the regulators' evaluations.
Under the risk-based capital rules, when the agencies assess the capital
adequacy of a bank, they must take into account the effect on that
bank's capital that would occur if interest rates moved up or down. The
purpose of this requirement is to ensure that banks with high levels of
interest rate risk have enough capital to cover the loss exposure.
The risk-based guidelines and the leverage ratio do not have a
significant effect on the Corporation and the Bank at this time because
both the Corporation and the Bank meet their respective required ratios.
The effect the requirements may have in the future is uncertain, but
management does not believe they will have an adverse effect on the
Corporation or the Bank. The risk-based capital guidelines may affect
the allocation of the Bank's assets between various types of loans and
investments. If the Bank continues to grow with its present asset
composition, it may be required to raise additional capital.
The Bank's capital ratios have increased in significance under FDICIA,
as described above. The ratios now affect the Bank's ability to utilize
brokered deposits and its deposit insurance premium rates, and they can
result in regulatory enforcement action. See, above, "The Bank."
As required by FDICIA, the Federal banking agencies now take credit risk
concentrations and an individual institution's ability to manage such
concentrations into account when they assess a bank's capital adequacy.
Non-traditional investments and activities, such as the use of
derivatives, are also taken into account in assessing capital
requirements. The agencies can adjust the standards for risk-based
capital on a case by case basis to take such risks into account, but
there is no formula that a bank can use prior to evaluation by the
agency to determine how credit concentration or nontraditional
activities will affect its capital requirements.
The Corporation and the Bank are also subject to regulatory restrictions
and guidelines with respect to the payment of dividends. See Item 5,
"Market for Common Equity and Related Stockholder Matters."
IMPACT OF MONETARY POLICIES
Banking is a business in which profitability depends on rate
differentials. In general, the difference between the interest rate
received by the Bank on loans extended to its customers and securities
held in the Bank's investment portfolio and the interest rate paid by
the Bank on its deposits and its other borrowings comprise the major
portion of the Bank's earnings. To the extent that the Bank is not able
to compensate for increases in the cost of deposits and other borrowings
with greater income from loans, securities and fees, the net earnings of
the Bank will be reduced. The interest rates paid and received by the
Bank are highly sensitive to many factors which are beyond the control
of the Bank, including the influence of domestic and foreign economic
conditions.
The earnings and growth of the Bank are also affected by the monetary
and fiscal policy of the United States government and its agencies,
particularly the Board. These agencies can and do implement national
monetary policy, which is used in part to curb inflation and combat
recession. Among the instruments of monetary policy used by these
agencies are open market transactions in United States Government
securities, changes in the discount rates of member bank borrowings and
changes in reserve requirements. The actions of the Board have had a
significant effect on lending by banks, investments and deposits, and
such actions are expected to continue to have a substantial effect in
the future. However, the nature and timing of any further changes in
such polices and their impact on the Bank cannot be predicted.
PUBLIC INTEREST LAWS, CONSUMER AND LENDING LAWS
In addition to the other laws and regulations discussed herein, the Bank
is subject to certain consumer and public interest laws and regulations
that are designed to protect customers in transactions with banks.
While the list set forth below is not exhaustive, these laws and
regulations include the Truth in Lending Act, the Truth in Savings Act,
the Electronic Funds Transfer Act, the Expedited Funds Availability Act,
the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate
Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair
Credit Reporting Act, the Fair Debt Collection Practices Act and the
Right to Financial Privacy Act.
These laws and regulations mandate certain disclosure requirements and
regulate the manner in which financial institutions must deal with
customers when taking deposits, making loans, collecting loans and
providing other services. The Bank must comply with the applicable
provisions of these laws and regulations as part of its ongoing customer
relations. Failure to comply with these laws and regulations can
subject the Bank to various penalties, including but not limited to
enforcement actions, injunctions, fines or criminal penalties, punitive
damages to consumers and the loss of certain contractual rights.
ENVIRONMENTAL REGULATION
Federal, state and local regulations regarding the discharge of
materials into the environment may have an impact on the Corporation and
the Bank. Under Federal law, liability for environmental damage and the
cost of cleanup may be imposed upon any person or entity who is an owner
or operator of contaminated property. State law provisions, which were
modeled after Federal law, impose substantially similar requirements.
Both Federal and state laws were amended in 1996 to provide generally
that a lender who is not actively involved in operating the contaminated
property will not be liable to clean up the property, even if the lender
has a security interest in the property or becomes an owner of the
property through foreclosure.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the
"Economic Growth Act"), discussed in more detail below, includes
protection for lenders from liability under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980
("CERCLA"). The Economic Growth Act adds a new section to CERCLA to
specify the actions a lender may take with respect to lending and
foreclosure activities without incurring environmental clean-up
liability or responsibility. Typical contractual provisions regarding
environmental issues in the loan documentation and due diligence
inspections will not lead to lender liability for clean-up, and a lender
may foreclose on contaminated property, so long as it merely maintains
the property and moves to divest it at the earliest possible time.
Under California law, a lender generally will not be liable to the State
Attorney General for the cost associated with cleaning up contaminated
property unless the lender realized some benefit from the property,
failed to divest the property promptly, caused or contributed to the
release of the hazardous materials or made the loan primarily for
investment purposes. This amendment to California law became effective
with respect to judicial proceedings filed and orders issued after
January 1, 1997.
The extent of the protection provided by both the Federal and state
lender protection statutes will depend on their interpretation by the
administrative agencies and courts, and the Corporation cannot predict
whether it will be adequately protected for the types of loans made by
the Bank.
In addition, the Corporation and the Bank are still subject to the risks
that a borrower's financial position will be impaired by liability under
the environmental laws and that property securing a loan made by the
Bank may be environmentally impaired and not provide adequate security
for the Bank. California law provides some protection against the
second risk, by establishing certain additional, alternative remedies
for a lender in the situation where the property securing a loan is
later found to be environmentally impaired. Primarily, the law permits
the lender in such a case to pursue remedies against the borrower other
than foreclosure under the deed of trust.
The Bank attempts to protect its position against the remaining
environmental risks by performing prudent due diligence. Environmental
questionnaires and information on use of toxic substances is requested
as part of its underwriting procedures. The Bank lends based upon its
evaluation of the collateral, net worth of the borrower and the
borrower's capacity for unforeseen business interruptions or risks.
AMERICANS WITH DISABILITIES ACT
The Americans With Disabilities Act ("ADA") enacted by Congress, in
conjunction with similar California legislation, is having an impact on
banks and their cost of doing business. The legislation requires
employers with 15 of more employees and all businesses operating
"commercial facilities" or "public accommodations" to accommodate
disabled employees and customers. The ADA has two major objectives (1)
to prevent discrimination against disabled job applicants, job
candidates and employees and (2) to provide disabled persons with ready
access to commercial facilities and public accommodations. Commercial
facilities, such as the Bank, must ensure all new facilities are
accessible to disabled persons, and in some instances may be required to
adapt existing facilities to make them accessible, such as ATM's and
bank premises.
NEW AND PENDING LEGISLATION
Economic Growth and Regulatory Paperwork Reduction Act of 1996
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the
"Economic Growth Act"), enacted on September 30, 1996, continues to have
a major impact on the banking industry. The primary purpose of the
Economic Growth Act was to address the problems that arose from the
disparity between the deposit insurance premiums payable by banks and
savings associations.
The crisis in the savings and loan industry during the late 1980s
resulted in the dissolution of the Federal Savings and Loan Insurance
Corporation and the insurance of thrift deposits through a separate fund
of the FDIC called the Saving Association Insurance Fund ("SAIF") and
the issuance of bonds by the Financing Corporation ("FICO") to cover
some of the losses incurred by the failed savings association. As the
banking industry in general has become more healthy since 1990, deposit
insurance premiums for well-managed and strongly-capitalized BIF insured
institutions have decreased to very low levels. However, because of the
cost of carrying the FICO bonds and because the SAIF still needed to
build reserves, deposit insurance premiums for SAIF insured institutions
have not decreased. This created a large disparity between the cost of
deposit insurance for healthy banks and similarly situated thrifts over
the last several years. Many healthy thrifts have sought ways either to
convert to BIF insurance or to obtain BIF insurance for some portions of
their deposits, in order to remain competitive with banks. The
migration of deposits increased the pressure on the remaining thrifts to
build up reserves at the SAIF and pay the cost of servicing the FICO
bonds.
Subtitle G of the Economic Growth Act provides that the cost of carrying
the FICO bonds will now be allocated between BIF insurance institutions
and SAIF insured institutions, with BIF insured institutions paying 1/5
the amount paid by SAIF insured institutions. During 1997, BIF
institutions paid an average assessment of $.0137 per $100 of insured
deposits. The rate is $.0126 per $100 of insured deposits for the first
quarter of 1998. These assessments are subject to adjustments. Starting
in the year 2000, BIF and SAIF institutions will share the FICO bond
costs equally, with an estimated assessment of $.0243 annually per $100
of insured deposits.
This legislation has increased the Bank's premiums, as it is now
required to share in the cost of carrying the FICO bonds. The increase
will be slight until the year 2000, at which time it will increase.
The Economic Growth Act also included many regulatory relief provisions
applicable to the Corporation and the Bank. National banks no longer
need to submit branch applications with respect to ATM machines.
Application procedures for the Corporation to engage in certain non-
banking activities will be streamline, so long as the Corporation
maintains an adequate financial position and is considered well managed.
The lending restrictions on directors and officers have been relaxed to
permit loans having favorable terms under employee benefit plans. The
Federal Reserve Board and the Department of Housing and Urban
Development ("HUD") are required to simplify and improve their
regulations with respect to disclosures relating to certain mortgage
loans, and certain exemptions from the disclosure requirements were
added.
The Economic Growth Act also provides protection for lenders who self-
test for compliance with the Equal Credit Opportunity Act (the "ECOA")
and the Fair Housing Act ("FHA"). The ECOA now provides that the
results or report generated or obtained by a bank from a self-test may
not be obtained by an agency, department or applicant to be used with
respect to any proceeding or civil action alleging a violation of the
ECOA. This change in the law protects the Bank against liability based
on the results of internal tests done to enhance compliance with the law
and encourages the Bank to use self-testing to evaluate its compliance
with the ECOA and the FHA.
ATM Fee Legislation
In April of 1996, two of the larger ATM networks lifted their prior
restriction prohibiting ATM operators from directly surcharging the
users of the ATMs, which triggered a series of legislative proposals and
hearings with respect to whether the fees charged by the operators of
ATM machines should be regulated. The lifting of the prior restriction
on surcharges was controversial in part because customer may be required
to pay two charges for a single transaction, one to the bank issuing the
ATM card and another to the operator of the ATM being used. See,
Proposed Legislation and Regulation, below.
Currently, Federal law requires a bank at which a depositor has an
account to disclose to its own customers the amount of fees it charges,
and California law requires an ATM operator to disclose to users of the
ATM machine who are using an ATM card issued by someone other than the
ATM operator that a fee will be charged. California law was amended in
1996, effective July 1, 1997, to require the operators of ATMs in
California to disclose to customers any surcharge or fee that the
operator of the machine will charge, including charges for mini-
statements and other services. The disclosure must be displayed on the
machine itself or shown electronically, on the ATM screen. The Bank
does not own or operate ATM machines.
Interstate Banking and Branching
The Caldera, Weggeland and Killea California Interstate Banking and
Branching Act of 1995 ("Interstate Banking Act") became effective
October 2, 1995. The Interstate Banking Act implements in California a
limited form of interstate branching. A bank from outside of California
may now acquire a whole bank in California and merge the California bank
into the out-of-state bank. The effect of such merger is that the out-
of-state bank will have full branch offices in California. Federal law
authorizing these mergers was passed in 1994 and became fully effective
on June 1, 1997.
Out-of-state banks may not establish branch offices in California by
opening a new branch or acquiring one or more (but less than all) of the
branches of a California bank. They may only acquire a whole bank that
has been in existence for at least five years. As a result of the
Interstate Banking Act, California banks may now be permitted to branch
into other states that have not opted-out of interstate banking. Since
the beginning of 1996, several large banks and thrifts from outside of
California have acquired banks in California under this legislation, and
the effect has been to increase competition within California.
New Community Reinvestment Act Regulations.
The Federal banking agencies amended substantially their Community
Reinvestment Act ("CRA") regulations in 1995, and issued guidelines and
explanations of the new regulations in 1996. CRA requires banks to help
meet the credit needs of their entire communities, including minorities
and low and moderate income groups.
Under the revised CRA regulations, the agencies determine a bank's
rating under the CRA by evaluating its performance on lending, service
and investment tests, with the lending test as the most important. The
tests are to be applied in an "assessment context" that is developed by
the agency for the particular institution. The assessment context takes
into account demographic data about the community, the community's
characteristics and needs, the institution's capacities and constraints,
the institution's product offerings and business strategy, the
institution's prior performance, and data on similarly situated lenders.
Since the assessment context is developed by the regulatory agencies, a
particular bank will not know until it is examined whether its CRA
programs and efforts have been sufficient.
Larger institutions are required under the revised regulations to
compile and report certain data on their lending activities in order to
measure performance. Some of this data is already required under other
laws, such as the Equal Credit Opportunity Act.
Small institutions (with less than $250 million in assets) are now being
examined on a "streamlined assessment method." The streamlined method
focuses on the institution's loan to deposit ratio, degree of local
lending, record of lending to borrowers and neighborhoods of differing
income levels, and record of responding to complaints. The Federal
regulators who are implementing the new regulations have reported that
the time spent at the banks during CRA examination is reduced under the
new regulations, and the banks spend less time on paperwork evidencing
compliance. The Bank was examined under the new guidelines as of June
30, 1996.
Large and small institutions have the option of being evaluated for CRA
purposes in relation to their own pre-approved strategic plan. Such a
strategic plan must be submitted to the institution's regulator three
months before its effective date and be published for public comment.
The Bank is currently considered a small institution under the CRA
regulations and it will be a small institution until it has assets of
greater than $250 million at the ends of two years in a row. The impact
of this amendment on the business of the Bank is currently less than
when the Bank no longer qualifies as a small institution. At that time,
the new regulations will increase the amount of reports the Bank is
required to prepare and submit, and it could cause the Bank to change
its asset mix, in order to meet the performance standards. At this
time, the new regulations have increased the uncertainty of the Bank's
business, both as the rating and examination procedures changes and as
the Bank grows and may no longer qualify as a small institution.
Proposed Legislation and Regulation.
Certain legislative and regulatory proposals that could affect the
Corporation, the Bank and the banking business in general are pending or
may be introduced, before the United States Congress, the California
State Legislature, and Federal and state government agencies. The
United States Congress is considering numerous bills that could reform
the banking laws substantially.
During 1997, the Unites States Congress considered financial
modernization legislation that would have permitted banks or bank
holding companies to become affiliated with securities companies,
insurance companies and other financial firms. The legislation would
also have eliminated the Federal thrift or savings and loan charter, by
merging the charter with the bank charter. Such legislation, if
adopted, is expected to have a significant impact on the business of the
Corporation and the Bank, as the affiliation of banks with large and
powerful companies in these other industries could make those banks
strong competitors and give those banks advantages with respect to
obtaining customers, accessing funds and capital markets and providing
related services.
Legislation was also introduced during 1997 to lift the current ban on
the payment of interest on business checking accounts. Legislation
lifting the ban on paying interest on business checking accounts is
expected to the considered again in 1998. The adopting of this
legislation would permit the Bank to compete more directly for
commercial deposits, but increase its costs of funds.
Bills have been introduced in the Congress and the California State
Legislature to regulate the amount of ATM fees that operators of ATMs
may charge, and to further regulate the disclosure of such fees. The
Bank does not own or operate ATM machines.
The regulatory agencies regulating the Corporation and the Bank have
pending various proposals that would affect the business of the
Corporation and the Bank. The Comptroller currently has pending several
applications that would permit operating subsidiaries of national banks
to engage in activities in which the parent banks are not be permitted
to engage, and the Comptroller has indicated that it expects to expand
the activities permitted for operating subsidiaries. Also, the
Comptroller is reviewing the effect of its substantial revision over the
past two years of its regulations generally, and has indicated that it
may further revise its regulations in the near future.
It is not known to what extent, if any, these proposals will be enacted
and what effect such legislation would have on the structure, regulation
and competitive relationship of financial institutions. It is likely,
however, that many of these proposals would subject the Corporation and
the Bank to increased regulation, disclosure and reporting requirements
and would increase competition to the Bank and its cost of doing
business.
In addition to pending legislative changes, the various banking
regulatory agencies frequently propose rules and regulations to
implement and enforce already existing legislation. It cannot be
predicted whether or in what form any such legislation or regulations
will be enacted or the effect that such legislation may have on the
Bank's business.
ITEM 2.
DESCRIPTION OF PROPERTIES
The Corporation and the Bank share common quarters at 801 Fourth Street,
in the central business district of Santa Rosa. The Corporation leases
a total of approximately 9,335 square feet of ground floor and second
floor office space at that location and sublets this area to the Bank.
The Corporation leases approximately 3,692 square feet of office space
at 6641 Oakmont Drive, Santa Rosa, where Highway 12 intersects with
Oakmont Drive, for a branch office of the Bank opened in 1989.
The Bank currently leases approximately 7,500 square feet of space in a
two story office building at 755 Fourth Street. The 755 Fourth Street
premises are located across the street from the Bank's main office and
is utilized for SBA and commercial lending and administration. During
the second quarter of 1998, the Bank will be relocating these offices to
another building which is located less than a block away from the main
office at 815 Fifth Street. The Bank will be leasing this facility from
Mr. James Ratto, a major shareholder of the Corporation.
The Bank has invested in loans secured by real property collateral. The
Bank's policies with respect to such loans are described under the
caption "Item 7, Management's Discussion and Analysis or Plan of
Operation - Loan Portfolio." The Bank's policies on real estate secured
loans may be changed without a vote of security holders.
ITEM 3.
LEGAL PROCEEDINGS
Neither the Corporation nor the Bank is a party to any pending legal
proceedings, other than proceedings arising in the ordinary course of
the Bank's business. None of these are expected to have a material
impact on the financial position or results of operations of the
Registrant.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of shareholders in the fourth
quarter of 1997.
Part II
ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On February 28, 1998, the Corporation had 1,567,765 shares of common
stock outstanding, held by approximately 318 shareholders of record.
The directors and officers of the Corporation and the Bank hold 13.3%
and beneficially own 34.9% of the outstanding shares. See "Item 11,
Security Ownership of Certain Beneficial Owners and Management," herein.
Under SEC rules, the directors and officers are restricted in the amount
of securities they may sell without registration under the Securities
Act of 1933, as amended. In general, directors and officers each may
offer up to 15,677 shares in any three month period without such
registration.
As of February 28, 1998, the directors, officers and staff also have the
right to acquire 67,531 additional shares upon the exercise of options
granted pursuant to the Corporation's Stock Option Plan. Should several
directors and officers choose to exercise options and sell their shares
on the market, such that a large number of shares are offered at one
time, the price of the common stock could be adversely affected.
The firms Everen Securities, Inc. and First Associated Securities Group,
Inc., located in Santa Rosa, and Hoefer & Arnett, located in San
Francisco, are presently making a market in the stock.
The following chart shows the high and low bid quotations and the volume
of transactions in the Corporation's stock for the periods indicated.
This information has been provided to the Corporation by Hoefer & Arnet
and First Associated Securities Group, Inc., the Corporation's market
makers, and does not include privately negotiated transactions that were
not conducted through them. The prices indicated below are inter-dealer
prices, do not necessarily represent actual transactions and do not
include retail mark-ups, mark-downs or commissions. The bid prices and
numbers of shares in this table have been adjusted for the impact of
stock dividends issued in 1997 and 1996.
Bid Quotations for the Approximate
Corporation's Common Stock Trading Volume
Quarter Ended High Low
March 31, 1996 $10.38 $8.23 102,160
June 30, 1996 11.50 10.15 83,349
September 30, 1996 12.00 11.16 105,315
December 31, 1996 15.44 11.76 173,250
March 31, 1997 19.25 15.38 170,200
June 30, 1997 25.50 18.00 102,200
September 30, 1997 26.38 23.38 59,100
December 31, 1997 32.38 26.25 90,900
There has been an increase in the trading volume over the last two years;
however, due to the lack of any significant trading and no established
public market, this information should not be considered an indication
of the market value of the shares. There is no assurance that any
significant trading market for the shares will develop in the future and
there are no assurances as to the price at which shares may be traded in
the future. The bid and asked prices of the Corporation's common stock
were $28.00 and $30.75, respectively, on February 27, 1998.
DIVIDENDS
On February 19, 1997, the Corporation declared a 5% stock dividend to
shareholders of record on March 31, 1997. On May 14, 1996, the
Corporation declared a 5% stock dividend to shareholders of record on
June 14, 1996.
There is no assurance that dividends will be paid again, or, if paid,
what the amount of any such dividends will be. The future dividend
policy of the Corporation is subject to the discretion of the Board of
Directors and will depend upon a number of factors, including earnings,
financial condition, cash needs and general business conditions.
In addition, the Board of Directors may declare dividends only out of
funds legally available therefor. The Corporation's primary source of
income (other than interest income earned on the Corporation's other
investments) is the receipt of dividends from the Bank. The Bank's
ability to pay dividends is subject to the restrictions of the national
banking laws and, under certain circumstances, the approval of the
Comptroller of the Currency.
A national bank may not pay dividends from its capital. All dividends
must be paid out of net profits then on hand, after deducting for
expenses, including losses and bad debts. A national bank is also
prohibited from declaring a dividend until its surplus fund equals the
amount of its capital stock or, if the surplus fund does not equal the
amount of its capital stock, until one-tenth of the bank's net profits
for the preceding half year, in the case of quarterly or semiannual
dividends, or the preceding two consecutive half-year periods, in the
case of an annual dividend, are transferred to the surplus fund each
time dividends are declared.
The approval of the Comptroller is required if the total of all
dividends declared by a bank in any calendar year will exceed the total
of its net profits of that year combined with its retained net profits
of the two preceding years, less any required transfers to surplus or a
fund for the retirement of any preferred stock which may be outstanding.
Moreover, the Comptroller may prohibit the payment of dividends which
would constitute an unsafe and unsound banking practice. As of December
31, 1997, $7,264,000 of retained earnings of the Bank was available for
the payment of dividends under this requirement.
ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Corporation's sole subsidiary is Sonoma National Bank ("Bank"), and
its primary activities are the commercial banking activities engaged in
through the Bank. The following discussion of financial condition and
results of operations focuses primarily on the Bank, for the years ended
December 31, 1996 and 1997.
During 1997, total consolidated assets grew 4.0% to $233,737,000 at
December 31, 1997. Total consolidated assets grew 34.6% during 1996 to
$224,793,000 at December 31, 1996.
Total deposits increased 2.6% to $214,747,000 when comparing December
31, 1997 to December 31, 1996. For the year ended December 31, 1996,
total deposits increased 35.7% to $209,235,000.
RESULTS OF OPERATIONS
The Corporation's consolidated net income for the year ended December
31,1997 was $3,273,000 as compared to $2,306,000 for the year ended
December 31, 1996, an increase of 41.9%. The Corporation's consolidated
net income for the year ended December 31, 1996, increased 34.1% over
the year ended December 31, 1995.
Net interest income before provision for loan losses increased 24.1%, or
$2,222,000, when comparing the year of 1997 to 1996. This increase
results from the growth in the volume of loans on which the Bank earns a
net interest margin. The Bank's interest margin for 1997 declined
slightly to 5.22% from 5.31% in 1996. The interest margin equaled 5.65%
in 1995. See, "Net Interest Income."
The provision for loan losses increased $230,000 in 1997 over 1996.
See, "Allowance for Loan Losses." Other income decreased $217,000
primarily due to the reduced level of SBA loan sales. See,
"Non-Interest Income." Operating expenses increased by $309,000
primarily because of increases in personnel costs.
When comparing 1996 to 1995 the provision for loan losses increased
$170,000 and other income increased $18,000. Operating expenses
increased $548,000 during 1996 primarily due to increases in personnel
costs and the cost associated with foreclosed property and problem
loans.
NET INTEREST INCOME
The primary source of the Bank's income is the difference between (1)
the interest earned on its loan and investment portfolios, interest
bearing deposits with other banks, and federal funds sold, and (2) the
interest paid on deposits and other borrowed funds. This difference is
referred to as net interest income, and it is one of the primary factors
that affect the Corporation's profitability. Interest income earned on
loans, which includes loan fee income, is primarily a function of the
amount of loans outstanding and the rates prevailing on these loans.
Interest paid on deposits depends on the composition of the deposit base
and the rates paid to attract deposits. See, "Deposits."
For the year ended December 31, 1997, net interest income before the
provision for loan losses totaled $11,454,000 as compared to $9,232,000
for the year ended December 31, 1996, representing an increase of 24.1%.
The majority of this increase results from the net margin earned on
growth in the loan portfolio, largely from the increase in SBA loans and
commercial real estate loans. See, "Loan Portfolio." During 1996, net
interest income before the provision for loan losses increased
$1,667,000 or 22.0%, from $7,565,000 to $9,232,000, primarily due to the
net margin earned on growth in the loan portfolio.
The Bank's net interest margin (expressed as a percentage, the yield on
average interest earning assets less the rate paid on average interest
bearing liabilities) has declined from 5.64% in 1995 to 5.31% in 1996 to
5.22% in 1997. Changes in market interest rates were the primary reason
for the decline. The Federal Reserve Board lowered the discount rate in
February of 1996 where it remained for the balance for the year and all
of 1997. During 1995 the Federal Reserve increased the discount rate in
February 1995 by 50 basis points and then lowered the rate in July 1995
by 25 basis points and again in December 1995 by 25 basis points.
Commercial banks generally adjusted their prime lending rates
immediately following changes in the discount rate. The prime rate was
8.25% at December 31, 1997 and 1996, compared to 8.5% at end of 1995.
Since the Bank is asset sensitive, meaning more assets are immediately
adjustable than liabilities, the net interest margin tends to increase
when rates increase and tends to decrease in a declining rate
environment.
The full impact of rate changes on the Bank's earnings are not realized
for several months, since not all loans or deposits reprice immediately.
The majority of SBA loans are tied to the prime rate and reprice on a
calendar quarterly basis. Additionally, the Bank has some fixed rate
loans and adjustable rate loans, mainly commercial real estate loans,
that are tied to indexes which adjust at a slower pace, such as the
Eleventh District Cost of Funds Index (COFI). The COFI rate decreased
from 5.1% in December 1995 to 4.84% in December 1996 and increased to
4.95% in December 1997. There can be no assurances that earnings will
not be adversely impacted by future actions of the Federal Reserve Board
and changes in market interest rates.
The net interest margin is also affected by the level of loans relative
to deposits. The Bank's ratio of loans-to-deposits increased during
1997, when it averaged 90.6%, as compared to 87.9% in 1996.
Interest income increased from $13.0 million in 1995 to $16.4 million in
1996 to $20.6 million in 1997. This is a direct result of growth in
loans. Average loans increased from $148.0 million in 1996 to $191.3
million in 1997. However, the yield on loans declined to 9.98% in 1997
from 10.14% in 1996. The 16 basis point decline during 1997 results
from several factors. The 50 basis point yield adjustment on the
guaranteed portion of all new SBA loans continues to have a negative
impact on the margin since SBA loans grew $15.5 million during 1997.
This 50 basis points yield adjustment on new SBA loans was a change
mandated by the SBA which became effective in October of 1995. The mix
of loans also impacts the overall yield on loans. During 1997, average
balances of real estate loans, which have a lower yield than other types
of loans such as SBA loans, increased $17.3 million thereby impacting
the overall portfolio yield. The Bank continues to experience increased
competition for loans, which has resulted in lower loan pricing in the
market place, which may impact the Bank's offering rates on new loans in
the future.
Overall loan portfolio yields are affected by deferred loan fees and
discounts on loans. These fees and discounts are amortized to income
over the life, or estimated life, of the loan with which they are
associated and serve to increase loan portfolio yields. Interest income
on loans includes amortization of loan fee income of $923,000 for the
year ended December 31, 1997 and $740,000 for the year ended December
31, 1996. This amortization increased yields on average loans by 48
basis points in 1997 as compared to 50 basis points in 1996. Deferred
loan fees are a product of origination and commitment fees net of
certain direct loan origination costs. The deferred fee amounts are as
follows: $1,143,000 as of December 31, 1997, and $1,138,000 as of
December 31, 1996. Deferred fees are netted against total loans in the
balance sheet.
Discounts on the unguaranteed portion of SBA loans are recorded when the
guaranteed portion of the SBA loan is sold. These discounts are
amortized as an adjustment to the loan yields over the estimated life of
the SBA loan. As of December 31, 1997, $700,000 was recorded as
discounts compared to $867,000 at December 31, 1996. These discounts
are netted against total loans in the balance sheet.
The allowance for loan losses has no direct effect on yield. Loans
carried as non-accrual reduce the portfolio yield, since the balance of
a non-accrual loan is maintained in the loan total but no interest is
accrued. Nonaccrual loans are included in the loan amounts in the
following average balance sheets. Interest foregone on non-accrual
loans equaled $12,000 in 1997 compared to $32,000 in 1996.
Interest expense increased 28% when comparing 1996 to 1997, due to
increases in interest bearing deposits, particularly in time deposits
which bear the highest cost. The average cost of interest paid on
interest bearing deposits for the year ended December 31, 1997 was
4.98%, versus 4.96% for the year ended December 31, 1996. Average
non-interest bearing deposits increased 14% in 1997, with most of the
Bank's growth being funded by money market deposits and time deposits.
In 1996, the Bank's growth also was funded by time certificates and
money market accounts.
The Bank's deposits reprice at a slower pace than loans, primarily since
certificates of deposits usually do not reprice until their maturity
dates, which generally range from six months to eighteen months. Time
deposits have increased from $66.5 million at December 1995 to $94.0
million at the end of 1996 to $102.9 million at December 31, 1997.
During both 1996 and 1997, the Bank ran several time deposit campaigns
at rates slightly higher than its local competitors. These higher
priced deposits were used to fund the rapid growth in loans. The cost
of time deposits averaged 5.77% in 1997 compared to savings and money
market rate accounts which averaged 4.41%. This increase in time
deposits has had a negative impact on the Bank's net interest margin.
The Bank's money market rate account, the Sonoma Investors Reserve
Account, which offers rates tied to US Treasury rates, also remained
competitive during 1997. Balances held in Sonoma Investors Reserve
accounts increased from $49.9 million at the end of 1995 to $71.1
million at December 31, 1996 and declined to $64.8 million at year end
1997. In late December 1996, the Bank received short term deposits of
approximately $16 million, which were held in Sonoma Investors Reserve
accounts for approximately 30 days. This accounted for the majority of
the increase in money market rate accounts in 1996 and explains the
decline in 1997. The rate offered on the Sonoma Investors Reserve
account is repriced on a weekly basis. During 1995 and 1996 the cost of
these funds has remained fairly consistent with temporary increases and
decreases based upon the movement of the 90 day U.S. Treasury Bill. Due
to the weekly repricing, changes in rates on the Sonoma Investors
Reserve Account have a more immediate impact on the Bank's cost of funds
than changes in rates on time certificates. The cost of funds on
savings and money market accounts equaled 4.41% in 1997 compared to
4.35% in 1996.
The decline in the Bank's margin during 1996 was caused by the decline
in interest rates since February 1995, changes in the mix of loans and
deposits and changes in the ratio of loans-to-deposits. During 1996,
the Bank's cost of funds increased 0.02%, while the rate earned on
interest-earning assets decreased 0.28% which negatively impacted
income. The Bank's average loans-to-deposits ratio declined slightly
from 88.2% in 1995 to 87.9% in 1996, this also impacted net interest
margin.
The tables on the following pages (i) summarize the distribution, by
amount, of the average assets, liabilities and shareholders' equity of
the Corporation for the periods indicated and (ii) set forth the yields
on earning assets and the rates paid for interest bearing liabilities
during the periods indicated. Averages are computed primarily from
daily balances.
AVERAGE BALANCE SHEET
Year Ended
December 31, 1997
(dollars in thousands)
Average Interest Average
Balance Income/Expense Yield/Rate
------- -------------- ----------
Certificates of deposit
with other banks $1,292 $75 5.80%
Investments 7,360 422 5.73%
Federal funds sold 19,514 1,064 5.45%
Loans:
Commercial (incl. SBA loans &
loans held for sale) 95,682 9,894 10.34%
Installment loans to individuals 1,833 202 11.02%
Real estate - Construction 4,766 585 12.27%
Real estate - Other 89,011 8,403 9.44%
-------- ------ ------
Total Loans 191,292 19,084 9.98%
-------- ------ ------
Total earning assets 219,458 20,645 9.41%
------
Non-earning assets:
Allowance for loan losses (2,146)
Deferred Loan Fees & Discounts (1,868)
Cash and due from banks 7,458
Other assets 5,547
--------
TOTAL ASSETS $228,449
========
Deposits:
Demand - interest bearing $11,258 $120 1.07%
Savings & money market 67,949 2,999 4.41%
Time certificates 105,207 6,072 5.77%
-------- ------ -----
Total interest bearing deposits 184,414 9,191 4.98%
------
Demand - non-interest bearing 26,649
Other liabilities:
Other liabilities 1,262
Shareholders' equity 16,124
--------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $228,449
========
Net interest income $11,454
=======
Net interest margin 5.22%
=======
AVERAGE BALANCE SHEET
Year Ended
December 31, 1996
(dollars in thousands)
Average Interest Average
Balance Income/Expense Yield/Rate
------- -------------- ----------
Certificates of deposit
with other banks $4,872 $265 5.44%
Investments 6,163 341 5.53%
Federal funds sold 14,883 812 5.46%
Loans:
Commercial (incl. SBA loans &
loans held for sale) 71,523 7,589 10.61%
Installment loans to individuals 2,337 274 11.72%
Real estate - Construction 2,500 235 9.40%
Real estate - Other 71,665 6,907 9.64%
-------- ------- -----
Total Loans 148,025 15,005 10.14%
-------- ------- -----
Total earning assets 173,943 16,423 9.44%
-------
Non-earning assets:
Allowance for loan losses (1,837)
Deferred Loan Fees & Discounts (1,868)
Cash and due from banks 6,850
Other assets 5,339
--------
TOTAL ASSETS $182,427
========
Deposits:
Demand - interest bearing 9,730 103 1.06%
Savings & money market 58,383 2,540 4.35%
Time certificates 76,844 4,548 5.92%
-------- ------- -----
Total interest bearing deposits 144,957 7,191 4.96%
Demand - non-interest bearing 23,356
Other liabilities:
Other liabilities 991
Shareholders' equity 13,123
--------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $182,427
========
Net interest income $9,232
=======
Net interest margin 5.31%
=======
AVERAGE BALANCE SHEET
Year Ended
December 31, 1995
(dollars in thousands)
Average Interest Average
Balance Income/Expense Yield/Rate
------- -------------- ----------
Certificates of deposit
with other banks $5,880 $354 6.02%
Investments 2,450 134 5.47%
Federal funds sold 10,503 599 5.70%
Bankers acceptances 572 34 5.94%
Loans:
Commercial (incl. SBA loans &
loans held for sale) 52,361 5,844 11.16%
Installment loans to individuals 2,924 348 11.90%
Real estate - Construction 2,528 294 11.63%
Real estate - Other 57,006 5,439 9.54%
-------- ------- -----
Total Loans 114,819 11,925 10.39%
-------- ------- -----
Total earning assets 134,224 13,046 9.72%
Non-earning assets:
Allowance for loan losses (1,508)
Deferred Loan Fees & Discounts (1,628)
Cash and due from banks 6,155
Other assets 4,663
--------
TOTAL ASSETS $141,906
========
Deposits:
Demand - interest bearing 9,042 95 1.05%
Savings & money market 54,925 2,832 5.16%
Time certificates 47,089 2,554 5.42%
-------- ------- -----
Total interest bearing deposits 111,056 5,481 4.94%
-------- ------- -----
Demand - non-interest bearing 19,095
Other liabilities:
Other liabilities 588
Shareholders' equity 11,167
--------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $141,906
========
Net interest income $7,565
=======
Net interest margin 5.64%
=======
The following tables set forth the changes in net interest income due to
changes in interest rates and the volume of assets and liabilities from
the year ended December 31, 1997 as compared to the year ended December
31, 1996, and for the year ended December 31, 1996, as compared to the
year ended December 31, 1995. Variances attributable to simultaneous
rate and volume changes are all allocated to volume change amount.
ANALYSIS OF VOLUME AND RATE CHANGES
ON NET INTEREST INCOME AND EXPENSE
1997 OVER 1996
(dollars in thousands)
Volume Yield/Rate Total
------ ---------- -----
Increase/(decrease) in interest income:
Certificates of deposit
with other banks $(208) $18 $(190)
Investments 69 12 81
Federal funds sold 253 (1) 252
Bankers acceptances
Loans:
Commercial (incl. SBA loans) 2,498 (192) 2,306
Installment loans to individuals (56) (16) (72)
Real estate - Construction 278 71 349
Real estate - Other 1,638 (142) 1,496
------ ----- -----
Total 4,472 (250) 4,222
------ ----- -----
Increase/(decrease) in interest expense:
Deposits:
Demand - interest bearing 16 1 17
Savings & money market 422 37 459
Time certificates 1,637 (113) 1,524
------ ----- -----
Total 2,075 (75) 2,000
------ ----- -----
Increase/(decrease) in net
interest income $2,397 $(175) $2,222
====== ===== ======
ANALYSIS OF VOLUME AND RATE CHANGES
ON NET INTEREST INCOME AND EXPENSE
1996 OVER 1995
(dollars in thousands)
Volume Yield/Rate Total
------ ---------- -----
Increase/(decrease) in interest income:
Certificates of deposit
with other banks $(55) $(34) $(89)
Investments 205 2 207
Federal funds sold 239 (26) 213
Bankers acceptances (34) (34)
Loans:
Commercial (incl. SBA loans) 2,033 (289) 1,744
Installment loans to individuals (69) (5) (74)
Real estate - Construction (3) (55) (58)
Real estate - Other 1,413 55 1,468
------ ----- ------
Total 3,729 (352) $3,377
------ ----- ------
Increase/(decrease) in interest expense:
Deposits:
Demand - interest bearing 7 1 8
Savings & money market 150 (442) (292)
Time certificates 1,761 233 1,994
------ ----- ------
Total 1,918 (208) 1,710
------ ----- ------
Increase/(decrease) in net
interest income $1,322 $(144) $1,667
====== ===== ======
NON-INTEREST INCOME
Non-interest income is derived primarily from gains on sales of SBA
(Small Business Administration) loans, service charges on deposit
accounts, discount brokerage income, earnings on life insurance and SBA
loan servicing fees. When comparing the year ended December 31, 1997 to
December 31, 1996, non-interest income decreased 13.4% to $1,403,000,
compared to $1,620,000 in 1996.
Gains on the sale of the guaranteed portion of SBA loans declined to
$265,000 in 1997 versus $567,000 in 1996. This decline in gains on
sales resulted from management's decision to retain a larger portion of
these loans, earning interest income, rather than selling them
immediately. During 1997 the Bank sold SBA loans totaling $3,959,000,
compared to $6,390,000 in 1996.
SBA servicing fees increased to $392,000 for 1997 compared to $379,000
for 1996. Service fee income is based on payments received, and
therefore, vary from year to year. During 1997, the Bank's average
SBA loan portfolio serviced was $39.1 million compared to $43 million in
1996, which reflects the reduced level of loan sales and the impact of
SBA loan payoffs. If the serviced portfolio continues to decline, the
revenue will be negatively impacted.
There can be no assurance that the SBA program will continue to generate
significant amounts of other non-interest income in the future. The
Bank continues to experience additional competition with more financial
institutions making SBA loans. The government may also revise the SBA
program at any time, which could have a negative impact on the Bank's
profit. See, "Item 1, The Corporation, Business of the Bank."
Non-interest income includes service charges on deposit accounts.
During 1997, service charges totaled $346,000 versus $337,000 in 1996.
Service charges vary depending upon the customers' uses of various Bank
services. With the growth in deposit customers the fee income also
increased. The Bank adjusted its rates for various services during the
first quarter of 1996 after several years of no changes, thereby
increasing service fee income in the future.
Non-interest income also includes earnings on life insurance held for
directors and senior officers which totaled $135,000 in 1997 as compared
to $104,000 in 1996. During 1996, the Bank sold US Treasuries, which
were classified as held for sale, at a gain of $7,000. There were no
gains or losses in 1997. Discount brokerage services generated
$65,000 in 1997 compared to $47,000 in 1996, its first full year of
operation.
During 1997, $42,000 in gains on sale of other real estate owned (OREO)
was recorded. There were no gains on the sale of OREO in 1996. See,
"Other Real Estate Owned." Other non-interest income for 1996 totaled
$1,620,000, increasing over the 1995 total of $1,605,000. The decline
in gains on the sale of the guaranteed portions of SBA loans, which
totaled $567,000 in 1996 compared to $715,000 in 1995 negatively
impacted non-interest income, on SBA loan sales totaling $6,390,000 in
1996 and $9,837,000 in 1995. SBA servicing fees increased during 1996
to $379,000 compared to $362,000 in 1995 due to the increase in loans
serviced. Discount brokerage services added $47,000 during its
first full year. Service charges also increased $31,000 during 1996.
NON-INTEREST EXPENSE
Non-interest expenses include salaries and employee benefits, occupancy,
equipment and the general expenses required for the operation of the
Corporation and the Bank. For the year ended December 31, 1997,
non-interest expenses totaled $6,716,000, an increase of 4.8% over the
previous year.
The following table outlines the components of non-interest expense for
the periods indicated:
(In thousands)
Year Ended December 31,
Expense Item 1997 1996 1995
- ------------ ---- ---- ----
Salaries & Employee Benefits $3,762 $3,521 $3,186
Occupancy 713 699 698
Equipment 368 315 283
Advertising/Business Development 318 336 308
Outside Customer Services 249 245 218
Professional Fees 147 185 130
Stationery & Supplies 146 161 141
Deposit and Other Insurance 173 142 240
Other 840 803 655
------ ------ ------
TOTAL $6,716 $6,407 $5,859
====== ====== ======
A large portion of the 6.8% increase in salaries and benefits resulted
from larger incentive payments since they are tied to loan production
and deposit growth, which were at higher than anticipated levels during
1997. Salaries included increases for performance and promotions during
the year. The Bank also experienced staff growth in 1997 with the Bank's
full time equivalent (FTE) staff positions averaging 73 persons in
1997, compared to 68 in 1996.
Occupancy costs were $713,000 in 1997 compared to $699,000 in 1996.
Effective in October 1996, the Oakmont lease payment was reduced from
$10,000 per month to $6,000. This reduction in rent resulted from the
renegotiation of our lease agreement. This savings partially offset
increases in rents based on indexes in the various lease agreements for
other locations and increases in property taxes, utilities and
maintenance costs.
Equipment expenses increased to $368,000 in 1997 as the Bank has
continued to upgrade its computer technology. Progress was made to
upgrade from terminals to individual personal computers in the loan
department. The Bank has ordered a new mainframe which will allow
for additional expansion of personal computers through the use of
networks. The new mainframe will be operational in February 1998. The
Bank expects that equipment costs will continue to increase in 1998.
Advertising and business development costs vary from year to year
depending on the various promotions that have occurred during the year.
These costs include promotion of various products (Telebanc, SBA
lending, Commercial lending and Deposit campaigns).
Outside customer services increased from $245,000 in 1996 to $249,000 in
1997. Analysis charges are a major expense included in this category.
Analysis charges are customer expenses for title and escrow services,
check charges, courier and payroll services incurred on behalf of
customers who maintain deposit balances sufficient to compensate
for these costs. See, "Deposits." While some non-interest expense is
incurred, management feels the contribution of the non-interest bearing
demand accounts toward lowering overall cost of funds more than offsets
this cost.
Professional fees decreased from $185,000 in 1996 to $147,000 in 1997.
The Bank's legal costs vary depending on the need to retain legal
assistance. During 1996 legal costs increased due to a higher volume of
problem loans and foreclosure activity. In 1997, the Bank received
reimbursement from the SBA for its share of legal expenses on SBA
guaranteed loans, which had previously been expensed by the Bank. See,
"Other Real Estate Owned.
Regulatory assessments have varied from $129,000 in 1995 to $55,000 in
1996 to $88,000 in 1997. The Bank's deposit insurance premium is
currently in the lowest cost category. The Bank's cost per $100 of
insurance deposits fell from $0.23 to $0.04 during 1995 and then
fell in the first half of 1996 to zero cents per $100 of insured
deposits with an annual minimum payment of $2,000. There can be no
assurance that the deposit insurance rates will remain at this low
level. Effective in 1997, the Bank was charged a "Financing
Corporation" (FICO) assessment at the annual rate of $0.0128 per $100 of
insured deposits. This cost equaled $25,000 in 1997. See,
"Description of Business-Supervision
and Regulation-New and Pending Legislation."
Other expenses increased 4.6% to $840,000 during 1997. Included in this
category are expenses related to loan costs (broker fees, appraisals,
etc.), foreclosure and OREO expense, shareholder and director fees,
seminars and travel costs. During 1996, other expenses of $803,000
increased 22.6% over 1995.
Non-interest expenses are expected to increase in 1998 due to the
planned growth in the Bank.
The increase in non-interest expenses of 9.4% from the 1995 total of
$5,859,000 to $6,407,000 in 1996 was due primarily to staff incentives
associated with increased volume of loan and deposit activity which were
partially offset by FDIC insurance savings. Loan expenses were higher
due expenses associated with problem loan.
The SBA department's direct operating expenses equaled $1,434,000,
$1,547,000 and $1,382,000 for the years ended December 1997, 1996 and
1995 respectively.
LOAN PORTFOLIO
The following table shows the composition of the Corporation's loan
portfolio, by type of loan, as of the dates indicated.
<TABLE>
(In thousands)
<CAPTION>
December 31,
Type of Loan 1997 1996 1995 1994 1993
- ------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial $100,283 $84,969 $62,062 $38,688 $31,315
Real Estate Construction 10,982 1,533 3,556 1,701 5,113
Real Estate Other 95,513 81,008 64,720 49,601 44,048
Installment Loans to Individuals 2,012 2,218 2,702 2,965 3,147
-------- -------- -------- ------- -------
TOTAL $208,790 $169,728 $133,040 $92,955 $83,623
======== ======== ======== ======= =======
</TABLE>
The table above illustrates the Bank's emphasis on commercial and real
estate lending. At December 31, 1997 and 1996 commercial loans
comprised 48.0% and 50.1%, respectively, of the Bank's total loan
portfolio. Construction and other real estate loans (combined)
comprised 51.0% and 48.6% on those same dates. Management is aware of
the risk factors in making commercial and real estate loans and is
continuously monitoring the local marketplace as well as performing
annual reviews of this portfolio.
The Bank makes commercial loans primarily to small and medium sized
businesses and to professionals located within Sonoma and Marin
Counties. While the Bank emphasizes commercial lending, management does
not believe that there is any significant concentration of commercial
loans to any specific type of business or industry.
Most of the Bank's loans are made to borrowers located in Sonoma or
Marin County and most of the security for the Bank's loans is located in
those counties. A significant natural disaster impacting those
counties, such as a severe earthquake or widespread flooding,
could disrupt the business of these borrowers and impair the security
for the Bank's loans. Although some of the Bank's borrowers carry
insurance to cover some of the losses that might arise from such an
event, the Bank does not require all its borrowers to carry
earthquake insurance coverage since such insurance typically provides a
large deductible amount. If a large earthquake occurs in the Bank's
market area, the Bank would probably have to restructure some of its
loans and may suffer loan losses related
to the earthquake.
The Bank originates loans guaranteed by the U.S. Small Business
Administration ("SBA"). The guaranteed portion of each loan, typically
ranging from 70% to 90%, may be sold to outside investors, usually at a
price in excess of par. The unguaranteed portion on sold loans is
generally retained in the Bank's loan portfolio. The Bank follows the
same internal credit approval process when approving an SBA loan as when
approving other loans. The majority of the Bank's SBA loans are secured
by real estate. All SBA loans are reported in the chart above as
Commercial Loans.
While SBA loans generally have the same underwriting requirements as the
Bank's other loans, they are sometimes for longer terms (7 to 25 years)
and have a higher loan-to-value ratio than the Bank typically accepts.
This risk is mitigated by the majority of the loans being secured by
real estate. If a default on a SBA loan occurs the Bank shares
proportionally in the collateral supporting the loan with the SBA which
guarantees the loan. At December 31, 1997, the Bank held $92,188,000 in
loans generated by the SBA department, of which $46,712,000 was
guaranteed by the SBA. At December 31, 1996, the Bank held $69,232,000
in loans generated by the SBA department, of which $28,256,000 was
guaranteed by SBA. There were no SBA loans more than 90 days past due
and still accruing interest: there were three SBA loan totaling
$294,000, of which $40,000 was guaranteed by the SBA, on nonaccrual
status, as of December 31, 1997. There were no SBA loan charge offs
during 1997.
The category entitled "Real Estate-Other" includes loans which are
secured by real estate and not classified as a construction or
commercial loan. The majority of these loans are secured by commercial
real estate. The Bank offers residential mortgage loans on a limited
basis.
Home equity lines of credit, included in real estate - other, equaled
2.1% of the total loan portfolio at December 31, 1997 compared to 2.9%
at December 31, 1996. These loans are secured primarily by second trust
deeds on single family residences. The Bank typically requires a
loan-to-value ratio of no more than 80% for home equity loans. The
rates are adjustable monthly based on the Bank's internal reference
rate, and terms do not exceed ten years.
Real estate construction loans grew from $1,533,000 in 1996 to
$10,982,000 in 1997. The Bank created a construction loan group during
1997 to focus on construction loans primarily for single family
residences and commercial properties valued at under $2,500,000 located
in Northern California. Construction loans are made to "owner/occupied"
and "owner/users" of the properties and occasionally to developers with
a successful history of developing projects in the Bank's market area.
Loan-to-value ratios on construction loans depend upon the nature of the
property. The Banks's policy is to require that the loan-to-value ratio
ranges from 65% to 75% and that the borrower have a cash equity interest
in the land ranging from 25%-50%. The construction lending business is
subject to, among other things, the volatility of interest rates, real
estate prices in the area and the market availability of conventional
real estate financing to repay such construction loans. A decline in
real estate values and/or demand could potentially have an adverse
impact on this portion of the loan portfolio, and on the earnings and
financial condition of the Bank.
The Bank has a small portfolio of consumer loans, equaling 1.3% of the
total loan portfolio at December 31, 1996 and 1.0% at December 31, 1997.
Personal lines of credit and overdraft protection are offered to
customers. Regular underwriting procedures are followed depending upon
the type of loans. Revolving lines are reviewed every two years.
It is the Bank's policy to collateralize all loans unless, in
management's estimation, the credit worthiness, cash flow and character
of the borrower justify extension of credit on an unsecured basis.
Management recognizes the inherent risk in making unsecured loans, but
in management's judgement, such unsecured loans are justified based
on the credit worthiness and financial strength of the borrowers.
Management believes that its secured loans are adequately collateralized
to minimize loss in the event of default in payment of interest or
principal or decline in collateral values. In making collateralized
loans, the Bank's policy establishes a maximum loan to collateral value
ratio of from 50% to 100%, depending on the type of collateral and the
other factors supporting the loan.
The following table summarizes the Bank's loan maturities, by loan type,
at December 31, 1997. Loans are categorized by the maturity of the
final installment.
(In thousands)
Over 1 Year
1 year through Over 5
or Less 5 Years Years Total
------- -------- ------ -----
Commercial $12,319 $11,318 $76,646 $100,283
Real Estate-Construction 6,787 1,945 2,250 10,982
Real Estate-Other 7,963 13,227 74,323 95,513
Installment Loans 493 963 556 2,012
------- ------- -------- --------
TOTAL $27,562 $27,453 $153,775 $208,790
======= ======= ======== ========
Of the total loans due in more than one year at December 31, 1997,
$48,396,000 were at fixed interest rates, which includes loans currently
at their floor rate, and $132,832,000 were at adjustable interest rates.
INTEREST RATE SENSITIVITY
The Bank attempts to lend at competitive interest rates and to reduce
exposure to interest rate fluctuations by making most of its loans at
adjustable interest rates.
The following table summarizes the Bank's loan portfolio by contractual
repricing frequency and by loan type, at December 31, 1997. SBA loans
are considered commercial loans for this analysis. Most of the SBA
loans are secured by real estate. The Bank has approximately $27
million in adjustable loans which are priced at floor rate and are
considered fixed rate loans, deemed to reprice at their maturity date
for the purpose of this analysis.
<TABLE>
<CAPTION>
Over 3 Months Over 1 Year
3 Months or through Through Over 5
(In thousands) Less 1 Year 5 Years Years Total
---------- ------------- ----------- ------ -----
<S> <C> <C> <C> <C> <C>
Commercial $93,486 $3,635 $3,162 $100,283
Real Estate-Construction 3,625 4,388 1,084 $1,885 10,982
Real Estate -Other 16,226 40,206 9,282 29,799 95,513
Installment Loans 1,514 62 276 160 2,012
-------- ------- ------- ------- --------
TOTAL $114,851 $48,291 $13,804 $31,844 $208,790
======== ======= ======= ======= ========
</TABLE>
Interest rate risk is reduced through the practice of making variable
interest rate loans which are tied to an outside rate index. These
loans "float", or adjust their rate as the interest rate environment
changes. As of December 31, 1997 and 1996 approximately 70% and 72%
respectively of the Bank's loan portfolio was comprised of loans with
adjustable rates (excluding those which had reached their floors).
ALLOWANCE FOR LOAN LOSSES
In accordance with its policy, the Bank maintains an allowance for loan
losses to provide for losses in the loan portfolio. The allowance for
loan losses is reviewed monthly and is based on an allocation for each
loan category (e.g. Real Estate, Commercial), an allocation for
undisbursed commitments, plus an allocation for any outstanding loans
which have been classified by regulators or internally for the "Watch
List." Each loan that has been classified is individually analyzed for
the risk involved and an allowance provided according to the risk
assessment. In addition, management considers such factors as known
loan problems, historical loan loss experience, loan concentrations,
loan loss experience in the banking industry, evaluations made by bank
regulatory agencies, assessment of economic conditions and other
appropriate data to identify risks in the loan portfolio. Based upon
this analysis of the allowance for loan losses (which incorporates the
growth in the loan portfolio during the year), the Bank has increased
the allowance by 24.3% to $2,539,000 at December 31, 1997 compared to
$2,042,000 in 1996. The provision for loan losses for the year ended
December 31, 1997 was $650,000 as compared to $420,000 for the year
ended December 31, 1996. The increase in the allowance and the
provision was based upon the growth in the loan portfolio during
the year.
Depending on future evaluations of the allowance in connection with
regulatory examinations, any changes in the factors management reviews
as described above, and the amount of any loan losses that may be
incurred, further increases may be made in accordance with the Bank's
policy, and such increases will have an adverse effect on earnings.
Management attempts to reduce exposure to loss from adverse economic
conditions through portfolio diversification among businesses and types
of borrowers.
During 1997, the Bank charged-off five loans (1 commercial, 2 real
estate and 2 consumer) totaling $222,000 and recovered $69,000 on real
estate loans. In 1996 six loans totaling $62,000 were charged-off and
$8,000 was recovered during the year on loans which had been previously
charged-off.
<PAGE>
The following table sets forth the changes in the allowance for loan
losses over the last five years and the relationship to loans
outstanding, net of the SBA guaranteed portion, at the end of those
periods.
<TABLE>
<CAPTION>
(dollars in thousands) Year Ended December 31,
ALLOWANCE FOR LOAN LOSSES: 1997 1996 1995 1994 1993
- -------------------------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Period $2,042 $1,676 $1,421 $1,113 $1,144
Provision for Loan Losses Charged to Expense 650 420 250 280 174
Less Charge-Offs:
Commercial 48 38 0 0 204
Real Estate-Other 140 0 72 0 0
Consumer loans 34 24 30 16 8
-------- -------- -------- -------- --------
Total Charge-offs 222 62 102 16 212
-------- -------- -------- -------- --------
Recoveries:
Commercial 69 8 79 20 3
Real Estate - Other 0 0 24 24 1
Consumer 0 0 4 0 3
Total Recoveries 69 8 107 44 7
-------- -------- -------- -------- --------
Net Charge-offs/(Recoveries) 153 54 (5) (28) 205
-------- -------- -------- -------- --------
Balance at the End of the Period $2,539 $2,042 $1,676 $1,421 $1,113
======== ======== ======== ======== ========
Total Loans Outstanding at End of
Period-Net of SBA Guarantees $162,077 $141,472 $118,716 $89,124 $82,263
======== ======== ======== ======== ========
Ratio of Ending Allowance to Ending
Loans Outstanding-Net of SBA Loan
Guarantees 1.6% 1.4% 1.4% 1.6% 1.4%
======== ======== ======== ======== ========
AVERAGE TOTAL LOANS $191,292 $148,025 $114,819 $90,341 $77,295
======== ======== ======== ======== ========
Ratio of Net Charge-offs to Average
Loans Outstanding During the Period 0.079% 0.036% (0.004)% (0.031)% 0.265%
======== ======== ======== ======== ========
</TABLE>
The following tables set forth the allocation of the allowance for loan
losses by loan type at the end of those periods indicated. The
allocation of the allowance will necessarily change whenever management
determines that the risk characteristics of the loan portfolio have
changed. It should not be construed that the amount allocated to a
particular segment is the only amount available for future charge-offs
that might occur within that segment, since the allowance is a general
reserve. In addition, the amounts allocated by segment may not be
indicative of future charge-off trends. The percentage of loans shown
in these schedules represent the percentage of loans in each loan
category to total loans.
(dollars in thousands)
December 31, 1997 December 31, 1996
----------------- -----------------
Category Amount % of Loans Amount % of Loans
------ ---------- ------ ----------
Commercial $1,312 48.0% $1,081 50.1%
Real Estate -Construction 133 5.3 66 0.9
Real Estate -Other 1,021 45.7 744 47.7
Installment Loans 73 1.0 151 1.3
------ ----- ------ -----
TOTAL $2,539 100.0% $2,042 100.0%
====== ===== ====== =====
<TABLE>
<CAPTION>
(dollars in thousands)
December 31, 1995 December 31, 1994 December 31, 1993
----------------- ----------------- -----------------
% of % of % of
Category Amount Loans Amount Loans Amount Loans
- -------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Commercial $788 46.7% $524 39.1% $385 37.4%
Real Estate -Construction 166 2.7 117 1.9 189 6.1
Real Estate -Other 682 48.6 683 55.7 449 52.7
Installment Loans 40 2.0 97 3.3 90 3.8
------ ----- ------ ----- ------ -----
TOTAL $1,676 100.0% $1,421 100.0% $1,113 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
NON-PERFORMING AND IMPAIRED LOANS
Loans are generally placed on nonaccrual status when the borrowers are
past due 90 days or when payment in full of principal or interest is not
expected. At the time a loan is placed on nonaccrual status, any
interest income previously accrued but not collected is reversed.
Interest accruals are resumed on such loans only when they are brought
fully current with respect to interest and principal and when, in the
judgement of management, the loans are estimated to be fully collectible
as to both principal and interest. The Bank considers a loan impaired
when, based upon current information and events, it is probable that the
Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement.
<PAGE>
The following table sets forth accruing loans past due 90 days or more
and non-accrual loans as of the dates indicated. The $150,000 past due
over 90 days was one loan which had matured and was in the process of
being renewed. This loan is now current and is not considered an
impaired loan.
(dollars in thousands)
December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Past due 90 days or more $150 $0 $0 $0 $0
Non-accrual 318 438 398 201 438
---- ---- ---- ---- ----
Total $468 $438 $398 $201 $438
==== ==== ==== ==== ====
Percent of Total Loans 0.2% 0.3% 0.3% 0.2% 0.5%
==== ==== ==== ==== ====
Impaired Loans $468 $438 $398 $201 $438
==== ==== ==== ==== ====
The amount of interest foregone on the loans on non-accrual at December
31, 1997 totaled approximately $12,000 for 1997 and $23,000 in interest
was collected on those loans (prior to those loans being placed on
nonaccrual) during the year.
On December 31, 1997, the Bank had $318,000 in non-accrual loans, of
which $294,000 was collateralized by real estate and $40,000 was
guaranteed by the SBA. As of December 31, 1996, the Bank had $438,000 in
non-accrual loans, of which $100,000 was collateralized by real estate
and $114,000 was guaranteed by the SBA on loans not secured by real
estate.
Potential non-performing loans are identified by management as part of
its ongoing evaluation and review of the loan portfolio. Based on such
reviews as of December 31, 1997, management has no knowledge of
information about any loan which causes management to have doubts about
the borrowers' ability to comply with present repayment terms, such that
the loan might subsequently be classified as non-performing.
OTHER REAL ESTATE OWNED
The Bank held one property recorded at a fair market value of $130,000
at December 31, 1997. The Bank foreclosed with respect to real estate
collateral securing three loans and sold six OREO properties during
1997. The OREO sales resulted in gains totaling $42,000 during the
year.
The Bank foreclosed with respect to real estate collateral securing four
loans during 1996. These properties were recorded at the lessor of cost
or fair market value and totaled $359,000 at December 31, 1996.
DEPOSITS
The Bank obtains deposits primarily from shareholders, local businesses,
loan customers and personal contacts by its business development staff,
officers and directors. The Bank does not have any brokered deposits.
At December 31, 1997, deposits totaled $214,747,000, which was an
increase of 2.6% from December 31, 1996. The growth of the Bank was
impacted by the temporary receipt of an unusually large deposit
approximating $16 million in late December 1996. Those funds were on
deposit for less than 30 days. This resulted in higher than normal
deposit balances at the end of 1996. If year-end 1996 deposits are
adjusted to exclude this temporary deposit, December 31, 1997 deposits
show an increase of 11.1% from 1996 amounts. This increase was based on
new deposit business and expansion of services to existing customers.
Non-interest bearing demand deposits totaled $30,091,000 at December 31,
1997 as compared to $28,612,000 at December 31, 1996. Although these
deposits do not bear interest, some of the account holders utilize the
Bank's analysis system which gives earnings credits for their collected
average balances based on 100% of the 91-Day T-Bill rate. The customer
may then use those earnings credits towards various account services
such as escrow accounting fees, courier services, payroll, and check
printing paid to third party vendors.
Most of the deposit growth at the Bank in 1997 was in time deposit,
which increased $8.9 million or 9.5% in 1997. Money market deposits
decreased $6.2 million or 8.7% from December 31, 1996 to December 31,
1997. The decrease in money market deposits result from the $16 million
short term deposit discussed above that was received at the end of 1996.
Had the beginning balances not included this large deposit, money market
deposits would have grown $7.1 million or 17.7%.
During both 1996 and 1997, the Bank offered highly competitive rates on
time deposits in order to fund growth in loans. Time deposits increased
from $66,533,000 at December 31, 1995 to $93,973,000 at December 31,
1996 to $102,904,000 at December 31, 1997. This shift to time deposits
which bear a higher rate than other types of deposits, increased the
Bank's overall cost of funds. See, "Net Interest Income."
Average balances held in money market rate accounts increased from
$58,383,000 in 1996 to $63,932,000 during 1997. The Bank's Sonoma
Investor Reserve account is tied to the 90-day Treasury Bill and
reprices on a weekly basis. Since 1994 then the rates offered on longer
term time deposit have exceeded the rate offered on the Sonoma Investors
Reserve account, and there has been movement into time deposit unless
immediate access to funds is needed. During 1997 the Sonoma Investors
Reserve accounts offered rates which were competitive with rates
offered on 30 to 90 day time certificates, and therefore, this account
continues to be a very popular with depositors.
Management attempts to reduce risks from fluctuating interest rates by
limiting the maturities on certificates of deposit. The following table
sets forth, by time remaining to maturity, the Bank's time certificates
of deposit as of December 31, 1997.
$100,000 and Over Less than $100,000
Amount Amount
(in 000's) Pct. (in 000's) Pct.
Three Months or Less $7,018 24.1% $18,607 25.2%
3 to 6 months 7,330 25.2 15,390 20.9
6 months to 1 year 9,524 32.7 24,519 33.2
Over 1 year 5,230 18.0 15,286 20.7
------- ----- ------- -----
Total $29,102 100.0% $73,802 100.0%
======= ===== ======= =====
At December 31, 1997, certificates of deposit of $100,000 or more
constituted approximately 13.6% of total deposits. The holders of these
deposits are primarily local customers of the Bank. While these
deposits are rate sensitive, the Bank believes they are stable deposits,
as they are obtained primarily from customers with other banking
relationships with the Bank.
INVESTMENT PORTFOLIO
The following table shows the book value of the Bank's investment
portfolio at December 31, 1997, 1996 and 1995.
December 31,
(in thousands) 1997 1996 1995
U.S. Treasury Securities $1,500 $16,009 $10,756
U.S. Government-Sponsored Agencies 3,498 0 0
Mortgage-Backed Securities 452 0 0
Federal Home Loan Bank Stock 1,511 0 0
Federal Reserve Stock 129 123 123
------ ------- -------
Total $7,090 $16,132 $10,879
====== ======= =======
Securities Pledged $500 $500 $500
====== ======= =======
The following table shows the yield of investments (at amortized cost)
by maturity ranges as of December 31, 1997.
(in thousands) Amount Yield
------ -----
One year or less $2,999 5.63%
Over one year through 5 years 2,293 6.05
Over 5 years through 10 years 159 5.25
Over 10 years 0
------ -----
Total $5,451 5.79%
====== =====
The Bank's investments in U.S. Treasury securities declined from
$16,009,000 at December 31, 1996 to $1,500,000 at the end of 1997. The
Bank had excess liquidity at the end of 1996 and the receipt of a large
short term deposit. $10 million of the funds from that deposit were
invested in U.S. Treasury securities with a maturity of January 2, 1997
at a yield of 4.16%. At maturity, the funds were reinvested in Fed
Funds Sold. See, "Deposits." The yield on average investments equaled
5.53% during 1996 compared to 5.73% in 1997. See, "Net Interest
Income."
The Federal Home Loan Bank ("FHLB") stock was purchased during 1997.
Stock purchase is a requirement of establishing a borrowing
relationship. See, "Liquidity." The Bank receives dividends quarterly
based upon the earnings of the Federal Home Loan Bank Stock. The Bank
received an annualized yield of 6.2% during 1997. The Bank invested in
mortgage-backed securities to qualify for participation with the FHLB
since there is a requirement that participating banks have a minimum
percentage of its loan outstandings in residential loan products.
Since year end these securities have matured. The Federal Reserve Bank
stock has a yield of 6.0%.
Investments are carried at amortized cost or market value, depending on
whether they are held to maturity or available for sale. At December
31, 1997, $3,139,000 was held as held-to-maturity and $3,951,000 as held
as available-for- sale per accounting definitions. All debt securities,
at December 31, 1997 and 1996 were categorized as held-to-maturity. The
market value of securities equaled $7,089,000 at December 31, 1997 and
$16,132,000 at December 31, 1996.
LIQUIDITY - CONSOLIDATED
Liquidity is a bank's ability to meet possible deposit withdrawals, to
meet loan commitments and increased loan demand, and to take advantage
of other investment opportunities as they arise. The Bank's liquidity
practices are defined in both the Asset and Liability Policy and the
Investment Policy. These policies define acceptable liquidity measures
in terms of ratios to total assets, deposits, liabilities and capital.
In addition, these policies include acceptable ranges for the Bank's
loans-to-deposits ratio. The Bank also compares its liquidity position
and ratios to its peer group.
The Bank is required to maintain specific reserve balances with the
Federal Reserve Bank. This is monitored on a daily basis to assure
compliance with regulatory requirements. The Office of the Comptroller
of the Currency ("OCC") also requires the Bank to establish adequate
liquidity policies and practices. Although defined liquidity
percentages are not specified in the OCC's regulations, they have been
incorporated in the Bank's policies and procedures.
Cash and due from banks, federal funds sold and time certificates of
deposit totaled $16,182,000 or 6.9% of total assets at December 31, 1997
compared to $37,158,000 or 16.5% at the end of 1996. This decline in
liquidity resulted from several events. During the third quarter, the
Bank entered into an arrangement with the Federal Home Loan Bank for
short term secured borrowings. This additional source of liquidity
justified reducing the level of liquidity held in Cash and Fed Funds and
the Bank's liquidity guidelines were reduced. Then, during December of
1997, the Bank increased its loan portfolio by $7.3 million, which
reduced the Bank' liquidity to below policy guidelines. Also during
December of 1997, a new certificate of deposit campaign was implemented
to raise liquidity, but there is a delay in the receipt of deposits
following publication of a certificate of deposit campaign.
Additionally, the ALCO committee approved the sale of $2 million in SBA
loans in January 1998. As a result of these actions the liquidity
position improved during January and came within policy guidelines by
January 5, 1998.
At December 31, 1997 and 1996 the Bank's ratio of loans-to-deposits was
97.2% and 86.9% respectively. Due to the high loan growth in December
1997, the loan-to-deposit ratio exceeded the policy guideline of 95% at
1997 year end. During January of 1998 the ratio of loans-to-deposits
declined and came within policy guidelines.
The Bank has two federal funds lines of credit totaling $9,000,000 with
two financial institutions. These lines are available on a short term
basis to meet cash demands that may arise. The Bank has also
established a borrowing relationship with the Federal Home Loan Bank, as
discussed above, which will provide a new source of funds for loan
growth and liquidity purposes.
The Bank funded loan growth during 1997 through increased
interest-bearing deposits (mainly time deposits) and liquidity.
Deposits increased during 1997 and 1996 largely due to deposit campaigns
which offered higher rates to attract new time deposits. This trend is
expected to continue in 1998.
<PAGE>
The following table represents the Corporation's interest rate
sensitivity profile as of December 31, 1997. Assets, liabilities and
shareholders' equity are classified by the earliest possible repricing
opportunity or maturity date, whichever first occurs.
<TABLE>
<CAPTION>
Over 3
months Over 1 year Non-rate
Balance Sheet Through 3 through through 5 Sensitive or
(in thousands) months 1 year years Over 5 years Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Assets
Fed funds sold $8,770 $8,770
Investment securities 1,500 3,498 2,092 7,090
Loans 114,851 48,291 13,804 31,844 208,790
Non-interest-earning assets
(net of allowance for loan
losses) 9,087 9,087
--------- -------- -------- -------- --------
$125,121 $48,291 $17,302 $43,023 $233,737
========= ======== ======== ======== ========
Liabilities & Shareholders Equity
Time Deposits $100,000 and over $7,018 $7,330 $9,524 $5,230 $29,102
All other interest-bearing deposits 100,439 15,390 24,519 15,286 155,634
Non-interest bearing liabilities 31,292 31,292
Other Liabilities &
Shareholders' Equity 17,709 17,709
-------- -------- -------- -------- --------
$107,457 $22,720 $34,043 $69,517 $233,737
======== ======== ======== ======== ========
Interest Rate Sensitivity (1) $17,664 25,571 ($16,741) ($26,494)
Cumulative Interest Rate Sensitivity $17,664 $43,235 $26,494 0
======== ======== ======== ========
</TABLE>
(1) Interest rate sensitivity is the difference between interest rate
sensitive assets and interest rate sensitive liabilities within the
above time frames.
The Bank is asset sensitive. In a declining interest rate environment
there is an immediate negative impact on the Bank's net interest margin,
since assets reprice to lower rates more quickly than liabilities. In a
raising interest rate environment, the Bank's earnings are positively
affected immediately. The Bank continually monitors its interest rate
sensitivity as part of the Bank's planning process.
The Corporation and the Bank do not at this time engage in hedging
transactions (interest rate futures, caps, swap agreements, etc.).
LIQUIDITY - PARENT COMPANY ONLY
At present, the Corporation's primary sources of liquidity are from
short term investments on its capital, proceeds from exercise of stock
options, and dividends from the Bank. The Bank's ability to pay
dividends to the Corporation is subject to the restrictions of the
national banking laws and, under certain circumstances, the approval of
the OCC. Under such restrictions, the Bank may not presently pay
dividends to the Corporation without notification to the OCC.
In addition, the Federal Reserve Act prohibits the Bank from making
loans to its "affiliates", including the Corporation, unless certain
collateral requirements are met.
At December 31, 1997, the Corporation had non-interest and interest
bearing cash balances of $162,000, which management believes is adequate
to meet the Corporation's foreseeable operational expenses.
RETURN ON EQUITY AND ASSETS
The following table shows key financial ratios for the years ended
December 31, 1997, 1996 and 1995:
Year Ended December 31,
1997 1996 1995
---- ---- ----
Return on Average Assets 1.4% 1.3% 1.2%
Return on Average
Shareholders' Equity 20.3% 17.6% 15.4%
Average Shareholders' Equity
as a Percent of Average Assets 7.1% 7.2% 7.9%
Dividend Payout Ratio N/A N/A 15.7%
EFFECTS OF INFLATION
Inflation affects the Bank and the banking business generally because of
its effect on interest rates and loan demand. To offset inflation and
the resulting changes in interest rates and market demands, the Bank
attempts to maintain liquid interest bearing assets and to manage its
assets and liabilities such that they can be repriced within a short
period of time. In addition to its effect on market conditions and
interest rates, inflation increases the Corporation's cost of
operations. The rate of inflation has maintained a very low annual
rate during 1997 and 1996.
CAPITAL
The Corporation and the Bank are required by the Federal Reserve Board
and the Comptroller of the Currency to maintain adequate capital. The
Board of Governors of the Federal Reserve Bank has adopted risk-based
capital guidelines for member banks and bank holding companies which
provide minimum uniform capital adequacy requirements for bank holding
companies. The OCC has also adopted additional capital requirements
which are applicable to national banks, such as the Bank. See "Item 1,
Description of Business, Supervision and Regulation-Capital
Regulations."
The Bank and the Corporation are considered "Well-Capitalized" under the
"risk- based" capital methodology. The Bank's leverage capital ratio
was 7.3% of its total assets. The Bank's total risk-based capital ratio
was 10.8% at December 31, 1997. The minimum acceptable level at
December 31, 1997 was 8.0%. The Corporations leverage capital ratio was
7.4%, with total risk-based capital equaling 11.0%, at December 31,
1997.
INCOME TAXES
The 1997 provision for income tax equaled $2,218,000, which included a
state tax provision of $583,000,. The overall effective tax rate was
40.4% during 1997. See, "Item 7, Consolidated Financial Statements, Note
6." The provision for federal income taxes for 1996 was $1,251,000, and
the state provision was $468,000. The overall effective tax rate for
1996 was 42.7%. The decline in the effective tax rate resulted from
positive tax adjustments in the accrual calculation.
YEAR 2000
The Company has an ongoing program designed to ensure that its
operational and financial systems will not be adversely affected by year
2000 software failures, due to processing errors arising from
calculations using the year 2000 date. The Company expects to incur
additional costs on its program to redevelop, replace, or repair its
computer applications to make them "year 2000 compliant." While the
Company believes it is doing everything technologically possible to
assure year 2000 compliance, it is to some extent dependent upon vendor
cooperation. The Company is requiring its computer systems and software
vendors to represent that the products provided are, or will be, year
2000 compliant, and has planned a program of testing for compliance. It
is recognized that any year 2000 compliance failures could result in
additional expense to the Company.
NEW AND PENDING ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes requirements for disclosure of comprehensive income and will
become effective for the Company's 1998 fiscal year, with
reclassification of earlier financial statements for comparative
purposes. Comprehensive income generally represents contributions by
shareholders. The Company is evaluating alternative formats for
presenting this information, but does not expect this pronouncement to
materially impact the Company's current reporting and disclosures.
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). This statement establishes standards for
disclosures about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes SFAS No
14. "Financial Reporting for Segments of a Business Enterprise. SFAS
131 will become effective for the Company's 1998 fiscal year and
requires that comparative information from earlier years to be restated
to conform to the requirements of this standard. The Company is
evaluating the requirements of SFAS 131 and the effects, if any, on the
Company's current reporting and disclosures.
ITEM 7.
Financial Statements
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1997 and 1996
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Northern Empire Bancshares and Subsidiary:
We have audited the consolidated balance sheets of Northern Empire
Bancshares and Subsidiary (the Company) as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders'
equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
the Company at December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended, in conformity
with generally accepted accounting principles.
San Francisco, California
February 2, 1998
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
as of December 31, 1997 and 1996
(dollars in thousands)
ASSETS 1997 1996
Cash and cash equivalents:
Cash and due from banks $ 7,412 $ 11,066
Federal funds sold 8,770 22,724
Total cash and cash equivalents 16,182 33,790
Certificates of deposits in other
financial institutions - 3,368
Investment securities:
Held-to-maturity 3,139 16,132
Available-for-sale 3,951 -
Loans receivable, net 204,408 165,681
Leasehold improvements and equipment, net 683 620
Accrued interest receivable and other assets 5,374 5,202
-------- --------
Total assets $233,737 $224,793
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $214,747 $209,235
Accrued interest payable and
other liabilities 1,281 1,220
-------- --------
Total liabilities 216,028 210,455
Commitments and contingencies (Note 10).
Shareholders' equity:
Preferred stock, no par value; authorized,
10,000,000 shares; none issued or
outstanding - -
Common stock, no par value; authorized,
20,000,000 shares; shares issued and
outstanding, 1,555,069 in 1997 and
1,534,523 in 1996 9,778 9,677
Retained earnings 7,931 4,661
-------- --------
Total shareholders' equity 17,709 14,338
-------- --------
Total liabilities and shareholders' equity $233,737 $224,793
======== ========
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1997 and 1996
(dollars in thousands) 1997 1996
Interest income:
Loans $19,084 $15,005
Certificates of deposits in
other financial institutions 75 265
Federal funds sold and
investment securities 1,486 1,153
------- -------
Total interest income 20,645 16,423
------- -------
Interest expense 9,191 7,191
------- -------
Net interest income before
provision for loan losses 11,454 9,232
Provision for loan losses 650 420
------- -------
Net interest income after provision
for loan losses 10,804 8,812
------- -------
Other income:
Service charges on deposits 346 337
Gain on sale of loans 265 567
Other 792 716
------- -------
Total other income 1,403 1,620
------- -------
Other expenses:
Salaries and employee benefits 3,762 3,521
Occupancy 713 699
Equipment 368 315
Outside customer services 249 245
Deposit and other insurance 173 142
Professional fees 147 185
Advertising 184 150
Other 1,120 1,150
------- -------
Total other expenses 6,716 6,407
------- -------
Income before income taxes 5,491 4,025
Provision for income taxes 2,218 1,719
------- -------
Net income $ 3,273 $ 2,306
======= =======
Earnings per common share $ 2.12 $ 1.50
======= =======
Earnings per common share
assuming dilution $ 2.03 $ 1.46
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
(dollars in thousands)
Common Stock
-------------------- Retained
Shares Amount Earnings Total
--------- ------ -------- -------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 1,388,355 $7,433 $ 4,549 $11,982
Stock options exercised 3,578 52 52
Payout of fractional shares -2 -2
Stock dividend 142,590 2,192 -2,192
Net income 2,306 2,306
--------- ------ ------- -------
Balance, December 31, 1996 1,534,523 9,677 4,661 14,338
Stock options exercised 20,546 101 101
Payout of fractional shares -2 -2
Change in unrealized gain/loss on
available-for-sale securities -1 -1
Net income 3,273 3,273
--------- ------ ------ -------
Balance, December 31, 1997 1,555,069 $9,778 $7,931 $17,709
========= ====== ====== =======
</TABLE>
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997 and 1996
(dollars in thousands) 1997 1996
---- ----
Cash flows from operating activities:
Net income $ 3,273 $ 2,306
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 650 420
Depreciation, amortization and accretion 320 290
Net increase (decrease) in deferred loan
fees and discounts -162 228
Deferred income taxes -216 -28
Increase in interest receivable and other assets -184 -492
Increase in accrued interest payable and
other liabilities 61 460
-------- --------
Net cash provided by operating activities 3,742 3,184
-------- --------
Cash flows from investing activities:
Purchase of: Held-to maturity securities -16,354 -21,003
Available-for-sale securities -6,977 -
Proceeds from: Maturities of held-to-maturity
securities 24,500 15,750
Maturities of available-for-sale securities 3,043 -
Sale of available-for-sale securities 5,006 -
Net decrease in deposits in other
financial institutions 3,368 1,771
Net increase in loans receivable -39,164 -37,102
Purchase of leasehold improvements and
equipment, net -383 -163
-------- --------
Net cash used in investing activities -26,961 -40,747
-------- --------
Cash flows from financing activities:
Net increase in deposits 5,512 55,015
Payment of cash dividends -2 -2
Stock options exercised 101 52
-------- --------
Net cash provided by financing activities 5,611 55,065
-------- --------
Net increase (decrease) in cash and
cash equivalents -17,608 17,502
Cash and cash equivalents at beginning of year 33,790 16,288
-------- --------
Cash and cash equivalents at end of year $16,182 $33,790
======== ========
Other cash flow information:
Interest paid $ 9,178 $ 7,150
Income taxes paid $ 2,394 $ 1,860
Addition to other real estate owned $ 227 $ 359
NORTHERN EMPIRE BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Organization:
Northern Empire Bancshares (the "Company") is a bank holding
company which conducts its primary business through its wholly
owned subsidiary, Sonoma National Bank (the "Bank"), a
commercial bank located in Sonoma County, California. All
significant intercompany transactions and accounts have been
eliminated in consolidation.
Nature of Operations:
The Company primarily operates three branches in suburban
communities in Sonoma County. The Company's primary source of
revenue is providing commercial and real estate loans to
customers, who are predominantly small and middle-market
businesses. The cost of funds relate to various deposit products
offered to these same businesses and individuals.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Cash and Equivalents:
For the purposes of reporting cash flows, cash and equivalents
include cash on hand, amounts due from banks and federal funds
sold. Generally, federal funds are sold overnight.
Substantially all cash and cash equivalents held in other
financial institutions exceed existing deposit insurance
coverage.
Investment Securities:
The Bank classifies and accounts for debt and equity securities
as follows:
Held-to-Maturity:
Debt securities that management has the positive intent
and ability to hold until maturity are classified as
held-to-maturity are carried at their remaining unpaid
principal balance, net of unamortized premiums or
unaccreted discounts. Premiums are amortized and
discounts are accreted using the level interest yield
method over the estimated remaining term of the
underlying security.
Trading Securities:
Debt and equity securities that are bought and held
principally for the purpose of selling them
in the near term are classified as trading securities and
reported at market value, with unrealized gains and losses
included in earnings. The Bank held no trading securities
during 1997.
Available-For-Sale:
Debt and equity securities that will be held for
indefinite periods of time, including securities
that may be sold in response to changes in market interest
or prepayment rates, needs for liquidity and changes in
the availability of and the yield of
alternative investments are classified as
available-for-sale. After amortization or accretion of
any premiums or discounts, these assets are carried at
market value. Market value is determined using published
quotes as of the close of business. Unrealized gains and
losses are excluded from earnings and reported net of tax
as a separate component of stockholders' equity until
realized.
Realized gains and losses on held-to-maturity and
available-for-sale securities are computed
using the specific identification method using amortized
cost.
Loans Receivable:
Loans held for investment are carried at amortized cost and all
loans held for sale are carried at the lower of cost or market.
The Company's loan portfolio consists primarily of commercial and
installment loans generally collateralized by first and second
deeds of trust on real estate as well as business assets and
personal property.
Interest income is accrued daily on the outstanding loan
balances using the simple interest method. Loans are generally
placed on nonaccrual status when the borrowers are past due 90
days and when full payment of principal or interest is not
expected. At the time a loan is placed on nonaccrual status, any
interest income previously accrued but not collected is reversed.
Interest accruals are resumed on such loans only when they are
brought fully current with respect to interest and principal and
when, in the judgment of management, the loans are
estimated to be fully collectible as to both principal and
interest.
The Company charges loan origination and commitment fees. Net
loan origination fees are deferred and amortized to interest
income over the life of the loan. Loan commitment fees are
amortized to interest income over the commitment period.
Sales and Servicing of Small Business Administration (SBA)
Loans:
The Company originates loans to customers under SBA programs
that generally provide for SBA guarantees of 70% to 90% of each
loan. The Company has the option to sell the guaranteed
portion of each loan to an investor and retain the unguaranteed
portion in its own portfolio. Funding for the SBA programs depend
on annual appropriations by the U.S. Congress. Gains on these
sales are earned through the sale of the guaranteed portion of
the loan for an amount in excess of the adjusted carrying value
of the portion of the loan sold. The Company allocates the
carrying value of such loans between the portion sold, the
portion retained and a value assigned to the right to service the
loan. The difference between the adjusted carrying value of the
portion retained and the face amount of the portion retained is
amortized to interest income over the life of the related loan
using a method which approximates the interest method. The value
assigned to the right to service the loan is also amortized over
the estimated life of the loan.
Allowance for Loan Losses:
An allowance for loan losses is maintained at a level deemed
appropriate by management to provide for known losses as well as
unidentified losses in the loan portfolio. The allowance is
based upon management's assessment of various factors affecting
the collectibility of the loans including current and projected
economic conditions, past credit experience, delinquency status,
the value of the underlying collateral, if any, and continuing
review of the portfolio of loans and commitments. The allowance
is increased by provisions charged to income and reduced by net
charge-offs. The allowance for loan losses is based on
estimates, and ultimate losses may vary from the current
estimates.
A loan is considered impaired if it is probable that the Company
will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the
loan agreement. Any allowance for losses on impaired loans is
measured under one of three prescribed methods. Since almost all
of the Company's loans are collateral dependent, the
calculation of the impaired loans is generally based on the fair
value of the collateral.
Other Real Estate Owned:
Other real estate owned (OREO) consists of properties acquired
through foreclosure and is stated at the lower of cost or fair
value less estimated costs to sell. Development and improvement
costs relating to the property are capitalized. Estimated
losses that result from the ongoing periodic valuation of these
properties are charged to current earnings with a provision for
losses on foreclosed property in the period in which they are
identified. The resulting allowance for OREO losses is decreased
when the property is sold. Operating expenses of such
properties, net of related income, are included in other
expenses. Gains and losses on disposition of OREO are
included in other income.
Leasehold Improvements and Equipment:
Leasehold improvements and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and
amortization are computed on the straight-line basis over the
shorter of the estimated useful lives of the assets or the term
of the lease.
Income Taxes:
The Company and the Bank file consolidated federal income tax
returns and combined state tax returns for California and
Arizona. Deferred income taxes reflect the estimated future tax
effects of temporary differences between the amount of assets
and liabilities for financial reporting purposes and such amounts
as measured by tax laws and regulations.
Earnings Per Share:
Earnings per share (EPS) amounts for the years ended December
31, 1997 and 1996 are shown in accordance with SFAS No. 128
Earnings per Share which was effective for fiscal years ended
after December 15, 1997 and requires restatement of prior period
EPS. Basic EPS is computed by dividing income available to
common shareholders by the weighted average number of
common shares outstanding during the period. Diluted EPS is
computed by dividing diluted income available to shareholders by
the weighted average number of common shares and common
equivalent shares outstanding which include dilutive stock
options. The computation of common stock equivalent shares is
based on the weighted average market price of the Bank's
common stock throughout the period.
The following is a reconciliation of the numerators and
denominators of the basic and diluted EPS computations for the
years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
--------------------------------------- ----------------------------------
Per Per
Income Shares Share Income Shares Share
(dollars in thousands) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
<S> <S> <C> <C> <C> <C> <C>
Net income $ 3,273 $ 2,306
======= =======
Basic EPS
Income available to common
stockholder $ 3,273 1,545,729 2.12 $ 2,306 1,533,057 1.50
======= ==== ======= ====
Effect of Dilutive Securities
Stock options 65,716 43,645
--------- ---------
Diluted EPS
Income available to common
stockholders + assumed
conversion $ 3,273 1,611,445 2.03 $ 2,306 1,576,702 1.46
======= ========= ==== ======= ========= ====
</TABLE>
Reclassifications:
Certain amounts in the 1996 financial statements have been
reclassified to conform with 1997 classifications.
The amortized cost and estimated market values of investment
securities at December 31, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
1997
--------------------------------------------
Unrealized Unrealized Market
Cost Gains Losses Value
------ ---------- ---------- ------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government Agency Securities $ 3,952 $-1 $ 3,951
Held to maturity:
U.S. Treasury Securities 1,499 - - 1,499
Restricted:
Federal Reserve Bank Stock 129 129
Federal Home Loan Bank Stock 1,511 1,511
------- ------ ----- ------
$ 7,091 - $ -1 $ 7,091
======= ====== ===== =======
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------------
Unrealized Unrealized Market
Cost Gains Losses Value
------ ---------- ---------- ------
<S> <C> <C> <C> <C>
Held to maturity -
U.S. Treasury securities $16,009 $ 1 $ -1 $16,009
Other securities -
Federal Reserve Bank stock 123 123
------- ------ -------- -------
$16,132 $ 1 $ -1 $16,132
======= ====== ======== =======
Investment securities totaling $500,000 at December 31, 1997 and 1996,
were pledged to secure certain deposits.
During the year ended December 31, 1997, the bank sold one security
classified as available-for-sale, for proceeds of $5,006,000 and
recognized no gain or loss. During the year ended December 31, 1996,
the bank sold one security, classified as available-for-sale, for
proceeds of $1,002,000 and recognized a gain of $7,000.
The amortized cost and estimated market value of investment securities
at December 31, 1997 by contractual maturity is as follows:
(dollars in thousands)
Amortized Cost Market Value
Held-to-maturity: One year or less $1,499 $1,499
------ ------
Available -for -sale:
One year or less 1,500 1,500
Over one through five years 2,293 2,292
Over ten years 159 159
------- ------
$3,952 $3,951
------- ------
$5,451 $5,450
======= ======
3. Loans and Allowance for Loan Losses:
Loans at December 31, 1997 and 1996 consisted of the following:
(dollars in thousands) 1997 1996
Commercial loans $100,283 $84,969
Consumer installment loans 2,012 2,218
Real estate loans:
Construction 10,982 1,533
Other 95,513 81,008
--------- --------
208,790 169,728
Deferred loan fees and discounts -1,843 -2,005
Allowance for loan losses -2,539 -2,042
--------- ---------
$204,408 $165,681
========= =========
The Company's lending activities are concentrated primarily in Sonoma
County; however, the Company makes loans under the Small Business
Administration primarily in Northern California and Arizona. There
were no industry or borrower group concentrations at December 31, 1997.
3. Loans and Allowance for Loan Losses:
A summary of activity in the allowance for loan losses is as
follows:
(dollars in thousands) 1997 1996
---- ----
Balance, beginning of year $2,042 $1,676
Provision for loan losses 650 420
Charge-offs -222 -62
Recoveries 69 8
------ ------
Balance, end of year $2,539 $2,042
====== ======
There were four loans totaling $318,000 and six loans totaling
$438,000 on nonaccrual status as of December 31, 1997 and 1996,
respectively. Interest foregone on such loans totaled $12,000 in
1997 and $32,000 in 1996.
At December 31, 1997 and 1996, the recorded investment in loans for
which impairment has been recognized in accordance with SFAS No. 114, as
amended by SFAS No. 118, totaled $318,000 and $438,000, with a
corresponding valuation allowance of $54,000 and $201,000, respectively.
The average recorded investment in impaired loans in 1997 and 1996 was
$378,000 and $418,000, respectively. No interest income was
recognized on impaired loans in 1997 and 1996.
As discussed in Note 1, the Company originates loans guaranteed by the
U.S. Small Business Administration (SBA). The Company has the option to
sell to outside investors, usually at a price in excess of par, the
guaranteed portion of these loans and retain the remaining unguaranteed
portion in its loan portfolio. When the Company sells the guaranteed
portion of such loans, it transfers the SBA guarantee to the buyer and
retains the servicing function. At December 31, 1997 and 1996,
the Company serviced $33,893,000 and $44,110,000 in loans guaranteed
by the SBA of which the Company's retained interests in these loans
range from 10% to 35%. The Company and the SBA share losses on these
loans on a pro rata basis. In addition, at December 31, 1997 and 1996,
loans receivable included $43,988,000 and $28,256,000 of SBA loans
which could be sold in the future.
At December 31, 1997 and 1996 the Company serviced additional loans
for others totaling $8,395,000 and $10,494,000, respectively.
4. Leasehold Improvements and Equipment:
Leasehold improvements and equipment consisted of the following at
December 31, 1997 and 1996:
(dollars in thousands) 1997 1996
----- ----
Leasehold improvements $ 963 $ 942
Furniture and equipment 1,752 1,513
------ ------
Total $2,715 2,455
Less accumulated depreciation
and amortization -2,032 -1,835
------ ------
Total $ 683 $ 620
====== ======
Depreciation and amortization of approximately $320,000 and $290,000
were charged to expense for the years ended December 31, 1997 and 1996,
respectively.
5. Deposits:
Deposits consisted of the following at December 31, 1997 and 1996:
(dollars in thousands) 1997 1996
---- ----
Noninterest-bearing deposits $ 30,092 $ 28,612
Interest-bearing deposits:
Money market rate 64,842 71,087
Savings 3,823 4,095
Demand 13,086 11,468
Certificates of deposit 102,904 93,973
------- -------
$214,747 $209,235
======== ========
Certificates of deposits with balances of $100,000 or more totaled
$29,104,000 and $25,621,000 at December 31, 1997 and 1996, respectively.
Certificates of deposit have remaining maturities at December 31, 1997
and 1996 as follows:
5.Deposits, continued:
(dollars in thousands) 1997 1996
---- ----
Three months or less $ 25,572 $ 22,855
Over three through six months 22,721 25,335
Over six through twelve months 34,082 37,969
Over twelve months 20,529 7,814
-------- --------
Total certificates of deposit $102,904 $ 93,973
======== ========
6. Income Taxes:
The components of the provision for federal and state income taxes are
as follows:
(dollars in thousands) 1997 1996
---- ----
Currently payable:
Federal $1,784 $1,219
State 650 528
------ ------
2,434 1,747
Deferred:
Federal -132 45
State -84 -73
------ ------
-216 -28
------ ------
$2,218 $1,719
====== ======
A reconciliation of the statutory tax rates to the effective tax
rates is as follows:
1997 1996
---- ----
Statutory federal tax rate 35.0 35.0
State tax, net of federal
income tax effect 7.2 7.2
Other, net -1.8 0.5
---- ----
40.4 42.7
==== ====
The components of deferred income tax assets net of liabilities as of
December 31, 1997 and 1996 are as follows:
(dollars in thousands)
1997 1996
Deferred Deferred
Tax Assets Tax Assets
(Liabilities) (Liabilities)
----------- -----------
Loan loss reserves $ 810 $ 650
Deferred compensation 140 86
Deferred loan fees 41 61
State taxes, net of
federal effect 454 370
All others -166 -104
------ ------
Total $1,279 $1,063
====== ======
7. Stock Option Plan:
The Company's stock option plan provided for granting of stock
options (up to 311,380 shares) to directors and officers to purchase
shares of the Company's stock at a price not less than the fair
market value on the date the option is granted. Options to outside
directors vest at the time of grant. Options to officers and directors
who are also officers vest over five years from the date of grant. All
options expire ten years from the date of grant.
Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
Accounting for Stock Based Compensation, is effective for transactions
entered into for fiscal years beginning after December
31, 1995, and applies to awards made in fiscal years beginning after
December 31, 1994. This statement defines a fair-value method of
accounting for stock-based compensation. As permitted
by SFAS No. 123, the Company accounts for stock options under APB
Opinion No. 25, under which no compensation cost has been recognized.
The Company has made no awards under its stock option plans subsequent
to January 1, 1995. As such, pro forma net income and earnings
per share data as if compensation cost for these plans had been
determined consistent with SFAS No. 123 would not differ from the
reported amounts in the Company's income statement.
A summary of all stock option activity for the year ending
December 31, 1997 is presented below:
Weighted-Average
Exercise Price
Weighted-Average
Exercise
Shares Price
---------- ----------------
Outstanding, December 31, 1996 100,773 $6.33
Exercised -20,546 $4.94
-------
Outstanding, December 31, 1997 80,227
=======
Options exercisable at year-end 80,227
=======
The following table summarizes information about the Plan's stock
options at December 31, 1997:
Outstanding Weighted-Average
at Remaining Weighted-Average
Range of Exercise Price 12/31/97 Contractual Life Exercise Price
- ----------------------- -------- ---------------- --------------
$5.74 - $7.01 80,227 2.1 years $6.32
In 1994, the stock option plan expired, therefore at December 31, 1997
and 1996, there were no options to purchase shares available, under the
1984 plan, for future grants.
8. Deferred Compensation:
The Company has entered into deferred compensation agreements with
two key officers and four board members. Under these agreements, the
Company is obligated to provide for each such employee/director or their
beneficiaries, during a period of 15 years after the
employee's/director's death, disability, or retirement, annual benefits
ranging from $75,000 to $100,000 for the employees and $13,000 to
$55,000 for the directors. The estimated present value of future
benefits to be paid is being accrued over the period from the
effective date of the agreements until the expected retirement dates of
the participants. The expense incurred and amount accrued for
this plan for the years ended December 31, 1997 and 1996 totaled
$156,517 and $104,000, respectively. The Company is the beneficiary of
life insurance policies that have been purchased as a method of
financing the benefits under the agreements. At December 31, 1997 and
1996, the cash surrender value of these policies was $1,900,000 and
$1,778,000, respectively, which is included in other assets.
9. Employee Benefit Plan:
The Company has a 401(k) savings plan covering substantially all
employees of the Company. Under the provisions of the plan, employees
who elect to participate are allowed to make "deferred
contributions" (as defined in the Plan Agreement) of up to 15% of
their annual salary with a maximum of $9,500. In addition, the Company
will make matching contributions equal to 100% of each employee's
elective deferral with a maximum of $1,000 per employee. Contributions
by the Company for the year ended December 31, 1997 and 1996 amounted to
$52,000 and $46,000, respectively.
10. Related Party Transactions:
The Company has and expects to have, in the future, banking transactions
in the ordinary course of business with directors, officers and their
associates. An analysis of the loans to related parties is as follows:
(dollars in thousands)
1997 1996
---- ----
Balance, beginning of year $6,075 $4,581
Additions 10,336 6,164
Principal reductions -9,396 -4,670
------ ------
Balance, end of year $7,015 $6,075
====== ======
The Company has entered into three operating leases for branch and
office facilities with a Director or partnerships owned by Directors of
the Company. Rental payments made under these leases were $189,000 and
$331,000 for the years ended December 31, 1997 and 1996, respectively.
Two of the leases require that rental payments will increase each year
based on the consumer price index, and under certain circumstances,
average deposits at the branch. Two of the leases changed owners during
the year and are no longer related party transactions.
11. Commitments and Contingencies:
The Bank is required by federal regulations to maintain certain
minimum average balances with the Federal Reserve, based primarily on
the Bank's daily demand deposit balances. Required deposits
held with the Federal Reserve at December 31, 1997 were $1,205,000.
The future minimum noncancellable lease payments as of December 31,
1997 are as follows:
(Dollars in thousands)
1998 $ 401
1999 339
2000 341
2001 329
Thereafter 1,071
------
Total $2,481
Total rental expense for the years ended December 31, 1997 and 1996
was $480,000 and $481,000, respectively.
12. Regulatory Capital Requirements:
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material affect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of
the Bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1997, that the Company and the
Bank meet all capital adequacy requirements to which it is subject.
(dollars in thousands
For Capital To Be Well-Capitalized
Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ----- ------
Total Capital (to Risk Weighted Assets):
Consolidated $ 19,952 11.0% $ >14,576 >8.0% $ >18,220 >10.0%
Bank 19,743 10.8% >14,754 >8.0% >18,218 >10.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 17,671 9.7% > 7,288 >4.0% >10,932 > 6.0%
Bank 17,462 9.6% > 7,287 >4.0% >10,931 > 6.0%
Tier 1 Capital (to Average Assets):
Consolidated 17,671 7.4% > 9,591 >4.0% >11,988 > 5.0%
Bank 17,462 7.3% > 9,575 >4.0% >11,968 > 5.0%
As of December 31, 1997, the Bank was categorized as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well-capitalized, the Bank must maintain minimum
total risk-based, Tier I risk-based, Tier I leverage ratio as set forth
in the table, and not subject to a capital directive. Payment of
dividends by the Bank is limited under regulation. The amount that can
be paid in any calendar year without prior approval of the Office of the
Comptroller of the Currency cannot exceed the lesser of net profits (as
defined) for that year plus the net profits for the preceding two
calendar years, or retained earnings. Therefore, the payment of
dividends by the Company may also be limited.
13. Fair Values of Financial Instruments:
Fair value estimates are determined as of a specific date in time
utilizing quoted market prices, where available, or various assumptions
and estimates. As the assumptions underlying these
estimates change, the fair value of the financial instruments will
change. The use of assumptions and various valuation techniques, as
well as the absence of secondary markets for certain financial
instruments, will likely reduce the comparability of fair value
disclosures between financial institutions. Additionally, the Bank has
not disclosed highly subjective values of other non-financial
instruments. Accordingly, the aggregate fair value amounts presented do
not represent and should not be construed to represent the full
underlying value of the Company.
The methods and assumptions used to estimate the fair values of each
class of financial instruments are as follows:
Cash and Cash Equivalents:
The carrying value of cash and cash equivalents approximates fair
value due to the relatively short-term nature of these instruments.
Investment Securities, Held to Maturity:
Fair value of securities and investments is based on quoted market
prices. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans Receivable:
In order to determine the fair values for loans, the loan portfolio was
segmented based on loan type, credit quality and repricing
characteristics. For certain variable rate loans with no significant
credit concerns and frequent repricings, estimated fair values are based
on the carrying values. The fair values of other loans are estimated
using discounted cash flow analysis. The discount rates used in these
analysis are generally based on origination rates for similar loans of
comparable credit quality. Maturity estimates of installment loans are
based on historical experience with prepayments.
Deposits:
The fair values for deposits, subject to immediate withdrawal such as
interest and noninterest bearing, and savings deposit accounts, are
equal to the amount payable on demand at the reporting date (i.e., their
carrying amount on the balance sheet). Fair values for fixed-rate
certificates of deposits are estimated by discounting future cash flows
using interest rates currently offered on time deposits with similar
remaining maturities.
Off-Balance Sheet Instruments:
The fair value of commitments to extend credit and standby letters of
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 counter parties.<PAGE>
(dollars in thousands)
December 31, 1997 December 31, 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial Assets:
Cash equivalents and
certificates
of deposits $16,182 $16,182 $37,158 $37,159
Investments securities 7,091 7,091 16,009 16,009
Loans receivable, net 204,408 212,002 165,681 168,577
-------- -------- -------- --------
$227,681 $235,275 $218,848 $221,745
======== ========= ======== ========
Financial Liabilities:
Deposits $214,747 $214,761 $209,431 $209,597
======== ======== ======== ========
Off-balance sheet financial instruments:
Commitments to
extend credit $ - $231 $ - $166
Standby letters of credit - - - 4
------- ------ ----- -----
$ - $231 $ - $170
======= ====== ===== =====
14. Financial Instruments with Off-Balance Sheet Risk:
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. To date, these financial instruments include
commitments to extend credit and standby letters of credit which involve
elements of credit and interest rate risk in excess of the amount
recognized in the statement of financial position.
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. The Company evaluates each customer's creditworthiness on
a case-by-case basis. The Company generally requires collateral or
other security to support commitments to extend credit. Standby
letters of credit are performance assurances made on behalf of customers
who have a contractual obligation to produce or deliver goods or
services or otherwise perform. Credit risk in these transactions arises
from the possibility that a customer may not be able to repay the Bank
if the letter of credit is drawn upon. As with commitments to extend
credit, the Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if any, is based
on management's credit evaluation of the counter-party.
At December 31, 1997 and 1996 loan commitments totaled $23,123,000 and
$16,590,000, respectively and standby letters of credit totaled $80,000
and $377,000, respectively.
15. Parent Company Only Condensed Financial Information:
The condensed financial statements of Northern Empire Bancshares
(parent company only) as of December 31, 1997 and 1996, and for each of
the two years in the period ended December 31, 1997, are presented
below:
Balance Sheets (dollars in thousands)
1997 1996
----- -----
Assets:
Cash and cash equivalents $ 162 $ 196
Investment in Sonoma National Bank 17,501 14,060
Other assets 86 91
------- -------
Total assets $17,749 $14,347
======= =======
Liabilities and shareholders' equity:
Other liabilities $ 40 $ 9
Preferred stock, no par value;
authorized, 10,000,000 shares;
none issued or outstanding
Common stock, no par value;
authorized, 20,000,000 shares;
issued and outstanding 1,555,069
in 1997 and 1,534,523 in 1996 9,778 9,677
Retained earnings 7,931 4,661
------- ------
Total shareholders' equity 17,709 14,338
------- ------
Total liabilities and
shareholders' equity $17,749 $14,347
======= =======
15. Parent Company Only Condensed Financial Information, continued:
Statements of Income (dollars in thousands)
1997 1996
---- ----
Interest and other income $ 16 $ 8
Administrative expenses -9 -9
Income taxes expense 25 -1
Equity in undistributed earnings of
Sonoma National Bank 3,241 2,308
------ ------
Net income $3,273 $2,306
====== ======
Statements of Cash Flows
(dollars in thousands) 1997 1996
---- ----
Cash flows from operating activities:
Net income $ 3,273 $ 2,306
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Change in other assets 5 -40
Change in other liabilities 31 8
------ ------
Total 3,309 2,274
Less equity in undistributed earnings
of Sonoma National Bank -3,241 -2,308
------- -------
Net cash provided by (used in)
operating activities 68 -34
Cash flows from investing activities:
Capital contributed to
Sonoma National Bank -200 -
------- -------
Net cash (used in) provided by
investing activities -200 -
------- -------
Cash flows from financing activities:
Cash dividend paid -3 -2
Stock options exercised 101 52
------- -------
Net cash provided by
financing activities 98 50
------- -------
Net increase (decrease) in cash
and cash equivalents -34 16
Cash and cash equivalents:
Beginning of year 196 180
------ ------
End of year $ 162 $196
======= =======
ITEM 8.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Part III
ITEM 9.
Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The following are the directors and executive officers of the
Corporation and the
Bank:
Name and Positions with the Principal Occupation
Corporation and the Bank Age During the Past 5 Years
- --------------------------- --- -----------------------
Deborah A. Meekins, 45 President and Chief
President & Chief Executive Executive Officer of
Officer and Director the Bank since February
1991.
Clement C. Carinalli 52 Retired CPA, local
Director of the Corporation Businessman, rancher
and the Bank and real estate
investor.
Patrick R. Gallaher, 52 Certified Public
Chief accounting Officer of the Accountant and local
Corporation and Director of the businessman; major
Corporation and the Bank shareholder in Oakmont
Developers, a Santa
Rosa development
company.
William P. Gallaher, 47 Real Estate developer
Director of the Corporation and investor; President
and the Bank of Oakmont Developers;
President of Gallaher
Construction Company.
William E. Geary, 69 Senior Partner in
Director of the Corporation Geary,Shea & O'Donnell,
and the Bank a Santa Rosa law firm.
Dennis R. Hunter, 55 Real estate investor
Chairman of the Board of the and developer in Santa
Corporation and Vice Chairman of Rosa; principal in
the Board of the Bank Investment Development
Fund, a venture capital
fund.
James B. Keegan, Jr., 49 Partner in Keegan &
President & Director of the Coppin Company, a Santa
Corporation and Chairman of the Rosa real estate
Board of the Bank brokerage and
development firm, since
1976.
Robert V. "Buzz" Pauley, 53 Owner of Pauley
Secretary/Treasurer of the Exports, Ltd., an
Corporation and Director of the exporter of California
Bank food and beverage
products to the Pacific
Rim; commercial
properties manager;
trader of futures and
options contracts in
Chicago and other
international market
exchanges.
David F. Titus, 45 Executive Vice
Executive Vice President and Senior President & Senior Loan
Loan Officer of the Bank Officer of the Bank
since January, 1995.
Senior Vice President
& Senior Loan Officer
of the Bank from August
1991 to January, 1995.
JoAnn Barton, 44 Senior Vice President
Senior Vice President & Senior and Senior Operations
Operations Officer of the Bank Administrator of the
Bank since March 1992;
from November 1985 Vice
President and Senior
Operations
Administrator of the
Bank.
Jane M. Baker 51 Senior Vice President
Senior Vice President & and Chief Financial
Chief Financial Officer of the Bank Officer of the Bank
since August 1995; Vice
President and Chief
Financial Officer of
the Bank since August
1992.
Each of the directors of the Corporation has served as a director since
the initial organization of the Corporation in 1982, except for Patrick
R. Gallaher who was elected on May 19, 1992, William P. Gallaher who was
elected on June 21,1994 and Clement C. Carinalli who was reappointed in
May 1996. William P.Gallaher and Patrick R. Gallaher are brothers.
William E. Geary, Dennis R. Hunter, James B. Keegan, Jr. and Robert V.
Pauley have served as directors of the Bank since the initial
organization of the Bank. Clement C. Carinalli was reappointed to the
Bank board in February 1996. Deborah A. Meekins was appointed as Bank
director in August 1990; William P. Gallaher was appointed in November
1988; and Patrick R. Gallaher was appointed in December 1991. As the
sole shareholder of the Bank, the Corporation elects the directors of
the Bank.
The Corporation's common stock is not registered pursuant to section 12
of the Exchange Act, therefore Item 405 of Regulation S-B is not
applicable.
ITEM 10.
Executive Compensation
The following table sets forth the cash compensation paid to or accrued
for the officers of the Bank whose cash compensation exceeded $100,000,
for services rendered for the periods indicated. The executive officers
of the Corporation,including the President, do not receive compensation
for their services as such. The President of the Corporation, James B.
Keegan, Jr., serves as the Chairman of the Board of the Bank and
receives $1,500 per month from the Bank for his services in that
capacity. All other executive officers of the Corporation are
considered outside directors of the Bank and, as such, they receive
directors fees. See, "Compensation of Directors," below.
Summary Compensation Table
--------------------------
(dollars in thousands)
Long Term
Annual Compensation Compensation
Name and Options All
Principal Position Yr Salary Bonus (# of shares) Other 1
- ------------------ -- --------------- ------------- ----
Deborah A. Meekins, 1995 $128 $69 $27
President and Chief 1996 133 81 39
Executive Officer and 1997 141 110 51
Director of the Bank
David F. Titus, Executive 1995 91 44 23
Vice President and Senior 1996 96 54 34
Loan Officer of the Bank 1997 100 73 46
1) Includes contribution by the Bank for the benefit of the named
officer pursuant to the Bank's 401(k) plan and expenses incurred with
respect to the Salary Continuation Agreement for the named officer, as
described below.
Salary Continuation Agreements
During 1993, the Bank entered into deferred compensation agreements with
Deborah A. Meekins, President & Chief Executive Officer, and David F.
Titus, Executive Vice President & Senior Loan Officer. Under these
agreements, the Bank is obligated to provide for them or their
beneficiaries, during a period of 15 years after the employee's death,
disability, or retirement, annual benefits ranging from $75,000
to $100,000. Benefits are also provided to the officer if he/she
resigns following a change in control or if he/she voluntarily resigns
after June 1, 1995. The estimated present value of future benefits to
be paid is being accrued over the period from the effective date of the
agreements until their expected retirement dates. The accrued expense
is included in Other Liabilities in the financial statements. The Bank
is the beneficiary of life insurance policies that have been purchased
as a method of financing the benefits under the agreements. At December
31, 1997, the cash surrender value of these policies were $876,000,
which is included in other assets.
Stock Option Plan
Neither the Corporation nor the Bank award restricted stock or have long
term incentive plans, other than the Corporation's Stock Option Plan.
No stock options were granted to officers in 1997 or 1996, since the
stock option plan expired on February 26, 1994. Stock options granted
under the Stock Option Plan remain outstanding even though the Plan has
terminated.
The Corporation's Board of Directors has adopted a new stock option plan
which will be brought to the shareholders for approval at the May 19,
1998 shareholders meeting. No options have been granted under this
plan.
Aggregated Year-End Option Values
December 31, 1997
Name Number of Unexercised Value of Unexercised
Securities Underling Options (2)
Options (No. of Shares)(1) Exercisable/Unexercisable
Exercisable/Unexercisable
========================================================================
Deborah A. Meekins 21,464 / 0 $313,000 / $0
David F. Titus 1,214/ 0 31,000 /
(1) Adjusted for stock dividends issued since date of the option grant.
(2) Calculated based on the difference between the fair market value of
the stock and the exercise price of the options, as of December 31,
1997.
Compensation of Directors
Outside Directors of the Bank (including directors who serve as
executive officers of the Corporation) receive director fees as follows:
$1,000 for each monthly board meeting attended, $200 per executive or
loan committee meeting attended and $125 per all other committee
meetings attended. The Chairman of the Board of the Bank receives a fee
of $1,500 per month in addition to the committee fees described above.
The Corporation does not pay director's fees at this time, and does not
plan to in the near future.
Directors also were eligible to receive options under the Corporation's
Stock Option Plan. See "Item 11, Security Ownership of Certain
Beneficial Owners and Management." During 1997, stock options for 4,700
shares were exercised by directors, realizing a value of approximately
$72,000. Outside directors held on December 31, 1997 options for 62,905
shares, which options had an estimated value of $1,647,000 based on the
difference between the fair market value of the stock as of that date
and the exercise price of the options.
During 1994, 1995 and 1996, the Corporation entered into deferred
compensation agreements with Patrick R. Gallaher, William P. Gallaher,
William Geary, and James B. Keegan, Jr. Under each of these agreements,
the Corporation is obligated to provide for the director or his
beneficiaries, during a period of between 10 to 15 years after the
director's death, disability or retirement, annual benefits ranging
from $13,000 to $55,000. The estimated present value of future benefits
to be paid is being accrued over the period from the effective date of
the agreements until the expected retirement dates. The Corporation is
beneficiary of life insurance policies that have been purchased as a
method of financing the benefits. At December 31, 1996, the cash
surrender value of these policies was $1,021,000, which is included in
other assets.
ITEM 11.
Security Ownership of Certain Beneficial Owners and Management
Other than as set forth below, the Corporation knows of no person who is
the beneficial owner of more than 5.0% of the Corporation's outstanding
shares as of February 28, 1998.
The following sets forth the numbers of shares of common stock
beneficially owned by each director of the Corporation and the Bank and
by the directors and officers (including vice presidents and above) of
the Corporation and the Bank as a group, as of February 28, 1998. The
numbers of shares beneficially owned include the numbers of shares which
each person has the right to acquire upon exercise of stock options
granted pursuant to the Corporation's Stock Option Plan. The
percentages of shares owned beneficially are calculated, pursuant to SEC
Rule 13d-3(d) (1), based on the number of shares presently outstanding
plus the number of shares which the person or group has the right to
acquire.
Name Number of Shares
Beneficially Owned Pct
==== ================== ===
Clement C. Carinalli 63,469 (1) 4.0%
Patrick R. Gallaher 44,301 2.8
William P. Gallaher 37,389 (2) 2.4
William E. Geary 71,550 (3 4.6
Dennis R. Hunter 140,623 (4) 9.0
James B. Keegan, Jr. 48,831 (5) 3.1
Deborah A. Meekins 22,564 (6) 1.4
Robert V. Pauley 100,797 (7) 6.4
All other officers as a
group (13 people) 18,182 (8) 1.2
Directors and Officers ------- ----
as a group (21 persons) 547,706 34.9%
======= ====
(1) Including 20,271 shares which Mr. Carinalli has the right to
purchase upon exercise of outstanding options and 3,160 shares
held by members of his immediate family residing at his home.
(2) Including 7,291 shares which Mr. W. Gallaher has the right to
purchase upon ercise of outstanding options and 18,300 shares held
in Mr. W. Gallaher's IRA.
(3) Including 9,724 shares which Mr. Geary has the right to purchase
upon exercise of outstanding options, 7,324 shares held for the
employee pension and profit sharing plan of Geary Shea &
O'Donnell, 8,195 shares held by Mrs. Geary and 3,949 shares held
in a trust account for which Mr. Geary serves as trustee but
does not have a beneficial interest.
(4) Including 39,147 shares held in the name of Katherine Hunter, as
to which Mr. Hunter has voting rights, and 95,521 shares held in
trust accounts for which Mr. Hunter serves as trustee but does not
have a beneficial interest.
(5) Including 3,199 shares which Mr. Keegan has the right to purchase
upon exercise of outstanding options, 34,008 shares held by Keegan
& Coppin Company, Inc., 3,591 shares held by the Keegan & Coppin
Profit Sharing Plan and 5,241 held in trust accounts for which Mr.
Keegan is trustee or held in accounts for the benefit of his minor
children.
(6) Including 11,757 shares which Ms. Meekins has the right to
purchase upon exercise of outstanding options.
(7) Including 9,724 shares which Mr. Pauley has the right to purchase
upon exercise of outstanding options and 8,473 shares held by Mrs.
Pauley.
(8) Including 5,081 shares which officers have the right to purchase
upon exercise of outstanding options.
The following are the business addresses of the directors having
beneficial ownership of more than 5% of the Corporation's outstanding
shares.
Robert V. Pauley, 120 "D" Street, Santa Rosa, CA 95404
Dennis R. Hunter, 2455 Bennett Valley Road, Santa Rosa, CA 95404
As of February 28, 1998, Mr. James Ratto and Mrs. Deana Ratto, P.O. Box
768, Novato, CA 94948, owned 77,191 shares or 4.9% of the total shares
outstanding and held 24,917 shares in trust accounts for which either
Mr. Ratto or Mrs. Ratto serve as the trustee. The total number of
shares equaled 102,108 or 6.5% of the total shares outstanding.
ITEM 12.
Certain Relationships and Related Transactions
The Corporation leased the main premises of the Bank from Clement C.
Carinalli, a director of the Corporation and the Bank, and Ann Marie
Carinalli. The Corporation subleases the premises to the Bank. During
1996, the building was sold and Mr. and Mrs. Carinalli assigned the
lease obligation to the new owners. The monthly lease payment was
$16,596 per month in 1997. The total rental expenses on this lease for
the year ended December 31, 1997 was $194,000.
The Corporation leased the Oakmont Branch premises from Oakmont
Investments of which Patrick Gallaher, a director of the Corporation and
Bank, is a partner. During 1997, Oakmont Investments sold the building
and assigned the lease obligation to the new owner. The monthly rental
for the Oakmont Branch was $7,122 at December 31, 1997. Total rental
expense on this lease for the year ended December 31, 1997 was $76,000.
The Bank has leased new facilities for the loan department and some
administrative offices from Mr. James Ratto, a major shareholder of the
Corporation. The monthly rent will be $12,875 per month commencing May
1, 1998.
The Bank has had in the ordinary course of business, and expects to have
in the future, banking transactions with its directors, officers and
their associates, including transactions with corporations of which such
persons are directors, officers or controlling shareholders. The
transactions involving loans have been and will be entered into with
such persons in the ordinary course of business, on substantially the
same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with other persons, and on terms
not involving more than the normal risk of collectibility or presenting
other unfavorable features. At December 31, 1997, loans by the Bank to
directors, officers and their associates totaled approximately
$7,015,000, constituting 3.4% of total loans, 40.1% of the Bank's
shareholder's equity and 39.6% of the consolidated shareholders' equity
of the Corporation.
Loans to insiders, such as officers, directors, and certain other
persons are subject to the limitations and requirements of the Financial
Institutions Regulatory and Interest Rate Control Act of 1978 and
regulations thereunder.
PART IV
ITEM 13.
Exhibits, Financial and Reports on Form 8-K
(a)
Exhibits
The following is a list of the exhibits to this Form 10-KSB.
(3) (a) Articles of Incorporation of the Corporation
(filed as Exhibit 3.1 to the Corporation's S-1
Registration Statement, filed May 18, 1984 and
incorporated herein by this reference).
(b) Certificate of Amendment to Articles of
Incorporation, filed January 17, 1989 (filed as
exhibit (3)(b) to the Corporation's Annual Report
on Form 10-K for the Fiscal Year Ended December 31,
1988 and incorporated herein by this reference).
(c) Bylaws of the Corporation, as amended (filed as
Exhibit 3.2 to the Corporation's S-2 Registration
Statement, File No. 33-51906 filed September 11, 1992
and incorporated herein by this reference).
(d) Amendment to the Bylaws of the Corporation and
revised Bylaws (filed as Exhibit (3)(d) to the
Corporation's Annual Report on Form 10-KSB for
the Fiscal Year Ended December 31,1994 and
incorporated herein by this reference).
(e) Secretary's certificate of Amendment to the Bylaws
of the Corporation and revised Bylaws.
(10) (a) Lease for Bank Premises at 801 Fourth Street,
Santa Rosa, California (filed as Exhibit 10.2 to the
Corporation's S-2 Registration Statement, filed
September 11, 1992, and incorporated herein by this
reference).
(b)* Stock Option Plan (filed as Exhibit 10.2 to the
Corporation's S-1 Registration Statement, filed
May 18, 1984, and incorporated herein by this
reference).
(c) Lease for Bank Premises at 6641 Oakmont Drive,
Santa Rosa, California, dated February 1, 1989
(filed as Exhibit (10)(c) to the Corporation's Annual
Report on Form 10-K for the Fiscal Year ended
December 31, 1988 and incorporated herein by
this reference).
(d)* Amendment No. 1 to Stock Option Plan (filed as Exhibit
(10)(d) to the Corporation's Annual Report on Form
10-K for the Fiscal Year ended December 31, 1989 and
incorporated herein by this reference).
(e)* Amendment No. 2 to Stock Option Plan (filed as Exhibit
(10)(f) to the Corporation's Annual Report on Form
10-K for the Fiscal Year Ended December 31, 1991 and
incorporated herein by this reference).
(f)* Indemnification Agreements between James B.
Keegan, Jr. and Northern Empire Bancshares and
Sonoma National Bank (filed as Exhibit (10)(h) to the
Corporation's Annual Report on Form 10-KSB for the
Fiscal Year Ended December 31,1992 and
incorporated herein by this reference).
(g)* Indemnification Agreements between Dennis R. Hunter
and Northern Empire Bancshares and Sonoma National
Bank (filed as Exhibit (10)(i) to the Corporation's
Annual Report on Form 10-KSB for the Fiscal Year
Ended December 31,1992 and incorporated herein by
this reference).
(h)* Indemnification Agreements between Robert V. Pauley and
Northern Empire Bancshares and Sonoma National
Bank (filed as Exhibit (10)(j) to the Corporation's
Annual Report on Form 10-KSB for the Fiscal Year
Ended December 31,1992 and incorporated herein by
this reference).
(i)* Indemnification Agreements between William E. Geary and
Northern Empire Bancshares and Sonoma National
Bank (filed as Exhibit (10)(k) to the Corporation's
Annual Report on Form 10-KSB for the Fiscal Year Ended
December 31,1992 and incorporated herein by this
reference).
(j)* Indemnification Agreements between Patrick R. Gallaher
and Northern Empire Bancshares and Sonoma National
Bank (filed as Exhibit (10)(l) to the Corporation's
Annual Report on Form 10-KSB for the Fiscal Year Ended
December 31,1992 and incorporated herein by this
reference).
(k)* Indemnification Agreement between William P. Gallaher
and Sonoma National Bank (filed as Exhibit (10)(m) to
the Corporation's Annual Report on Form 10-KSB for the
Fiscal Year Ended December 31,1992 and incorporated
herein by this reference).
(l)* Indemnification Agreement between Deborah A. Meekins
and Sonoma National Bank (filed as Exhibit (10)(p) to
the Corporation's Annual Report on Form 10-KSB for the
Fiscal Year Ended December 31,1992 and incorporated
herein by this reference).
(m)* Executive Salary Continuation Agreement between
Deborah A. Meekins and Sonoma National Bank (filed as
Exhibit (10)(O) to the Corporation's Annual Report on
Form 10-KSB for the Fiscal Year Ended December 31,1993
and incorporated herein by this reference).
(n)* Executive Salary Continuation Agreement between
David F. Titus and Sonoma National Bank (filed
as Exhibit(10)(p) to the Corporation's Annual
Report on Form 10-KSB for the Fiscal Year Ended
December 31,1993 and incorporated herein by this
reference).
(o) Lease for premises in Lakeside Village Shopping Center,
Windsor, California, dated March 1,1993 (filed as
Exhibit (10.15) to the Corporation's Amendment No. 1
to Form S-2 Registration Statement, File No. 33-60566,
filed May 13, 1993 and incorporated herein by
this reference).
(p)* Director's Deferred Compensation Plan between
Patrick R. Gallaher and Sonoma National Bank (filed
as Exhibit (10)(r) to the Corporation's Annual Report
on Form 10-KSB for the Fiscal Year Ended
December 31,1994 and incorporated herein by
this reference).
(q)* Director's Deferred Compensation Plan between William P.
Gallaher and Sonoma National Bank (filed as Exhibit
(10)(s) to the Corporation's Annual Report on
Form 10-KSB for the Fiscal Year Ended
December 31,1994 and incorporated herein by this
reference).
(r)* Director's Deferred Compensation Plan between
James B. Keegan, Jr. and Sonoma National Bank (filed
as Exhibit (10)(t) to the Corporation's Annual Report
on Form 10-KSB for the Fiscal Year Ended
December 31,1994 and incorporated herein by this
reference).
(s)* Director's Deferred Compensation Plan between William E.
Geary and Sonoma National Bank (filed as Exhibit
(10)(u) to the Corporation's Annual Report on
Form 10-KSB for the Fiscal Year Ended December 31,1994
and incorporated herein by this reference).
t)* Director's Deferred Compensation Plan between
William P. Gallaher and Sonoma National Bank (filed as
Exhibit (10)(v) to the Corporation's Quarterly Report
on Form 10-QSB for the Quarter Ended June 30,1996 and
incorporated herein by this reference).
u) Lease for Bank Premises at 6641 Oakmont Drive,
Santa Rosa, California, dated October 1, 1996
(filed as Exhibit (10)(w) to the Corporation's
Quarterly Report on Form 10-QSB for the Quarter
ended September 30, 1996 and incorporated herein
by this reference).
(v) Lease for Loan and Administration Offices at 751
and 755 Fourth Street, Santa Rosa, California, dated
June 1, 1996 (filed as Exhibit (10)(x) to the
Corporation's Quarterly Report on Form 10-QSB for
the Quarter ended September 30, 1996 and
incorporated herein by this reference).
(w) Lease for Loan and Administration Offices at 815
Fifth Street, Santa Rosa, California, dated
February 24, 1998. *Management contract or compensation
plan or arrangement.
(22) Subsidiaries of the Corporation (filed as Exhibit 22 to
Post Effective Amendment No. 5 to the Corporation's S-1
Registration Statement, filed May 29, 1987, File No
2-91196 and incorporated herein by this reference).
(27) Financial Data Schedule.
(b) Reports on Form 8-K
Not Applicable
Supplemental Information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Exchange Act by Non Reporting Issuers.
Four copies of the Registrant's 1997 Annual Report to Security Holders
will be furnished to the Commission for its information when it is sent
to the security holders.
The Registrant's Proxy Materials for the 1998 Shareholders' Meeting have
not yet been sent to the Security Holders. Copies of the Proxy
materials will be furnished to the Commission for its information when
they are sent to the security holders.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Northern Empire Bancshares
By /s/ Dennis R. Hunter
- -----------------------
Dennis R. Hunter, Chairman of the Board
of Directors
Date
March 17, 1998
- -------------------
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in capacities on the dates indicated.
Date March 17, 1998
/s/ Dennis R. Hunter
- --------------------
Dennis R. Hunter
Chairman of the Board of Directors
Date March 17, 1998
/s/ James B. Keegan
- --------------------
James B. Keegan, Jr.
President/Director
Date March 17, 1998
/s/Patrick R. Gallaher
- ----------------------
Patrick R. Gallaher,
Chief Accounting Officer/Director
Date March 17, 1998
/s/Robert V. Pauley
- -------------------
Robert V. Pauley,
Secretary and Treasurer/Director
Date March 17, 1998
/s/Clement C. Carinalli
- -----------------------
Clement C. Carinalli,
Director
Date March 17, 1998
/s/William P. Gallaher
- ----------------------
William P. Gallaher,
Director
Date March 17, 1998
/s/William E. Geary
- -------------------
William E. Geary,
Director
</TABLE>
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<PERIOD-END> DEC-31-1997
<CASH> 7412
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<FED-FUNDS-SOLD> 8770
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3951
<INVESTMENTS-CARRYING> 7090
<INVESTMENTS-MARKET> 7090
<LOANS> 206947
<ALLOWANCE> 2539
<TOTAL-ASSETS> 233737
<DEPOSITS> 214747
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1281
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0
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<COMMON> 978
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<INCOME-PRETAX> 5491
<INCOME-PRE-EXTRAORDINARY> 5491
<EXTRAORDINARY> 0
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</TABLE>
BASIC LEASE
INFORMATION______________________________________________________
Date: February 24, 1998
Landlord: James Ratto, dba 815 Fifth Street
Tenant: Sonoma National Bank
Premises: 815 Fifth Street - SU 100, Santa Rosa, CA
First Floor consisting of approximately
8047 Square Feet
Type of Lease: Full Service excepting janitorial services
Use: General Office and Professional Use
Term: Six years, three and one-half months
(Termination Date: August 15, 2004)
Renewal Option: One five (5) year option
Commencement Date: May 1, 1998
Initial Base Rent: Monthly: $ 12,875.00
Annually: $154,500.00
Operating Expenses: Tenant's Percentage Share - 53.2%
Base Year -First twelve (12) months of occupancy
Security Deposit: $12,875.00
Real Estate Broker: Keegan & Coppin Company, Inc.
Address for Notices: Landlord: c/o Bart Van Voorhis
P.O. Box 30, Kenwood, CA 95452
Tenant: c/o Deborah Meekins - President
801 Fourth Street,
Santa Rosa, CA 95404
Tenant Improvements: Per attached space plan
Exhibits: A (Premises), B (Rules), C (Utilities), Addendum
Signatures:
TENANT: LANDLORD:
Sonoma National Bank James Ratto
______________________________ __________________________________
By: By:
______________________________
By:
ADDENDUM TO LEASE
This Addendum to Lease ("Addendum") shall constitute part of that
certain Lease ("Lease"), dated as of February 1, 1998, between Sonoma
National Bank as Tenant and James Ratto as Landlord. The terms of this
Addendum shall be incorporated in the Lease for all purposes.
1. Existing Loan Office Premises: Landlord agrees to assume Tenant's
lease obligations in the space currently occupied by Tenant's loan
office at 755 4th Street, Santa Rosa, CA from the Commencement Date
through the term of the lease for those premises.
2. Tenant Improvements: Landlord shall construct Tenant's interior
improvements to building standards in accordance with the floor plan
attached hereto as Exhibit A, including architectural fees, building
permit fees, and all physical improvements, alterations, additions
and/or interior modifications constructed according to the plan.
Increased construction costs resulting from any changes and/or additions
to Exhibit A and/or building standards shall be paid for by Tenant.
3. Use Permit: Landlord shall obtain a use permit from the City of
Santa Rosa on behalf of Tenant for the use stated herein. Tenant shall
cooperate with Landlord as reasonably necessary to obtain this use
permit.
4. Disclosures: See attached Standard Lease Disclosure Addendum and
Leasing Disclosure Regarding Real Estate Agency Relationship. Keegan &
Coppin Company, Inc. is acting as a dual agent in this transaction.
5. Area Measurement: Tenant has reviewed and approves the system of
measurement defining the rentable and usable square footage of the
Premises.
6. Signage: Landlord will provide at his cost lobby directory and suite
entrance door signage. Tenant may install their company name on the
facade of the building above the Fifth Street entrance in accordance
with the sign program currently under development by Scott Architectural
Graphics.
7. Option to Extend.
a. Terms of the Option. Provided that Tenant is not in default under
this Lease at the time of exercise of the right to extend and on the
date each extension is to commence, Tenant shall have the right to
extend this Lease for one additional term of five (5) years ("Extension
Term"). The Extension Term shall commence on the expiration date
("Expiration Date") of this Lease and shall extend for five years
therefrom ("Extension Term Expiration Date").
b. Exercise Notice. If Tenant elects to extend the Lease for the
Extension Term, Tenant shall give unequivocal written notice ("Exercise
Notice") of its exercise to Landlord not less than one hundred twenty
(120) days prior to the Expiration Date.
c. Failure to Give Notice. Tenant's failure to give an Exercise Notice
in a timely manner shall be deemed a waiver of Tenant's right to extend
for the Extension Term.
d. Applicable Terms and Conditions. The terms, covenants and conditions
applicable to the Extension Term shall be the same terms, covenants and
conditions of this Lease except that:
(i) Extension. Tenant shall not be entitled to any further option to
extend; and
(ii) Base Rent. The Base Rent for the Premises may be increased (but
not decreased) as provided in this Section.
e. Determination of Base Rent During Extension Term.
(i) Landlord and Tenant shall have thirty (30) days after Landlord
receives the Exercise Notice within which to agree on the Base Rent
during the Extension Term, which shall be the prevailing fair market
rental value of the Premises during the Extension Term, except that in
no event shall the Base Rent for the Extension Term be less than the
Base Rent last payable under this Lease during the Term. In determining
the fair market rental value of the Premises during the Extension Term,
consideration shall be given to the uses of the premises permitted under
this Lease, the quality, size, design and location of the Premises, and
the rental value of comparable, improved office space located in the
downtown Santa Rosa area. If Landlord and Tenant agree on the Base Rent
for the Extension Term during the thirty (30) day period, they shall
immediately execute an amendment to this Lease stating the Base Rent.
(ii) Selection of Appraisers. If Landlord and Tenant are unable to
agree on the Base Rent for the Extension Term within the thirty (30) day
period, then within ten days after the expiration of the thirty (30) day
period, Landlord and Tenant each, at its cost and by giving notice to
the other, shall appoint a competent and disinterested real estate
appraiser with at least five years' full-time commercial appraisal
experience in the geographical area of the Building to appraise and set
the Base Rent during the Extension Term. If either Landlord or Tenant
does not appoint an appraiser within ten days after the other party has
given notice of the name of its appraiser, the single appraiser
appointed shall be the sole appraiser and shall set the Base Rent during
the Extension Term. If two appraisers are appointed by Landlord and
Tenant as stated in this Section, they shall meet promptly and attempt
to set the Base Rent for the Extension Term. If the two appraisers are
unable to agree within thirty (30) days after the second appraiser has
been appointed, they shall attempt to select a third appraiser meeting
the qualifications stated in this Section within ten days after the last
day the two appraisers are given to set the Base Rent. If they are
unable to agree on a third appraiser, either Landlord or Tenant, by
giving ten days' notice to the other, can apply to the then president of
the real estate board of Sonoma County, or to the presiding Judge of the
Superior Court of Sonoma County, for the selection of the third
appraiser who meets the qualifications stated in this Section. Landlord
and Tenant each shall bear one-half of the cost of appointing the third
appraiser and of paying the third appraiser's fee. The third appraiser,
however selected, shall be a person who has not previously acted in any
capacity for either Landlord or Tenant.
(iii) Value Determined by Three Appraisers. Within thirty (30) days
after the selection of the third appraiser, a majority of the appraisers
shall set the Base Rent for the Extension Term. If a majority of the
appraisers is unable to set the Base Rent within the stipulated period
of time, Landlord's appraiser shall arrange for simultaneous exchange of
written appraisals from each of the appraisers and the three appraisals
shall be added together and their total divided by three; the resulting
quotient shall be the Base Rent for the Premises during the Extension
Term. If, however, the low appraisal and/or the high appraisal are/is
more than ten percent (10%) lower and/or higher than the middle
appraisal, the divergent appraisal shall be disregarded. If only one
appraisal is disregarded, the remaining two appraisals shall be added
together and their total divided by two; the resulting quotient shall be
the Base Rent for the Premises during the Extension Term. If both the
low and the high appraisal are disregarded, the middle appraisal shall
be the Base Rent for the Premises during the Extension Term.
(iv) Notice to Landlord and Tenant. After the Base Rent for the
Extension Term has been set, the appraisers shall immediately notify
Landlord and Tenant, who shall immediately execute an amendment to this
Lease stating the Base Rent.
TENANT: LANDLORD:
Sonoma National Bank James Ratto
______________________________________ ___________________________________
By: By:
______________________________________
By:
CERTIFICATE OF SECRETARY
NORTHERN EMPIRE BANCSHARES
I, Robert V. Pauley, Secretary of Northern Empire Bancshares, a
California corporation, do hereby certify that at a meeting of the Board
of Directors of the corporation, duly held on February 20, 1996, at
which a quorum was present and acting throughout, the following
resolutions were adopted and are now in full force and effect:
"WHEREAS, pursuant to Section 2 of Article III of the
Bylaws of this corporation, the Board of Directors may amend the
section to change the fixed number of directors within the range of
five (5) to nine (9), and the Board has determined to increase the
number of directors within such range from six (6) to seven (7),
"RESOLVED, that Section 2 of Article III of the Bylaws
of this corporation is hereby amended to delete such Section in its
entirety and to replace such Section with the following:
'Section 2. Number and Qualification of Directors. The
authorized number of directors shall not be less than five (5) nor
more than nine (9) until changed by an amendment to this Bylaw adopted
by the vote or written consent of holders of a majority of the
outstanding shares entitled to vote. The exact number of directors
shall seven (7), until changed, within the limits specified above,
by a bylaw amending this Section 2, duly adopted by the Board of
Directors or by the shareholders.'
"RESOLVED, FURTHER, that the Secretary of this
corporation is hereby authorized and directed to certify copies
of this amendment to the bylaws, to insert one certified copy in the
corporation's minute book, and to keep one certified copy at the
corporation's principal executive office where it shall be open to
inspection by the shareholders at all reasonable times during office
hours, as provided in Section 213 of the California Corporations
Code."
In witness whereof, I have hereunto set my hand and the seal of
this corporation this 17th day of March, 1998.
Robert V. Pauley, Secretary
BYLAWS
OF
NORTHERN EMPIRE BANCSHARES
ARTICLE I
Offices
Section 1. Principal Office. The Board of Directors shall fix the
location of the principal executive office of the corporation at any
place within or outside the State of California. If the principal
executive office is located outside this State, and the corporation has
one or more business offices in this State, the Board of Directors shall
fix and designate a principal business office in the State of
California.
Section 2. Other Offices. Branch or other subordinate offices may
at any time be established by the Board at such other places as it deems
appropriate.
ARTICLE II
Meetings of Shareholders
Section 1. Place of Meetings. Meetings of share-holders shall be
held at any place within or outside the State of California designated
by the Board of Directors. In the absence of any such designation,
shareholders' meetings shall be held at the principal executive office
of the corporation.
Section 2. Annual Meeting. The annual meeting of shareholders
shall be held on the third Tuesday of April of each year at 6:00 p.m.,
or such other date or such other time as may be fixed by the Board of
Directors. However, if this day falls on a legal holiday, then the
meeting shall be held at the same time and place on the next succeeding
full business day. At this meeting, directors shall be elected, and any
other proper business within the power of the shareholders may be
transacted.
Section 3. Special Meetings. Special meetings of the shareholders
may be called at any time by the Board, the Chairman of the Board, the
President, or by the holders of shares entitled to cast not less than
ten percent (10%) of the votes at such meeting. If a special meeting is
called by any person or persons other than the Board of Directors, the
request shall be in writing, specifying the time of such meeting and the
general nature of the business proposed to be transacted, and shall be
delivered personally or by registered mail to the Chairman of the Board,
the President, any vice president or the Secretary of the corporation.
The officer receiving the request shall cause notice to be promptly
given to the shareholders entitled to vote that a meeting will be held
at a time requested by the person or persons calling the meeting, not
less than 35 nor more than 60 days after the receipt of the request. If
the notice is not given within 20 days after receipt of the request, the
person or persons requesting the meeting may give the notice. Nothing
in this paragraph shall be construed as limiting, fixing or affecting
the time when a meeting of shareholders called by action of the Board of
Directors may be held.
Section 4. Notice of Meetings. Written notice, in accordance with
Section 5 of this Article II, of each annual or special meeting of
shareholders shall be given not less than 10 nor more than 60 days
before the date of the meeting to each shareholder entitled to vote
thereat. Such notice shall state the place, date, and hour of the
meeting and (a) in the case of a special meeting, the general nature of
the business to be trans-acted, and no other business may be transacted,
or (b) in the case of the annual meeting, those matters which the Board,
at the time of the mailing of the notice, intends to present for action
by the shareholders, but, subject to the provisions of applicable law,
any proper matter may be presented at the meeting for such action. The
notice of any meeting at which directors are to be elected shall include
the names of nominees intended at the time of the notice to be presented
by management for election.
If action is proposed to be taken at any meeting for approval of
(a) a contract or transaction in which a director has a direct or
indirect financial interest, pursuant to Section 310 of the Corporations
Code of California, (b) an amendment of the Articles of Incorporation,
pursuant to Section 902 of that Code, (c) a reorganization of the
corporation, pursuant to Section 1201 of that Code, (d) a voluntary
dissolution of the corporation, pursuant to Section 1900 of that Code,
or (e) a distribution in dissolution other than in accordance with the
rights of out-standing preferred shares, pursuant to Section 2007 of
that Code, the notice shall also state the general nature of that
proposal.
Section 5. Manner of Giving Notice. Notice of a shareholders'
meeting shall be given either personally or by first- class mail or
telegraphic or other written communication, charges prepaid, addressed
to the shareholder at the address of that shareholder appearing on the
books of the corporation or given by the shareholder to the corporation
for the purpose of notice. If no such address appears on the
corporation's books or is given, notice shall be deemed to have been
given if sent to that shareholder by first- class mail or telegraphic or
other written communication to the corporation's principal office or if
published at least once in a newspaper of general circulation in the
county of which that office is located. Notice shall be deemed to have
been given at the time when delivered personally or deposited in the
mail or sent by telegram or other means of written communication. An
affidavit of mailing or other means of giving any notice in accordance
with the above provisions, executed by the Secretary, Assistant
Secretary or other transfer agent shall be prima facie evidence of the
giving of the notice or report.
Section 6. Quorum. The presence in person or by proxy of the
holders of a majority of the shares entitled to vote at any meeting
shall constitute a quorum for the transaction of business. The
shareholders present at a duly called or held meeting at which a quorum
is present may continue to transact business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than
a quorum, if any action taken (other than adjournment) is approved by at
least a majority of the shares required to constitute a quorum.
Section 7. Adjourned Meeting and Notice Thereof. Any
shareholders' meeting, whether or not a quorum is present, may be
adjourned from time to time by the vote of a majority of the shares, the
holders of which are either present in person or represented by proxy
thereat, but in the absence of a quorum (except as provided in Section 6
of this Article) no other business may be transacted at such meeting.
When any meeting of shareholders, either annual or special, is
adjourned to another time or place, notice need not be given of the
adjourned meeting if the time and place are announced at the meeting at
which the adjournment is taken. However, when any shareholders' meeting
is adjourned for more than 45 days from the date set for the original
meeting, or, if after adjournment a new record date is fixed for the
adjourned meeting, notice of the adjourned meeting shall be given as in
the case of an original meeting. At any adjourned meeting the
corporation may transact any business which may have been trans-acted at
the original meeting.
Section 8. Voting. The shareholders entitled to notice of any
meeting or to vote at any such meeting shall be only persons in whose
name shares stand on the stock records of the corporation on the record
date determined in accordance with Section 9 of this Article.
Voting shall in all cases be subject to the provisions of Section
702 through 704, inclusive, of the California General Corporation Law
(relating to voting shares held by a fiduciary, in the name of a
corporation, or in joint ownership).
The shareholders' vote may be by voice or ballot; provided,
however, that any election for directors must be by ballot if demanded
by any shareholder before the voting has begun. On any matter other
than elections of directors, any shareholder may vote part of the shares
in favor of the proposal and refrain from voting the remaining shares or
vote them against the proposal (other than the election of directors),
but, if the shareholder fails to specify the number of shares which the
shareholder is voting affirmatively, it will be conclusively presumed
that the shareholder's approving vote is with respect to all shares that
the shareholder is entitled to vote. If a quorum is present, the
affirmative vote of the majority of the shares represented at the
meeting and entitled to vote on any matter (other than the election of
directors) shall be the act of the shareholders, unless the vote of a
greater number or voting by classes is required by the California
Corporation Law or by the Articles of Incorporation.
Subject to the following sentence and to the provisions of Section
708 of the California General Corporation Law, every shareholder
entitled to vote at any election of directors may cumulate such
shareholder's votes and give one candidate a number of votes equal to
the number of directors to be elected multiplied by the number of votes
to which the shareholder's shares are entitled, or distribute the
share-holder's votes on the same principle among as many candidates as
the shareholder thinks fit. No shareholder shall be entitled to
cumulate votes for any candidate or candidates pursuant to the preceding
sentence unless such candidate or candidates' names have been placed in
nomination prior to the voting and the shareholder has given notice, at
the meeting and before the voting begins, of the shareholder's intention
to cumulate the shareholder's votes. If any one shareholder has given
such notice, all shareholders may cumulate their votes for candidates in
nomination.
In any election of directors, the candidates receiving the highest
number of votes of the shares entitled to be voted for them up to the
number of directors to be elected, shall be elected.
Section 9. Nominations for Directors. Nominations for election to
the Board of Directors may be made by the Board or by any shareholder
entitled to vote in the election of directors. Nominations, other than
those made by or on behalf of the existing management of the
corporation, shall be made in writing and shall be mailed or delivered
to the President of the corporation not less than 14 days nor more than
50 days prior to any meeting of shareholders called for the election of
directors; provided, however, that if less than 21 days' notice of the
meeting is given to shareholders, such nomination shall be mailed or
delivered to the President of the corporation not later than the close
of business on the seventh day following the date on which the notice of
meeting was mailed. Such written nomination shall include the following
information to the extent known to the nominating shareholder: (a) the
name and address of each proposed nominee; (b) the principal occupation
of each proposed nominee; (c) the total number of voting shares that
will be voted for each proposed nominee; (d) the name and residence
address of the nominating shareholder; and (e) the number of shares of
voting stock of the corporation owned by the nominating shareholder.
Nominations not made in accordance herewith may, in his discretion, be
disregarded by the Chairman of the meeting, and upon his instructions,
the inspectors of election may disregard all votes cast for each such
nominee.
Section 10. Record Date. The Board may fix, in advance, a record
date for the determination of the shareholders entitled to notice of any
meeting or to vote or entitled to receive payment of any dividend or
other distribution, or any allotment of rights, or to exercise rights in
respect to any other lawful action. The record date so fixed shall be
not more than 60 days nor less than 10 days prior to the date of the
meeting nor more than 60 days prior to any other action. When a record
date is so fixed, only shareholders of record on that date are entitled
to notice of and to vote at the meeting or to receive the dividend,
distribution, or allotment of rights, or to exercise the rights, as the
case may be, notwithstanding any transfer of shares on the books of the
corporation after the record date. A determination of shareholders of
record entitled to notice of or to vote at a meeting of shareholders
shall apply to any adjournment of the meeting unless the Board fixes a
new record date for the adjourned meeting. The Board shall fix a new
record date if the meeting is adjourned for more than 45 days.
If no record date is fixed by the Board, the record date for
determining shareholders entitled to notice of or to vote at a meeting
of shareholders shall be at the close of business on the business day
next preceding the date on which the meeting is held. The record date
for determining shareholders for any purpose other than set forth in
this Section 10 or Section 12 of this Article shall be at the close of
business on the day on which the Board adopts the resolution relating
thereto, or the sixtieth day prior to the date of such other action,
whichever is later.
Section 11. Consent of Absentees. The transactions of any meeting
of shareholders, however called and noticed, and wherever held, are as
valid as though had at a meeting duly held after regular call and
notice, if a quorum is present either in person or by proxy, and if,
either before or after the meeting, each of the persons entitled to
vote, not present in person or by proxy, signs a waiver of notice, or a
consent to the holding of the meeting or an approval of the minutes
thereof. All such waivers, consents or approvals shall be filed with
the corporate records or made a part of the minutes of the meeting.
Neither the business to be transacted at nor the purpose of any regular
or special meeting of shareholders need be specified in any written
waiver of notice, except that if action is taken or proposed to be taken
for approval of any of those matters specified in the second paragraph
of Section 4 of this Article II, the waiver of notice or consent shall
state the general nature of the proposal.
Section 12. Action by Written Consent Without a Meeting. Subject
to Section 603 of the California General Corporation Law, any action
which may be taken at any annual or special meeting of shareholders may
be taken without a meeting and without prior notice if a consent in
writing, setting forth the action so taken, is signed by the holders of
the outstanding shares having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted, or
their proxies. All such consents shall be filed with the Secretary of
the corporation and shall be maintained in the corporate records.
Provided, however, that (1) unless the consents of all shareholders
entitled to vote have been solicited in writing, notice of any
shareholder approval without a meeting by less than unanimous written
consent shall be given as provided by Section 603(b) of the California
Corporations Code, and (2) in the case of election of directors, such a
consent shall be effective only if signed by the holders of all
outstanding shares entitled to vote for the election of directors;
provided, however, that subject to applicable law, a director may be
elected at any time to fill a vacancy on the Board of Directors that has
not been filled by the directors, by the written consent of the holders
of a majority of the outstanding shares entitled to vote for the
election of directors. Any written consent may be revoked by a writing
received by the Secretary of the corporation prior to the time that
written consents of the number of shares required to authorize the
proposed action have been filed with the Secretary.
Unless a record date for voting purposes be fixed as provided in
Section 10 of this Article, the record date for determining shareholders
entitled to give consent pursuant to this Section 12, when no prior
action by the Board has been taken, shall be the day on which the first
written consent is given.
Section 13. Proxies. Every person entitled to vote shares or
execute written consents has the right to do so either in person or by
one or more persons authorized by a written proxy executed and dated by
such shareholder and filed with the Secretary of the corporation prior
to the convening of any meeting of the shareholders at which such proxy
is to be used or prior to the use of such written consent. A validly
executed proxy which does not state that it is irrevocable continues in
full force and effect unless (1) revoked by the person executing it,
before the vote pursuant thereto, by a writing delivered to the
corporation stating that the proxy is revoked or by a subsequent proxy
executed by, or by attendance at the meeting and voting in person by,
the person executing the proxy; or (2) written notice of the death or
incapacity of the maker of the proxy is received by the corporation
before the vote pursuant thereto is counted; provided, however, that no
proxy shall be valid after the expiration of 11 months from the date of
its execution unless otherwise provided in the proxy.
Section 14. Inspectors of Election. In advance of any meeting of
shareholders, the Board may appoint any persons other than nominees for
office as inspectors of election to act at such meeting and any
adjournment thereof. If no inspectors of election are so appointed, or
if any persons so appointed fail to appear or fail or refuse to act, the
Chairman of any such meeting may, and on the request of any shareholder
or shareholder's proxy shall, appoint inspectors of election at the
meeting. The number of inspectors shall be either one (1) or three (3).
If inspectors are appointed at a meeting on the request of one or more
shareholders or proxies, the holders of a majority of shares or their
proxies present shall determine whether one (1) or three (3) inspectors
are to be appointed.
The duties of such inspectors shall be as prescribed by Section
707(b) of the California General Corporation Law and shall include:
determining the number of shares outstanding and the voting power of
each; the shares represented at the meeting; the existence of a quorum;
the authenticity, validity and effect of proxies; receiving votes,
ballots or consents; hearing and determining all challenges and
questions in any arising in connection with the right to vote; counting
and tabulating all votes or consents, determining when the polls shall
close; determining the result; and doing such acts as may be proper to
conduct the election or vote with fairness to all shareholders. If
there are three inspectors of election, the decision, act, or
certificate of a majority is effective in all respects as the decision,
act, or certificate of all.
ARTICLE III
Directors
Section 1. Powers. Subject to the provisions of the California
General Corporation Law and any limitations in the Articles of
Incorporation and these Bylaws relating to action required to be
approved by the shareholders or by the outstanding shares, the business
and affairs of the corporation shall be managed and all corporate powers
shall be exercised by or under the direction of the Board of Directors.
The Board may delegate the management of the day- to-day operation of
the business of the corporation to a management company or other person
provided that the business and affairs of the corporation shall be
managed and all corporate powers shall be exercised under the ultimate
direction of the Board. Without prejudice to such general powers, but
subject to the same limitations, it is hereby expressly declared that
the Board shall have the following powers in addition to the other
powers enumerated in these Bylaws:
(a) To select and remove all the other officers, agents, and
employees of the corporation, prescribe any powers and duties for them
that are consistent with law, or with the Articles or these Bylaws, fix
their compensation, and require from them security for faithful service.
(b) To conduct, manage, and control the affairs and business
of the corporation and to make such rules and regulations therefor not
inconsistent with law, or with the Articles or these Bylaws, as they may
deem best.
(c) To adopt, make, and use a corporate seal, and to
prescribe the forms of certificates of stock, and to alter the form of
such seal and of such certificates from time to time as in their
judgment they may deem best.
(d) To authorize the issuance of shares of stock of the
corporation from time to time, upon such terms and for such
consideration as may be lawful.
(e) To borrow money and incur indebtedness for the purposes
of the corporation, and to cause to be executed and delivered therefor,
in the corporate name, promissory and capital notes, bonds, debentures,
deeds of trust, mortgages, pledges, hypothecations, or other evidences
of debt and securities therefor and any agreements pertaining thereto.
(f) To prescribe the manner in which and the person or
persons by whom any or all of the checks, drafts, notes, contracts and
other corporate instruments shall be executed.
(g) To appoint and designate, by resolution adopted by a
majority of the authorized number of directors, one or more committees,
each consisting of two or more directors, including the appointment of
alternate members of any committee who may replace any absent member at
any meeting of the committee.
Section 2. Number and Qualification of Directors. The authorized
number of directors shall not be less than five (5) nor more than nine
(9) until changed by an amendment to this Bylaw adopted by the vote or
written consent of holders of a majority of the outstanding shares
entitled to vote. The exact number of directors shall be seven (7),
until changed, within the limits specified above, by a bylaw amending
this Section 2, duly adopted by the Board of Directors or by the
shareholders.
Section 3. Election and Term of Office. The directors shall be
elected at each annual meeting of shareholders but if any such annual
meeting is not held or the directors are not elected thereat, the
directors may be elected at any special meeting of shareholders held for
that purpose. Each director shall hold office until the next annual
meeting and until a successor has been elected and qualified.
Section 4. Vacancies. Any director may resign effective upon
giving written notice to the Chairman of the Board, the President,
Secretary, or the Board, unless the notice specifies a later time for
the effectiveness of such resignation. If the resignation is effective
at a future time, a successor may be elected to take office when the
resignation becomes effective.
Vacancies in the Board may be filled by a majority of the remaining
directors, though less than a quorum, or by a sole remaining director,
and each director so elected shall hold office until the next annual
meeting and until such director's successor has been elected and
qualified; provided, however, that a vacancy in the Board existing as a
result of a removal of a director may not be filled by the directors,
unless the Articles or a bylaw adopted by the shareholders so provides.
The Board may declare vacant the office of a director who has been
declared of unsound mind by an order of court or convicted of a felony.
The shareholders may elect a director or directors at any time to
fill any vacancy or vacancies not filled by the directors. Any such
election by written consent, other than to fill a vacancy created by
removal, requires the consent of a majority of the outstanding shares
entitled to vote. Any such election by written consent to fill a
vacancy created by removal requires the unanimous consent of the
outstanding shares entitled to vote. If the Board accepts the
resignation of a director tendered to take effect at a future time, the
Board or the shareholders shall have power to elect a successor to take
office when the resignation is to become effective.
Section 5. Place of Meeting. Regular meetings of the Board shall
be held at any place within the State of California which has been
designated in the notice of meeting or if there is no notice, at the
principal office of the corporation, or at a place designated by
resolution of the Board or by the written consent of the Board. Any
regular or special meeting is valid wherever held if held upon written
consent of all members of the Board given either before or after the
meeting and filed with the Secretary of the corporation.
Section 6. Regular Meeting. Immediately following each annual
meeting of shareholders and at the same place, the Board shall hold a
regular meeting for the purpose of organization, any desired election of
officers, and the transaction of other business. Notice of this meeting
shall not be required.
Other regular meetings of the Board shall be held without notice
either on the third Tuesday of January, April, July and October at the
hour of 9:30 a.m., or at such different date and time as the Board may
from time to time fix by resolution; provided, however, should said day
fall upon a legal holiday observed by the corporation at its principal
office, the said meeting shall be held at the same time and place on the
next succeeding full business day. Call and notice of all regular
meetings of the Board are hereby dispensed with.
Section 7. Special Meetings. Special meetings of the Board for
any purpose or purposes may be called at any time by the Chairman of the
Board, the President, or the Secretary or by any two directors.
Special meetings of the Board shall be held upon four days' written
notice by mail or 24 hours' notice delivered personally or by telephone
or telegraph. Any such notice shall be addressed or delivered to each
director at such director's address as it is shown upon the records of
the corporation or as may have been given to the corporation by the
director for purposes of notice or, if such address is not shown on such
records or is not readily ascertainable, at the place in which the
meetings of the directors are regularly held. Such notice may, but need
not, specify the purpose of the meeting, nor the place if the meeting is
to be held at the principal office of the corporation. Notice of any
meeting of the Board need not be given to any director who attends the
meeting without protesting either prior thereto or at its commencement,
the lack of notice to such director.
Notice by mail shall be deemed to have been given at the time a
written notice is deposited in the United States mails, postage prepaid.
Any other written notice shall be deemed to have been given at the time
it is personally delivered to the recipient or is delivered to a common
carrier for transmission, or actually transmitted by the person giving
the notice by electronic means, to the recipient. Oral notice shall be
deemed to have been given at the time it is communicated, in person or
by telephone or wireless, to the recipient or to a person at the office
of the recipient who the person giving the notice has reason to believe
will promptly communicate it to the recipient.
Section 8. Quorum. A majority of the authorized number of
directors constitutes a quorum of the Board for the transaction of
business, except to adjourn as hereinafter provided. Every act or
decision done or made by a majority of the directors present at a
meeting duly held at which a quorum is present shall be regarded as the
act of the Board, unless a greater number is required by the Articles
and subject to the provisions of Section 310 of the California General
Corporation Law (as to approval of contracts or transactions in which a
director has a direct or indirect material financial interest), Section
311 (as to appointment of committees), and Section 317(e) (as to
indemnification of directors). A meeting at which a quorum is initially
present may continue to transact business notwithstanding the withdrawal
of directors, if any action taken is approved by at least a majority of
the required quorum for such meeting.
Section 9. Participation in Meetings by Conference Telephone.
Members of the Board may participate in a meeting through use of a
conference telephone or similar communications equipment, so long as all
members participating in such meeting can hear one another.
Participation in a meeting pursuant to Section 9 constitutes "presence"
in person at such meeting.
Section 10. Waiver of Notice. The transactions of any meeting of
the Board, however called and noticed or wherever held, are as valid as
though had at a meeting duly held after regular call and notice if a
quorum is present and if, either before or after the meeting, each of
the directors not present signs a written waiver of notice, a consent to
holding such meeting or an approval of the minutes thereof. All such
waivers, consents, or approvals shall be filed with the corporate
records or made a part of the minutes of the meeting.
Section 11. Adjournment. A majority of the directors present,
whether or not a quorum is present, may adjourn any directors' meeting
to another time and place. Notice of the time and place of holding an
adjourned meeting need not be given, unless the meeting is adjourned for
more than twenty-four hours, in which case notice of the time and place
shall be given before the time of the adjourned meeting, in the manner
specified in Section 7 of this Article III, to the directors who were
not present at the time of the adjournment.
Section 12. Action Without Meeting. Any action required or
permitted to be taken by the Board may be taken without a meeting if all
members of the Board shall individually or collectively consent in
writing to such action. Such action by written consent shall have the
same effect as a unanimous vote of the Board. Such consent or consents
shall be filed with the minutes of the proceedings of the Board.
Section 13. Fees and Compensation. Directors and members of
committees may receive such compensation, if any, for their services,
and such reimbursement for expenses, as may be fixed or determined by
resolution of the Board. This Section shall not be construed to
preclude any director from serving the corporation in any other capacity
as an officer, agent, employee, or otherwise, and receiving compensation
for those services.
Section 14. Rights of Inspection. Every director of the
corporation shall have the absolute right at any reasonable time to
inspect and copy all books, records and documents of every kind and to
inspect the physical properties of the corporation and also of its
subsidiary corporations, domestic or foreign. Such inspection by a
director may be made in person or by agent or attorney and includes the
right to copy and obtain extracts.
ARTICLE IV
Officers
Section 1. Officers. The officers of the corporation shall be a
president, a vice president, a secretary, and a chief financial
officer. The corporation may also have, at the discretion of the Board,
a chairman of the board, a vice chairman of the board, one or more
assistant vice presidents, one or more assistant treasurers, one or more
assistant secretaries and such other officers as may be elected or
appointed in accordance with the provisions of Section 3 of this
Article. One person may hold two or more offices, except those of
president and chief financial officer.
Section 2. Election. The officers of the corporation, except such
officers as may be elected or appointed in accordance with the
provisions of Section 3 or Section 5 of this Article, shall be chosen
by, and shall serve at the pleasure of, the Board, and shall hold their
respective offices until their resignation, removal, or other
disqualification from service, or until their respective successors
shall be elected, subject to the rights, if any, of an officer under any
contract of employment.
Section 3. Subordinate Officers. The Board may elect, and may
empower the President to appoint, such other officers as the business of
the corporation may require, each of whom shall hold office for such
period, have such authority, and perform such duties as are provided in
these Bylaws or as the Board may from time to time determine.
Section 4. Removal and Resignation. Subject to the rights, if
any, of an officer under any contract of employment, any officer may be
removed, either with or without cause, by the Board at any time, or,
except in the case of an officer chosen by the Board, by any officer
upon whom such power of removal may be conferred by the Board.
Any officer may resign at any time by giving written notice to the
corporation, but without prejudice to the rights, if any, of the
corporation under any contract to which the officer is a party. Any
such resignation shall take effect at the date of the receipt of such
notice or at any later time specified therein; and, unless otherwise
specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
Section 5. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be
filled in the manner prescribed in these Bylaws for regular election or
appointment to such office.
Section 6. Chairman of the Board. The Chairman of the Board, if
there shall be such an officer, shall, if present, preside at all
meetings of the Board and of the shareholders, and exercise and perform
such other powers and duties as may be from time to time assigned by the
Board.
Section 7. Vice Chairman. The Vice Chairman of the Board, if
there shall be such an officer, shall, in the absence of the Chairman of
the Board of Directors, preside at all meetings of the Board and of the
shareholders, and exercise and perform such other powers and duties as
may be from time to time assigned by the Board.
Section 8. President. Subject to such powers, if any, as may be
given by the Board to the Chairman of the Board, if there be such an
officer, the President is the General Manager and Chief Executive
Officer of the corporation and has, subject to the control of the Board,
general supervision, direction, and control of the business and officers
of the corporation. In the absence of both the Chairman of the Board
and the Vice Chairman, or if there be none, the President shall preside
at all meetings of the shareholders and at all meetings of the Board.
The President has the general powers and duties of management usually
vested in the office of President and General Manager of a corporation
and such other powers and duties as may be prescribed by the Board.
Section 9. Vice Presidents. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the
Board or, if not ranked, the Vice President designated by the Board,
shall perform all the duties of the President, and when so acting shall
have all the powers of, and be subject to all the restrictions upon, the
President. The Vice Presidents shall have such other powers and perform
such other duties as from time to time may be prescribed for them
respectively by the Board or the Bylaws, and the President, or the
Chairman of the Board.
Section 10. Secretary. The Secretary shall keep or cause to be
kept, at the principal office and such other place as the Board may
order, a book of minutes of all the meetings of shareholders, the Board,
and its committees, with the time and place of holding, whether regular
or special, and, if special, how authorized, the notice thereof given,
the names of those present or represented at shareholders' meetings, and
the proceedings thereof.
The Secretary shall keep, or cause to be kept, a copy of the Bylaws
of the corporation at the principal office or business office in
accordance with Section 213 of the California General Corporation Law.
The Secretary shall keep, or cause to be kept, at the principal office
or at the office of the corporation's transfer agent or registrar, if
one be appointed, a share register, or a duplicate share register,
showing the names of the shareholders and their addresses, the number
and classes of shares held by each, the number and date of certificates
issued for the same, and the number and date of cancellation of every
certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all the
meetings of the shareholders, of the Board and of any committees thereof
required by these Bylaws or by law to be given, shall keep the seal of
the corporation in safe custody, and shall have such other powers and
perform such other duties as may be prescribed by the Board.
Section 11. Assistant Secretary. The Assistant Secretary or the
Assistant Secretaries, in the order of their seniority, shall, in the
absence or disability of the Secretary, or in the event of such
officer's refusal to act, perform the duties and exercise the powers of
the Secretary, and shall have such additional powers and discharge such
duties as may be assigned from time to time by the President or by the
Board of Directors.
Section 12. Chief Financial Officer. The Chief Financial Officer
shall keep and maintain, or cause to be kept and maintained, adequate
and correct books and records of the properties and business
transactions of the corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained
earnings, and shares, and shall send or cause to be sent to the
shareholders of the corporation such financial statements and reports as
are by law or these Bylaws required to be sent to them. The books of
account shall at all times be open to inspection by any director of the
corporation.
The Chief Financial Officer shall deposit all monies and other
valuables in the name and to the credit of the corporation with such
depositaries as may be designated by the Board. The Chief Financial
Officer shall disburse the funds of the corporation as may be ordered by
the Board, shall render to the President and directors, whenever they
request it, an account of all transactions as Chief Financial Officer
and of the financial condition of the corporation, and shall have such
other powers and perform such other duties as may be prescribed by the
Board.
Section 13. Assistant Treasurer. The Assistant Treasurer or the
Assistant Treasurers, in the order of their seniority, shall, in the
absence or disability of the Chief Financial Officer, or in the event of
such officer's refusal to act, perform the duties and exercise the
powers of the Chief Financial Officer, and shall have such additional
powers and discharge such duties as may be assigned from time to time by
the President or by the Board of Directors.
Section 14. Salaries. The salaries of the officers shall be fixed
from time to time by the Board of Directors and no officer shall be
prevented from receiving such salary by reason of the fact that such
officer is also a director of the corporation.
Section 15. Officers Holding More Than One Office. Any two or
more offices, except those of President and Chief Financial Officer, may
be held by the same person, but no officer shall execute, acknowledge or
verify any instrument in more than one capacity.
Section 16. Inability to Act. In the case of absence or inability
to act of any officer of the corporation and of any person herein
authorized to act in his place, the Board may from time to time delegate
the powers or duties of such officer to any other officer, or any
director or other person whom it may select.
ARTICLE V
Other Provisions
Section 1. Inspection of Corporate Records. The corporation shall
keep at its principal executive office a record of its shareholders,
giving the names and addresses of all shareholders and the number and
class of shares held by each shareholder. A shareholder or shareholders
of the corporation holding at least five percent (5%) in the aggregate
of the outstanding voting shares of the corporation may:
(a) Inspect and copy the record of shareholders' names and
addresses and shareholdings during usual business hours upon five
business days' prior notice demand upon the corporation; or
(b) Obtain from the transfer agent, if any, for the
corporation, upon five business days' prior written demand and upon the
tender of its usual charges for such a list (the amount of which charges
shall be stated to the shareholder by the transfer agent upon request),
a list of the shareholders' names and addresses who are entitled to vote
for the election of directors and their shareholdings, as of the most
recent record date for which it has been compiled or as of the date
specified by the shareholder subsequent to the date of demand.
Section 2. Inspection of Bylaws. The corporation shall keep at
its principal office the original or a copy of these Bylaws as amended
to date which shall be open to inspection by shareholders at all
reasonable times during business hours.
Section 3. Endorsement of Documents, Contracts. Subject to the
provisions of applicable law, any note, mortgage, evidence of
indebtedness, contract, share certificate, conveyance, or other
instrument in writing and any assignment or endorsements thereof
executed or entered into between this corporation and any other person,
when signed by the President or any Vice President and the Treasurer or
any Assistant Treasurer of this corporation shall be valid and binding
upon this corporation in the absence of actual knowledge on the part of
the other person that the signing officers did not have the authority to
execute the same. Any such instruments may be signed by any other
person or persons and in such manner as from time to time shall be
determined by the Board, and, unless so authorized by the Board, no
officer, agent, or employee shall have any power or authority to bind
the corporation by any contract or arrangement or to pledge its credit
or to render it liable for any purpose or amount.
Section 4. Certificates of Stock. Every holder of shares of the
corporation shall be entitled to have a certificate signed in the name
of the corporation by the President or Vice President and by the Chief
Financial Officer or Assistant Financial Officer or by the Secretary or
Assistant Secretary, certifying the number of shares and the class or
series of shares owned by the shareholder. Any or all of the signatures
on the certificates may be facsimile. If any officer, transfer agent,
or registrar who has signed a certificate shall have ceased to be such
officer, transfer agent, or registrar before such certificate is issued,
it may be issued by the corporation with the same effect as if such
person were an officer, transfer agent, or registrar at the date of
issue.
Except as provided in this Section, no new certificate for shares
shall be issued in lieu of an old one unless the latter is surrendered
and cancelled at the same time. The Board may, however, in case any
certificate for shares is alleged to have been lost, stolen, or
destroyed, authorize the issuance of a new certificate in lieu thereof,
and the corporation may require that the corporation be given a bond or
other adequate security sufficient to indemnify it against any claim
that may be made against it (including expense or liability) on account
of the alleged loss, theft, or destruction of such certificate or the
issuance of such new certificate.
Prior to the due presentment for registration of transfer in the
stock transfer book of the corporation, the registered owner shall be
treated as the person exclusively entitled to vote, to receive
notifications and otherwise to exercise all the rights and powers of an
owner, except as expressly provided otherwise by the laws of the State
of California.
Section 5. Representation of Shares of Other Corporations. The
President or any other officer or officers authorized by the Board or
the President are each authorized to vote, represent, and exercise on
behalf of the corporation all rights incident to any and all shares of
any other corporation or corporations standing in the name of the
corporation. The authority herein granted may be exercised by any such
officer in person or by any other person authorized to do so by proxy or
power of attorney duly executed by said officer.
Section 6. Annual Report to Shareholders. Except when this
corporation has 100 or more holders of record of its shares (determined
as provided in Section 605 of the Corporations Code), the annual report
to shareholders referred to in Section 1501 of the California General
Corporation Law is expressly waived, but nothing herein shall be
interpreted as prohibiting the Board from issuing annual or other
periodic reports to shareholders.
Section 7. Seal. The corporate seal of the corporation shall
consist of two concentric circles, between which shall be the name of
the corporation, and in the center shall be inscribed the word
"Incorporated" and the date of its incorporation.
Section 8. Fiscal Year. The fiscal year of the corporation shall
begin on the first day of January and end on the 31st day of December of
each year.
Section 9. Construction and Definitions. Unless the context
otherwise requires, the general provisions, rules of construction, and
definitions contained in the California General Corporation Law shall
govern the construction of these Bylaws. Without limiting the
generality of this provision, the singular number includes the plural,
the plural number includes the singular, and the term "person" includes
both a corporation and a natural person.
Section 10. Bylaw Provision Contrary to or Inconsistent with
Provisions of Law. Any article, section, subsection, subdivision,
sentence, clause or phrase of these Bylaws which, upon being construed
in the manner provided in Section 9 of this Article, shall be contrary
to or inconsistent with any applicable provision of the California
General Corporation Law or other applicable law of the State of
California or of the United States shall not apply so long as said
provisions of law shall remain in effect, but such result shall not
affect the validity or applicability of any other portions of these
Bylaws, it being hereby declared that these Bylaws would have been
adopted and each article, section, subsection, subdivision, sentence,
clause or phrase thereof, irrespective of the fact that any one or more
articles, sections, subsections, subdivisions, sentences, clauses or
phrases is or are illegal.
ARTICLE VI
Indemnification
Section 1. Extent of Indemnification. The Corporation shall have
the power to indemnify agents (as defined in Section 317 of the
California Corporations Code), including directors, officers and
employees, in accordance with the provisions of Section 317 or as
otherwise permitted under the Corporation's Articles of Incorporation.
Section 2. Expense Advancement. Expenses incurred in defending
any proceeding may be advanced by the Corporation prior to the final
disposition of such proceeding upon receipt of an undertaking by or on
behalf of the agent to repay such amount unless it shall be determined
ultimately that the agent is entitled to be indemnified.
Section 3. Insurance. The Corporation may purchase and maintain
insurance on behalf of any agent of the Corporation against any
liability asserted against or incurred by the agent in such capacity or
arising out of the agent's status as such whether or not the Corporation
would have the power to indemnify the agent against such liability under
the provisions of Section 317 of the California Corporations Code.
ARTICLE VII
Amendments
Section 1. Amendment By Shareholders. New Bylaws may be adopted
or these Bylaws may be amended or repealed by the vote or written
consent of holders of a majority of the outstanding shares entitled to
vote; provided, however, that if the Articles of the corporation set
forth the number of authorized directors of the corporation, the
authorized number of directors may be changed only by an amendment of
the Articles.
Section 2. Amendment By Directors. Subject to the rights of the
shareholders as provided in Section 1 of this Article VII, Bylaws, other
than a bylaw or an amendment of a bylaw changing the authorized number
of directors, may be adopted, amended, or repealed by the Board of
Directors.
COMMERCIAL LEASE - 815 FIFTH STREET
This lease (the "Lease"), which is effective as of the date set forth
in the Basic Lease Information, is entered by Landlord and Tenant as set
forth in the Basic Lease Information. Terms which are capitalized in
this Lease shall have the meanings set forth in the Basic Lease
Information.
1. PREMISES
Landlord hereby leases to Tenant, and Tenant leases from Landlord, the
Premises described in the Basic Lease Information, together with the
right in common to use the Common Area of the Building and the Property
(as described in Exhibit A). The common area shall mean the areas and
facilities within the Building and the Property provided and designated
by Landlord for the general use, convenience or benefit of Tenant and
other tenants and occupants of the Building (e.g., janitorial, telephone
and electrical closets) but shall, for purposes of this Lease, exclude
elevator shafts and stairwells.
2. TERM
a. Lease Term. The Term of this Lease shall commence on the
Commencement Date (as defined in Subsection 2.b.) and, unless terminated
on an earlier date in accordance with the terms of this Lease, shall
extend for the period (i.e., Term) specified in the Basic Lease
Information.
b. Commencement Date. The "Commencement Date" shall be as defined in
the Basic Lease Information.
c. Premises Not Delivered. If, for any reason, Landlord cannot
deliver possession of the Premises to Tenant by the Commencement Date
(as set forth in the Basic Lease Information), (i) Tenant shall not be
obligated to pay Rent until the actual Commencement Date; (ii) the Term
shall not be extended; (iii) the failure shall not affect the validity
of this Lease, or the obligations of Tenant under this Lease; and (iv)
Landlord shall not be subject to any liability. Notwithstanding the
above, if Landlord has not delivered possession of the Premises to
Tenant, through no fault of Tenant, within one hundred twenty (120) days
following the Commencement Date, as the same may be extended under the
terms of a Work Letter executed by Landlord and Tenant, Tenant may, at
Tenant's option, by notice in writing to Landlord within ten (10) days
thereafter, cancel this Lease; provided, however, that as to Tenant's
obligations, Tenant first reimburses Landlord for all costs incurred for
Non-Standard improvements and, As to Landlord's obligations, Landlord
shall return any money previously deposited by Tenant (less any offsets
due Landlord for Non-Standard improvements); and provided further, that
if such written notice by Tenant is not received by Landlord within said
ten (10) day period, Tenant's right to cancel this Lease hereunder shall
terminate and be of no further force or effect.
d. Early Entry. If Tenant is permitted to enter the Premises prior to
the Commencement Date for the purposes of fixturing, or any purpose
other than occupancy permitted by Landlord, the entry shall be subject
to all the terms and provisions of this Lease, except that the payment
of Rent shall commence as of the Commencement Date.
3. RENT
As used in this Lease, the term "Rent" shall include: (i) the Base Rent;
(ii) Tenant's Percentage Share of the total dollar increase, if any, in
the Operating expenses paid or incurred by Landlord during the calendar
year over the Operating Expenses paid or incurred by Landlord during the
Base Year (as set forth in the Basic Lease Information) and (iii) all
other amounts which Tenant is obligated to pay under the terms of this
Lease. All amounts of money payable by Tenant to Landlord shall be paid
without prior notice or demand, deduction or offset. If any installment
of Rent is not paid by the tenth day of the month, Tenant shall pay to
Landlord a late payment charge equal to five percent (5%) of the amount
of the delinquent installment, in addition to the installment of Rent
then owing, regardless of whether a notice of default or notice of
termination has been given by Landlord. In addition to the five percent
(5%) late charge, any Rent or other amounts owing hereunder which are
not paid within five days after the date they are due shall thereafter
bear interest at the rate ("Interest Rate") which is the lesser of
eighteen percent (18%) per annum or the maximum rate permitted by law.
4. BASE RENT
a. Initial Base Rent. Tenant shall pay Base Rent to Landlord (or other
entity designated by Landlord), in advance, on the first day of each
calendar month of the Term, at Landlord's address for notices (as set
forth in the Basic Lease Information) or at such other address as
Landlord may designate. The Initial Base Rent shall be the amount set
forth in the Basic Lease Information. Upon executing this Lease, Tenant
shall pay an amount equal to the monthly Base Rent stated on the Basic
Lease Information, which shall be credited against the Base Rent due at
the Beginning of the Term.
b. CPI Adjustment. The Initial Base Rent provided for in Paragraph 4(a)
shall be subject to adjustment at the commencement of the third year of
the term and each year thereafter ("Adjustment Date"). The base for
computing the adjustment is the Consumer Price Index, All Items, for the
San Francisco-Oakland Metropolitan Area (1982 - 84 = 100) as published
by the United States Department of Labor, Bureau of Labor Statistics
("Index"), which is published for the month nearest the Commencement
Date ("Beginning Index"). If the Index published nearest the Adjustment
Date ("Extension Index") has increased over the Beginning Index, the
Base Rent for the following period (until the next Rent adjustment)
shall be set by multiplying the Base Rent as set forth in Paragraph 4(a)
by a fraction, the numerator of which is the Extension Index and the
denominator of which is the Beginning Index. In no case shall the Base
Rent be less than the Base Rent set forth in Paragraph 4(a). On
adjustment of the Base Rent as provided for in this Lease, Landlord
shall deliver to Tenant written notice stating the new Base Rent.
If the Index is changed so that the base year differs from that used as
of the month immediately preceding the month in which the term
commences, the Index shall be converted in accordance with the
conversion factor published by the United States Department of Labor,
Bureau of Labor Statistics. If the Index is discontinued or revised
during the term, such other government index or computation with which
it is replaced shall be used in order to obtain substantially the same
result as would be obtained if the Index had not been discontinued or
revised.
5. ADDITIONAL RENT - ANNUAL RENT ADJUSTMENTS/OPERATING EXPENSES
a. Increase in Operating Expenses. Rent shall include Tenant's
Percentage Share of the total dollar increase, if any, in the Operating
Expenses paid or incurred by Landlord during the calendar year over the
Operating Expenses paid or incurred by Landlord during the Base Year.
b. Operating Expenses. The term "Operating Expenses" shall include
all reasonable expenses and costs of every kind and nature which
Landlord shall pay or become obligated to pay because of or in
connection with the ownership and operation of the Building, Common
Areas and Premises, surrounding property and supporting facilities.
Operating Expenses shall include, without limitation, the following: (i)
all impositions relating to the Building, Common Areas and Premises,
including the Real Property Taxes; (ii) premiums for insurance relating
to the Building, Common Areas and Premises; (iii) reasonable wages,
salaries and related expenses of employees engaged directly in the
operation, maintenance and security of the Building; (iv) all supplies,
materials and equipment rental used in operation of the Building and
Common Areas; (v) all maintenance, janitorial, security and service
costs, not including janitorial costs associated with any other tenant
in the building; (vi) reasonable legal and accounting expenses, (vii)
repairs and general maintenance (excluding those paid for by proceeds of
insurance or other parties, and alterations attributable solely to other
tenants of the Building); (viii) all maintenance costs relating to the
Building and Common Areas, including sidewalks, landscaping, service
areas, mechanical rooms, parking areas, and Building exterior; (ix) all
other reasonable operating, management and other expenses incurred by
Landlord in connection with operation of the Building and Common Areas;
and (x) all charges for heat, water, gas, electricity and other
utilities used or consumed in the Building and Common Areas,
entranceways, sidewalks, etc. Landlord agrees to exercise reasonable
discretion and to apply standards generally accepted in Sonoma County,
California for the operation of similar properties.
c. Monthly Increments; Adjustment. Prior to the commencement of each
of Landlord's accounting years, Landlord shall estimate the amount of
the Operating Expenses payable by Tenant for the next accounting year
pursuant to this Section. Tenant shall pay to Landlord, on the first of
each month, in advance, one-twelfth (1/12) of Landlord's estimate.
Within ninety (90) days after (or as soon thereafter as possible) the
close of each accounting year, Landlord shall provide Tenant with a
statement to account for any difference between the actual and the
estimated Operating Expenses for the previous year. If Tenant has
overpaid the amount of Operating Expenses owing pursuant to this
Section, Landlord shall credit the overpayment to Tenant within thirty
(30) days after Tenant's receipt of Landlord's statement. If Tenant has
underpaid the amount of Operating Expenses owing pursuant to this
Paragraph, Tenant shall pay the amount of the underpayment to Landlord,
as Additional Rent, within thirty (30) days after Tenant's receipt of
Landlord's statement. If less than one hundred percent (100%) of the
rentable area of the Building is occupied, Operating Expenses shall be
adjusted to equal Landlord's reasonable estimate of Operating Expenses
if one hundred percent (100%) of the total rentable area of the building
were occupied.
d. Definition of Real Property Taxes. The term "Real Property Taxes"
shall mean any ordinary or extraordinary form of assessment or special
assessment, license fee, rent tax. levy. penalty (if a result of
Tenant's delinquency), or tax, other than net income, estate,
succession, inheritance, transfer or franchise taxes, imposed by any
authority having the direct or indirect power to tax, or by any city,
county, state or federal government for any maintenance or improvement
or other district or division thereof. The term shall include all
transit charges, housing fund assessments, real estate taxes and all
other taxes relating to the Premises, Building and/or Property, all
other taxes which may be levied in lieu of real estate taxes, all
assessments, assessment bonds, levies, fees and other governmental
charges (including, but not limited to, charges for traffic facilities,
improvements, child care, water services studies and improvements, and
fire services studies and improvements) for amounts necessary to be
expended because of governmental orders, whether general or special,
ordinary or extraordinary, unforeseen as well as foreseen, of any kind
and nature for public improvement, services, benefits or any other
purposes which are assessed, levied, confirmed, imposed or become a lien
upon the Premises, Building or Property or become payable during the
Term.
e. Acknowledgment of Parties. It is acknowledged by Landlord and
Tenant that Proposition 13 was adopted by the voters of the State of
California in the June 1978 election, and that assessments, taxes, fees,
levies and charges may be imposed by governmental agencies for such
purposes as fire protection, street, sidewalk, road, utility
construction and maintenance, refuse removal and for other governmental
services which formerly may have been provided without charge to
property owners or occupants. It is the intention of the parties that
all new and increased assessments, taxes, fees, levies and charges due
to Proposition 13 or any other cause are to be included within the
definition of Real Property Taxes for purposes of this Lease.
f. Taxes on Tenant Improvements and Personal Property.
Notwithstanding any other provisions hereof, Tenant shall pay the full
amount of any increase in Real Property Taxes during the Term resulting
from any and all alterations and tenant improvements of any kind
whatsoever placed in, on or about the Premises for the benefit of, at
the request of, or by Tenant. Tenant shall pay, prior to delinquency,
all taxes assessed or levied against Tenant's personal property in, on
or about the Premises. When possible, Tenant shall cause its personal
property to be assessed and billed separately from the real or personal
property of Landlord.
6. PRORATION OF RENT
If the Commencement Date is not the first day of the month, or if the
end of the Term is not the last day of the month, Rent shall be prorated
on a monthly basis for the fractional month during the month which this
Lease commences or terminates. The termination of this Lease shall not
affect the obligations of Landlord and Tenant pursuant to Subsection
5.c. which are to be performed after the termination.
7. USE OF THE PREMISES
a. Use. The Premises shall be used solely for the use set forth in the
Basic Lease Information and for no other use.
b. Rules and Regulations. Landlord may modify the Rules and Regulations
as reasonably necessary for the smooth and efficient operation of the
Building. Landlord agrees to exercise a high standard of reasonableness
in the implementation of such amended rules. Tenant agrees to abide by
such reasonably amended Rules and Regulations.
c. Compliance. Tenant, at its sole cost and expense, shall promptly
comply with all laws, statutes, ordinances and governmental rules,
regulations or requirements now in force or which hereinafter may be in
force, with the requirements of any board of fire underwriters or other
similar board now or hereafter constituted, with any direction or
occupancy certificate issued pursuant to any law by any public officer
or officers, as well as the provisions of all recorded documents
affecting the Premises insofar as any thereof relate to or affect the
condition, use or occupancy of the Premises.
8. ALTERATIONS AND LIENS
Any alterations of the Premises made by Tenant, except those changes
required by zoning or law, shall require the prior written consent of
Landlord, which consent shall not be unreasonably withheld. Tenant
shall retain title to all movable furniture and trade fixtures placed in
the property by Tenant. All heating, lighting, plumbing, electrical and
air conditioning installations made by Tenant shall be and become the
property of Landlord upon installation and shall not be deemed trade
fixtures.
9. REPAIRS
Tenant, at all times during the Term and at Tenant's sole cost and
expense, shall keep the Premises and every part thereof in good
condition and repair; ordinary wear and tear, damage thereto not caused
by Tenant, damage by fire, earthquake, acts of God or the elements
excepted. Tenant hereby waives all right to make repairs at the expense
of Landlord or in lieu thereof to vacate the Premises as provided in
California Civil Code Section 1942 or any other law, statute or
ordinance now or hereafter in effect.
10. DAMAGE OR DESTRUCTION
a. Insured Destruction. In the event the Premises are damaged from a
risk covered by insurance described in Paragraph 12(b), Landlord shall
promptly repair the damage and this Lease shall remain in full force and
effect. In such event, Tenant shall be entitled to a proportionate
reduction of the Base Rent from the date of damage and while such
repairs are being made, such proportionate reduction to be reasonably
based upon the extent to which the damage and making of such repairs
shall interfere with the business carried on by Tenant in the Premises.
b. Uninsured Destruction. In the event the Premises, the Common Area or
the building and other improvements in which the Premises are located
are damaged from a risk not covered by insurance described in Paragraph
12(b), Landlord shall promptly repair the damage, provided the extent of
the destruction is less than fifty percent (50%) of the then full
replacement cost of the building. In the event the destruction of the
building is to an extent of fifty percent (50%) or more of the full
replacement cost then Landlord shall have the option: (i) promptly to
repair or restore such damage, this Lease continuing in full force and
effect, but the Rent to be proportionately reduced while such repairs
are being made as provided for in Paragraph 10(a), or (ii) give notice
to Tenant at any time within fifteen (15) days after such damage,
terminating this Lease as of the date specified in such notice, which
date shall be thirty (30) days after the giving of such notice.
Notwithstanding anything to the contrary in Paragraph 10(a) or (b),
Landlord shall not have any obligation to repair, reconstruct or restore
the Premises when the damage resulting from any casualty occurs during
the last ten percent (10%) of the term of this Lease or any option to
extend. Landlord shall not be required to repair any damage by fire or
other cause to, or to make any repairs or replacements of, any
improvements, fixtures, or other personal property of Tenant.
c. In the event any insured or uninsured destruction of the Building
substantially and materially interferes with Tenant's use of the
Premises for the purposes for which they were leased for a period in
excess of one hundred twenty (120) days, Tenant may terminate this
Lease.
11. EMINENT DOMAIN
In the event any proceedings shall be commenced by any public or
quasi-public authority under the powers of eminent domain, condemnation,
or otherwise affecting the Premises or the Common Area, Tenant shall
have no right to claim any valuation for its leasehold interest or
otherwise by reason of its occupancy of or improvements to the Premises,
and any award adjudicated or by way of settlement shall belong in its
entirety to Landlord. Tenant shall, however, be entitled to any award
made to him for depreciation to and cost of removal of stock, fixtures,
and equipment placed in the Premises by Tenant, provided that said award
does not otherwise diminish the amount to be received by Landlord. In
the event of a partial taking of the Premises, the Rent shall be reduced
in the proportion that the floor area taken bears to the total floor
area prior to the taking. If more than twenty-five percent (25%) of the
floor area of said Premises is taken, or if the portion taken
substantially and materially interferes with Tenant's use of the
Premises for the purposes for which they were leased, only then may
Tenant, at Tenant's option, terminate this Lease as of the date the
public or quasi-public authority takes possession of said portion by
giving written notice of termination to Landlord within ten days after
the public or quasi-public authority takes such possession. If Tenant
does not terminate this Lease as hereinabove provided, then the Rent
payable shall be reduced as set forth above.
12. INDEMNITY AND INSURANCE.
a. Indemnity. Tenant shall be responsible for, shall insure against,
and shall indemnify Landlord and its constituent parts and hold them
harmless from, any and all liability for any loss, damage or injury to
persons or property occurring in, on or about the Premises, and Tenant
hereby releases Landlord and its constituent parts from any and all
liability for the same unless caused by the negligence or intentional
act of Landlord. Tenant's obligation to indemnify Landlord and its
constituent parts hereunder shall include the duty to defend against any
claims asserted by reason of any loss, damage or injury, and to pay any
judgments, settlements, costs, fees and expenses, including attorneys'
fees, incurred in connections therewith.
b. Fire and Extended Coverage. Landlord shall maintain a policy or
policies of fire insurance, with extended coverage, vandalism, and
malicious mischief endorsements, on the buildings in which the Premises
are located in an amount equal to at least ninety percent (90%) of the
full insurance replacement value thereof and agrees to name Tenant as
additional insured on such policy or policies to the extent of
Landlord's obligation to rebuild the Premises as provided herein.
c. Public Liability. Tenant shall at its sole cost and expense
procure and at all times during the Lease term, maintain in full force
and effect a policy or policies of comprehensive public liability
insurance issued by an insurance carrier approved by Landlord insuring
against loss, damage or liability for injury or death to persons and
loss or damage to property occurring from any cause whatsoever in
connection with Tenant's use and occupancy of the Premises and Common
Area. Such liability insurance shall be in amounts of not less than One
Million Dollars ($1,000,000.00) per person and One Million Dollars
($1,000.,000.00) per occurrence, and covering property damage in the
amount of Five Hundred Thousand Dollars ($500,000.00); provided,
however, that if, at any time during the Term, Tenant shall have in full
force and effect a blanket policy of public liability insurance with the
same coverage for the Premises as described above, as well as coverage
of other premises and properties of Tenant, or in which Tenant has some
interest, the blanket insurance shall satisfy the requirement hereof.
Landlord shall be named as additional insured under each such policy or
policies of insurance.
d. Personal Property. Tenant at its cost shall maintain on all its
personal property, Tenant's improvements, and alterations, in, on, or
about the Premises, a policy of standard fire and extended coverage
insurance, with vandalism and malicious mischief endorsements, to the
extent of at least ninety percent (90%) of their full replacement value.
The proceeds from any such policy shall be used by Tenant for the
replacement of personal property or the restoration of Tenant's
improvements or alterations. Tenant's failure to maintain any insurance
required by this Lease shall be a default hereunder, and Tenant shall be
liable for any loss or costs resulting from such failure.
e. Insurance Certificates. Tenant shall furnish to Landlord, upon the
Commencement Date and thereafter as soon as available prior to the
expiration of each policy, a certificate of insurance issued by the
insurance carrier of each policy of insurance carried by Tenant pursuant
to this section 12. The certificates shall expressly provide that the
policies shall not be cancelable or subject to reduction of coverage or
otherwise be subject to modification except after thirty (30) days'
prior written notice to the parties named as insureds. Landlord, its
successors and assigns, and any nominee of Landlord holding any interest
in the Premises, including, without limitation, any ground lessor or the
holder of any fee or leasehold mortgage, shall be named as an insured
under each policy of insurance maintained by Tenant pursuant to this
Lease.
13. ASSIGNMENT OR SUBLET
Tenant shall not assign this Lease in whole or in part, nor sublease or
allow other persons (except Tenant's authorized representatives) to
occupy or use all or any part of the Premises without prior written
consent of Landlord, which Landlord agrees not to unreasonably withhold.
The consent by Landlord to any one or more assignment or subletting
shall not constitute a waiver of the necessity for such consent to any
subsequent assignment or subletting. Landlord's consent to an
assignment or subletting shall not release Tenant from its obligation to
pay Rent and to perform all of the other obligations to be performed by
Tenant under this Lease unless Landlord specifically in writing releases
Tenant from said obligations. Any purported assignment or subletting
without prior written consent of Landlord shall constitute a material
breach of this Lease and shall be void. Any such assignment or
subletting shall, at the option of Landlord, terminate this Lease
provided that in such event Tenant shall be relieved of any future
liability under this Lease.
14. DEFAULT
a. Tenant's Default. The occurrence of any one or more of the
following events shall constitute a material default and breach of this
Lease by Tenant:
(i) The vacating or abandonment of the Premises by Tenant.
(ii) The failure by Tenant to pay Rent or any other payment required to
be made by Tenant, as and when due, where such failure shall continue
for a period of ten days after written notice by Landlord to Tenant.
(iii) The failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease to be performed by
Tenant other than those described in (ii) above, where such failure
shall continue for a period of thirty (30) days after written notice by
Landlord to Tenant; provided, that if the nature of Tenant's default is
such that more than thirty (30) days are reasonably required for its
cure, then Tenant shall not be deemed to be in default if Tenant
commences such cure within said thirty (30) day period and diligently
prosecutes such cure to completion.
b. Remedies Upon Tenant's Default. In the event of any material
default or breach by Tenant, Landlord may at any time thereafter, in its
sole discretion, exercise the following rights or remedies which it may
have by reason of such default:
(i) Landlord can continue this Lease in full force and effect (even
though Tenant has abandoned the Premises) unless Landlord elects to
terminate Tenant's rights to possession by a written notice. Landlord
can enforce all its rights and remedies including the right to recover
Rent as it becomes due. In no event shall Landlord's acts of
maintenance or preservation of the Premises, or Landlord's exercise of
its rights under any other agreement between Landlord and Tenant, or the
appointment of a receiver upon the initiative of Landlord (which shall
be at Tenant's expense) to protect its interest under this Lease, be
deemed to constitute a termination of Tenant's right to possession.
Landlord may take whatever actions provided herein, or as permitted by
law, without terminating this Lease, and this Lease shall continue in
full force and effect until and unless Landlord gives to Tenant written
notice of its election to terminate this Lease. After Tenant's default
and for as long as Landlord does not terminate Tenant's right to
possession of the Premises, Tenant may, with Landlord's prior written
consent, assign this Lease or sublet the Premises but Tenant shall not
be released from liability. Landlord's consent to a proposed assignment
or subletting shall not be unreasonably withheld, subject to the
provisions of Paragraph 13 above.
(ii) Landlord can elect to terminate this Lease at any time after the
occurrence of any event of default by written notice, and if Landlord so
elects may declare this Lease and Tenant's right to possession
terminated, reenter the Premises, remove Tenant's property therefrom
without court order and at Tenant's expense, eject all persons from the
property and recover damages from Tenant as provided. If re-entry is
made after abandonment by Tenant, Landlord may consider any property
belonging to Tenant and left on the Premises to have been abandoned.
Landlord may utilize or dispose of such property without liability. Any
such re-entry shall be permitted by Tenant without hindrance; and
Landlord shall not thereby be liable in damages for such re-entry or be
guilty of trespass or forcible entry. In the event Landlord elects to
terminate this Lease and Tenant's right to possession in accordance with
the above, or the same is terminated by operation of law, Landlord may
recover as damages from Tenant the following:
(a) The worth at the time of the award of the unpaid Rent and other
sums due hereunder which had been earned at the time of termination of
this Lease; and
(b) The worth at the time of the award of the amount by which the
unpaid Rent and other sums due hereunder which would have been earned
after the date of termination of this Lease until the time of award
exceeds the amount of such loss of Rent and other sums due that Tenant
proves could have been reasonably avoided; and
(c) The worth at the time of the award of the amount by which the
unpaid Rent and other sums due hereunder for the balance of the Lease
term after the time of award exceeds the amount of the loss of such Rent
and other sums that Tenant proves could be reasonably avoided; and
(d) That portion of the leasing commission, if any, paid by Landlord
and applicable to the unexpired term of this Lease; and
(e) Any other amount, including attorneys' fees and court costs,
necessary to compensate Landlord for all detriment proximately caused by
Tenant's failure to perform its obligations under this Lease, or which
in the ordinary course of things would be likely to result therefrom.
The "worth at the time of award" of the amounts referred to in
Paragraphs 14b(ii)(a) and (b) above shall be computed by allowing
interest at the annual rate of five percent (5%) plus the rate of
interest charged by the San Francisco Federal Reserve Bank to member
banks on the 25th day of the month prior to the due date of the sums due
hereunder. The "worth at the time of award" of the amount referred to
in Paragraph 14b(ii)(c) above shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco
at the time of award plus one percent (1%).
(iii) During the period Tenant is in default Landlord may elect at
Tenant's expense to petition the Superior Court of the State of
California for, and be entitled as a matter of right to, the appointment
of a receiver who shall be vested with such powers and authority as may
be necessary to fully protect all the rights of Landlord. Such receiver
may take possession of any assets belonging to Tenant and used in the
conduct of the business then being carried on by Tenant upon the
Premises without compensation to Tenant.
(iv) Efforts by Landlord to mitigate the damages caused by Tenant's
breach of this Lease shall not constitute a waiver of Landlord's right
to recover damages under the foregoing provisions.
(v) Nothing herein affects the right of Landlord to indemnification for
liability arising prior to the termination of this Lease for personal
injuries or property damages as may be provided elsewhere in this Lease.
c. Remedies Cumulative. The foregoing remedies of Landlord shall be
cumulative or alternative, as Landlord determines, and shall be in
addition to all rights and remedies now or hereafter provided or allowed
by law. No termination of this Lease shall cause a merger of the
estates of Landlord and Tenant unless Landlord so elects.
d. Landlord's Default. Landlord shall not be deemed to be in default
in the performance of any obligation required to be performed by
Landlord hereunder unless and until Landlord has failed to perform the
obligation within ten (10) days after receipt of written notice by
Tenant to Landlord specifying wherein Landlord has failed to perform the
obligation; provided, however, that if the nature of Landlord's
obligation is such that more than ten (10) days are required for its
performance, then Landlord shall not be deemed to be in default if
Landlord shall commence the performance within the ten (10) day period
and thereafter shall diligently prosecute the same to completion.
15. LANDLORD'S RIGHT TO PERFORM TENANT'S COVENANTS
If Tenant shall at any time fail to make any payment or perform any
other act on its part to be made or performed under this Lease, Landlord
may, but shall not be obligated to, make the payment or perform any
other act to the extent Landlord may deem desirable and, in connection
therewith, pay expenses and employ counsel. Any payment or performance
by Landlord shall not waive or release Tenant from any obligations of
Tenant under this Lease. All sums so paid by Landlord, and all
penalties, interest and costs in connection therewith, shall be due and
payable by Tenant on the next day after any payment by Landlord,
together with interest thereon at the Interest Rate, from that date to
the date of payment thereof by Tenant to Landlord, plus collection costs
and attorneys' fees. Landlord shall have the same rights and remedies
for the nonpayment thereof as in the case of default in the payment of
Rent.
16. SECURITY DEPOSIT
Tenant has deposited with Landlord the Security Deposit, in the amount
specified in the Basic Lease Information, as security for the full and
faithful performance of every provision of this Lease to be performed by
Tenant. If Tenant defaults with respect to any provision of this Lease,
Landlord may use, apply or retain all or any part of the Security
Deposit for the payment of any Rent or other sum in default, for the
payment of any amount which Landlord may expend or become obligated to
expend by reason of Tenant's default, or to compensate Landlord for any
loss or damage which Landlord may suffer by reason of Tenant's default.
If any portion of the Security Deposit is used or applied, Tenant shall
deposit with Landlord, within ten (10) days after written demand
therefor, cash in an amount sufficient to restore the Security Deposit
to its original amount. Landlord shall not be required to keep the
Security Deposit separate from its general funds, and Tenant shall not
be entitled to interest on the Security Deposit.
17. SURRENDER OF PREMISES
By taking possession of the Premises, Tenant shall be deemed to have
accepted the Premises, Building, and the Property in good, clean and
completed condition and repair, subject to all applicable laws, codes
and ordinances. On the expiration or early termination of this Lease;
Tenant shall surrender the Premises to Landlord in its condition as of
the Commencement Date, normal wear and tear excepted. Tenant shall
remove from the Premises all of Tenant's personal property, trade
fixtures and any alterations required to be removed pursuant to Section
8 of this Lease. Tenant shall repair damage or perform any restoration
work required by the removal. If Tenant fails to remove any personal
property, trade fixtures or alterations after the end of the Term,
Landlord may remove the property and store it at Tenant's expense,
including interest at the Interest Rate. If the Premises are not so
surrendered at the termination of this Lease, Tenant shall indemnify
Landlord against all loss or liability resulting from delay by Tenant in
so surrendering the Premises, including, without limitation, any claims
made by any succeeding tenant, losses to Landlord due to lost
opportunities to lease to succeeding tenants, and attorneys' fees and
costs.
18. HOLDING OVER
In the event Tenant remains in possession of the Premises after the
expiration of this Lease and without the execution of a new lease,
Tenant, at the option of Landlord, shall be deemed to be occupying the
Premises as a tenant from month to month, at Base Rent equal to one and
one-half times the Base Rent in effect on the date of said expiration,
and shall provide Landlord with written notice at least one month prior
to the date of termination of such monthly tenancy of its intention to
terminate such tenancy, subject to all the other conditions, provisions
and obligations of this Lease insofar as the same are applicable to a
month-to-month tenancy.
19. ACCESS TO PREMISES
Tenant shall permit Landlord and its agents to enter the Premises at all
reasonable times, upon twenty-four hours' notice to Tenant, to inspect
the same or to show said Premises to prospective purchasers. Tenant
shall permit Landlord, within one hundred twenty (120) days prior to the
expiration of this Lease (or any extended term) to place upon the
Premises ordinary "for lease" signs, and to show said Premises to
prospective tenants during reasonable business hours.
20. SIGNS
The size, design, color, location and other physical aspects of any sign
in or on the Building shall be subject to the Rules, Landlord's approval
prior to installation which, so long as any such sign is in conformance
with the sign program for the building, Landlord agrees not to
unreasonably withhold, and to any appropriate municipal or other
governmental approvals. The costs of any permitted sign, and the costs
of its installation, maintenance and removal, shall be at Tenant's sole
expense and shall be paid within ten (10) days of Tenant's receipt of a
bill from Landlord for the costs.
21. WAIVER OF SUBROGATION
Each party shall cause each insurance policy obtained by it to provide
that the insurance company waives all right of recovery by way of
subrogation against either party in connection with any damage covered
by any policy.
22. SUBORDINATION
At Landlord's option, Tenant shall subordinate its interest in this
Lease to any mortgage, deed of trust or any other hypothecation for
security subsequently placed upon the real property of which the
Building and Premises are a part and to any and all advances made on the
security thereof and to all renewals, modifications, consolidations,
replacements and extensions thereof. In the event of the termination of
any ground lease or the sale of the real property of which the Building
and Premises are a part (pursuant to foreclosure or the exercise of a
power of sale under any such mortgage, deed of trust or other security
instrument) Tenant shall attorn to the ground lessor or the purchaser,
as the case may be, and recognize such person as Landlord under this
Lease. Notwithstanding such subordination, Tenant's right to quiet
possession of the Premises shall not be disturbed if Tenant is not in
default at the time of any termination or sale.
23. TRANSFER OF PREMISES
If Landlord sells or transfers the Premises other than to Tenant,
Landlord, on consummation of the sale or transfer, shall be released
from any liability thereafter accruing under this Lease. In that event,
Landlord's successor shall be deemed, without any further agreement
between the parties, to have assumed all the Lease obligations of
Landlord from and after the consummation of the sale or transfer, and
any liability thereafter accruing under this Lease.
24. ESTOPPEL CERTIFICATES
Either party shall, without charge, at any time within ten days after
written request of the other, certify by written instrument duly
executed and acknowledged to any mortgagee or purchaser, or proposed
mortgagee or proposed purchaser, or any other person specified in such
request: (a) that this Lease has not been supplemented or amended, or
if so, the substance and manner of such supplement or amendment; (b)
that the Lease is valid and in force in accordance with its terms; (c)
that there are no defaults thereunder; (d) the existence of any offsets,
counterclaims or defenses thereto on the part of such other party; (e)
the commencement and expiration dates of this Lease; and (f) any other
matters as may reasonably be requested. Any such certificate may be
relied upon by the party requesting it and any other person to whom the
same may be exhibited or delivered and the contents of such certificate
shall be binding upon the party executing same.
25. ATTORNEY'S FEES
In the event of any action or proceeding brought by either party against
the other under this Lease the prevailing party shall be entitled to
recover for the fees of its attorneys in such action or proceeding,
including costs of appeal, if any, in such amount as the court may
adjudge reasonable as attorneys' fees.
26. BROKERS
Tenant warrants and represents that it has had no dealings with any real
estate broker or agent in connection with the negotiation of this Lease,
except for any broker(s) specified in the Basic Lease Information, and
that it knows of no other real estate broker or agent who is or might be
entitled to a commission in connection with this Lease. Tenant shall
indemnify and hold harmless Landlord from and against any and all
liabilities or expenses arising out of claims made by any other broker
or individual for commissions or fees resulting from this Lease.
27. UTILITIES AND SERVICES
Landlord agrees to furnish, or cause to be furnished, to the Premises,
the utilities and services described in the standards for Utilities and
Services, set forth in Exhibit C, subject to the conditions and in
accordance with the standards set forth therein. Landlord shall not be
liable for, and Tenant shall not be entitled to any abatement or
reduction of Rent by reason of, no eviction of Tenant shall result from
and, further, Tenant shall not be relieved from the performance of any
covenant or agreement in this Lease because of, Landlord's failure to
furnish any of the foregoing when the failure is caused by accident,
breakage, or repairs, strikes, lockouts or other labor disturbance or
labor dispute of any character, governmental regulation, moratorium or
other governmental action, inability despite the exercise of reasonable
diligence to obtain electricity, water or fuel, or by any other cause
beyond Landlord's reasonable control. In the event of any failure,
stoppage or interruption thereof, Landlord shall diligently attempt to
resume service.
28. ACCEPTANCE
Delivery of this Lease, duly executed by Tenant, constitutes an offer to
lease the Premises as set forth herein, and under no circumstances shall
such delivery be deemed to create an option or reservation to lease the
Premises for the benefit of Tenant. This Lease shall become effective
and binding only upon execution hereof by Landlord and delivery of a
signed copy to Tenant. Upon acceptance of Tenant's offer to lease under
the terms hereof and receipt by Landlord of the Rent for the first month
of the Term and the Security Deposit in connection with Tenant's
submission of the offer, Landlord shall be entitled to retain the sums
and apply them to damages, costs, and expenses incurred by Landlord if
Tenant fails to occupy the Premises. If Landlord rejects the offer, the
sums shall be returned to Tenant.
29. USE OF BUILDING NAME
Tenant shall not employ the name of the Building in the name or title of
its business or occupation without Landlord's prior written consent,
which consent Landlord may withhold in its sole discretion. Landlord
reserves the right to change the name of the Building without Tenant's
consent and without any liability to Landlord.
30. RECORDING
Neither Landlord nor Tenant shall record this Lease, nor a short form
memorandum of this Lease, without the prior written consent of the
other.
31. QUITCLAIM
Upon any termination or expiration of this Lease pursuant to its terms,
Tenant, at Landlord's request, shall execute, have acknowledged and
deliver to Landlord, a quitclaim deed of all Tenant's interest in the
Premises, Building and Property created by this Lease.
32. NOTICES
Any notice or demand required or desired to be given under this Lease
shall be in writing and shall be given by hand delivery, electronic mail
(e.g. facsimile transmission) or the United States mail. Notices which
are sent by electronic mail shall be deemed to have been given upon
receipt. Notices which are mailed shall be deemed to have been given
when seventy-two (72) hours have elapsed after the notice was deposited
in the United States mail, registered or certified, the postage prepaid,
addressed to the party to be served. As of the date of execution of
this Lease, the addresses of Landlord and Tenant are as specified in the
Basic Lease Information. Either party may change its address by giving
notice of the change in accordance with this Section.
33. GENERAL
a. Captions. The captions in this Lease are for convenience and
reference only and shall have no effect on its interpretation.
b. Time. Time is of the essence of this Lease and of each provision
hereof.
c. Severability. The unenforceability, invalidity, or illegality of any
provision shall not render the other provisions unenforceable, invalid,
or illegal.
d. Choice of Law; Construction. This Lease shall be construed and
interpreted in accordance with the laws of the State of California. The
language in all parts of this Lease shall in all cases be construed as a
whole according to its fair meaning and not strictly for or against
either Landlord or Tenant.
e. Authority of Tenant. If Tenant is a corporation, each individual
executing this Lease on behalf of said corporation represents and
warrants that he is duly authorized to execute and deliver this Lease on
behalf of said corporation, in accordance with the bylaws of said
corporation, and that this Lease is binding upon said corporation.
f. Joint and Several Obligations. "Party" shall mean Landlord or
Tenant; and if more than one person or entity is Landlord or Tenant,
then the obligations imposed on that party shall be joint and several.
g. Relationship of the Parties. Landlord does not by execution of this
Lease, in any way or for any purpose, become a partner of Tenant in the
conduct of its business or otherwise. The sole relationship of the
parties shall be that of Landlord and Tenant.
h. Gender; Singular, Plural. Masculine or feminine pronouns shall be
substituted for the neuter form and vice versa, and the plural shall be
substituted for the singular form and vice versa, in any place or places
herein in which the context requires such substitution.
i. Binding Effect. This Lease shall be binding upon and inure to the
benefit and be enforceable by the respective heirs, executors,
administrators, and permitted successors and assigns of the parties.
j. Waiver. The waiver by Landlord or Tenant of any breach of any term,
covenant or condition herein contained shall not be deemed to be a
waiver of such term, covenant, or condition or any subsequent breach of
the same or any other term, covenant, or condition herein contained.
The subsequent acceptance of Rent hereunder by Landlord shall not be
deemed to be a waiver of any preceding breach by Tenant of any term,
covenant, or condition of this Lease, other than the failure of Tenant
to pay the particular sum of rental so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance
of such Rent.
k. Entire Agreement. This Lease contains all of the agreements of the
parties with respect to any matter covered or mentioned in this Lease.
No provision of this Lease may be amended or added to except by an
agreement in writing signed by the parties or their respective
successors in interest. However, any minor changes or interlineations
may be made if initialed by each of the parties on all counterparts
hereof. This Lease shall not be effective or binding on any party until
fully executed by both parties.
l. Counterparts. This Lease may be executed in counterparts, each of
which shall be an original, but all counterparts shall constitute one
instrument.
m. Exhibits. The Basic Lease Information and all exhibits attached
hereto are hereby incorporated herein and made an integral part hereof.
n. Addenda. Any Addenda attached hereto are hereby incorporated herein
and made an integral part hereof.
IN WITNESS WHEREOF, the parties have executed this Lease on the dates
set forth below.
TENANT: LANDLORD:
Sonoma National Bank James Ratto
___________________________ ____________________________
By:
Date: ______________________ Date: ____________________
EXHIBIT A
EXHIBIT B - RULES AND REGULATIONS
1. No sign, placard, picture, advertisement, name or notice shall be
installed or displayed on any part of the outside or inside of the
Building without the prior written consent of Landlord, not to be
unreasonably withheld, conditioned or delayed. Landlord shall have the
right to remove, at Tenant's expense, any sign installed or displayed in
violation of this rule. All approved signs or lettering on doors and
walls shall be painted, affixed or inscribed at the expense of Tenant by
a person approved by Landlord.
2. Except as consented to in writing by Landlord or in accordance with
established Building standard improvements, no draperies, curtains,
shades, screens or other devices shall be hung at or used in connection
with any window or exterior door or doors on the Premises. No awning
shall be permitted on any part of the Premises. Tenant shall not place
anything against or near glass partitions or doors or windows which may
appear unsightly from outside the Premises.
3. Tenant shall not obstruct any sidewalks, halls, lobbies, passages,
exits, entrances, elevators or stairways of the Building. No tenant and
no employee or invitee of any tenant shall go upon the roof of the
Building or make any roof or terrace penetrations. Tenant shall not
allow anything to be placed on the outside terraces or balconies without
the prior written consent of Landlord.
4. No Tenant shall invite to the Premises, or permit the visit of,
persons in such numbers or under such conditions as to interfere with
the use and enjoyment of the Common Areas of the Building by other
tenants.
5. Landlord will furnish Tenant, free of charge, one key to Tenant's
suite entrance for each two hundred fifty (250) rentable square feet of
the Premises. Landlord may make a reasonable charge for any additional
keys and for having any locks changed. Tenant shall not make or have
made additional keys without Landlord's prior written consent, and
Tenant shall not alter any lock or install a new additional lock or bolt
on any door of its Premises without Landlord's prior written consent.
Tenant shall deliver to Landlord, upon termination of its tenancy, the
keys to all locks for doors on the Premises.
6. If Tenant requires telegraphic, telephonic, burglar alarm or similar
services, it shall first obtain, and comply with, Landlord's
instructions for their installation.
7. The elevators shall be available for use by all tenants in the
Building, subject to reasonable scheduling as Landlord in its discretion
shall deem appropriate. No equipment, materials, furniture, packages,
supplies, merchandise or other property will be received in the Building
or carried in the elevators except between such hours and in such manner
as may be designated by the Landlord.
8. Tenant shall not place a load upon any floor of the Premises which
exceeds the maximum load per square foot which the floor was designed to
carry and which is allowed by law. Tenant's business machines and
mechanical equipment which cause noise or vibration which may be
transmitted to the structure of the Building or to any space therein,
and which is objectionable to Landlord or to any tenants in the Building
shall be placed and maintained by Tenant, at Tenant's expense, on
vibration eliminators or other devices sufficient to eliminate noise or
vibration.
9. Tenant shall not use or keep in the Premises any toxic or hazardous
materials or any kerosene, gasoline or inflammable or combustible fluid
or material other than those limited quantities necessary for the
operation or maintenance of office equipment. Tenant shall not use or
permit to be used in the Premises any foul or noxious gas or substance,
or permit or allow the Premises to be occupied or used in a manner
offensive or objectionable to Landlord or other occupants of the
Building by reason of noise, odors or vibrations.
10. Tenant shall not use any method of heating or air-conditioning other
than that supplied by Landlord, unless Tenant receives the prior written
consent of Landlord.
11. Tenant shall cooperate fully with Landlord to assure the most
effective operation of the Building's heating and air-conditioning and
to comply with any governmental energy-saving rules, laws or regulations
of which Tenant has actual notice. Tenant shall refrain from attempting
to adjust controls other than room thermostats installed for Tenant's
use.
12. All entrance doors to the Premises shall be left locked when the
Premises are not in use, and all doors opening to public corridors shall
be kept closed except for normal ingress and egress to and from the
Premises.
13. Landlord reserves the right to exclude any person from the Building
after normal business hours, unless that person is known to the person
or employee in charge of the Building or is properly identified. Tenant
shall be responsible for all employees, clients or visitors and shall be
liable for all acts of those persons. Landlord shall not be liable for
damages for any error in admitting or excluding any person from the
Building.
14. Tenant shall close and lock the door of its Premises, shut off all
water faucets or other water apparatus and turn off all lights and other
equipment which is not required to be continuously run.
15. Tenant shall not install any radio or television antenna,
loudspeaker or other device on the roof or exterior walls of the
Building. Tenant shall not interfere with radio or television
broadcasting or reception from or in the Building or elsewhere.
16. Tenant shall not cut or bore holes for wires in the partitions,
woodwork or plaster of the Premises. Tenant shall not affix any floor
covering to the floor of the Premises in any manner except as approved
by Landlord. Landlord shall approve in writing the method of attachment
of any objects affixed to walls, ceilings or doors in the Premises.
Tenant shall repair, or be responsible for the cost of repair of, any
damage resulting from noncompliance with this rule.
17. Canvassing, soliciting and distributing handbills or any other
written material and peddling in the Building are prohibited, and each
tenant shall cooperate to prevent these activities.
18. Landlord reserves the right to exclude or expel from the Building
any person who, in Landlord's judgment, is intoxicated or under the
influence of liquor or drugs, or who is in violation of any of the Rules
and Regulations of the Building.
19. Tenant shall store all its trash and garbage within its Premises or
in appropriate common debris containers for the Building. Tenant shall
not place in any trash box or receptacle any material which cannot be
disposed of in the ordinary and customary manner of trash and garbage
disposal within the Building. All garbage and refuse disposal shall be
made in accordance with directions issued from time to time by Landlord.
20. Use by Tenant of Underwriters' Laboratory approved equipment for
brewing coffee, tea, hot chocolate and similar beverages and microwaving
food shall be permitted, provided that the equipment and use is in
accordance with all applicable federal, state, county and city laws,
codes, ordinances, rules and regulations. No other cooking shall be
permitted on the Premises.
21. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental
agency.
22. Tenant assumes any and all responsibility for protecting its
Premises from theft and robbery, which responsibility includes keeping
doors locked and other means of entry to the Premises closed.
23. Tenant shall not use the Premises, or suffer or permit anything to
be done on, in or about the Premises, which may result in an increase to
Landlord in the cost of insurance maintained by Landlord on the Building
and Common Areas.
24. The scheduling and manner of all Tenant move-ins and move-outs shall
be subject to the discretion and approval of Landlord. If Tenant's
movers damage the elevator or any other part of the Property, Tenant
shall pay to Landlord the amount required to repair the damage.
25. Landlord shall have the right to control and operate the public
portions of the Building, and the public facilities, heating and
air-conditioning, as well as facilities furnished for the common use of
the tenants, in such manner as it deems best for the benefit of the
tenants generally.
26. Landlord may waive any one or more of these Rules and Regulations
for the benefit of Tenant or any other tenant, but no waiver by Landlord
shall be construed as a waiver of the Rules and Regulations in favor of
Tenant or any other tenant, nor prevent Landlord from thereafter
enforcing the Rules and Regulations against any or all of the tenants of
the Building.
27. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify or amend in whole or in part, the terms,
covenants, agreements and conditions of any lease of premises in the
building.
28. Landlord reserves the right to make other reasonable and
non-discriminatory Rules and Regulations as, in its judgment, may from
time to time be needed for safety and security, for care and cleanliness
of the Building and for the preservation of good order therein. Tenant
agrees to abide by all Rules and Regulations herein above stated and any
additional rules and regulations which are adopted.
EXHIBIT C - UTILITIES AND SERVICES
The standards set forth below for Utilities and Services are in effect.
Landlord reserves the right to adopt nondiscriminatory modifications and
additions hereto, which do not materially affect Tenant's rights.
Landlord shall give notice to Tenant, in accordance with provisions of
this Lease, of material modifications and additions.
1. Provision by Landlord.
Landlord shall:
a. Elevator. Where applicable, provide unattended automatic elevator
facilities twenty four hours a day, Monday through Friday, except
holidays, and take reasonable steps to insure that one elevator is
available at all times.
b. Ventilation. Ventilate the Premises and furnish air-conditioning or
heating to the extent required for the comfortable occupancy of the
Premises, subject to governmental regulation. The air-conditioning
system achieves maximum cooling when available window coverings and
sliding glass doors are closed. Landlord shall not be responsible for
room temperatures if Tenant does not keep all sliding glass doors in the
Premises closed whenever the system is in operation. Tenant shall
cooperate to the best of its ability at all times with Landlord and
shall abide by all reasonable regulations and requirements which
Landlord may prescribe for the proper functioning and protection of the
air-conditioning system. Tenant shall not connect any apparatus,
device, conduit or pipe to the Building's chilled and hot water
air-conditioning supply lines. Tenant and Tenant's servants, employees,
agents, visitors, licensees or contractors shall not enter at any time
the mechanical installations or facilities of the Building, or adjust,
tamper with, touch or otherwise in any manner affect the installations
or facilities. After the Commencement Date, if any installation of
partitions, equipment or fixtures by Tenant necessitates the
re-balancing of the climate control equipment in the Premises, the
re-balancing shall be performed by Landlord at Tenant's reasonable
expense.
c. Electricity. Tenant shall not connect any apparatus or device with
wires, conduits or pipes, or other means by which the services are
supplied, for the purpose of using additional or unusual amounts of the
services without the prior written consent of Landlord. At all times
Tenant's use of electric current shall not exceed the capacity of the
feeders to the Building or the risers or wiring installation, except as
provided in working drawings approved by Landlord.
d. Water. Make water available in public areas for drinking, lavatory
purposes and, where applicable, for installed shower facilities only.
2. Stopping of Service.
Landlord reserves the right to stop services of the elevator, plumbing,
ventilation, air-conditioning and electric systems when necessary by
reason of accident or emergency, or for repairs, alterations or
improvements, in the judgment of Landlord desirable or necessary to be
made, until the repairs, alterations or improvements have been
completed. Landlord shall have no responsibility or liability for
failure to supply elevator facilities, plumbing, ventilating,
air-conditioning or electric service when prevented by strike or
accident or by any cause beyond Landlord's reasonable control, or by
laws , rules, orders, ordinances, directions, regulations or
requirements of any federal, state, county or municipal authority or
failure of gas, oil or other suitable fuel supply or inability by
exercise of reasonable diligence to obtain gas, oil or other suitable
fuel. It is expressly understood and agreed that any covenants on
Landlord's part to furnish any service pursuant to any of the terms,
covenants, conditions, provisions or agreements of this Lease, or to
perform any act or thing for the benefit of Tenant, shall not be deemed
breached if Landlord is unable to furnish or perform the same by virtue
of a strike or labor trouble or any other cause whatsoever beyond
Landlord's reasonable control. Landlord shall provide at least forty
eight (48) hours' advance notice of any repair affecting service, except
in cases of emergency. To the extent practical, Landlord shall schedule
repairs affecting service on evenings or weekends after Tenant's
business hours. Landlord shall give Tenant at least forty eight (48)
hours' notice of proposed shutdowns of service.
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