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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[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, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number: 0-19231
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REDWOOD EMPIRE BANCORP
(Exact name of Registrant as specified in its charter)
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CALIFORNIA 68-0166366
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
111 SANTA ROSA AVENUE, SANTA ROSA, CALIFORNIA 95404-4905
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (707) 573-4800
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Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par
value.
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed under Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of the Registrant's common stock held by
non-affiliates on March 1, 2000 (based on the closing sale price of the Common
Stock) was $44,365,629.
As of March 1, 2000 there were 3,275,890 shares outstanding of the
Registrant's common stock.
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TABLE OF CONTENTS
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PART I
Forward-Looking Information............................................ 3
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Securities Holders....... 13
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 14
Item 6. Selected Financial Data..................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Item 7a. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 33
Item 8. Financial Statements and Supplementary Data................. 36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 66
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 67
Item 11. Executive Compensation...................................... 67
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 67
Item 13. Certain Relationships and Related Transactions.............. 67
PART IV
Item 14. Exhibits, Financial Statements, Financial Statements
Schedules and Reports on Form 8-K......................... 68
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PART I
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K includes forward-looking information which
is subject to the "safe harbor" created by the Securities Act of 1933 and
Securities Exchange Act of 1934. These forward-looking statements (which involve
the Company's plans, beliefs and goals, refer to estimates or use similar terms)
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors:
- Competitive pressure in the banking industry and changes in the regulatory
environment.
- Changes in the interest rate environment and volatility of rate sensitive
deposits.
- Declines in the health of the economy nationally or regionally which could
reduce the demand for loans or reduce the value of real estate collateral
securing most of the Company's loans.
- Credit quality deterioration which could cause an increase in the
provision for loan losses.
- Losses in the Company's merchant credit card processing business.
- Changes in the securities markets.
- Asset/Liability matching risks and liquidity risks.
The Company undertakes no obligation to revise or publicly release the
results of any revision to these forward-looking statements. For additional
information concerning risks and uncertainties related to the Company and its
operations please refer to Certain Important Considerations for Investors in
Item 1, Management's Discussion and Analysis of Financial Condition and Results
of Operations in Item 7 and other information in this Report.
ITEM 1. BUSINESS
Redwood Empire Bancorp ("Redwood," and with its subsidiaries, the "Company")
is a financial institution holding company headquartered in Santa Rosa,
California, and operating in Northern California through one principal
subsidiary, National Bank of the Redwoods, a national bank ("NBR" or the
"Bank"). A previously owned subsidiary of the Company, Allied Bank, F.S.B., a
federal savings bank ("Allied") merged with its sister subsidiary, NBR, in March
1997.
(a) GENERAL DEVELOPMENT OF BUSINESS.
Redwood is a California corporation, headquartered in Santa Rosa,
California. Its wholly-owned subsidiary is NBR, a national bank which was
chartered in 1985. In addition, NBR has three wholly-owned California chartered
subsidiaries, Valley Mortgage Corporation and Allied Diversified Credit, and
Redwood Merchant Services, Inc., which are currently inactive. Redwood was
created by NBR in August 1988, in order to become a bank holding company through
the acquisition of all of NBR's outstanding shares. That transaction was
consummated in January 1989. Redwood acquired Allied in September 1990, through
a tax-free reorganization in which Redwood exchanged shares of its stock for all
of the outstanding shares of Allied. The acquisition of Allied was accounted for
as a pooling of interests for financial reporting purposes.
On October 31, 1992, Lake Savings and Loan Association, a one-branch
California chartered savings and loan based in Lakeport, California ("Lake"),
was purchased for approximately $2,300,000 in cash, and merged into Allied. At
the time of its acquisition Lake had total assets of approximately $41 million.
The acquisition was accounted for as a purchase.
On November 4, 1994, Codding Bank, a multiple-branch California chartered
bank based in Rohnert Park, California ("Codding"), was purchased for $7,028,000
in cash, including merger related expenses,
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and merged into NBR. At the merger date, the fair value of the assets acquired
totaled approximately $42 million.
In November 1996, the Board of Directors of the Company voted to merge
Allied into NBR. On February 3, 1997, NBR received approval from the Office of
the Comptroller of the Currency to merge Allied into NBR. The merger was
consummated March 24, 1997. The combination of the two wholly-owned subsidiaries
of Redwood was structured as a merger transaction wherein Allied has merged into
NBR with NBR as the survivor. As a result of the merger NBR assumed all of
Allied's rights and obligations. Allied ceased to exist as a federally chartered
savings institution upon the merger.
In September 1999, the Company divested itself of its subprime mortgage
brokerage and mortgage banking units, Valley Financial and Allied Diversified
Credit. The divestiture took the form of an asset sale and employee transfer to
Valley Financial Funding, Inc., whose shareholders include senior management of
Valley Financial and Allied Diversified Credit. The Company has disclosed the
operations of these units as well as the after tax loss on disposition as
discontinued operations. Accordingly, historical financial information has been
recast to present the operating results of Valley Financial and Allied
Diversified Credit as discontinued operations.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
Through September 10, 1999, the Company operated in four principal industry
segments: core community banking, merchant card services, sub prime lending, and
residential mortgage banking and brokerage. The Company's core community banking
industry segment includes commercial, commercial real estate, construction, and
permanent residential lending along with all depository activities. The
Company's merchant card services industry group provides credit card settlement
services for 67,000 merchants throughout the United States. The Company's sub
prime lending unit, known as Allied Diversified Credit and the Company's
residential mortgage banking and brokerage arm, known as Valley Financial were
divested on September 10, 1999. The divestiture took the form of an asset sale
and employee transfer. The Company has disclosed the operations of these units
as well as the after tax loss on disposition as discontinued operations.
Accordingly, historical financial information regarding segments has been
restated. For further discussion see "Management Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
The Company's business strategy involves two principal business activities
which are conducted through NBR: community banking and merchant card services.
NBR provides its core community banking services through five retail
branches located in Sonoma County, California, one retail branch located in
Mendocino County, California, and one retail branch located in Lake County,
California. NBR generally extends commercial loans to professionals and to
businesses with annual revenues of less than $10 million. Commercial loans are
primarily for working capital, asset acquisition and commercial real estate.
NBR's targeted commercial banking market area includes the California counties
north of San Francisco. NBR is a Preferred Lender under the Small Business
Administration ("SBA") Loan Guarantee Program. NBR also originates commercial
and residential construction loans for its portfolio.
The primary sources of funds for the Company's commercial and residential
lending programs are local deposits, proceeds from loan sales, loan payments,
and other borrowings. The Company attracts deposits primarily from local
businesses, professionals and retail customers. The Company's primary deposit
market areas include the counties of Sonoma, Mendocino and Lake. Sonoma,
Mendocino and Lake Counties have benefited from the migration of population and
businesses into the area, as well as growth in established firms and industries.
These counties have generally exceeded the growth in population and economic
activity of California as a whole. The Company generally does not purchase
deposits through deposit brokers and had no brokered deposits at December 31,
1999. In addition to deposits, the Company may obtain other borrowed funds
through its membership in the Federal Home
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Loan Bank of San Francisco (the "FHLB") and its retention of treasury, tax and
loan funds at the Federal Reserve Bank of San Francisco.
The Company provides Visa and Mastercard credit card processing and
settlement services for roughly 67,000 merchants located throughout the United
States. Yearly processing volume is in excess of $1.6 billion. The Company's
merchant card services customer base is made up of merchants located in its
primary market area and merchants who have been acquired by the Company through
the use of independent sales organizations, or ISO's.
The Company is regulated by various government agencies, with the primary
regulators being the Board of Governors of the Federal Reserve System (the
"FRB"), the Office of the Comptroller of the Currency (the "OCC") and the
Federal Deposit Insurance Corporation (the "FDIC").
The Company and its subsidiaries had 162 full-time-equivalent employees at
December 31, 1999. Redwood's headquarters are located at 111 Santa Rosa Avenue,
Santa Rosa, California 95404-4905, and its telephone number is (707) 573-4800.
REGULATION AND SUPERVISION
THE EFFECT OF GOVERNMENT POLICY ON BANKING
The earnings and growth of the Company are affected not only by local market
area factors and general economic conditions, but also by government monetary
and fiscal policies. For example, the FRB influences the supply of money through
its open market operations in U.S. Government securities and adjustments to the
discount rates applicable to borrowings by depository institutions and others.
Such actions influence the growth of loans, investments and deposits and also
affect interest rates charged on loans and paid on deposits. The nature and
impact of future changes in such policies on the business and earnings of the
Company cannot be predicted. Additionally, state and federal tax policies can
impact banking organizations.
As a consequence of the extensive regulation of commercial banking
activities in the United States, the business of the Company is particularly
susceptible to being affected by the enactment of federal and state legislation
which may have the effect of increasing or decreasing the cost of doing
business, modifying permissible activities or enhancing the competitive position
of other financial institutions. Any change in applicable laws or regulations
may have a material adverse effect on the business and prospects of the Company.
REGULATION AND SUPERVISION OF BANK HOLDING COMPANIES
The Company is a bank holding company subject to the Bank Holding Company
Act of 1956, as amended ("BHCA"). The Company reports to, registers with, and
may be examined by, the FRB. The FRB also has the authority to examine the
Company's subsidiaries. The costs of any examination by the FRB are payable by
the Company.
The FRB has significant supervisory and regulatory authority over the
Company and its affiliates. The FRB requires the Company to maintain certain
levels of capital. See "Capital Standards." The FRB also has the authority to
take enforcement action against any bank holding company that commits any unsafe
or unsound practice, or violates certain laws, regulations or conditions imposed
in writing by the FRB.
Under the BHCA, a company generally must obtain the prior approval of the
FRB before it exercises a controlling influence over a bank, or acquires
directly or indirectly, more than 5% of the voting shares or substantially all
of the assets of any bank or bank holding company. Thus, the Company is required
to obtain the prior approval of the FRB before it acquires, merges or
consolidates with any bank or bank holding company; any company seeking to
acquire, merge or consolidate with the Company also would be required to obtain
the prior approval of the FRB.
The Company is generally prohibited under the BHCA from acquiring ownership
or control of more than 5% of the voting shares of any company that is not a
bank or bank holding company and from
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engaging directly or indirectly in activities other than banking, managing banks
or providing services to affiliates of the holding company. However, a bank
holding company, with the approval of the FRB, may engage, or acquire the voting
shares of companies engaged in activities that the FRB has determined to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. A bank holding company must demonstrate that the benefits to
the public of the proposed activity will outweigh the possible adverse effects
associated with such activity.
A bank holding company may acquire banks in states other than its home state
without regard to the permissibility of such acquisitions under state law, but
subject to any state requirement that the acquired bank has been organized and
operating for the minimum period of time and providing that the bank holding
company, prior to or following the proposed acquisition, controls no more than
10% of the total amount of deposits of insured depository institutions in the
United States and no more than 30% of such deposits in that state (or such
lesser or greater amount set by state law). Banks may also merge across state
lines, creating interstate branches. Furthermore, a bank may open new branches
in a state in which it does not already have banking operations, if the laws of
such state permit such DE NOVO branching.
Under California law, (a) out-of-state banks that wish to establish a
California branch office to conduct core banking business must first acquire an
existing five year old California bank or industrial loan company by merger or
purchase; (b) California state-chartered banks are empowered to conduct various
authorized branch-like activities on an agency basis through affiliated and
unaffiliated insured depository institutions in California and other states and
(c) the Commissioner is authorized to approve an interstate acquisition or
merger which would result in a deposit concentration exceeding 30% if the
Commissioner finds that the transaction is consistent with public convenience
and advantage. However, a state bank chartered in a state other than California
may not enter California by purchasing a California branch office of a
California bank or industrial loan company without purchasing the entire entity
or by establishing a de novo California bank.
The FRB generally prohibits a bank holding company from declaring or paying
a cash dividend which would impose undue pressure on the capital of subsidiary
banks or would be funded only through borrowing or other arrangements that might
adversely affect a bank holding company's financial position. The FRB's policy
is that a bank holding company should not continue its existing rate of cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall financial condition. See the
section entitled "Restrictions on Dividends and Other Distributions" for
additional restrictions on the ability on the Company and the Bank to pay
dividends.
Transactions between the Company and the Bank are subject to a number of
other restrictions. FRB policies forbid the payment by bank subsidiaries of
management fees which are unreasonable in amount or exceed the fair market value
of the services rendered (or, if no market exists, actual costs plus a
reasonable profit). Subject to certain limitations, depository institution
subsidiaries of bank holding companies may extend credit to, invest in the
securities of, purchase assets from, or issue a guarantee, acceptance, or letter
of credit on behalf of, an affiliate, provided that the aggregate of such
transactions with affiliates may not exceed 10% of the capital stock and surplus
of the institution, and the aggregate of such transactions with all affiliates
may not exceed 20% of the capital stock and surplus of such institution. The
Company may only borrow from depository institution subsidiaries if the loan is
secured by marketable obligations with a value of a designated amount in excess
of the loan. Further, the Company may not sell a low-quality asset to a
depository institution subsidiary.
Comprehensive amendments to Regulation Y became effective in 1997, and are
intended to improve the competitiveness of bank holding companies by, among
other things: (i) expanding the list of permissible nonbanking activities in
which well-run bank holding companies may engage without prior FRB approval,
(ii) streamlining the procedures for well-run bank holding companies to obtain
approval to engage in other nonbanking activities and (iii) eliminating most of
the anti-tying restrictions imposed upon bank holding companies and their
nonbank subsidiaries. Amended Regulation Y also provides for a streamlined and
expedited review process for bank acquisition proposals submitted by well-run
bank
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holding companies and eliminates certain duplicative reporting requirements when
there has been a further change in bank control or in bank directors or officers
after an earlier approved change. These changes to Regulation Y are subject to
numerous qualifications, limitations and restrictions. In order for a bank
holding company to qualify as "well-run," both it and the insured depository
institutions that it controls must meet the "well-capitalized" and
"well-managed" criteria set forth in Regulation Y.
To qualify as "well-capitalized," the bank holding company must, on a
consolidated basis: (i) maintain a total risk-based capital ratio of 10% or
greater; (ii) maintain a Tier 1 risk-based capital ratio of 6% or greater; and
(iii) not be subject to any order by the FRB to meet a specified capital level.
Its lead insured depository institution must be well-capitalized as that term is
defined in the capital adequacy regulations of the applicable bank regulator,
80% of the total risk-weighted assets held by its insured depository
institutions must be held by institutions that are well-capitalized, and none of
its insured depository institutions may be undercapitalized.
To qualify as "well-managed": (i) each of the bank holding company, its lead
depository institution and its depository institutions holding 80% of the total
risk-weighted assets of all its depository institutions at their most recent
examination or review must have received a composite rating, rating for
management and rating for compliance which were at least satisfactory; (ii) none
of the bank holding company's depository institutions may have received one of
the two lowest composite ratings; and (iii) neither the bank holding company nor
any of its depository institutions during the previous 12 months may have been
subject to a formal enforcement order or action.
BANK REGULATION AND SUPERVISION
As a national bank, the Bank is regulated, supervised and regularly examined
by the OCC. Deposit accounts at the Bank are insured by the Bank Insurance Fund
("BIF") and the Savings Institution Insurance Fund ("SAIF"), as administered by
the FDIC, to the maximum amount permitted by law. The Bank is also subject to
applicable provisions of California law, insofar as such provisions are not in
conflict with or preempted by federal banking law. The Bank is a member of the
Federal Reserve System, and is also subject to certain regulations of the FRB
dealing primarily with check clearing activities, establishment of banking
reserves, Truth-in-Lending (Regulation Z), Truth-in-Savings (Regulation DD), and
Equal Credit Opportunity (Regulation B).
The OCC may approve, on a case-by-case basis, the entry of bank operating
subsidiaries into a business incidental to banking, including activities in
which the parent bank is not permitted to engage. A national bank is permitted
to engage in activities approved for a bank holding company through a bank
operating subsidiary, such as acting as an investment or financial advisor,
leasing personal property and providing financial advice to customers. In
general, these activities are permitted only for well-capitalized or adequately
capitalized national banks.
CAPITAL STANDARDS
The federal banking agencies have risk-based capital adequacy guidelines
intended to provide a measure of capital adequacy that reflects the degree of
risk associated with a banking organization's operations for both transactions
reported on the balance sheet as assets and transactions, such as letters of
credit and recourse arrangements, which are recorded as off balance sheet items.
Under these guidelines, nominal dollar amounts of assets and credit equivalent
amounts of off balance sheet items are multiplied by one of several risk
adjustment percentages, which range from 0% for assets with low credit risk,
such as certain U.S. government securities, to 100% for assets with relatively
higher credit risk, such as certain loans.
In determining the capital level the Company and the Bank are required to
maintain, the federal banking agencies do not, in all respects, follow generally
accepted accounting principles ("GAAP") and have special rules which have the
effect of reducing the amount of capital they will recognize for purposes of
determining the capital adequacy of the Bank.
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A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk-adjusted assets and off balance sheet
items. The regulators measure risk-adjusted assets and off balance sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common
stock, retained earnings, noncumulative perpetual preferred stock, other types
of qualifying preferred stock and minority interests in certain subsidiaries,
less most other intangible assets and other adjustments. Net unrealized losses
on available-for-sale equity securities with readily determinable fair value
must be deducted in determining Tier 1 capital. For Tier 1 capital purposes,
deferred tax assets that can only be realized if an institution earns sufficient
taxable income in the future are limited to the amount that the institution is
expected to realize within one year, or ten percent of Tier 1 capital, whichever
is less. Tier 2 capital may consist of a limited amount of the allowance for
possible loan and lease losses, term preferred stock and other types of
preferred stock not qualifying as Tier 1 capital, term subordinated debt and
certain other instruments with some characteristics of equity. The inclusion of
elements of Tier 2 capital are subject to certain other requirements and
limitations of the federal banking agencies. The federal banking agencies
require a minimum ratio of qualifying total capital to risk-adjusted assets and
off balance sheet items of 8%, and a minimum ratio of Tier 1 capital to adjusted
average risk-adjusted assets and off balance sheet items of 4%.
On October 1, 1998, the OCC adopted two rules governing minimum capital
levels that OCC-supervised banks must maintain against the risks to which they
are exposed. The first rule makes risk-based capital standards consistent for
two types of credit enhancements (i.e., recourse arrangements and direct credit
substitutes) and requires different amounts of capital for different risk
positions in asset securitization transactions. The second rule permits limited
amounts of unrealized gains on debt and equity securities to be recognized for
risk-based capital purposes as of September 1, 1998. The OCC rules also provide
that a qualifying institution that sells small business loans and leases with
recourse must hold capital only against the amount of recourse retained. In
general, a qualifying institution is one that is well-capitalized under the
FDIC's prompt corrective action rules. The amount of recourse that can receive
the preferential capital treatment cannot exceed 15% of the institution's total
risk-based capital.
In addition to the risked-based guidelines, the federal banking agencies
require banking organizations to maintain a minimum amount of Tier 1 capital to
adjusted average total assets, referred to as the leverage capital ratio. For a
banking organization rated in the highest of the five categories used to rate
banking organizations, the minimum leverage ratio of Tier 1 capital to total
assets must be 3%. It is improbable, however, that an institution with a 3%
leverage ratio would receive the highest rating since a strong capital position
is a significant part of the regulators' rating. Bank holding companies not
rated in the highest category must have a minimum leverage ratio of 4%. For all
banks not rated in the highest category, the minimum leverage ratio must be at
least 100 to 200 basis points above the 3% minimum. Thus, the effective minimum
leverage ratio, for all practical purposes, must be at least 4% or 5% for banks.
In addition to these uniform risk-based capital guidelines and leverage ratios
that apply across the industry, the regulators have the discretion to set
individual minimum capital requirements for specific institutions at rates
significantly above the minimum guidelines and ratios.
The federal banking agencies recently amended their guidelines to clarify
the leverage ratio requirement for banks to conform to that of bank holding
companies. As of April 1, 1999, banks not rated in the highest category must
have a minimum leverage ratio of 4%. The ratio for banks in the highest category
will remain at 3%.
As of December 31, 1999, the Bank's capital ratios exceeded applicable
regulatory requirements. The following tables present the capital ratios for the
Company and the Bank, compared to the standards for
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well-capitalized bank holding companies and depository institutions, as of
December 31, 1999 (amounts in thousands except percentage amounts).
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THE COMPANY
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ACTUAL MINIMUM
------------------- CAPITAL
CAPITAL RATIO REQUIREMENT
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Leverage......................................... $36,885 8.66% 4.0%
Tier 1 Risk-Based................................ 36,885 11.74 4.0
Total Risk-Based................................. 40,860 13.01 8.0
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THE BANK
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ACTUAL WELL MINIMUM
------------------- CAPITALIZED CAPITAL
CAPITAL RATIO RATIO REQUIREMENT
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Leverage.............................. $37,401 8.86% 5.0% 4.0%
Tier 1 Risk-Based..................... 37,401 11.94 6.0 4.0
Total Risk-Based...................... 41,368 13.20 10.0 8.0
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The federal banking agencies must take into consideration concentrations of
credit risk and risks from non-traditional activities, as well as an
institution's ability to manage those risks, when determining the adequacy of an
institution's capital. This evaluation will be made as a part of the
institution's regular safety and soundness examination. The federal banking
agencies must also consider interest rate risk (when the interest rate
sensitivity of an institution's assets does not match the sensitivity of its
liabilities or its off-balance-sheet position) in evaluation of a bank's capital
adequacy.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires each federal banking agency to take prompt corrective action to resolve
the problems of insured depository institutions, including but not limited to
those that fall below one or more prescribed minimum capital ratios. The law
required each federal banking agency to promulgate regulations defining the
following five categories in which an insured depository institution will be
placed, based on the level of its capital ratios: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.
Under the prompt corrective action provisions of FDICIA, an insured
depository institution generally will be classified in the following categories
based on the capital measures indicated below:
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"WELL CAPITALIZED" "ADEQUATELY CAPITALIZED"
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"UNDERCAPITALIZED" "SIGNIFICANTLY UNDERCAPITALIZED"
Total risk-based capital less than 8%; Total risk-based capital less than
6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than
3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"CRITICALLY UNDERCAPITALIZED"
Tangible equity to total assets equal to
or less than 2%.
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An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or
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unsound condition or an unsafe or unsound practice warrants such treatment. At
each successive lower capital category, an insured depository institution is
subject to more restrictions.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal banking agencies for unsafe or unsound practices in conducting
their businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a depository institution),
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if such equitable
relief was not granted. Additionally, a holding company's inability to serve as
a source of strength to its subsidiary banking organizations could serve as an
additional basis for a regulatory action against the holding company.
SAFETY AND SOUNDNESS STANDARDS
FDICIA also implemented certain specific restrictions on transactions and
required federal banking regulators to adopt overall safety and soundness
standards for depository institutions related to internal control, loan
underwriting and documentation and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by undercapitalized institutions,
restricts the use of brokered deposits, limits the aggregate extensions of
credit by a depository institution to an executive officer, director, principal
shareholder or related interest, and reduces deposit insurance coverage for
deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts.
The federal banking agencies may require an institution to submit to an
acceptable compliance plan as well as the flexibility to pursue other more
appropriate or effective courses of action given the specific circumstances and
severity of an institution's noncompliance with one or more standards.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
The power of the board of directors of an insured depository institution to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory restrictions which limit the amount available for
such distribution depending upon the earnings, financial condition and cash
needs of the institution, as well as general business conditions. FDICIA
prohibits insured depository institutions from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized.
The federal banking agencies also have authority to prohibit a depository
institution from engaging in business practices that are considered to be unsafe
or unsound, possibly including the payment of dividends or other payments under
certain circumstances even if such payments are not expressly prohibited by
statute.
The payment of dividends by a national bank is further restricted by
additional provisions of federal law, which prohibit a national bank from
declaring a dividend on its shares of common stock unless its surplus fund
exceeds the amount of its common capital (total outstanding common shares times
the par value per share). Additionally, if losses have at any time been
sustained equal to or exceeding a bank's undivided profits then on hand, no
dividend shall be paid. Moreover, even if a bank's surplus exceeded its common
capital and its undivided profits exceed its losses, the approval of the OCC is
required for the payment of dividends if the total of all dividends declared by
a national bank in any calendar year would 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. A national bank must consider other business factors in
determining the payment of dividends. The payment of dividends by the Bank is
governed by the Bank's ability to maintain minimum required capital levels and
an adequate allowance for loan losses. Regulators also have authority to
prohibit a depository institution
10
<PAGE>
from engaging in business practices which are considered to be unsafe or
unsound, possibly including payment of dividends or other payments under certain
circumstances even if such payment are not expressly prohibited by statute.
PREMIUMS FOR DEPOSIT INSURANCE AND ASSESSMENTS FOR EXAMINATIONS
FDICIA established several mechanisms to increase funds to protect deposits
insured by the BIF and SAIF administered by the FDIC. The FDIC is authorized to
borrow up to $30 billion from the United States Treasury; up to 90% of the fair
market value of assets of institutions acquired by the FDIC as receiver from the
Federal Financing Bank; and from depository institutions that are members of the
BIF and SAIF. Any borrowings not repaid by asset sales are to be repaid through
insurance premiums assessed to member institutions. Such premiums must be
sufficient to repay any borrowed funds within 15 years and provide insurance
fund reserves of $1.25 for each $100 of insured deposits. FDICIA also provides
authority for special assessments against insured deposits. No assurance can be
given at this time as to what the future level of premiums will be.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantive penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
RECENTLY ENACTED AND PROPOSED LEGISLATION
On November 12, 1999, the President signed the Gramm-Leach-Bliley Financial
Modernization Act of 1999 into law. The Modernization Act will:
- allow bank holding companies meeting management, capital and Community
Reinvestment Act standards to engage in a substantially broader range of
nonbanking activities than currently is permissible, including insurance
underwriting and making merchant banking investments in commercial and
financial companies; if a bank holding company elects to become a
financial holding company, it files a certification, effective in 30 days,
and thereafter may engage in certain financial activities without further
approvals;
- allow insurers and other financial services companies to acquire banks;
- remove various restrictions that currently apply to bank holding company
ownership of securities firms and mutual fund advisory companies; and
- establish the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations.
This part of the Modernization Act became effective on March 13, 2000.
On January 19, 2000, the FRB adopted an interim rule allowing bank holding
companies to submit certifications by February 15 to become financial holding
companies on March 13, 2000. The FRB also provided regulations on procedures
which would be used against financial holding companies which have depository
institutions which fall out of compliance with the management or capital
criteria. Only financial holding companies can own insurance companies and
engage in merchant banking.
On January 14, 2000, the OCC proposed rules to allow national banks to form
subsidiaries to engage in financial activities allowed for financial holding
companies. Electing national banks must meet the same management and capital
standards as financial holding companies but may not engage in insurance
11
<PAGE>
underwriting, real estate development or merchant banking. Sections 23A and 23B
of the Federal Reserve Act will apply to financial subsidiaries and the capital
invested by a bank in its financial subsidiaries will be eliminated from the
bank's capital in measuring all capital ratios. These rules may be used by
national banks effective March 13, 2000.
The Modernization Act also modifies other current financial laws, including
laws related to financial privacy and community reinvestment.
Additional proposals to change the laws and regulations governing the
banking and financial services industry are frequently introduced in Congress,
in the state legislatures and before the various bank regulatory agencies. The
likelihood and timing of any such changes and the impact such changes might have
on Redwood cannot be determined at this time.
The Company intends to comply with all provisions of the Gramm-Leach-Bliley
Act and all implementing regulations as they become effective, and National Bank
of the Redwoods intends to develop appropriate policies and procedures to meet
its responsibilities in connection with the privacy provisions of Title V of
that Act.
OTHER LEGISLATION
California law provides that, subject to numerous exceptions, a lender
acting in the capacity of a lender shall not be liable under any state or local
statute, regulation or ordinance, other than the California Hazardous Waste
Control Law, to undertake a cleanup, pay damages, penalties or fines, or forfeit
property as a result of the release of hazardous materials at or from the
property.
In 1997, California adopted the Environmental Responsibility Acceptance Act
(Cal. Civil Code Section Section 850-855) to facilitate (i) the notification of
government agencies and potentially responsible parties (e.g., for cleanup) of
the existence of contamination and (ii) the cleanup or other remediation of
contamination by the potentially responsible parties. The Act requires, among
other things, that owners of sites who have actual awareness of a release of a
hazardous material that exceeds a specified notification threshold to take all
reasonable steps to identify the potentially responsible parties and to send a
notice of potential liability to the parties and the appropriate oversight
agency.
The Company cannot be certain of the effect of the foregoing recently
enacted legislation on its business.
Certain other pending legislative proposals include bills to let banks pay
interest on business checking accounts, to institute "know your customer"
policies, to cap consumer liability for stolen debit cards and to give judges
the authority to force high-income borrowers to repay their debts rather than
cancel them through bankruptcy.
COMPETITION
In the past, an independent bank's principal competitors for deposits and
loans have been other banks (particularly major banks), savings and loan
associations and credit unions. To a lesser extent, competition was also
provided by thrift and loans, mortgage brokerage companies and insurance
companies. Other institutions, such as brokerage houses, mutual fund companies,
credit card companies, and even retail establishments have offered new
investment vehicles which also compete with banks for deposit business. The
direction of federal legislation in recent years favors competition between
different types of financial institutions and to foster new entrants into the
financial services market, and it is anticipated that this trend will continue.
CERTAIN IMPORTANT CONSIDERATIONS FOR INVESTORS
MERCHANT CREDIT CARD PROCESSING. The Company's profitability can be
negatively impacted should one of the Company's merchant credit card customers
be unable to pay on charge-backs from cardholders. Due to a contractual
obligation between the Company and Visa and Mastercard, NBR stands in the place
of the
12
<PAGE>
merchant in the event that a merchant is unable to pay on charge-backs from
cardholders. The Company utilizes ISO's to acquire merchant credit card
customers. The Company's ability to maintain and grow net revenue from its
merchant credit card processing operation is dependent upon maintaining and
adding to these ISO relationships.
CONCENTRATION OF LENDING ACTIVITIES. Concentration of the Company's lending
activities in the real estate sector, including construction loans, could have
the effect of intensifying the impact on the Company of adverse changes in the
real estate market in the Company's lending areas. At December 31, 1999,
approximately 80% of the Company's loans were secured by real estate, of which
32% were secured by commercial real estate, including small office buildings,
owner-user office/warehouses, mixed use residential and commercial properties
and retail properties. Substantially all of the properties that secure the
Company's present loans are located within Northern and Central California. The
ability of the Company to continue to originate mortgage or construction loans
may be impaired by adverse changes in local or regional economic conditions,
adverse changes in the real estate market, increasing interest rates, or acts of
nature (including earthquakes, which may cause uninsured damage and other loss
of value to real estate that secures the Company's loans). Due to the
concentration of the Company's real estate collateral, such events could have a
significant adverse impact on the value of such collateral or the Company's
earnings.
GOVERNMENT REGULATION. Redwood and its subsidiaries are subject to
extensive federal and state governmental supervision, regulation and control,
and future legislation and government policy could adversely affect the
financial industry. Although the full impact of such legislation and regulation
cannot be predicted, future changes may alter the structure of and competitive
relationship among financial institutions. See "Regulation and Supervision,"
above.
COMPETITION FROM OTHER FINANCIAL INSTITUTIONS. The Company competes for
deposits and loans principally with major commercial banks, other independent
banks, savings and loan associations, savings banks, thrift and loan
associations, credit unions, mortgage companies, insurance companies and other
lending institutions. With respect to deposits, additional significant
competition arises from corporate and governmental debt securities, as well as
money market mutual funds. Several of the nation's largest savings and loan
associations and commercial banks have a significant number of branch offices in
the areas in which the Company conducts operations. Among the advantages
possessed by the larger of these institutions are their ability to make larger
loans, finance extensive advertising campaigns, access international money
markets and generally allocate their investment assets to regions of highest
yield and demand.
ITEM 2. PROPERTIES
The Company owns two depository branches and leases 7 other locations used
in the normal course of business. In addition, the Company leases certain
equipment. There are no contingent rental payments and the Company has three
sublease arrangements. Total rental expenses under all leases, including
premises, totaled $1,449,000, $2,210,000 and $2,095,000, in 1999, 1998 and 1997.
The expiration dates of the leases vary, with the first such lease expiring
during 2001 and the last such lease expiring during 2009. The Company maintains
insurance coverage on its premises, leaseholds and equipment, including business
interruption and record reconstruction coverage.
ITEM 3. LEGAL PROCEEDINGS
Certain lawsuits and claims arising in the ordinary course of business have
been filed or are pending against the Company or its subsidiaries. Based upon
information available to the Company, its review of such lawsuits and claims and
consultation with its counsel, the Company believes the liability relating to
these actions, if any, would not have a material adverse effect on its
consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of 1999.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of November 2, 1998, Redwood's Common Stock has been publicly traded on
the NASDAQ National Market under the symbol "REBC". Prior to November 2, 1998,
the Company Common Stock traded on the American Stock Exchange under the symbol
"REB". As of December 31, 1999, there were 428 shareholders of record of
Redwood's Common Stock.
In June of 1998 Redwood began quarterly cash dividends of $0.04 per
outstanding share. Such dividend increased to $0.06 per outstanding share in
September 1999 then to $0.10 per outstanding share in January 2000. Redwood did
not pay dividends during the two year period ended December 31, 1997. There are
regulatory limitations on cash dividends that may be paid by Redwood as well as
regulatory limitations on cash dividends that may be paid by NBR to Redwood
which could limit Redwood's ability to pay dividends. Federal regulatory
agencies have the authority to prohibit the payment of dividends by NBR if a
finding is made that such payment would constitute an unsafe or unsound
practice, or if NBR became critically undercapitalized. See "Regulation and
Supervision".
REDWOOD EMPIRE BANCORP
COMMON STOCK PRICES
<TABLE>
<CAPTION>
QTR 1 QTR 2 QTR 3 QTR 4 QTR 1 QTR 2 QTR 3 QTR 4
1999 1999 1999 1999 1998 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High........................... $29.00 $27.25 $24.00 $23.94 $20.50 $21.88 $21.25 $17.50
Low............................ 17.00 21.88 17.75 17.75 16.63 17.75 14.13 13.00
Close.......................... 24.75 23.88 18.63 19.13 18.88 20.75 16.38 17.06
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF CONSOLIDATED FINANCIAL DATA AND PERFORMANCE RATIOS
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Total interest income............... $ 30,633 $ 30,557 $ 35,471 $ 40,308 $ 42,436
Net interest income................. 19,687 18,058 19,656 21,605 18,879
Provision for loan losses........... 750 2,040 2,100 6,262 1,590
Noninterest income.................. 5,197 5,625 4,304 6,916 6,380
Income from continuing operations
before extraordinary item......... 4,875 2,904 2,377 (4,270) 1,456
Discontinued operations, net of
tax............................... (437) 2,187 1,064 2,784 1,857
Extraordinary item, net of tax...... (276) -- -- -- --
Net income (loss)................... 4,162 5,091 3,441 (1,486) 3,313
Net income (loss) available to
common equity..................... 4,162 4,979 2,992 (1,935) 2,977
BALANCE SHEETS:
Total assets........................ $423,046 $422,299 $ 446,719 $499,466 $ 557,910
Total loans......................... 314,445 269,316 282,396 347,414 368,223
Mortgage loans held for sale
(Discontinued operations)......... -- 32,620 16,929 29,487 62,620
Allowance for loan losses........... 7,931 8,041 7,645 7,040 5,037
Total deposits...................... 369,509 364,720 391,421 436,450 458,393
Shareholders' equity................ 37,444 38,640 33,243 29,732 31,585
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets from
continuing operations............. 1.20% 0.73% .54% (.94)% .29%
Return on average common equity from
continuing operations............. 12.40% 8.09% 7.58% 13.43% 4.88%
Common dividend payout ratio........ 19.46% 8.09% N/A N/A N/A
Average equity to average assets
from continuing operations........ 9.66% 9.09% 7.14% 6.98% 5.86%
Leverage ratio...................... 8.66% 8.84% 7.10% 5.45% 5.14%
Tier 1 risk-based capital ratio..... 11.74% 11.84% 9.72% 7.63% 7.24%
Total risk-based capital ratio...... 13.01% 16.94% 14.64% 12.11% 11.68%
Net interest margin from continuing
operations........................ 5.30% 5.11% 4.93% 5.13% 4.01%
Noninterest expense from continuing
operations to net interest and
other noninterest income from
continuing operations............. 64.97% 71.26% 74.72% 103.22% 83.79%
Average earning assets to average
total assets from continuing
operations........................ 91.20% 89.40% 91.05% 92.34% 92.59%
Nonperforming assets to total
assets............................ 1.52% 2.11% 3.72% 2.64% 1.28%
Net loan charge-offs to average
loans............................. 0.29% 0.62% 0.46% 1.22% 0.60%
Allowance for loan losses to total
loans............................. 2.52% 2.99% 2.71% 2.03% 1.37%
Allowance for loan losses to
nonperforming loans............... 194.34% 121.82% 78.60% 67.82% 101.88%
SHARE DATA:
Common shares outstanding (000)..... 3,229 3,369 2,785 2,749 2,679
Book value per common share......... $ 11.60 $ 11.47 $ 9.87 $ 8.72 $ 9.64
Basic earnings (loss) per share:
Income from continuing operations
before extraordinary item......... 1.45 .88 .70 (1.73) .41
Income (loss) from discontinued
operations........................ (.13) .69 .38 1.02 .70
Income before extraordinary
item.............................. 1.32 1.57 1.08 (.71) 1.11
Net income available for common
stock shareholders................ 1.24 1.57 1.08 (.71) 1.11
Weighted average shares........... 3,364 3,170 2,776 2,721 2,671
Diluted earnings (loss) per share:
Income from continuing operations
before extraordinary item......... 1.41 .84 .70 (1.57) .46
Income (loss) from discontinued
operations........................ (.13) .63 .32 1.02 .58
Income before extraordinary
item.............................. 1.28 1.47 1.02 (.55) 1.04
Net income available for common
stock shareholders................ 1.20 1.47 1.02 (.55) 1.04
Weighted average shares........... 3,456 3,465 3,378 2,721 3,179
Cash dividend per common share...... .240 .120 -- -- --
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K includes forward-looking information which
is subject to the "safe harbor" created by the Securities Act of 1933 and
Securities Exchange Act of 1934. These forward-looking statements (which involve
the Company's plans, beliefs and goals, refer to estimates or use similar terms)
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors:
- Competitive pressure in the banking industry and changes in the regulatory
environment.
- Changes in the interest rate environment and volatility of rate sensitive
deposits.
- Declines in the health of the economy nationally or regionally which could
reduce the demand for loans or reduce the value of real estate collateral
securing most of the Company's loans.
- Credit quality deterioration that could cause an increase in the provision
for loan losses.
- Dividend restriction.
- Regulatory discretion.
- Losses in the Company's merchant credit card processing business.
- Asset/liability matching risks and liquidity risks.
- Changes in the securities markets.
The Company undertakes no obligation to revise or publicly release the
results of any revision to these forward-looking statements. For additional
information concerning risks and uncertainties related to the Company and its
operations, please refer to Certain Important Considerations for Investors in
Item 1, and other information in this Report.
GENERAL
On September 10, 1999 the Company divested itself of its mortgage brokerage
and mortgage banking units, Valley Financial and Allied Diversified Credit. The
divestiture took the form of an asset sale and employee transfer to Valley
Financial Funding, Inc., whose shareholders include senior management of Valley
Financial and Allied Diversified Credit. As a result of the divestiture, the
Company lost ninety-five employees of which sixty-three were transferred to
Valley Financial Funding, Inc., while thirty-two were terminated by the Company.
The Company has disclosed the operations of these units as well as the after tax
loss on disposition as discontinued operations. Accordingly, historical
financial information has been recast to present the operating results of Valley
Financial and Allied Diversified Credit as discontinued operations. Revenue from
discontinued operations was $4,369,000 for the year ended December 31, 1999, as
compared to $10,863,000 and $6,702,000 for 1998 and 1997.
The Company derives its income from two principal sources: (1) net interest
income, which is the difference between the interest income it receives on
interest-earning assets and the interest expense it pays on interest-bearing
liabilities; (2) non interest income or fee income which includes, fees earned
on deposit services, income from SBA lending, electronic-based cash management
services and merchant credit card processing.
The following analysis of the Company's financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements of Redwood Empire Bancorp and related notes thereto included in this
Annual Report on Form 10-K. Average balances, including such balances used in
calculating financial and performance ratios, are generally daily averages for
NBR, which management believes are representative of the operations of the
Company.
16
<PAGE>
RESULTS OF CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM
In 1999 the Company reported income from continuing operations before
extraordinary item of $4,875,000, or $1.41 diluted per share as compared to 1998
and 1997 net income from continuing operations before extraordinary item of
$2,904,000, or $0.84 diluted per share, and $2,377,000, or $0.70 diluted per
share, respectively.
Return on average assets for the year ended December 31, 1999 was 1.20% as
compared to .73% and .54% for the years ended December 31, 1998 and 1997. Return
on average common equity was 12.40% for the year ended December 31, 1999, as
compared to 8.09% and 7.58% for the years ended December 31, 1998 and 1997.
In the first quarter of 1999 the Company recorded an extraordinary charge of
$276,000, net of tax. Such charge is comprised of the unamortized debt issuance
costs associated with the Company's $12,000,000 subordinated debt, which was
early redeemed in the first quarter of 1999. In the first quarter of 1999
Redwood obtained funding for the early redemption through an $8,000,000 dividend
from NBR and the redemption of a $3,000,000 note from NBR.
The Company's results from continuing operations in 1999 improved
significantly from 1998. Net interest income increased $1,629,000 in 1999. The
provision for loan losses declined by $1,290,000 in 1999. Improvement was also
shown in noninterest expense, which decreased $711,000 to $16,166,000 in 1999 as
compared to $16,877,000 in 1998. These improvements more than offset a decline
in noninterest income of $428,000.
Results from continuing operations in 1998 improved when compared to 1997.
Net interest income decreased by $1,598,000 in 1998 which was offset by an
increase of $1,321,000 in noninterest income and a decline of $1,027,000 in
noninterest expense.
NET INTEREST INCOME. For 1999, the Company's net interest income from
continuing operations amounted to $19,687,000 as compared to $18,058,000 in 1998
and $19,656,000 in 1997. This represents an increase of $1,629,000 or 9% in 1999
and a decrease of $1,598,000 or 8% in 1998. The increase in 1999 when compared
to 1998 is due to an increase in earning assets from $353,314,000 in 1998 to
$371,170,000 in 1999 and an improvement in net interest margin from 5.11% in
1998 to 5.30% in 1999. The decrease in 1998 when compared to 1997 is primarily
attributable to a decline in earning assets from $398,856,000 in 1997 to
$353,314,000 in 1998 offset by an increase in net interest margin from 4.93% in
1997 to 5.11% in 1998.
The following table presents for the years indicated the distribution of
consolidated average assets, liabilities and shareholders' equity, as well as
the total dollar amounts of interest income from average earning assets and the
resultant yields, and the dollar amounts of interest expense and average
interest-bearing liabilities, expressed both in dollars and in rates. Nonaccrual
loans are included in the calculation
17
<PAGE>
of the average balances of loans, and interest not accrued is excluded. Fee
income included in loan income is $1,110,000, $687,000 and $928,000 in 1999,
1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Portfolio loans................ $293,352 $25,924 8.84% $266,716 $25,183 9.44% $322,122 $30,448 9.45%
Investment securities.......... 68,579 4,239 6.18 67,562 4,334 6.41 54,034 3,702 6.85
Federal funds sold............. 9,239 470 5.09 19,036 1,040 5.46 22,700 1,321 5.82
-------- ------- -------- ------- -------- -------
Total earning assets......... 371,170 30,633 8.25 353,314 30,557 8.65 398,856 35,471 8.89
------- ------- -------
Other non-earning assets....... 43,983 49,903 45,901
Less allowance for loan
losses....................... (8,188) (8,020) (6,690)
-------- -------- --------
Total average assets......... $406,965 $395,197 $438,067
======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Interest-bearing transaciton
accounts..................... $133,371 3,774 2.83 $142,859 5,047 3.53 $152,803 6,080 3.98
Time deposits.................. 137,113 7,030 5.13 117,270 6,345 5.41 155,588 8,628 5.55
Subordinated debt.............. 1,383 142 10.27 12,000 1,107 9.23 12,000 1,107 9.23
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities................ 271,867 10,946 4.03 272,129 12,499 4.59 320,391 15,815 4.94
------- ------- -------
Demand deposits................ 85,851 82,074 77,382
Other non-interest bearing
liabilities.................. 9,931 5,089 9,008
Shareholders' equity........... 39,316 35,905 31,286
-------- -------- --------
Total average liabilities and
shareholders' equity....... $406,965 $395,197 $438,067
======== ======== ========
Net interest spread............ 4.22 4.06 3.95
Net interest income and net
interest margin.............. $19,687 5.30% $18,058 5.11% $19,656 4.93%
======= ======= =======
</TABLE>
The Company's average earning assets for 1999 increased approximately 5%, or
$17,856,000, to $371,170,000, as compared to $353,314,000 for 1998. Average
earning assets decreased $45,542,000 or 11% in 1998 as compared to 1997. The
increase in earning assets in 1999 is primarily attributable to a increase in
average portfolio loans of $26,636,000 partially offset by a decrease in federal
funds sold of $9,797,000. Components of the increase in portfolio loans include
increases of $16,196,000 in average outstanding residential mortgage loans and
$12,020,000 in average outstanding commercial real estate loans.
The decrease in average earning assets for 1998 was due to the Company's
efforts to reduce its concentration in construction loans and the
refinance-driven reduction of its residential loan portfolio. Average portfolio
loans decreased $55,406,000 or 17% to $266,716,000 in 1998 from $322,122,000 in
1997.
With the increase in earning assets in 1999 discussed above, the Company's
funding levels also increased. The average balance of higher cost time deposits
increased $19,843,000 in 1999 compared to a decrease of $38,318,000 in 1998. The
growth in time deposits in 1999 is a result of the Company's marketing efforts
to fund earning asset growth. Additionally, average demand deposits grew
$3,777,000 in 1999 and $4,692,000 in 1998 as the Company was successful in
obtaining low cost transactional accounts. Average other borrowings decreased
$10,617,000 in 1999 due to the Company's early redemption of its subordinated
debt. Average other borrowings remained unchanged at $12,000,000 in 1998
compared to 1997.
The following table sets forth changes in interest income and interest
expense for each major category of earning asset and interest-bearing liability,
and the amount of change attributable to volume and rate
18
<PAGE>
changes for the years indicated. Changes not solely attributable to rate or
volume have been allocated to rate.
<TABLE>
<CAPTION>
1999 OVER 1998 1998 OVER 1997
------------------------------ ------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Portfolio loans (1), (2).................. $2,514 $(1,773) $ 741 $(5,236) $ (29) $(5,265)
Investment securities (3)................. 65 (160) (95) 927 (295) 632
Federal funds sold........................ (535) (35) (570) (213) (68) (281)
------ ------- ------- ------- ----- -------
Total increase (decrease)............... 2,044 (1,968) 76 (4,522) (392) (4,914)
------ ------- ------- ------- ----- -------
Increase (decrease) in interest expense:
Interest-bearing transaction accounts..... (335) (938) (1,273) (396) (637) (1,033)
Time deposits............................. 1,074 (389) 685 (2,127) (156) (2,283)
Other borrowings.......................... 0 (965) (965) 0 0 0
------ ------- ------- ------- ----- -------
Total increase.......................... 739 (2,292) (1,553) (2,523) (793) (3,316)
------ ------- ------- ------- ----- -------
Increase (decrease) in net interest
income.................................. $1,305 $ 324 $ 1,629 $(1,999) $ 401 $(1,598)
====== ======= ======= ======= ===== =======
</TABLE>
- ------------------------
(1) Does not include interest income which would have been earned on nonaccrual
loans had such loans performed in accordance with their terms.
(2) Loan fees of $1,110,000, $687,000 and $928,000 are included in interest
income for 1999, 1998 and 1997.
(3) The average balance of securities classified as available for sale are
presented at historical amortized cost without the effects of the fair value
adjustments.
The net interest margin increased to 5.30% for the year ended December 31,
1999, as compared to 5.11% and 4.93% for the years ended December 31, 1998 and
1997. The increase in net interest margin in 1999 was primarily due to decreased
liability costs slightly offset by a decline in yield on earning assets. The
yield on earning assets decreased to 8.25% in 1999 compared to 8.65% in 1998 and
8.89% in 1997. The decline in earning asset yields in 1999 is primarily due to
the change in the mix of earning assets. Average commercial and residential real
estate loans, which bear a yield lower than other portfolio loan types increased
$34,786,000. The decline in earning asset yield in 1998 is primarily
attributable to an overall decline in general interest rates as evidenced by a
drop in the prime rate from 8.50% at December 1997 to 7.75% at December 1998.
The effective rates on interest-bearing liabilities decreased to 4.03% for
1999 as compared to 4.59% for 1998 and 4.94% for 1997. The decrease in 1999 and
1998 was primarily due to a substantial downward repricing of the Company's
money market and certificate of deposit accounts in the third and fourth quarter
of 1998.
PROVISION FOR LOAN LOSSES. Annual fluctuations in the provision for loan
losses result from management's regular assessment of the adequacy of the
allowance for loan losses. The provision for loan losses was $750,000 for the
year ended December 31, 1999 which represents a decrease of $1,290,000 or 63%
from 1998. In 1998, the provision for loan losses of $2,040,000 represented a 3%
decrease from $2,100,000 in 1997. This decrease in the provision for loan losses
in 1999 when compared to 1998 was due to a decline in loan charge-offs and a
decrease in nonperforming loans.
19
<PAGE>
NONINTEREST INCOME. Noninterest income from continuing operations decreased
8%, or $428,000, to $5,197,000 as compared to $5,625,000, for 1998. The
Company's noninterest income from continuing operations for 1998 increased by
$1,321,000 or 31% from the $4,304,000 it received during 1997. The following
table sets forth the sources of noninterest income from continuing operations
for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service charges on deposit accounts................. $1,041 $1,072 $1,146
Merchant draft processing, net...................... 3,154 2,609 1,585
Loan servicing income............................... 129 562 831
Net realized gains on sale of investment securities
available for sale................................ 19 225 23
Other income........................................ 854 1,157 719
------ ------ ------
$5,197 $5,625 $4,304
====== ====== ======
</TABLE>
Merchant draft processing net revenue increased in 1999 to $3,154,000 as
compared to $2,609,000 in 1998 and $1,585,000 in 1997. The two primary reasons
for the 1998 and 1999 increase are due to an increase in the number of merchants
serviced due to an increase of independent sales organizations (ISO's) to market
the Bank's services and growth in the number of merchants obtained directly from
the Company's marketing efforts.
In December 1998, the Company renegotiated the terms of a processing
contract with an independent sales organization who represented $1,736,000 or
66% of the Company's 1998 merchant draft net processing revenue. In summary, as
a result of the renegotiation, the ISO bought down its processing rate in
consideration for a payment of $2,600,000 to the Company. The term of the
renegotiated contract is for two years and requires the Company to continue to
process merchant card transaction volume from this ISO's customers. The Company
has and will continue to amortize such payment over the life of the renegotiated
contract into income. During 1999 and 1998, $910,000 and $250,000 of this
payment was recognized as revenue. The amount of unearned processing revenue was
$1,440,000 as of December 31, 1999. The Company expects to build its overall
merchant card processing business in an effort to offset any potential decline
in future revenues.
The Company bears certain risks associated with its merchant credit card
processing business. Due to a contractual obligation between NBR and Visa and
MasterCard, NBR stands in the place of the merchant in the event that a merchant
is unable to pay charge-backs from cardholders. As a result of this obligation,
NBR may incur losses associated with its merchant credit card processing
business. Accordingly, NBR has established a reserve to provide for losses
associated with charge-back losses. Such reserve, which totaled $908,000 and
$459,000 as of December 31, 1999 and 1998, was estimated based upon industry
loss data and management's assumptions regarding merchant risk borne by NBR.
Factors that may effect NBR's merchant risk include the amount of merchant risk
borne by an ISO through its marketing agreement with the Bank.
Loan servicing revenues decreased to $129,000 for the year ended December
31, 1999, compared to $562,000 and $831,000 in 1998 and 1997. The decline in
1999 and 1998 was due to normal prepayments occurring within the Company's loan
servicing portfolio. Future loan servicing income will be dependent on
prepayments of loans held in the Company's servicing portfolio. Future loan
servicing income is not expected to be material to the Company's operations.
In 1999, $500,000 of callable bonds carried within the Company's investment
securities portfolio were called by their issuers compared to $32,700,000 in
1998. As several of these bonds were purchased at a discount the Company
recorded a gain on the redemption of $5,000 in 1999 and $199,000 in 1998.
20
<PAGE>
Securities sale and call activity was minimal in 1997. See Note D of Notes to
Consolidated Financial Statements.
NONINTEREST EXPENSE. Noninterest expense amounted to $16,166,000 in 1999,
$16,877,000 in 1998 and $17,904,000 in 1997. This represents a decrease of
$711,000 or 4% in 1999 and a decrease of 1,027,000 or 6% in 1998 when compared
to 1997.
Salary and employee benefits expense for 1999 increased $164,000, or 2%, to
$8,802,000, as compared to $8,638,000 for 1998. This compared with a 4% decrease
during 1998 over the 1997 salary and employee benefits expense of $9,021,000.
The increase in salary and benefit expense in 1999 is due to the emphasis placed
on growing the Company's core banking operations. The decrease in 1998 was due
to increased efficiencies as a result of cost savings associated with the merger
of Allied and NBR. The Company's full-time equivalent staff levels, adjusted for
discontinued operations, were 162, 174, and 155 at December 31, 1999, 1998, and
1997, respectively.
Occupancy and equipment expense was $2,242,000 in 1999, $2,743,000 in 1998,
and $2,719,000 in 1997. In 1999 the decrease of $501,000 was attributable to the
Company's decreased space requirements as a result of the relocation of
operating personnel. In 1998 occupancy and equipment costs increased $24,000
over 1997.
The following table describes the components of other noninterest expense
for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS)
Professional fees................................... $1,231 $ 769 $1,130
Regulatory expense and insurance.................... 459 588 541
Postage and office supplies......................... 489 506 702
Shareholder expenses and Director fees.............. 320 339 381
Advertising......................................... 217 188 241
Telephone........................................... 339 360 552
Electronic data processing.......................... 1,234 1,284 1,268
Net costs of other real estate owned................ 195 956 568
Other............................................... 638 506 1,067
------ ------ ------
$5,122 $5,496 $6,450
====== ====== ======
</TABLE>
Noninterest expenses were $5,122,000 during 1999, a decrease of $374,000, or
7%, when compared to 1998 expenses of $5,496,000. Noninterest expense decreased
$954,000 or 15% in 1998 when compared to 1997. The decline in 1999 is primarily
attributable to a decline of $761,000 in net OREO expenses. The decline in 1998
when compared to 1997 is a result of the Company's cost control efforts.
INCOME TAXES. The Company's effective tax rate varies with changes in the
relative amounts of its non-taxable income and nondeductible expenses. The
Company's effective tax rate on continuing operations was 38.8% in 1999, 39.1%
in 1998 and 39.9% in 1997.
BUSINESS SEGMENTS
Through September 10, 1999 operated in four principal industry segments:
core community banking, merchant card services, sub prime lending, and
residential mortgage banking and brokerage. The Company's core community banking
industry segment includes commercial, commercial real estate, construction, and
permanent residential lending along with all depository activities. The
Company's merchant card services industry group provides credit card settlement
services for 67,000 merchants throughout the United States. The Company's sub
prime lending unit, known as Allied Diversified Credit, and the Company's
residential mortgage banking and brokerage arm, known as Valley Financial, were
divested on
21
<PAGE>
September 10, 1999. The divestiture took the form of an asset sale and employee
transfer. The Company has disclosed the operations of these units, as well as
the after tax loss on disposition, as discontinued operations. Accordingly,
historical financial information regarding segments has been restated to reflect
only those segments associated with continuing operations.
Information related to the internal allocation of interest expense and
overhead to segments presented in previous periods has been restated to present
such amounts consistent with standards for accounting for discontinued
operations. These standards do not allow the allocation of general corporate
overhead to discontinued operations and generally require that the allocation of
interest to discontinued operations be based on the marginal interest expense
that would not have been incurred were it not for the discontinued operations.
Summary financial data by industry segment follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS)
Community Banking:
Revenue.................................. $ 21,187 $ 20,563 $ 21,865
Expenses................................. 15,503 17,789 18,714
-------- -------- --------
Income before income tax............... $ 5,684 $ 2,774 $ 3,151
======== ======== ========
Average assets............................. $385,025 $382,790 $428,983
======== ======== ========
Bankcard:
Revenue.................................. $ 3,697 $ 3,120 $ 2,095
Expenses................................. 1,413 1,128 1,290
-------- -------- --------
Income before income tax............... $ 2,284 $ 1,992 $ 805
======== ======== ========
Average assets............................. $ 21,940 $ 12,407 $ 9,084
======== ======== ========
Total Company:
Revenue.................................. $ 24,884 $ 23,683 $ 23,960
Expenses................................. 16,916 18,917 20,004
-------- -------- --------
Income before income tax............... $ 7,968 $ 4,766 $ 3,956
======== ======== ========
Average assets............................. $406,965 $395,197 $438,067
======== ======== ========
</TABLE>
COMMUNITY BANKING
The Community Banking segment revenues increased in 1999 as a result of an
improvement in the net interest margin and growth in earning assets. In 1999
segment expenses have declined primarily due to a decrease in the provision for
loan losses, reduced OREO disposition costs and administrative expenses. In 1998
segment revenue declined due to a drop in earning assets. 1998 segment expenses
dropped due to cost control measures.
BANKCARD
The Merchant Card processing segment provides Visa and Mastercard credit
card processing and settlement services for roughly 67,000 merchants located
throughout the United States. Yearly processing volume is in excess of $1.6
billion. The Company's merchant card services customer base is made up of
merchants located in its primary market area and merchants who have been
acquired by the Company through the use of independent sales organizations, or
ISO's.
The Merchant Card processing segment has experienced three successive years
of revenue and earnings growth due to an increase in the number of merchants it
services and an increase of independent sales organizations (ISO's) to market
its services. In December 1998 the Company renegotiated the terms
22
<PAGE>
of a processing contract with an ISO who represented $1,736,000 or 66% of the
Company's 1998 merchant draft net processing revenue and $1,412,000 or 45% of
such revenue in 1999. As a result of the renegotiation the ISO bought down its
processing rate in consideration for a payment of $2,600,000 to the Company. The
term of the renegotiated contract is for two years and requires the Company to
continue to process merchant card transaction volume from this ISO's customers.
The Company has amortized such payment over the life of the renegotiated
contract into income. During 1999 and 1998, $910,000 and $250,000 of this
payment was recognized as revenue. The amount of unearned processing revenue was
$1,440,000 as of December 31, 1999. The balance of this amount will be amortized
into income in 2000.
The Company expects to build its overall merchant card processing business
through direct marketing efforts and new ISO's in an effort to offset any
potential decline in future revenues that may result in periods following the
term of the buydown.
The Company bears certain risks associated with its merchant credit card
processing business. Due to a contractual obligation between NBR and Visa and
MasterCard, NBR stands in the place of the merchant in the event that a merchant
is unable to pay charge-backs from cardholders. As a result of this obligation,
NBR may incur losses associated with its merchant credit card processing
business. Accordingly, NBR has established a reserve to provide for losses
associated with charge-back losses. Such reserve, which totaled $908,000 and
$459,000 as of December 31, 1999 and 1998, was estimated based upon industry
loss data as a percentage of transaction volume throughout each year, historical
losses incurred by the Company, and management's assumptions regarding merchant
and ISO risk. The provision for charge-back losses, which is included in the
financial statements as a reduction in merchant draft processing income, was
$449,000, $288,000 and $56,000 in 1999, 1998 and 1997, respectively. While
charge-off levels were nominal from 1997 to 1999, the increase in the reserve
reflects the growth in transaction volume, increased exposures to internet
merchants, and a new ISO relationship in which the Company assumes fraud risk
directly rather than looking first to the ISO.
DISCONTINUED OPERATIONS
On September 10, 1999 the Company divested itself of its mortgage brokerage
and mortgage banking units, Valley Financial and Allied Diversified Credit. The
divestiture took the form of an asset sale and employee transfer to Valley
Financial Funding, Inc., whose shareholders include senior management of Valley
Financial and Allied Diversified Credit. As a result of the divestiture, the
Company lost ninety-five employees of whom sixty-three were transferred to
Valley Financial Funding, Inc., while thirty-two were terminated by the Company.
The Company has disclosed the operations of these units as well as the after tax
loss on disposition as discontinued operations. Accordingly, historical
financial information has been recast to present the operating results of Valley
Financial and Allied Diversified Credit as discontinued operations. After tax
income from discontinued operations at December 31, 1999, 1998 and 1997 was
($437,000), $2,187,000 and $1,064,000, respectively. Revenue from discontinued
operations was $4,369,000 for the year ended December 31, 1999, as compared to
$10,863,000 and $6,702,000 for 1998 and 1997. Due to the disposition, the
Company is no longer required to carry or fund a mortgage loan held for sale
position. This position was previously funded with other borrowings and time
deposits.
INVESTMENT PORTFOLIO
The Company classifies its investment securities as held to maturity or
available for sale. The Company's intent is to hold all securities held to
maturity until maturity and management believes that the Company has the ability
to do so. Securities available for sale may be sold to implement the Company's
asset/liability management strategies and in response to changes in interest
rates, prepayment rates and similar factors. The following table summarizes the
maturities of the Company's debt securities at their
23
<PAGE>
carrying value and their weighted average yields at December 31, 1999. Yields on
tax-exempt securities have been computed on a tax-equivalent basis.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
---------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN ONE THROUGH FIVE THROUGH TEN
YEAR YEARS YEARS
------------------- ------------------- -------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
agencies............... $2,000 5.78% $31,202 5.92% $2,896 5.93%
Other bonds and mortgage
backed securities...... -- -- 6,782 6.53% 858 7.17%
------ ------- ------
Total.................. $2,000 5.78% $37,984 6.03% $3,754 6.20%
====== ======= ======
<CAPTION>
AVAILABLE FOR SALE
-----------------------------------------
AFTER TEN
YEARS TOTAL
------------------- -------------------
AMOUNT YIELD AMOUNT YIELD
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government and
agencies............... -- -- $36,098 5.92%
Other bonds and mortgage
backed securities...... -- -- 7,640 6.60%
------- -------
Total.................. $ -- -- $43,738 6.04%
======= =======
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY
---------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN ONE THROUGH FIVE THROUGH TEN
YEAR YEARS YEARS
------------------- ------------------- -------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
agencies............... $ -- -- $ 6,000 6.17% $6,989 6.58%
Other bonds and mortgage
backed securities...... 36 3.80% -- -- 202 4.70%
------ ------- ------
Total.................. $ 36 3.80% $ 6,000 6.17% $7,191 6.53%
====== ======= ======
<CAPTION>
HELD TO MATURITY
-----------------------------------------
AFTER TEN
YEARS TOTAL
------------------- -------------------
AMOUNT YIELD AMOUNT YIELD
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government and
agencies............... -- -- $12,989 6.39%
Other bonds and mortgage
backed securities...... 17,093 6.84% 17,331 6.81%
------- -------
Total.................. $17,093 6.84% $30,320 6.63%
======= =======
</TABLE>
The following table summarizes the book value of the Company's investment
securities held on the dates indicated:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
--------------------------------
DECEMBER 31,
1999 1998 1997
-------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Government and agencies.................. $36,098 $30,538 $41,907
Other bonds and mortgage-backed securities.... 7,640 -- --
------- ------- -------
Total....................................... $43,738 $30,538 $41,907
======= ======= =======
<CAPTION>
HELD TO MATURITY
--------------------------------
DECEMBER 31,
1999 1998 1997
-------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Government and agencies.................. $12,989 $10,986 $18,360
Other bonds and mortgage-backed securities.... 17,331 14,781 8,401
FHLB and FRB Stock............................ 2,647 4,105 3,897
------- ------- -------
Total....................................... $32,967 $29,872 $30,658
======= ======= =======
</TABLE>
LOAN PORTFOLIO
The Company concentrates its lending activities in three principal areas:
real estate mortgage loans (residential and commercial loans), real estate
construction loans and commercial loans. At December 31, 1999, these three
categories accounted for approximately 67%, 13% and 19%, respectively, of the
Company's loan portfolio. The interest rates charged for the loans made by the
Company vary with the degree of risk, the size and maturity of the loans, the
borrowers' depository relationships with the Company and prevailing money market
rates indicative of the Company's cost of funds.
Concentration of the Company's lending activities in the real estate sector
could have the effect of intensifying the impact on the Company of adverse
changes in the real estate market in the Company's lending areas. The ability of
the Company to continue to originate mortgage loans may be impaired by adverse
changes in local or regional economic conditions, adverse changes in the real
estate market, increasing interest rates, or acts of nature (including
earthquakes or floods, which may cause uninsured
24
<PAGE>
damage and other loss of value to real estate that secures the Company's loans).
Due to the concentration of the Company's real estate collateral, such events
could have a significant adverse impact on the value of such collateral or the
Company's earnings.
The following table sets forth the amounts of loans outstanding by category
as of the dates indicated. There were no concentrations of loans exceeding 10%
of total loans which are not otherwise disclosed as a category of loans in the
table below.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Residential real estate mortgage.......... $130,504 $ 97,194 $ 93,516 $115,631 $160,767
Commercial real estate mortgage........... 79,476 59,257 57,425 67,401 55,667
Commercial................................ 61,165 63,260 69,097 73,987 79,723
Real estate construction.................. 40,059 46,905 55,031 84,908 62,432
Installment and other..................... 4,624 5,095 9,200 8,284 12,669
Less deferred fees........................ (1,383) (2,395) (1,873) (2,797) (3,035)
-------- -------- -------- -------- --------
Total loans............................. 314,445 269,316 282,396 347,414 368,223
Less allowance for loan losses............ (7,931) (8,041) (7,645) (7,040) (5,037)
-------- -------- -------- -------- --------
Net loans................................. $306,514 $261,275 $274,751 $340,374 $363,186
======== ======== ======== ======== ========
</TABLE>
REAL ESTATE MORTGAGE LOANS. As of December 31, 1999, the Company's
residential mortgage loans totaled $130,504,000, or 42%, of its total loans.
These loans were predominantly originated in Sonoma and Mendocino Counties.
Total residential loans increased $33,310,000 during 1999 and $3,678,000 in 1998
as a result of normal origination activity. As of December 31, 1998, residential
mortgage loans totaled $97,194,000 or 36% of total loans. As of December 31,
1997 residential mortgage loans totaled $93,516,000 or 33% of the total
portfolio. Such loans declined $22,115,000 during 1997 due to a curtailment of
origination activity. As of December 31, 1996 residential mortgage loans totaled
$115,631,000. Such loans declined $34,509,000 during 1996 due to prepayments and
continuing restructuring of the Company's balance sheet. This 1996 restructuring
was accomplished by a $34,000,000 loan sale in the second quarter of 1996. In
1995, total residential mortgage loans decreased $54,800,000. The decrease in
residential real estate loans is due primarily to loan sales of $35.9 million
during the second quarter of 1995. The sale was executed to restructure the
Company's balance sheet and consequently improve the Company's capital ratios
and reduce its interest rate risk. In addition, in the third quarter of 1995,
the Company swapped $22.1 million of adjustable rate loans with Fannie Mae for a
mortgage-backed security, which had a coupon rate of 7.295%, and was scheduled
to mature in 2025. This security, which was classified as available for sale,
was sold prior to December 31, 1995, with settlement due from broker in January
1996.
At December 31, 1999, $67,662,000, or 52%, of the Company's residential real
estate mortgage loans were fixed-rate mortgage loans having original terms
ranging from one to thirty years. Another $57,757,000, or 44%, were held as
adjustable-rate mortgages. The balance of these loans, $5,085,000, or 4%,
consisted of multifamily loans and loans on improved single-family lots. The
majority of the Company's residential mortgage loans have been underwritten for
the Company's portfolio and do not necessarily meet standard underwriting
criteria for sale in the secondary market. Approximately 82% of the total amount
outstanding had principal balances that were less than $300,000. The Company's
residential real estate mortgage loans predominately have loan-to-value ratios
of 80% or less, using current loan balances and appraised values as of the time
of origination. The Company's general policy is not to exceed an 80%
loan-to-value ratio on residential mortgage loans without mortgage insurance.
The Company generally does not make portfolio loans on a negative amortization
basis.
As of December 31, 1999, the Company had outstanding $79,476,000 in
commercial mortgage loans, which constituted 25% of total loans. These loans
were primarily secured by owner-occupied commercial properties and have 5- to
15-year maturities based upon 25- to 30-year amortization periods. The ratio of
the loan principal amount to appraised values are generally 75% or less, using
appraised values at the time of loan origination, and the loans are
predominantly for owner-occupied small office buildings or office/ warehouses.
The Company originates commercial mortgage loans that are guaranteed by the SBA
up to
25
<PAGE>
70% to 90% of the balance. The SBA guaranteed portion of such loans can be sold
into the secondary market with the unguaranteed principal balance retained. The
aggregate retained unguaranteed principal balance of such loans was $5 million
at December 31, 1999. Approximately 47% of the total amount outstanding of
commercial mortgage loans had principal balances that were less than $250,000.
REAL ESTATE CONSTRUCTION LOANS. The Company's primary market focus
emphasizes individual borrowers and small residential and commercial projects.
The economic viability of the project and the borrower's past development record
and creditworthiness are primary considerations in the loan underwriting
decision. The Company had $40,059,000 in construction loans outstanding at
December 31, 1999, comprising 13% of its total loans. These loans were
principally located in Northern California. This represents a decrease of
$6,846,000 or 15% from 1998. In 1998 construction loans decreased $8,126,000 or
15% from 1997. As of December 31, 1999, approximately $24 million of these loans
consisted of 76 single-family individual-borrower construction loans, and the
remaining loans included 13 subdivision projects, 5 land development projects
and 7 commercial projects. At December 31, 1999, the largest single-family
construction loan commitment was $1,015,000, and the average commitment was less
than $375,000. The largest commitment for a subdivision project was $2,538,000
and the average subdivision commitment was less than $979,000. The average
commercial project involved a loan of approximately $1,383,000.
Construction loans are funded on a line-item, percentage of completion
basis. As the builder completes various line items (foundation, framing,
electrical, etc.) of the project, or portions of those line items, the work is
reviewed by one of several independent inspectors hired by the Company. Upon
approval from the inspector, the Company funds the draw request according to the
percentage completion of the line items that have been approved. The Company
rotates inspectors during construction to ensure independent review. Actual
funding checks must be signed by an officer of the Company, and that officer
must also initial the line-item worksheet used to support the draw request. In
addition, Company personnel or agents routinely inspect the various construction
projects, all of which are located in the Company's lending area.
Commercial real estate mortgage and construction lending contains potential
risks which are not inherent in other types of portfolio loans. These potential
risks include declines in market values of underlying real property collateral
and, with respect to construction lending, delays or cost overruns which could
expose the Company to loss. In addition, risks in commercial real estate lending
include declines in commercial real estate values, general economic conditions
surrounding the commercial real estate properties and vacancy rates. A decline
in the general economic conditions or real estate values within the Company's
market area could have a negative impact on the performance of the loan
portfolio or value of the collateral. Because the Company lends primarily within
its market area, the real property collateral for its loans is similarly
concentrated, rather than diversified over a broader geographic area. The
Company could therefore be adversely affected by a decline in real estate values
in its primary market area even if real estate values elsewhere in California
remained stable or increased.
COMMERCIAL LOANS. Commercial loans consist primarily of short-term
financing for businesses and professionals located in Sonoma and Mendocino
Counties. At December 31, 1999, these loans totaled $61,165,000, or 19%, of the
Company's total loans. This represents a decrease of $2,095,000 or 3% from 1999
due to normal loan payoffs and the competitive banking environment. In 1998
commercial loans decreased $5,837,000 or 8% from 1997. The commercial loans are
diversified as to industries and types of businesses, with no material industry
concentrations. Commercial loan borrowers generally have deposit relationships
with the Company. The commercial loans can be unsecured or secured by various
assets, including equipment, receivables, deposits and other assets. Commercial
loans may be secured by commercial or residential property; however, they are
not classified as mortgage loans since these loans are not typically taken out
for the purpose of acquiring real estate and the loans are short-term. In these
cases, the mortgage collateral is often taken as additional collateral. As of
December 31, 1999, the size of individual commercial loans varied widely, with
93% having principal balances less than $350,000. At December 31, 1999, the
Company had 3 commercial borrowers whose aggregate individual liability exceeded
$2,000,000.
26
<PAGE>
LOAN COMMITMENTS. In the normal course of business, there are various
commitments outstanding to extend credit that are not reflected in the financial
statements. Annual review of the commercial credit lines and ongoing monitoring
of outstanding balances reduces the risk of loss associated with these
commitments. As of December 31, 1999, the Company had outstanding $41,000 in
unfunded mortgage loan commitments, $38,244,000 in undisbursed loan commitments
and $539,000 in standby letters of credit. The Company's undisbursed commercial
loan commitments represent primarily business lines of credit. The undisbursed
construction commitments represented undisbursed funding on construction
projects in process. The mortgage loan commitments represented approved but
unfunded mortgage loans with the Company's mortgage banking business.
MATURITY DISTRIBUTION. The following table shows the maturity distribution
of the Company's commercial and real estate construction loans outstanding as of
December 31, 1999, which, based on remaining scheduled repayments of principal,
were due within the periods indicated.
<TABLE>
<CAPTION>
AFTER ONE
WITHIN THROUGH AFTER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
-------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial............................................ $19,235 $17,236 $24,694 $ 61,165
Real estate construction.............................. 40,034 25 -- 40,059
------- ------- ------- --------
Total............................................... $59,269 $17,261 $24,694 $101,224
======= ======= ======= ========
Loans with fixed interest rates....................... $24,231 $ 5,972 $ 2,455 $ 32,658
Loans with variable interest rates.................... 35,198 11,289 22,079 68,566
------- ------- ------- --------
Total............................................... $59,429 $17,261 $24,534 $101,224
======= ======= ======= ========
</TABLE>
DEPOSIT STRUCTURE
The Company primarily attracts deposits from local businesses and
professionals, as well as through retail certificates of deposits, savings and
checking accounts. In addition to the Company's local depository offices, it
attracts certificates of deposit, primarily from financial institutions
throughout the nation, by publishing rates in national publications. These
certificates of deposit have often been attracted at interest rates at or above
local market retail deposit rates. The national deposit market is utilized to
supplement the Company's liquidity needs. There can be no assurance that this
funding practice will continue to provide deposits at attractive rates, or that
applicable federal regulations will not limit the Company's ability to attract
deposits in this manner. The amount of such deposits was $793,000 and $993,000
as of December 31, 1999 and 1998. The Company generally does not purchase
brokered deposits and had no brokered deposits at December 31, 1999.
The following chart sets forth the distribution of the Company's average
daily deposits for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Savings & Money Market.................... $108,290 3.21% $119,624 3.97% $130,999 4.40%
NOW....................................... 25,081 1.18 23,236 1.27 21,804 1.47
Noninterest bearing....................... 85,851 -- 82,074 -- 77,382 --
Time deposits $100,000 and over............. 49,919 5.43 35,349 5.45 27,586 6.55
Other time deposits......................... 87,194 4.96 81,920 5.39 128,002 5.33
</TABLE>
27
<PAGE>
The Company's time deposits of $100,000 or more had the following schedule
of maturities at December 31, 1999:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Remaining Maturity:
Three months or less...................................... $17,135
Over three months to six months........................... 18,516
Over six months to 12 months.............................. 28,820
Over 12 months............................................ 4,823
-------
Total................................................... $69,294
=======
</TABLE>
Time deposits of $100,000 or more are generally from the Company's local
business and professional customer base. The potential impact on the Company's
liquidity from the withdrawal of these deposits is considered in the Company's
asset and liability management policies, which attempt to anticipate adequate
liquidity needs through its management of investments, federal funds sold, or by
generating additional deposits.
OTHER BORROWINGS
NBR maintains a secured line of credit with the FHLB collateralized by
approximately $111,832,000 in residential mortgage loans. Available credit under
this line at December 31, 1999 was $91,000,000. Advances can be made on a
long-term and short-term basis with a rolling maturity date. On occasion, a
borrowing is made on a fixed maturity basis. In such instances, maturities do
not extend beyond one year. Redwood also maintains a $3,000,000 unsecrued line
of credit with a major financial institution. As of December 31, 1999, $825,000
was outstanding under this line and represents the highest amount outstanding
during the year. In addition, the Company enters into various short-term
borrowing agreements, which include Treasury, Tax and Loan borrowings. These
borrowings have maturities of one day and are collateralized by investments or
loans.
The following table summarizes the balances outstanding at year end, the
highest amount of borrowings outstanding for a month-end during the year, the
average balance of borrowings and the weighted average rate for the years ended
December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Balance, December 31......................... $4,695 $1,371 $2,341
Average balance during the year.............. $6,983 $6,413 $4,265
Average interest rate during the year........ 5.24% 5.62% 5.91%
Maximum month-end balance during the year.... $17,785 $19,783 $6,560
Date of maximum month-end balance............ September August January
</TABLE>
ASSET QUALITY
The Company attempts to minimize credit risk through its underwriting and
credit review policies. The Company conducts its own internal credit review
processes and, in addition, contracts with an independent loan reviewer who
performs monthly reviews of new loans and potential problem loans that meet
predetermined parameters. The Board of Directors of NBR has an internal asset
review committee which reviews the asset quality of new and problem loans on a
monthly basis and reports the findings to the full Board. In management's
opinion, this loan review system facilitates the early identification of
potential problem loans.
The performance of the Company's loan portfolio is evaluated regularly by
management. The Company places a loan on nonaccrual status when one of the
following events occurs: any installment of principal or interest is 90 days or
more past due (unless, in management's opinion, the loan is well secured
28
<PAGE>
and in the process of collection); management determines the ultimate collection
of principal of or interest on a loan to be unlikely; or the terms of a loan
have been renegotiated to less than market rates due to a serious weakening of
the borrower's financial condition.
With respect to the Company's policy of placing loans 90 days or more past
due on nonaccrual status unless the loan is well secured and in the process of
collection, a loan is considered to be in the process of collection if, based on
a probable specific event, it is expected that the loan will be repaid or
brought current. Generally, this collection period would not exceed 30 days.
When a loan is placed on nonaccrual status, the Company's general policy is to
reverse and charge against current income previously accrued but unpaid
interest. Interest income on such loans is subsequently recognized only to the
extent that cash is received and future collection of principal is deemed by
management to be probable. Where the collectibility of the principal of or
interest on a loan is considered to be doubtful by management, it is placed on
nonaccrual status prior to becoming 90 days delinquent.
Interest income is recognized on impaired loans in a manner similar to that
of all loans. It is the Company's policy to place loans that are delinquent 90
days or more as to principal or interest on nonaccrual status unless secured and
in the process of collection, and to reverse from current income accrued but
uncollected interest. Cash payments subsequently received on nonaccrual loans
are recognized as income only where the future collection of principal is
considered by management to be probable.
At December 31, 1999 and 1998 the Company's total recorded investment in
impaired loans was $4,430,000 and $10,293,000 of which $4,119,000 and $8,573,000
relates to the recorded investment for which there is a related allowance for
credit losses of $1,121,000 and $1,543,000. The amount of that recorded
investment for which there is no related allowance for credit losses was
$311,000 and $1,720,000 at December 31, 1999 and 1998. At December 31, 1999
substantially all of the impaired loan balance was measured based on the fair
value of the collateral, with the remainder measured by estimated present value
cash flow.
The average recorded investment in impaired loans during the years ended
December 31, 1999, 1998 and 1997 was $4,420,000, $10,377,000 and $10,949,000.
The related amount of interest income recognized during the period that such
loans were impaired was $292,000, $578,000 and $558,000.
As of December 31, 1999 and 1998 there were $3,063,000 and $5,556,000 of
loans on which the accrual of interest had been discontinued. Interest due but
excluded from interest income on loans placed on nonaccrual status was $362,000,
$341,000 and $469,000 for the years ended December 31, 1999, 1998 and 1997.
Interest income received on nonaccrual loans was $205,000, $51,000 and $84,000
for the years ended December 31, 1999, 1998 and 1997.
The following table sets forth the amount of the Company's nonperforming
assets as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans................................. $3,063 $5,556 $ 7,883 $ 8,246 $ 4,201
Accruing loans past due 90 days or more.......... -- -- 735 1,536 92
Restructured loans (in compliance with modified
terms)......................................... 1,018 1,045 1,109 599 651
------ ------ ------- ------- -------
Total nonperforming loans...................... 4,081 6,601 9,727 10,381 4,944
Other real estate owned.......................... 2,363 2,181 6,352 2,132 963
Other assets owned............................... -- 129 542 668 1,249
------ ------ ------- ------- -------
Total nonperforming assets..................... $6,444 $8,911 $16,621 $13,181 $ 7,156
====== ====== ======= ======= =======
Nonperforming loans to total loans............... 1.30% 2.45% 3.44% 2.99% 1.34%
Nonperforming assets to total assets............. 1.52 2.11 3.72 2.64 1.28
Allowance for loan losses to nonperforming
assets......................................... 123.08 90.24 46.00 53.41 70.39
Allowance for loan losses to nonperforming
loans.......................................... 1.94 1.22 0.79 0.68 1.02
</TABLE>
29
<PAGE>
Nonperforming loans totaled $4,081,000 at December 31, 1999, consisting of
$1,363,000 that were secured by residential real estate with the remaining
$2,718,000 either unsecured or collateralized by various business assets other
than real estate.
Other real estate owned totaled $2,363,000 at December 31, 1999, consisting
of $2,018,000 in construction, commercial buildings and land development and
$345,000 in residential properties.
In addition to the above mentioned assets, as of December 31, 1999
management of the Company has identified two lending relationships which in
aggregate amount to approximately $931,000 in potential nonperforming loans, as
to which it has serious doubts as to the ability of the borrowers to comply with
the present repayment terms and which may become nonperforming assets, based on
known information about possible credit problems of the borrower.
The following table provides certain information for the years indicated
with respect to the Company's allowance for loan losses as well as charge-off
and recovery activity.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period...................... $8,041 $7,645 $7,040 $5,037 $5,787
------ ------ ------ ------ ------
Charge-offs:
Residential real estate mortgage.................. 21 617 408 741 304
Commercial real estate mortgage................... 612 355 124 244 14
Commercial........................................ 769 794 784 2,517 1,985
Real estate construction.......................... 100 179 456 725 --
Installment and other............................. 13 55 148 337 147
------ ------ ------ ------ ------
Total charge-offs................................... 1,515 2,000 1,920 4,564 2,450
------ ------ ------ ------ ------
Recoveries:
Residential real estate mortgage.................. 42 31 15 2 25
Commercial real estate mortgage................... 45 10 -- 5 --
Commercial........................................ 498 279 295 252 84
Real estate construction.......................... 53 3 -- -- --
Installment and other............................. 17 33 115 46 1
------ ------ ------ ------ ------
Total recoveries.................................... 655 356 425 305 110
------ ------ ------ ------ ------
Net charge-offs..................................... 860 1,644 1,495 4,259 2,340
------ ------ ------ ------ ------
Provision for loan losses........................... 750 2,040 2,100 6,262 1,590
------ ------ ------ ------ ------
Balance at end of period............................ $7,931 $8,041 $7,645 $7,040 $5,037
====== ====== ====== ====== ======
Net charge-offs during the period to average
loans............................................. .29% .62% .46% 1.22% .60%
Allowance for loan losses to total loans............ 2.52 2.99 2.71 2.03 1.37
Allowance for loan losses to nonperforming loans.... 194.34 121.82 78.60 67.82 101.88
</TABLE>
The allowance for loan losses is established through charges to earnings in
the form of the provision for loan losses. Loan losses are charged to, and
recoveries are credited to, the allowance for loan losses. The provision for
loan losses is determined after considering various factors such as loan loss
experience, current economic conditions, maturity of the portfolio, size of the
portfolio, industry concentrations, borrower credit history, the existing
allowance for loan losses, independent loan reviews, current charges and
recoveries to the allowance for loan losses, and the overall quality of the
portfolio, as determined by management, regulatory agencies, and independent
credit review consultants retained by the Company.
The adequacy of the Company's allowance for loan losses is based on specific
and formula allocations to the Company's loan portfolio. Specific allocations of
the allowance for loan losses are made to identified
30
<PAGE>
problem or potential problem loans. The specific allocations are increased or
decreased through management's reevaluation of the status of the particular
problem loans. Loans which do not receive a specific allocation receive an
allowance allocation based on a formula, represented by a percentage factor
based on underlying collateral, type of loan, historical charge-offs and general
economic conditions, which is applied against the general portfolio segments.
It is the policy of management to make additions to the allowance for loan
losses so that it remains adequate to cover anticipated charge-offs, and
management believes that the allowance at December 31, 1999 is adequate.
However, the determination of the amount of the allowance is judgmental and
subject to economic conditions which cannot be predicted with certainty.
Accordingly, the Company cannot predict whether charge-offs of loans in excess
of the allowance may be required in future periods.
The provision for loan losses reflects an accrual sufficient to cover
projected probable charge-offs and the maintenance of the allowance at a level
deemed adequate to absorb potential future losses.
The table below sets forth the allocation of the allowance for loan losses
by loan type as of the dates specified. The allocation of individual categories
of loans includes amounts applicable to specifically identified as well as
unidentified losses inherent in that segment of the loan portfolio and will
necessarily change whenever management determines that the risk characteristics
of the loan portfolio have changed.
Management believes that any breakdown or allocation of the allowance for
loan losses into loan categories lends an appearance of exactness which does not
exist, in that the allowance is utilized as a single unallocated allowance
available for all loans and undisbursed commitments. The allocation below should
not be interpreted as an indication of the specific amounts or loan categories
in which future charge-offs may occur:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------
1999 1998 1997 1996
--------------------- --------------------- --------------------- ----------
ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE
FOR LOSSES LOANS FOR LOSSES LOANS FOR LOSSES LOANS FOR LOSSES
---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Residential real estate
mortgage............... $2,257 42% $1,725 36% $2,061 34% $1,522
Commercial real estate
mortgage............... 947 25 1,260 22 650 20 809
Commercial............... 2,088 19 2,514 23 1,640 24 1,753
Real estate
construction........... 1,064 13 1,691 17 1,821 19 2,076
Installment and other.... 130 1 207 2 194 3 231
Unallocated.............. 1,444 -- 644 -- 1,279 -- 649
------ --- ------ --- ------ --- ------
Total.................... $7,931 100% $8,041 100% $7,645 100% $7,040
====== === ====== === ====== === ======
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1995
-------- ---------------------
% OF ALLOWANCE % OF
LOANS FOR LOSSES LOANS
-------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Residential real estate
mortgage............... 34% $1,922 44%
Commercial real estate
mortgage............... 19 664 15
Commercial............... 21 1,082 21
Real estate
construction........... 24 1,210 17
Installment and other.... 2 118 3
Unallocated.............. -- 41 --
--- ------ ---
Total.................... 100% $5,037 100%
=== ====== ===
</TABLE>
From time to time the Company may be required to repurchase mortgage loans
from investors depending upon representations and warranties of the purchase
agreement between the investor and the Company. Such representations and
warranties include valid appraisal, status of borrower or fraud. The Company
expects that it may be required to repurchase loans in the future. In 1999, 1998
and 1997 the Company was required by various mortgage loan investors to
repurchase 4, 9 and 26 non performing residential mortgage loans totaling
$943,000, $542,000 and $3,459,000, respectively. The Company maintains a reserve
for its estimate of potential losses associated with the potential repurchase of
previously sold mortgage loans. Such reserve amounts to $142,000 and $172,000 as
of December 31, 1999 and 1998.
YEAR 2000
The Company's mission critical systems successfully responded to the century
date change. Accordingly, the Company's core banking systems, including the
applications software for its deposit, loan and merchant card processing
computer systems, as well as the electronic funds transfers system with the
Federal Reserve, are fully operational and accurately processing customer
information and transactions. The Company will continue to monitor its systems
and those of its vendors and suppliers over the coming months.
31
<PAGE>
LIQUIDITY
Redwood's primary source of liquidity is dividends from NBR. Redwood's
primary uses of liquidity are associated with dividend payments made to the
stockholders and operating expenses. It is the Company's general policy to
retain liquidity at the parent at a level which management believes to be
consistent with the safety and soundness of the Company as a whole. As of
December 31, 1999, Redwood held $119,000 in deposits at NBR. In addition, the
Company has a $3,000,000 unsecured line of credit with a major financial
institution, which bears an interest rate equal to the prime rate plus one
percent. As of December 31, 1999 $825,000 was outstanding under this line of
credit.
In 1998, Redwood reinstated a cash dividend to its common stock holders at a
quarterly rate of $.04 per share. In 1999, Redwood increased this dividend 50%
to $0.06 per share. In the fourth quarter of 1999, the dividend increased again
to $0.10 per share. Payment of dividends by the Company is ultimately dependent
on dividends from NBR to Redwood. Federal regulatory agencies have the authority
to prohibit the payment of dividends by NBR to Redwood if a finding is made that
such payment would constitute an unsafe or unsound practice, or if NBR became
undercapitalized. If NBR is restricted from paying dividends, Redwood could be
unable to pay the above obligations. No assurance can be given as to the ability
of NBR to pay dividends to Redwood. In 1999, 1998 and 1997 NBR declared
dividends of $10,900,000, $1,200,000 and $860,000.
Although each entity within the consolidated group manages its own
liquidity, the Company's consolidated cash flows can be divided into three
distinct areas; operating, investing and financing. For the year ended December
31, 1999 the Company received $35,331,000 in cash flows from operations while
using $47,670,000 and $9,292,000 in investing and financing activities,
respectively.
The principal sources of asset liquidity are federal funds sold. Secondary
sources of liquidity are loan repayments, investments available for sale,
maturing investments, and investments that can be used as collateral for other
borrowings. At December 31, 1999, the Company had $1,497,000 in federal funds
sold. Total investments were $76,705,000, of which $29,835,000 were pledged.
Time deposits from other financial institutions totaled $793,000 or .2% of
total deposits, at December 31, 1999, a decrease of $200,000 from the $993,000
recorded at December 31, 1998, which amounted to .3% of total deposits at that
time. These deposits are used to supplement liquidity when the Company
determines that deposits from local sources would be more expensive. The Company
is able to retain such deposits at favorable rates when desired.
Liability-based liquidity includes interest-bearing and noninterest bearing
retail deposits, which are a relatively stable source of funds, time deposits
from financial institutions throughout the United States, federal funds
purchased, and other short-term and long-term borrowings, some of which are
collateralized. The Company collateralized FHLB advances as NBR is a member of
the FHLB. Management uses FHLB advances as part of its funding strategy because
the rates paid for those advances are generally in line with the rates paid on
time certificates of deposits. FHLB advances must be collateralized by the
pledging of qualified mortgage loans of NBR. At December 31, 1999 approximately
$111,832,000 of residential mortgage loans were pledged to secure any funds the
Company may borrow. NBR's FHLB borrowing limitation at December 31, 1999 was
$91,000,000. At December 31, 1999 and December 31, 1998, NBR had paid off all
FHLB advances, as compared to advances outstanding of $1,800,000 at December 31,
1997. Management believes that at December 31, 1999 the Company's liquidity
position was adequate for the operations of Redwood and its subsidiaries for the
foreseeable future.
CAPITAL
A strong capital base is essential to the Company's continued ability to
service the needs of its customers. Capital protects depositors and the deposit
insurance fund from potential losses and is a source of funds for the
substantial investments necessary for the Company to remain competitive. In
addition, adequate capital and earnings enable the Company to gain access to the
capital markets to supplement its internal growth of capital. Capital is
generated internally primarily through earnings retention.
32
<PAGE>
The Company and NBR are each required to maintain minimum capital ratios
defined by various federal government regulatory agencies. The FRB and the OCC
have each established capital guidelines, which include minimum capital
requirements. The regulations impose two sets of standards: "risk-based" and
"leverage".
Under the risk-based capital standard, assets reported on an institution's
balance sheet and certain off-balance sheet items are assigned to risk
categories, each of which is assigned a risk weight. This standard characterizes
an institution's capital as being "Tier 1" capital (defined as principally
comprising shareholders' equity and noncumulative preferred stock) and "Tier 2"
capital (defined as principally comprising the allowance for loan losses and
subordinated debt). At December 31, 1999, 1998 and 1997, the Company and its
subsidiaries were required to maintain a total risk-based capital ratio of 8%,
including a Tier 1 capital ratio of at least 4%.
Under the leverage capital standard, an institution must maintain a
specified minimum ratio of Tier 1 capital to total assets, with the minimum
ratio ranging from 4% to 6% for other than the highest rated institutions. The
minimum leverage ratio for the Company and NBR is based on average assets for
the quarter.
NBR maintains insurance on its customer deposits with the Federal Deposit
Insurance Corporation ("FDIC"). The FDIC manages the Bank Insurance Fund
("BIF"), which insures deposits of commercial banks such as NBR, and the Savings
Association Insurance Fund ("SAIF"), which insures deposits of savings
associations such as Allied. FDICIA mandated that the two funds maintain
reserves at 1.25% of their respective federally insured deposits.
The table below shows the capital ratios for the Company and NBR at December
31, 1999.
<TABLE>
<CAPTION>
COMPANY NBR
-------- --------
<S> <C> <C>
Total capital to risk based assets.......................... 13.01% 13.20%
Tier 1 capital to risk based assets......................... 11.74% 11.94%
Leverage ratio.............................................. 8.66% 8.86%
</TABLE>
Under the most stringent capital requirement, the Company has approximately
$19,854,000 in excess capital before it becomes under-capitalized. Similarly,
NBR has $20,519,000 in excess capital.
COMMON STOCK REPURCHASE
In November 1998, the Board of Directors authorized the repurchase of up to
5% of the outstanding stock of the Company or 171,000 shares. This repurchase
authorization was completed in November 1999. Upon completion of the initial 5%
repurchase the Company's Board of Directors authorized an additional 5% share
repurchase.
During 1999 and 1998 the Company repurchased 191,500 and 16,500 shares of
its common stock for $4,181,938 and $282,750 respectively. The average price
paid under the repurchase program was $21.84 in 1999 and $17.14 in 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As a financial institution, the Company's primary component of market risk
is interest rate volatility. Fluctuation in interest rates will ultimately
impact both the level of income and expense recorded on a large portion of the
Bank's assets and liabilities, and the market value of all interest earning
assets and interest bearing liabilities, other than those which possess a short
term to maturity. Since virtually all of the Company's interest bearing
liabilities and all of the Company's interest earning assets are located at the
Bank, virtually all of the Company's interest rate risk exposure lies at the
Bank level. As a result, all significant interest rate risk management
procedures are performed at the Bank level. Based upon the nature of its
operations, the Bank is not subject to foreign currency exchange or commodity
price risk. The
33
<PAGE>
Bank's real estate loan portfolio, concentrated primarily within northern
California, is subject to risks associated with the local economy. The Company
does not own any trading assets. See "Asset Quality".
The fundamental objective of the Company's management of its assets and
liabilities is to maximize the economic value of the Company while maintaining
adequate liquidity and an exposure to interest rate risk deemed by management to
be acceptable. Management believes an acceptable degree of exposure to interest
rate risk results from the management of assets and liabilities through
maturities, pricing and mix to attempt to neutralize the potential impact of
changes in market interest rates. The Bank's profitability is dependent to a
large extent upon its net interest income, which is the difference between its
interest income on interest-earning assets, such as loans and securities, and
its interest expense on interest-bearing liabilities, such as deposits and
borrowings. The Bank, like other financial institutions, is subject to interest
rate risk to the degree that its interest-earning assets reprice differently
than its interest-bearing liabilities. The Bank manages its mix of assets and
liabilities with the goals of limiting its exposure to interest rate risk,
ensuring adequate liquidity, and coordinating its sources and uses of funds.
The Bank seeks to control its interest rate risk exposure in a manner that
will allow for adequate levels of earnings and capital over a range of possible
interest rate environments. The Bank has adopted formal policies and practices
to monitor and manage interest rate risk exposure. As part of this effort, the
Bank measures risk in three ways: repricing of earning assets and interest
bearing liabilities; changes in net interest income for interest rate shocks up
and down 200 basis points; and changes in the market value of equity for
interest rate shocks up and down 200 basis points.
The following table sets forth, as of December 31, 1999, the distribution of
repricing opportunities for the Company's earning assets and interest-bearing
liabilities, the interest rate sensitivity gap, the cumulative interest rate
sensitivity gap, the interest rate sensitivity gap ratio (i.e., earning assets
divided by interest-bearing liabilities) and the cumulative interest rate
sensitivity gap ratio.
<TABLE>
<CAPTION>
AFTER THREE AFTER SIX AFTER ONE
WITHIN MONTHS BUT MONTHS BUT YEAR BUT
THREE WITHIN SIX WITHIN WITHIN AFTER FIVE
MONTHS MONTHS ONE YEAR FIVE YEARS YEARS TOTAL
-------- ----------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Federal funds sold.................... $ 1,497 $ -- $ -- $ -- $ -- $ 1,497
Investment securities and other....... 9,493 6,839 12,160 26,514 21,699 76,705
Loans................................. 110,364 28,307 20,141 72,030 83,603 314,445
-------- -------- -------- ------- -------- --------
Total earning assets.................. 121,354 35,146 32,301 98,544 105,302 392,647
-------- -------- -------- ------- -------- --------
INTEREST-BEARING LIABILITIES:
Interest-bearing transaction
accounts............................ 20,726 20,726 20,726 62,179 -- 124,357
Time deposits......................... 39,702 46,850 69,536 11,311 -- 167,399
Other borrowings...................... 4,695 -- -- -- -- 4,695
-------- -------- -------- ------- -------- --------
Total interest-bearing liabilities.... 65,123 67,576 90,262 73,490 -- 296,451
-------- -------- -------- ------- -------- --------
Interest rate sensitivity gap......... $ 56,231 $(32,430) $(57,961) $25,054 $105,302 $ 96,196
======== ======== ======== ======= ======== ========
Cumulative interest rate sensitivity
gap................................. $ 56,231 $ 23,801 $(34,160) $(9,106) $ 96,196
======== ======== ======== ======= ========
Interest rate sensitivity gap ratio... 1.86 .52 .36 1.34 N/A
Cumulative interest rate sensitivity
gap ratio........................... 1.86 1.18 .85 .97 1.33
</TABLE>
The Company's gap position is substantially dependent upon the volume of
loans held in the portfolio. These loans generally have maturities greater than
five years; however, these loans have a repricing frequency of at least
quarterly and therefore are classified in the above table as repricing within
three months. Additionally, interest-bearing transaction accounts, which consist
of money market, demand and savings deposit accounts, are classified as
repricing within three months. Some of these deposits may be
34
<PAGE>
repriced at management's option, and therefore a decision not to reprice such
deposits could significantly alter the Company's net interest margin.
Management expects that, in a declining rate environment, the Company's net
interest margin would be expected to decline, and, in an increasing rate
environment, the Company's net interest margin would tend to increase. The
Company has experienced greater mortgage lending activity through mortgage
refinancings and financing new home purchases as rates declined, and may
increase its net interest margins in an increasing rate environment if more
traditional commercial bank lending becomes a higher percentage of the overall
earning assets mix. There can be no assurance, however, that under such
circumstances the Company will experience the described relationships to
declining or increasing interest rates.
On a monthly basis, NBR management prepares an analysis of interest rate
risk exposure. Such analysis calculates the change in net interest income and
the theoretical market value of the Bank's equity given a change in general
interest rates of 200 basis points up and 200 basis points down. All changes are
measured in dollars and are compared to projected net interest income and the
current theoretical market value of the Bank's equity. This theoretical market
value of the Bank's equity is calculated by discounting cash flows associated
with the Company's assets and liabilities. The following is a December 31, 1999
and 1998 summary of interest rate risk exposure as measured on a net interest
income basis and a market value of equity basis, given a change in general
interest rates of 200 basis points up and 200 basis points down.
<TABLE>
<CAPTION>
CHANGE IN ANNUAL CHANGE IN
CHANGE IN INTEREST RATE NET INTEREST INCOME MARKET VALUE OF EQUITY
- ----------------------- ------------------- ----------------------
<S> <C> <C>
1999
+ 200................................... $ (96,000) $(10,606,000)
+ 100................................... (40,000) (5,486,000)
- -100.................................... (20,000) 5,176,000
- -200.................................... (569,000) 6,478,000
1998
+ 200................................... $ 557,000 $ (6,920,000)
+ 100................................... 270,000 (3,788,000)
- -100.................................... (1,585,000) 3,563,000
- -200.................................... (3,943,000) 6,455,000
</TABLE>
The Company's interest rate risk exposure to a rising rate environment
increased in 1999. This increase was principally due to modest growth in fixed
rate commercial and residential real estate loans.
The model utilized by management to create the report presented above makes
various estimates at each level of interest rate change regarding cash flows
from principal repayments on loans and mortgage-backed securities and/or call
activity on investment securities. In addition, repricing these earning assets
and matured liabilities can occur in one of three ways: (1) the rate of interest
to be paid on an asset or liability may adjust periodically based on an index;
(2) an asset, such as a mortgage loan, may amortize, permitting reinvestment of
cash flows at the then-prevailing interest rates; or (3) an asset or liability
may mature, at which time the proceeds can be reinvested at current market rate.
Actual results could differ significantly from those estimates which would
result in significant differences in the calculated projected change.
35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
The following consolidated financial statements of Redwood and its
subsidiaries, and independent auditors' report included in the Annual Report of
Redwood to its shareholders for the years ended December 31, 1999, 1998 and
1997.
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report................................ 37
Consolidated Financial Statements of Redwood Empire Bancorp
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997........................ 38
Consolidated Balance Sheets as of December 31, 1999 and
1998.................................................... 39
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997............ 40
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997........................ 41
Notes to Consolidated Financial Statements................ 42
</TABLE>
36
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Redwood Empire Bancorp
Santa Rosa, California
We have audited the accompanying consolidated balance sheets of Redwood
Empire Bancorp and subsidiaries (Company) as of December 31, 1999 and 1998 and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
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, such consolidated financial statements present fairly, in
all material respects, the financial position of Redwood Empire Bancorp and
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
January 26, 2000
37
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans................................ $ 25,924 $ 25,183 $ 30,448
Interest on investment securities......................... 4,239 4,334 3,709
Interest on federal funds sold............................ 470 1,040 1,314
---------- ---------- ----------
Total interest income....................................... 30,633 30,557 35,471
Interest expense:
Interest on deposits...................................... 10,736 11,392 14,708
Interest on other borrowings.............................. 68 -- --
Interest on subordinated notes............................ 142 1,107 1,107
---------- ---------- ----------
Total interest expense...................................... 10,946 12,499 15,815
---------- ---------- ----------
Net interest income......................................... 19,687 18,058 19,656
Provision for loan losses................................... 750 2,040 2,100
---------- ---------- ----------
Net interest income after provision for loan losses......... 18,937 16,018 17,556
---------- ---------- ----------
Noninterest income:
Service charges on deposit accounts....................... 1,041 1,072 1,146
Merchant draft processing, net............................ 3,154 2,609 1,585
Loan servicing income..................................... 129 562 831
Net realized gains on sale of investment securities held
for sale and redemption of investment securities........ 19 225 23
Other income.............................................. 854 1,157 719
---------- ---------- ----------
Total noninterest income.................................. 5,197 5,625 4,304
Noninterest expense:
Salaries and employee benefits............................ 8,802 8,638 9,021
Occupancy and equipment expense........................... 2,242 2,743 2,719
Restructuring credit...................................... -- -- (286)
Other..................................................... 5,122 5,496 6,450
---------- ---------- ----------
Total noninterest expense................................... 16,166 16,877 17,904
---------- ---------- ----------
Income from continuing operations before income taxes and
extraordinary item........................................ 7,968 4,766 3,956
Provision for income taxes.................................. 3,093 1,862 1,579
---------- ---------- ----------
Income from continuing operations before extraordinary
item...................................................... 4,875 2,904 2,377
---------- ---------- ----------
Discontinued operations:
Income (loss) from discontinued operations (less
applicable income taxes (benefit) of $(435), $240 and
$687)................................................... (270) 2,187 1,064
Loss on disposal of discontinued operations, net of tax
benefit of ($113)....................................... (167)
---------- ---------- ----------
Income (loss) from discontinued operations................ (437) 2,187 1,064
---------- ---------- ----------
Income before extraordinary item............................ 4,438 5,091 3,441
Extraordinary item.......................................... 459 -- --
Income tax benefit.......................................... (183) -- --
---------- ---------- ----------
Total extraordinary item, net of tax........................ 276 -- --
---------- ---------- ----------
Net income.................................................. 4,162 5,091 3,441
Dividends on preferred stock................................ -- 112 449
---------- ---------- ----------
Net income available for common stock shareholders.......... $ 4,162 $ 4,979 $ 2,992
========== ========== ==========
Basic earnings per common shares:
Income from continuing operations before extraordinary
item.................................................... $ 1.45 $ .88 $ .70
Income (loss) from discontinued operations................ (.13) .69 .38
Income before extraordinary item.......................... 1.32 1.57 1.08
Net income available for common stock shareholders........ 1.24 1.57 1.08
Weighted average shares................................... 3,364,000 3,170,000 2,776,000
Diluted earnings per common share and common equivalent
share:
Income from continuing operations before extraordinary
item.................................................... $ 1.41 $ .84 $ .70
Income (loss) from discontinued operations................ (.13) .63 .32
Income before extraordinary item.......................... 1.28 1.47 1.02
Net income available for common stock shareholders........ 1.20 1.47 1.02
Weighted average shares................................... 3,456,000 3,465,000 3,378,000
</TABLE>
See Notes to Consolidated Financial Statements.
38
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets:
Cash and due from banks..................................... $ 19,058 $ 15,982
Federal funds sold.......................................... 1,497 26,205
-------- --------
Cash and cash equivalents................................. 20,555 42,187
Investment securities:
Held to maturity, at cost (market value: 1999--$31,923;
1998--$30,014).......................................... 32,967 29,872
Available for sale, at market (amortized cost:
1999--$44,667; 1998--$30,127)........................... 43,738 30,538
-------- --------
Total investment securities............................. 76,705 60,410
Mortgage loans held for sale................................ -- 32,620
Loans:
Portfolio loans........................................... 314,445 269,316
Less allowance for loan losses............................ (7,931) (8,041)
-------- --------
Net loans............................................... 306,514 261,275
Premises and equipment, net................................. 3,045 4,082
Mortgage servicing rights, net.............................. 32 305
Other real estate owned..................................... 2,363 2,181
Cash surrender value of life insurance...................... 3,187 3,033
Other assets and interest receivable........................ 10,645 16,206
-------- --------
Total Assets.......................................... $423,046 $422,299
======== ========
Liabilities and Shareholders' Equity:
Deposits:
Noninterest bearing demand deposits....................... $ 77,753 $ 82,448
Interest bearing transaction accounts..................... 124,357 141,316
Time deposits $100,000 and over........................... 69,294 62,600
Other time deposits....................................... 98,105 78,356
-------- --------
Total deposits.......................................... 369,509 364,720
Other borrowings............................................ 4,695 1,371
Other liabilities and interest payable...................... 11,398 5,568
Subordinated notes.......................................... -- 12,000
-------- --------
Total Liabilities..................................... 385,602 383,659
-------- --------
Commitments and contingencies............................... -- --
Shareholders' Equity:
Preferred stock, no par value; authorized 2,000,000
shares; issued and outstanding: no shares............... -- --
Common stock, no par value; authorized 10,000,000 shares;
issued and outstanding: 1999--3,228,771 shares,
1998--3,363,565 shares.................................. 22,033 25,801
Retained earnings......................................... 15,950 12,600
Accumulated other comprehensive (loss) income, net of
tax..................................................... (539) 239
-------- --------
Total Shareholders' Equity............................ 37,444 38,640
-------- --------
Total Liabilities and Shareholders' Equity.............. $423,046 $422,299
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
39
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
COMPREHENSIVE PREFERRED COMMON RETAINED (LOSS) INCOME,
INCOME SHARES STOCK SHARES STOCK EARNINGS NET TOTAL
-------------- -------- -------- -------- -------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997..... 575 $ 5,750 2,744 $19,281 $ 5,032 $(331) $29,732
Comprehensive income:
Net income.................. $3,441 3,441 3,441
Other comprehensive income:
Unrealized holding gains
arising during period, net
of tax of $80............. 117
Less: reclassification
adjustment net of tax of
$17....................... 27
------
Other comprehensive
income.................. 144 144 144
------
Comprehensive income...... $3,585
======
Stock options exercised....... 36 375 375
Cash dividends
declared--preferred......... (449) (449)
---- ------- ----- ------- ------- ----- -------
Balances, December 31, 1997... 575 5,750 2,780 19,656 8,024 (187) 33,243
Comprehensive income:
Net income.................. $5,091 5,091 5,091
Other comprehensive income:
Unrealized holding gains
arising during period, net
of tax of $152............ 208
Less: reclassification
adjustment net of tax of
$163...................... 218
------
Other comprehensive
income.................. 426 426 426
------
Comprehensive income...... $5,517
======
Conversion of preferred stock
to common................... (575) (5,750) 498 5,686 (64)
Common stock repurchased...... (17) (283) (283)
Stock options exercised....... 103 742 742
Cash dividends
declared--preferred......... (112) (112)
Cash dividends
declared--common ($0.12 per
share)...................... (403) (403)
---- ------- ----- ------- ------- ----- -------
Balances, December 31, 1998... -- -- 3,364 25,801 12,600 239 38,640
Comprehensive income:
Net income.................. $4,162 4,162 4,162
Other comprehensive income:
Unrealized holding losses
arising during period, net
of tax of $571............ (789)
Less: reclassification
adjustment net of tax of
$8...................... 11
------
Other comprehensive
income.................. (778) (778) (778)
------
Comprehensive income...... $3,384
======
Common stock repurchased...... (191) (4,182) (4,182)
Stock options exercised....... 56 414 414
Cash dividends
declared--common ($0.24 per
share)...................... (812) (812)
---- ------- ----- ------- ------- ----- -------
Balances, December 31, 1999... -- $ -- 3,229 $22,033 $15,950 $(539) $37,444
==== ======= ===== ======= ======= ===== =======
</TABLE>
See Notes to Consolidated Financial Statements.
40
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 4,162 $ 5,091 $ 3,441
--------- --------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization, net........................ 1,347 1,731 1,430
Deferred taxes............................................ (68) (1,247) 1,382
Net realized gains on securities available for sale....... (19) (225) (23)
Loans originated for sale................................. (251,468) (479,351) (182,096)
Proceeds from sale of loans held for sale................. 269,818 486,011 228,890
Gain on sale of loans and loan servicing.................. (1,293) (5,095) (3,601)
Provision for loan losses................................. 750 2,040 2,100
Change in cash surrender value of life insurance.......... (154) (104) (628)
Change in other assets and interest receivable............ 2,815 (2,346) 7,135
Change in other liabilities and interest payable.......... 8,358 (2,492) (3,334)
Noncash restructuring (credit) charge..................... -- -- (286)
Other, net................................................ 202 89 95
--------- --------- ---------
Total adjustments......................................... 30,288 (989) 51,064
--------- --------- ---------
Net cash provided by operating activities............... 34,450 4,102 54,505
--------- --------- ---------
Cash flows from investing activities:
Net increase in loans..................................... (31,720) (9,547) 26,073
Proceeds from sale of loans in portfolio.................. -- 1,666 2,043
Purchases of investment securities available for sale..... (20,625) (22,146) (23,845)
Purchases of investment securities held to maturity....... (6,938) (13,133) (17,056)
Sales of investment securities available for sale......... 1,987 1,995 7,031
Maturities of investment securities available for sale.... 4,013 26,913 13,974
Maturities of investment securities held to maturity...... 3,933 19,503 513
Purchase of premises and equipment, net of retirements.... (704) (1,611) (1,469)
(Purchase) sale of mortgage servicing rights.............. -- (12) (330)
Divestiture of mortgage banking operations................ 520 -- --
Change in interest bearing deposits due from financial
institutions............................................ -- -- 315
Proceeds from sale of other real estate owned............. 1,919 6,399 1,982
--------- --------- ---------
Net cash provided by (used in) investing activities..... (47,615) 10,027 9,231
--------- --------- ---------
Cash flows from financing activities:
Change in noninterest bearing transaction accounts........ (4,695) (16,467) 27,101
Change in interest bearing transaction accounts........... (16,959) (8,623) (6,514)
Change in time deposits................................... 26,443 (1,611) (65,616)
Change in other borrowings................................ 3,324 (970) (7,966)
Redemption of subordinated debt........................... (12,000) -- --
Issuance of stock......................................... (3,768) 180 299
Dividends paid............................................ (812) (515) (449)
--------- --------- ---------
Net cash used in financing activities................... (8,467) (28,006) (53,145)
--------- --------- ---------
Net change in cash and cash equivalents..................... (21,632) (13,877) 10,591
Cash and cash equivalents at beginning of period............ 42,187 56,064 45,473
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 20,555 $ 42,187 $ 56,064
========= ========= =========
Supplemental Disclosures:
Cash paid during the period for:
Income taxes.............................................. $ 1,811 $ 2,709 $ 2,454
Interest.................................................. 10,539 14,047 18,571
Noncash investing and financing activities:
Transfer from loans to other real estate owned............ -- 2,900 6,436
Transfer from mortgage loans held for sale to loans....... -- 8,999 1,377
Conversion of preferred stock to common................... -- 5,686 --
</TABLE>
See Notes to Consolidated Financial Statements.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--DESCRIPTION OF BUSINESS
Redwood Empire Bancorp ("Redwood," and with its subsidiaries, the "Company")
is a financial institution holding company headquartered in Santa Rosa,
California, and operating in Northern California. Its wholly-owned subsidiary is
National Bank of the Redwoods ("NBR"), a national bank chartered in 1985. A
previously wholly-owned subsidiary, Allied Bank, F.S.B., ("Allied"), a Federal
Savings Bank, was merged with its sister subsidiary, NBR, in March, 1997. The
Company's business strategy involves two principal business activities, core
community banking services and merchant card services, which are conducted
through NBR.
NBR provides its core community banking services through five retail
branches located in Sonoma County, California, one retail branch located in
Mendocino County, California, and one retail branch located in Lake County,
California. Loan services at NBR are generally extended to professionals and to
businesses with annual revenues of less than $10 million. Commercial loans are
primarily for working capital, asset acquisition and commercial real estate.
NBR's targeted commercial banking market area includes the California counties
north of San Francisco. NBR generates noninterest income through merchant draft
processing by virtue of its status as a Principal Member of Visa/MasterCard. NBR
is a Preferred Lender under the Small Business Administration ("SBA") Loan
Guarantee Program. In addition, NBR originates both commerical and residential
construction loans for its portfolio.
In September 1999, the Company divested itself of its subprime mortgage
brokerage and mortgage banking units, Valley Financial and Allied Diversified
Credit. The divestiture took the form of an asset sale and employee transfer to
Valley Financial Funding, Inc., whose shareholders include senior management of
Valley Financial and Allied Diversified Credit. As of December 31, 1999, there
are no assets and $142,000 in liabilities on the Company's consolidated balance
sheet related to the divested operations. The liability balance is related to
potential repurchases of previously sold mortgage loans. During the period from
October 1999 to December 1999 the Company has recorded $128,000 of income
related to the divested operations and has received proceeds of $13,324,000 from
the sale of mortgage loans held for sale. The Company has disclosed the
operations of these units as well as the after tax loss on disposition as
discontinued operations. Accordingly, historical financial information has been
recast to present the operating results of Valley Financial and Allied
Diversified Credit as discontinued operations. Revenue from discontinued
operations was $4,369,000 for the year ended December 31, 1999, as compared to
$10,863,000 and $6,702,000 for 1998 and 1997.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and general practice within the banking industry.
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. A summary of the more
significant policies follows:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Redwood Empire
Bancorp and its wholly-owned subsidiary, National Bank of the Redwoods. All
material intercompany transactions and accounts have been eliminated.
Certain reclassifications to the 1998 and 1997 financial statements were
made to conform to the 1999 presentation.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For the purpose of the statements of cash flows, cash and cash equivalents
have been defined as cash on hand, demand deposits with correspondent banks,
cash items in transit and federal funds sold.
INVESTMENT SECURITIES
Securities held to maturity are carried at cost adjusted by the accretion of
discounts and amortization of premiums. The Company has the ability and intent
to hold these investment securities to maturity. Securities available for sale
may be sold to implement the Company's asset/liability management strategies and
in response to changes in interest rates, prepayment rates and similar factors.
Available for sale securities are recorded at market value and unrealized gains
or losses, net of income taxes, are included in accumulated other comprehensive
income, a separate component of shareholders' equity. Gain or loss on sale of
investment securities is based on the specific identification method.
LOANS AND THE ALLOWANCE FOR LOAN LOSSES
Loans are stated at the principal balance outstanding net of allowance for
loan losses and deferred loan fees. Loan fees net of certain related direct
costs to originate loans are deferred and amortized over the contractual life of
the loan using a method approximating the interest method. Loan fees and direct
costs related to the origination of loans held for sale are recognized as a
component of gain or loss on sale of mortgage loans when the related loans are
sold.
The allowance for loan losses is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated and is based on
management's quarterly evaluation of the economic climate and other factors
related to the collectability of loan balances. The factors considered by
management include growth and composition of the loan portfolio, overall
portfolio quality, review of specific problem loans, historical loss rates,
regulatory reviews, trends and concentrations in delinquencies and current
economic conditions that may affect the borrower's ability to pay. The actual
results could differ significantly from management's estimates. The allowance
for loan losses is increased by provisions charged to operations and reduced by
loan charge-offs net of recoveries. A loan charge-off is recorded when a loan
has been determined by management to be uncollectable.
A loan is impaired when, based upon current information and events, it is
probable that NBR will be unable to collect all amounts due according to the
contractual terms of the loan agreement. This standard is applicable to all
loans, uncollateralized as well as collateralized, except loans that are
measured at the lower of cost or fair value. Impairment is measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. Management measures all loans
individually for impairment as part of the Company's normal internal asset
review process.
Interest income is recognized on impaired loans in a manner similar to that
of all loans. It is the Company's policy to place loans that are delinquent 90
days or more as to principal or interest on nonaccrual status unless secured and
in the process of collection, and to reverse from current income accrued but
uncollected interest. Cash payments subsequently received on nonaccrual loans
are recognized as income only where the future collection of principal is
considered by management to be probable.
The Company originates loans to customers under an SBA program that
generally provides for SBA guarantees of 70% to 85% of each loan. The Company
may sell and retain the guaranteed portion of each loan to a third party and
retain the unguaranteed portion in its own portfolio. A gain is recognized on
these loans through collection on sale of a premium over the adjusted carrying
value, through retention of an ongoing rate differential less a normal service
fee (excess servicing fee) between the rate paid by the borrower to the Company
and the rate paid by the Company to the purchaser, or both.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
To calculate the gain or loss on the sale, the Company's investment in an
SBA loan is allocated among the retained portion of the loan, excess servicing
retained and the sold portion of the loan, based on the relative fair market
value of each portion. The gain on the sold portion of the loan is recognized
currently. The excess servicing fees are reflected as an asset which is
amortized over an estimated life using a method approximating the interest
method; in the event future prepayments are significant and future expected cash
flows are inadequate to cover the unamortized excess servicing asset, additional
amortization would be recognized.
OTHER REAL ESTATE OWNED
Property acquired by the Company through foreclosure is recorded at the
lower of estimated fair value less estimated selling costs (fair value) or the
carrying value of the related loan at the date of foreclosure. At the time the
property is acquired, if the fair value is less than the loan amounts
outstanding, any difference is charged against the allowance for loan losses.
After acquisition, valuations are periodically performed and, if the carrying
value of the property exceeds the fair value, a valuation allowance is
established by a charge to operations. Subsequent increases in the fair value
may reduce or eliminate the allowance.
Operating costs on foreclosed real estate are expensed as incurred. Costs
incurred for physical improvements to foreclosed real estate are capitalized if
the value is recoverable through future sale.
MORTGAGE BANKING AND HEDGING ACTIVITIES
Prior to divesting Valley Financial and Allied Diversified Credit, the
Company sold residential mortgage loans to a variety of secondary market
investors, including Freddie Mac and Fannie Mae. Gains or losses on the sale of
mortgage loans are recognized based on the difference between the selling price
and the carrying value of the related mortgage loans sold.
Mortgage loans held for sale are carried at the lower of cost or market
value as determined by outstanding commitments from investors, indicators of
value obtained by management from independent third parties, current investor
yield requirements calculated on an aggregate loan basis and the market value of
its hedging instruments. Valuation adjustments are charged against the gain or
loss on sale of mortgage loans.
OFF BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the statement of financial
position. The contract or notional amounts of those instruments reflect the
extent of involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments.
Loan commitments are typically contingent upon the borrower meeting certain
financial and other covenants, and such commitments typically have fixed
expiration dates and require payment of a fee. As many of these commitments are
expected to expire without being drawn upon, the total commitments do
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
not necessarily represent future cash requirements. The Company evaluates each
potential borrower and the necessary collateral on an individual basis.
Collateral varies, but may include real property, bank deposits, debt
securities, equity securities, or business assets.
Standby letters of credit are conditional commitments written by the Company
to guarantee the performance of a customer to a third party. These guarantees
relate primarily to inventory purchases by the Company's commercial customers,
and such guarantees are typically short-term. Credit risk is similar to that
involved in extending loan commitments to customers and the Company accordingly
uses evaluation and collateral requirements similar to those of loan
commitments. Virtually all such commitments are collateralized.
PREMISES AND EQUIPMENT
Premises and equipment consist of building, leasehold improvements,
furniture and equipment and are stated at cost, less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives for financial reporting purposes and an accelerated
method for income tax reporting. Leasehold improvements are amortized over the
terms of the lease or their estimated useful lives whichever is shorter.
INCOME TAXES
The Company accounts for income taxes using an asset and liability approach,
which requires the recognition of deferred tax assets and liabilities at tax
rates in effect when these balances are utilized. Future tax benefits
attributable to temporary differences are recognized currently to the extent
that realization of such benefits is more likely than not. These future tax
benefits are measured by applying currently enacted tax rates.
EARNINGS PER COMMON SHARE
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table reconciles the numerator and denominator used in
computing both basic earnings (loss) per share and diluted earnings (loss) per
share for the periods indicated:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS PER COMMON SHARE:
Income from continuing operations
available to common shareholders
before extraordinary item............ $4,875 $4,875 $2,792(3) $2,904 $1,928(3) $2,377
Earnings per share from continuing
operations before extraordinary
item................................. $ 1.45 $ 1.41 $ 0.88 $ 0.84 $ 0.70 $ 0.70
Income (loss) from discontinued
operations $ (437) $ (437) $2,187 $2,187 $1,064 $1,064
Earnings per share from income (loss)
of discontinued operations........... $(0.13) $(0.13) $ 0.69 $ 0.63 $ 0.38 $ 0.32
Income before extraordinary item....... $4,438 $4,438 $4,979(3) $5,091 $2,992(3) $3,441
Earnings per share before extraordinary
item................................. $ 1.32 $ 1.28 $ 1.57 $ 1.47 $ 1.08 $ 1.02
Net income............................. $4,162 $4,162 $4,979(3) $5,091 $2,992(3) $3,441
Net income per share................... $ 1.24 $ 1.20 $ 1.57 $ 1.47 $ 1.08 $ 1.02
Weighted average common shares
outstanding.......................... 3,364 3,456(1) 3,170 3,465(2) 2,776 3,378(2)
====== ====== ====== ====== ====== ======
</TABLE>
- ------------------------
Notes to Earnings per Common Share table:
(1) The weighted average common shares outstanding include the dilutive effects
of common stock options of 92.
(2) The weighted average common shares outstanding include the dilutive effects
of common stock options of 128 and 104 and convertible perpetual preferred
stock of 166 and 499 for the years ended 1998 and 1997. There is no effect
of perpetual preferred stock in 1999.
(3) Amounts are shown net of $112 and $449 in dividends on preferred stock for
1998 and 1997. There were no preferred dividends paid in 1999.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board (APB) No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Accordingly, no compensation cost has
been recognized on stock options granted. The Company presents the required pro
forma disclosures of the effect of stock-based compensation on net income and
earnings per share using the fair value method in accordance with SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION.
BUSINESS SEGMENTS
On January 1, 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas, and major customers.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
Comprehensive income includes net income and other comprehensive income. The
Company's only source of other comprehensive income is derived from unrealized
gains and losses on investment securities held-for-sale. Reclassification
adjustments result from gains or losses on investment securities held-for-sale
that were realized and included in net income of the current period that also
had been included in other comprehensive income as unrealized holding gains or
losses in the period in which they arose. They are excluded from comprehensive
income of the current period to avoid double counting.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The statement
establishes accounting and reporting standards for derivative instruments and
hedging activities. As amended by SFAS No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB
STATEMENTS NO. 133, the statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company is in the process of
determining the impact of SFAS No. 133 on the Company's consolidated financial
statements.
NOTE C--CASH AND DUE FROM BANKS
The Company's subsidiaries are required to maintain average reserve balances
with the Federal Reserve Bank. The required reserve balance included in cash and
due from banks was approximately $2,922,000 and $3,183,000 at December 31, 1999
and 1998.
NOTE D--INVESTMENT SECURITIES
An analysis of the investment securities portfolio follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1999:
Available for sale:
U.S. Government obligations........ $36,863 $ 1 $ 766 $36,098
Mortgage-backed and other
securities......................... 7,804 -- 164 7,640
------- ---- ------ -------
Total available for sale......... $44,667 $ 1 $ 930 $43,738
======= ==== ====== =======
Held to maturity:
U.S. Government obligations........ $12,989 $ -- $ 450 $12,539
Mortgage-backed and other
securities......................... 17,331 1 595 16,737
------- ---- ------ -------
Total debt securities............ 30,320 1 1,045 29,276
FRB and FHLB stock................. 2,647 -- -- 2,647
------- ---- ------ -------
Total held to maturity........... $32,967 $ 1 $1,045 $31,923
======= ==== ====== =======
</TABLE>
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1998:
Available for sale:
U.S. Government obligations........ $30,127 $411 $ -- $30,538
======= ==== ====== =======
Held to maturity:
U.S. Government obligations........ $10,986 $ 63 $ 6 $11,043
Mortgage-backed and other
securities......................... 14,781 94 9 14,866
------- ---- ------ -------
Total debt securities............ 25,767 157 15 25,909
FRB and FHLB stock................. 4,105 -- -- 4,105
------- ---- ------ -------
Total held to maturity........... $29,872 $157 $ 15 $30,014
======= ==== ====== =======
</TABLE>
Debt securities by contractual maturity at December 31, 1999, were due as
follows:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Held to maturity:
One year or less....................................... $ 36 $ 36
After one year through five years...................... 6,000 5,871
After five years through ten years..................... 7,191 6,872
After ten years........................................ 17,093 16,497
------- -------
$30,320 $29,276
======= =======
Available for sale:
One year or less....................................... $ 2,000 $ 2,000
After one year through five years...................... 38,787 37,984
After five years through ten years..................... 3,880 3,754
After ten years........................................ -- --
------- -------
$44,667 $43,738
======= =======
</TABLE>
Proceeds from sales of available for sale investments in debt securities
during 1999, 1998 and 1997 were $1,987,000, $1,995,000, and $7,031,000. These
sales resulted in the realization of gross gains of $14,000 for 1999, gross
gains of $40,000 for 1998, gross gains of $30,000 and gross losses of $12,000
for 1997. Gains on redemption by issuers of debt securities amounted to $5,000,
$185,000 and $5,000 in 1999, 1998 and 1997.
During 1996 the Company transferred $17,193,000 in investment securities
carried as available for sale into the held to maturity category. At the date of
transfer the unrealized holding loss of $300,000 continued to be reported as a
component of accumulated other comprehensive income, a separate component of
equity. Amortization or reduction through redemption of the securities by the
issuer of the unrealized loss and amortization of the equity component offset
each other with no effect on the results of operation. The balance of the
unrealized loss included in accumulated other comprehensive income was reduced
to zero
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--INVESTMENT SECURITIES (CONTINUED)
as of December 31, 1998 as all transferred securities were redeemed. The balance
of such unrealized loss was $242,000 as of December 31, 1997.
Securities carried at approximately $29,835,000 and $19,545,000 at December
31, 1999 and 1998 were pledged to secure public deposits, bankruptcy deposits,
and treasury tax and loan borrowings.
NOTE E--MORTGAGE LOAN SERVICING
The Company services mortgage loans and participating interests in mortgage
loans owned by investors. The unpaid principal balances of mortgage loans
serviced for others are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loan portfolios serviced for:
Freddie Mac............................................ $ 2,530 $ 3,919
Fannie Mae............................................. 2,348 3,633
Other investors........................................ 27,982 124,173
------- --------
$32,860 $131,725
======= ========
</TABLE>
NOTE F--LOANS AND THE ALLOWANCE FOR LOAN LOSSES
The Company primarily makes permanent and construction residential real
estate loans in California, and loans to individuals and small businesses
primarily in Sonoma and Mendocino Counties, California. There are no major
industry segments in the loan portfolio. Outstanding loans by type were:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Residential real estate mortgage........................ $130,504 $ 97,194
Commercial real estate mortgage......................... 79,476 59,257
Commercial.............................................. 61,165 63,260
Real estate construction................................ 40,059 46,905
Installment and other................................... 4,624 5,095
Less deferred fees...................................... (1,383) (2,395)
-------- --------
Total loans........................................... 314,445 269,316
Less allowance for loan losses.......................... (7,931) (8,041)
-------- --------
Net loans............................................. $306,514 $261,275
======== ========
</TABLE>
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--LOANS AND THE ALLOWANCE FOR LOAN LOSSES (CONTINUED)
A summary of the transactions in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year........................ $ 8,041 $ 7,645 $ 7,040
Provision for loan losses......................... 750 2,040 2,100
Loans charged off................................. (1,515) (2,000) (1,920)
Recoveries........................................ 655 356 425
------- ------- -------
Balance, end of year.............................. $ 7,931 $ 8,041 $ 7,645
======= ======= =======
</TABLE>
At December 31, 1999 and 1998 the Company's total recorded investment in
impaired loans was $4,430,000 and $10,293,000 of which $4,119,000 and $8,573,000
relates to the recorded investment for which there is a related allowance for
loan losses of $1,121,000 and $1,543,000 determined in accordance with these
statements and $311,000 and $1,720,000 relates to the amount of that recorded
investment for which there is no related allowance for loan losses determined in
accordance with these statements. At December 31, 1999, approximately 80% of the
impaired loan balance was measured based on the fair value of the collateral,
with the remainder measured by estimated cash flow.
The average recorded investment in impaired loans during the years ended
December 31, 1999, 1998 and 1997 was $4,420,000, $10,377,000 and $10,949,000.
The related amount of interest income recognized during the periods that such
loans were impaired was $292,000, $578,000 and $558,000.
As of December 31, 1999 and 1998 there were $3,063,000 and $5,556,000 of
loans on nonaccrual. Interest due but excluded from interest income on these
nonaccrual loans was $362,000, $341,000, and $469,000 for the years ended
December 31, 1999, 1998 and 1997. Interest income received on nonaccrual loans
was $205,000, $51,000, and $84,000 for the years ended December 31, 1999, 1998
and 1997.
At December 31, 1999 and 1998, the Company did not have any loans past due
90 days or more in interest or principal and still accruing interest.
The Company originates SBA loans for sale to investors. A summary of the
activity in SBA loans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
SBA guaranteed portion of loans originated....... $ -- $ -- $ 2,882
SBA loans sold................................... -- -- 2,579
Premium received at sale......................... -- -- 243
SBA guaranteed portion of loans serviced for
others......................................... 14,053 25,313 32,950
SBA Loans, net of sold portion................... 6,900 10,330 12,960
</TABLE>
From time to time the Company extends credit to executive officers,
directors and related parties. No preference is given to these individuals as
these transactions are made in the ordinary course of business at the Company's
normal credit terms, including interest rates and collateralization. There were
no such balances outstanding at December 31, 1999 and 1998.
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G--PREMISES, EQUIPMENT AND LEASES
A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land...................................................... $ 293 $ 187
Building and leasehold improvements....................... 3,106 3,219
Furniture and equipment................................... 9,392 12,478
------- -------
Total premises and equipment.............................. 12,791 15,884
Less accumulated depreciation and amortization............ 9,746 11,802
------- -------
Premises and equipment, net............................... $ 3,045 $ 4,082
======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998, and 1997
was $1,347,000, $1,731,000, and $1,430,000.
The Company leases certain premises and equipment used in the normal course
of business. There are no contingent rental payments and the Company has three
subleased properties. Total rental expense under all leases, including premises,
totaled $1,449,000, $2,210,000, and $2,095,000 in 1999, 1998 and 1997. Minimum
future lease commitments are as follows: 2000--$1,591,000; 2001--$1,484,000;
2002--$1,499,000, 2003--$962,000, 2004--$686,000 and thereafter--$503,000.
Minimum future sublease receivables are as follows: 2000--$195,000;
2001--$196,000; 2002--$187,000; 2003--$90,000; and 2004--$77,000. All subleases
expire in 2004.
NBR leases 22,000 square feet of an office building for its main office.
Prior to June 1997, a partnership, of which a director of the Company is a
minority partner, owned the office building. Total lease payments made to the
partnership for the year ended December 31, 1997 were $440,000. There were no
payments made to the partnership in 1998 and 1999.
NOTE H--DEPOSITS
Interest expense on time certificates of deposit of $100,000 or more was
$2,641,000, $3,246,000, and $2,520,000 during 1999, 1998 and 1997, respectively.
At December 31, 1999 the scheduled maturities for all time deposits are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------ (IN THOUSANDS)
<S> <C>
2000........................................................ $156,088
2001........................................................ 5,183
2002........................................................ 4,152
2003........................................................ 1,586
2004........................................................ 390
--------
$167,399
========
</TABLE>
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I--INCOME TAXES
The provision (benefit) for income taxes attributable to continuing
operations consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.......................................... $2,433 $ 2,282 $ 123
State............................................ 728 827 74
------ ------- ------
3,161 3,109 197
------ ------- ------
Deferred:
Federal.......................................... 47 (975) 1,108
State............................................ (115) (272) 274
------ ------- ------
(68) (1,247) 1,382
------ ------- ------
$3,093 $ 1,862 $1,579
====== ======= ======
</TABLE>
A reconciliation of the statutory income tax rate to the effective income
tax rate attributable to continuing operations of the Company is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Income tax at federal statutory rate...................... 35.0% 35.0% 35.0%
State franchise tax, net of federal benefit............... 7.3 7.3 7.0
Other..................................................... (3.5) (3.2) (2.1)
---- ---- ----
38.8% 39.1% 39.9%
==== ==== ====
</TABLE>
Deferred income taxes reflect the tax effect of temporary differences
existing between the financial statement basis and tax basis of the Company's
assets and liabilities. Deferred tax benefits attributable to temporary
differences are recognized to the extent that realization of such benefits is
more likely than not. The Company believes it is more likely than not that the
net deferred tax asset at December 31, 1999 will be utilized to reduce future
taxable income. Accordingly, there is no valuation allowance associated with
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I--INCOME TAXES (CONTINUED)
deferred tax assets at December 31, 1999. The tax effect of the principal
temporary items creating the Company's net deferred tax asset included in other
assets and interest receivable are:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses................................. $3,202 $3,239
Restructuring costs....................................... 87 319
Accrued expenses not yet deductible....................... 589 400
Unrealized loss on securities available for sale.......... 390 --
Other real estate owned................................... 144 114
Depreciation.............................................. 327 38
Securities and loans marked to market for tax purposes.... -- 183
State taxes............................................... -- 69
------ ------
Total deferred tax assets............................... 4,739 4,362
------ ------
Deferred tax liabilities:
Deferred loan fees........................................ -- 237
Unrealized gain on securities available for sale.......... -- 173
Securities and loans marked to market for tax purposes.... 421 --
State taxes............................................... 43 --
FHLB stock dividends...................................... 206 292
Premium on loan sales..................................... -- 13
Mortgage servicing rights................................. -- 75
Other, net................................................ 31 165
------ ------
Total deferred tax liabilities.......................... 701 955
------ ------
Net deferred tax asset.................................... $4,038 $3,407
====== ======
</TABLE>
NOTE J--OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Treasury, tax and loan note................................. $3,870 $1,371
Advances from UBOC.......................................... 825 --
------ ------
$4,695 $1,371
====== ======
</TABLE>
ADVANCES FROM THE FHLB
The Company has a line of credit for short-term purposes with the Federal
Home Loan Bank (FHLB). During the year ended December 31, 1999 the average
balance of FHLB advances was $4,293,000, the highest month-end balance during
the year was $15,000,000 at an average interest rate of 5.31%. During 1998, the
average balance of FHLB advances was $1,318,000 at an average interest rate of
6.03%. The highest month-end balance during the year was $1,966,000. At December
31, 1999 and 1998, the line of credit had been fully paid off. All borrowings
from the FHLB must be collateralized, and the
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--OTHER BORROWINGS (CONTINUED)
Company has pledged approximately $111,832,000 of residential mortgage loans as
of December 31, 1999, to the FHLB to secure any funds it may borrow.
TREASURY, TAX AND LOAN NOTE
The Company enters into various short-term borrowing agreements which
include Treasury, Tax and Loan borrowings. These borrowings have maturities of
one day and are collateralized by investments or loans.
ADVANCES FROM UBOC
During 1999, the Company entered into an agreement with Union Bank of
California (UBOC) to obtain an unsecured line of credit for short-term borrowing
purposes. At December 31, 1999 the line of credit had an outstanding balance of
$825,000, an interest rate of 9.50% and a maturity date of December 31, 2000.
The average balance of UBOC advances was $35,000 for 1999 at an average interest
rate of 9.37%. The highest month-end balance during the year was $825,000.
NOTE K--OTHER NONINTEREST EXPENSES
The major components of other expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Professional fees................................... $1,231 $ 769 $1,130
Regulatory expense and insurance.................... 459 588 541
Postage and office supplies......................... 489 506 702
Shareholder expenses and Director fees.............. 320 339 381
Advertising......................................... 217 188 241
Telephone........................................... 339 360 552
Electronic data processing.......................... 1,234 1,284 1,268
Net costs of other real estate owned................ 195 956 568
Other............................................... 638 506 1,067
------ ------ ------
$5,122 $5,496 $6,450
====== ====== ======
</TABLE>
NOTE L--STOCK OPTIONS AND BENEFIT PLANS
The Company's 1991 stock option plan, which was amended in 1992, provides
for the granting of both incentive stock options and nonqualified stock options
to Directors and key employees. Generally, options outstanding under the stock
option plan are granted at prices equal to the market value of the stock at the
date of grant, vest ratably over a four year service period and expire ten years
subsequent to the award.
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L--STOCK OPTIONS AND BENEFIT PLANS (CONTINUED)
Outstanding common stock options at December 31, 1999, are exercisable at
various dates through 2006. The following table summarizes option activity:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ----------------
<S> <C> <C>
Balance at January 1, 1997......................... 431,500 $ 9.33
Options granted.................................. 30,000 13.13
Options exercised................................ (36,600) 8.14
Options cancelled................................ (10,900) 9.39
--------
Balance at December 31, 1997....................... 414,000 9.71
Options granted.................................. 74,000 20.50
Options exercised................................ (124,000) 9.14
Options cancelled................................ (10,000) 9.94
--------
Balance at December 31, 1998....................... 354,000 12.16
Options granted.................................. 8,000 17.13
Options exercised................................ (82,000) 10.71
Options cancelled................................ (7,000) 20.50
--------
Balance at December 31, 1999....................... 273,000 $12.50
========
</TABLE>
At December 31, 1999 23,600 shares were available for future grants under
the plan.
Additional information regarding options outstanding as of December 31, 1999
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------
WEIGHTED AVG. OPTIONS EXERCISABLE
REMAINING -------------------------------
RANGE OF NUMBER CONTRACTUAL WEIGHTED AVG. NUMBER WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING LIFE (YRS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 6.00 - $ 7.99.............. 11,000 1 $7.54 11,000 $ 7.54
8.00 - 9.99.............. 128,000 4 8.90 117,000 8.81
10.00 - 11.99.............. 21,000 5 10.75 17,000 10.75
12.00 - 13.99.............. 44,000 5 13.02 34,000 12.99
14.00 - 20.99.............. 69,000 9 20.11 15,000 20.50
------- -------
273,000 194,000
======= =======
</TABLE>
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L--STOCK OPTIONS AND BENEFIT PLANS (CONTINUED)
Had compensation cost for the grants been determined based upon the fair
value method, the Company's net income and earnings per share would have been
adjusted to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net Income:
As reported............................ $4,162,000 $5,091,000 $3,441,000
Pro forma.............................. 3,940,000 4,836,000 3,313,000
Basic earnings per share:
As reported............................ 1.24 1.57 1.08
Pro forma.............................. 1.17 1.49 1.03
Diluted earnings per share:
As reported............................ 1.20 1.47 1.02
Pro forma.............................. 1.14 1.41 .98
</TABLE>
The fair value of the options granted during 1999, 1998, and 1997, is
estimated as $60,000, $727,000, and $225,000, on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: dividend at
the current rate, volatility of 32.36%, 30.32%, and 29.5%, risk-free interest
rate of 6.41%, 5.53%, and 6.65%, assumed forfeiture rate of zero, and an
expected life of 10 years. The weighted average per share fair value of the
1999, 1998, and 1997 awards was $7.45, $9.82, and $7.48, respectively.
In 1991 the Company established a 401(K) savings plan for employees who have
at least one year of continuous service. The Company's contributions are based
on a sliding scale where it matches 100% of the first $300 contributed by the
employee, 75% of the next $400, 50% of the next $800 and 25% of the next $4,000
for a maximum contribution per employee of $2,000. Company contributions totaled
$138,000, $212,000, and $179,000 in 1999, 1998 and 1997.
In December 1993 the Company established a supplemental benefit plan (Plan)
to provide death benefits and supplemental income payments during retirement for
selected officers. The Plan is a nonqualified defined benefit plan and is
unsecured. Benefits under the Plan are fixed for each participant and are
payable over a specific period following the participant's retirement or at such
earlier date as termination or death occurs. Participants vest in the plan based
on their years of service subsequent to being covered by the Plan. The Company
has purchased insurance policies to provide for its obligations under the Plan
in the event a participant dies prior to retirement. The cash surrender value of
such policies was $3,187,000 at December 31, 1999. Under this plan, the Company
recognized expense of $54,000, $110,000, and $142,000 in 1999, 1998 and 1997.
The aggregate projected benefit obligation of the Plan was approximately
$206,000 and $163,000 at December 31, 1999 and 1998. A discount rate of 8.5% was
used to determine the aggregate projected benefit obligation for both years.
NOTE M--SUBORDINATED DEBT AND PREFERRED STOCK
On February 22, 1999, the Company redeemed the entire $12,000,000 of its
8.5% subordinated notes. As a result of the redemption the Company recorded an
extraordinary charge of $288,000 net of tax related to previously deferred debt
issuance costs. Such charge was recorded by the Company in the first quarter of
1999.
On April 30, 1998 the Company called all 575,000 shares of its outstanding
7.80% Noncumulative Convertible Preferred Stock at a redemption price of $10.39
per share. As a result of this action, the
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M--SUBORDINATED DEBT AND PREFERRED STOCK (CONTINUED)
Company issued 497,865 shares of the Company's common stock in exchange for
573,290 shares of preferred stock. The remaining shares were redeemed with cash.
NOTE N--REGULATORY MATTERS
One of the principal sources of cash for Redwood are dividends from NBR.
Total dividends which may be declared by subsidiary financial institutions
depend on the regulations which govern them. In addition, regulatory agencies
can place dividend restrictions on the subsidiaries based on their evaluation of
the financial condition of the subsidiaries. No restrictions are currently
imposed by regulatory agencies on the subsidiaries other than the limitations
found in the regulations which govern the respective subsidiaries. At December
31, 1999, NBR could pay additional dividends to Redwood of approximately
$2,151,000 without prior regulatory approval.
NBR is subject to certain restrictions under the Federal Reserve Act,
including restrictions on the extension of credit to affiliates. In particular,
it is prohibited from lending to an affiliated company unless the loans are
secured by specific types of collateral. Such secured loans and other advances
from the subsidiaries are limited to 10 percent of the subsidiary's equity. No
such loans or advances were outstanding during 1999 or 1998.
Redwood and NBR are subject to various regulatory capital requirements
administered by the federal banking agencies. In addition to these capital
guidelines, the Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) required each federal banking agency to implement a regulatory
framework for prompt corrective actions for insured depository institutions that
are not adequately capitalized. The Board of Governors of the Federal Reserve
System, FDIC, OCC and OTS have adopted such a system which became effective on
December 19, 1992. 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 effect on the Company's
financial statements. The regulations require the Company to meet specific
capital adequacy guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. NBR's capital classification is 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 to maintain a minimum leverage ratio of Tier 1 capital (as
defined in the regulations) to adjusted assets (as defined), and minimum ratios
of Tier 1 and total capital (as defined) to risk-weighted assets (as defined).
As of December 31, 1999 and 1998, the most recent notification from the Office
of the Comptroller of the Currency categorized NBR as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, NBR must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed NBR's
category.
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE N--REGULATORY MATTERS (CONTINUED)
<TABLE>
<CAPTION>
TO BE
CATEGORIZED
AS WELL
FOR CAPITAL CAPITALIZED
ADEQUACY UNDER PROMPT
ACTUAL PURPOSES CORRECTIVE ACTION
------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
At December 31, 1999:
COMPANY
Leverage Capital (to Average Assets)........ $36,885 8.66% $17,031 4.00% n/a n/a
Tier 1 Capital (to Risk-weighted Assets).... 36,885 11.74 12,563 4.00 n/a n/a
Total Capital (to Risk-weighted Assets)..... 40,860 13.01 25,126 8.00 n/a n/a
NBR
Leverage Capital (to Average Assets)........ 37,401 8.86 16,885 4.00% 21,102 5.00%
Tier 1 Capital (to Risk-weighted Assets).... 37,401 11.94 12,535 4.00 18,802 6.00
Total Capital (to Risk-weighted Assets)..... 41,368 13.20 25,069 8.00 31,337 10.00
At December 31, 1998:
COMPANY
Leverage Capital (to Average Assets)........ $37,072 8.84% $16,769 4.00% n/a n/a
Tier 1 Capital (to Risk-weighted Assets).... 37,072 11.84 12,522 4.00 n/a n/a
Total Capital (to Risk-weighted Assets)..... 53,036 16.94 25,044 8.00 n/a n/a
NBR
Leverage Capital (to Average Assets)........ 43,110 10.31 16,726 4.00% 20,907 5.00%
Tier 1 Capital (to Risk-weighted Assets).... 43,110 13.75 12,539 4.00 18,808 6.00
Total Capital (to Risk-weighted Assets)..... 50,079 15.98 25,077 8.00 31,347 10.00
</TABLE>
Management believes that as of December 31, 1999, the Company and NBR meet
all capital requirements to which they are subject. Under the most stringent
capital requirement, NBR has approximately $16,299,000 in excess capital before
it becomes "undercapitalized" under the regulatory framework for prompt
corrective action.
The prompt corrective action regulations impose restrictions upon all
financial institutions to refrain from certain actions which would cause an
institution to be classified as "undercapitalized", such as the declaration of
dividends or other capital distributions or payment of management fees, if
following the distribution or payment the institution would be classified as
"undercapitalized". In addition, financial institutions which are classified as
"undercapitalized" are subject to certain mandatory and discretionary
supervisory actions.
NOTE O--BUSINESS SEGMENTS
From January 1, 1999 to September 10, 1999, the Company operated in four
principal industry segments: core community banking, merchant card services, sub
prime lending, and residential mortgage banking and brokerage. The Company's
core community banking industry segment includes commercial, commercial real
estate, construction, and permanent residential lending along with all
depository activities. The Company's merchant card services industry group
provides credit card settlement services for 67,000 merchants throughout the
United States. The Company's sub prime lending unit, known as Allied Diversified
Credit and the Company's residential mortgage banking and brokerage arm, known
as Valley
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O--BUSINESS SEGMENTS (CONTINUED)
Financial were divested on September 10, 1999. The divestiture took the form of
an asset sale and employee transfer. The Company has disclosed the operations of
these units as well as the after tax loss on disposition as discontinued
operations. Accordingly, historical financial information regarding changes due
to overhead and interest allocation for all segments has been restated.
The condensed income statements and average assets of the individual
segments are set forth in the table below. The information in this table is
derived from the internal management reporting system used by management to
measure the performance of the segments and the Company. The management
reporting system assigns balance sheet and income statement items to each
segment based on internal management accounting policies. Net interest income is
determined by the Company's internal funds transfer pricing system, which
assigns a cost of funds or credit for funds to assets or liabilities based on
their type, maturity or repricing characteristics. Noninterest income and
expense directly attributable to a segment are assigned to that business. Total
other operating expense includes indirect costs, such as overhead, operations
and technology expense, are allocated to the segments based on an evaluation of
costs for product or data processing. All amounts other than allocations of
interest and indirect costs are derived from third parties. The provision for
credit losses is allocated based on the required reserves and the net
charge-offs for each respective segment. The Company allocates depreciation
expense without allocating the related depreciable asset to that segment.
Information related to the interest allocation and indirect costs presented
for 1998 and 1997 has been restated to allow for the Company's revision to the
internal funds transfer pricing methodology and overhead allocation.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
-------------------------------------
COMMUNITY TOTAL
BANKING BANKCARD COMPANY
----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total interest income....................................... $ 30,633 $ -- $ 30,633
Total interest expense...................................... 10,943 3 10,946
Interest income (expense) allocation........................ (546) 546 0
-------- ------- --------
Net interest income......................................... 19,144 543 19,687
Provision for loan losses................................... 750 0 750
Total other operating income................................ 2,043 3,154 5,197
Total other operating expense............................... 14,753 1,413 16,166
-------- ------- --------
Income from continuing operations before income taxes and
extraordinary item........................................ 5,684 2,284 7,968
Provision for income taxes.................................. 2,216 877 3,093
-------- ------- --------
Income from continuing operations before extraordinary
item...................................................... $ 3,468 $ 1,407 $ 4,875
======== ======= ========
Total Average Assets........................................ $385,025 $21,940 $406,965
======== ======= ========
</TABLE>
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O--BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-------------------------------------
COMMUNITY TOTAL
BANKING BANKCARD COMPANY
----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total interest income....................................... $ 30,557 $ -- $ 30,557
Total interest expense...................................... 12,467 32 12,499
Interest income (expense) allocation........................ (543) 543 0
-------- ------- --------
Net interest income......................................... 17,547 511 18,058
Provision for loan losses................................... 2,040 0 2,040
Total other operating income................................ 3,016 2,609 5,625
Total other operating expense............................... 15,749 1,128 16,877
-------- ------- --------
Income from continuing operations before income taxes and
extraordinary item........................................ 2,774 1,992 4,766
Provision for income taxes.................................. 1,125 737 1,862
-------- ------- --------
Income from continuing operations before extraordinary
item...................................................... $ 1,649 $ 1,255 $ 2,904
======== ======= ========
Total Average Assets........................................ $382,790 $12,407 $395,197
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------
COMMUNITY TOTAL
BANKING BANKCARD COMPANY
----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total interest income....................................... $ 35,471 $ -- $ 35,471
Total interest expense...................................... 15,789 26 15,815
Interest income (expense) allocation........................ (536) 536 0
-------- ------- --------
Net interest income......................................... 19,146 510 19,656
Provision for loan losses................................... 2,100 0 2,100
Total other operating income................................ 2,719 1,585 4,304
Total other operating expense............................... 16,614 1,290 17,904
-------- ------- --------
Income from continuing operations before income taxes and
extraordinary item........................................ 3,151 805 3,956
Provision for income taxes.................................. 1,269 310 1,579
-------- ------- --------
Income from continuing operations before extraordinary
item...................................................... $ 1,882 $ 495 $ 2,377
======== ======= ========
Total Average Assets........................................ $428,983 $ 9,084 $438,067
======== ======= ========
</TABLE>
NOTE P--FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires that the Company disclose the fair value of financial instruments for
which it is practicable to estimate that value. Although management uses its
best judgment in assessing fair value, there are inherent weaknesses in any
estimating technique that may be reflected in the fair values disclosed. The
fair value estimates are made at a discrete point in time based on relevant
market data, information about the financial instruments, and other factors.
Estimates of fair value of instruments without quoted market prices are
subjective in nature and involve various assumptions and estimates that are
matters of judgment. Changes in the assumptions used could significantly affect
these estimates. Fair value has not been adjusted to reflect changes in market
conditions for the period subsequent to the valuation dates of December 31, 1999
and 1998 and therefore
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE P--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
estimates presented herein are not necessarily indicative of amounts which could
be realized in a current transaction.
The following estimates and assumptions were used on December 31, 1999 and
1998 to estimate the fair value of each class of financial instruments for which
it is practicable to estimate that value.
(A) CASH AND CASH EQUIVALENTS
For cash and cash equivalents, the carrying amount is a reasonable estimate
of fair value.
(B) INVESTMENTS
Fair value equals quoted market price, if available. If a quoted market
price is not available, fair value is estimated using quoted market prices for
similar securities. For investments in unregistered mortgage-backed securities
with recourse, fair value was estimated based on the expected future cash flows
to be received adjusted for prepayments, foreclosures, losses and other
significant factors impacting fair value. U.S. Government agency stock has no
trading market but is required as part of membership, and therefore it is
carried at cost.
(C) LOANS HELD FOR SALE
For uncommitted residential mortgages held for sale, fair value is estimated
using indications of value obtained by management from independent third parties
or quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. Committed residential mortgage loans held
for sale are valued based on actual commitment prices. Fair value of certain
loans held for sale include the value of premiums associated with the sale of
the related servicing rights in the instance that a commitment exists for the
sale of such servicing at a predetermined rate.
(D) LOANS RECEIVABLE
To estimate fair value of loans held for investment, including commercial
loans, mortgages and construction loans, each loan category is segmented by
fixed and adjustable rate interest terms, by estimated credit risk, by maturity,
and by performing and nonperforming categories.
The fair value of performing loans is estimated by discounting contractual
cash flows using the current interest rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
Assumptions regarding credit risk, cash flow, and discount rates are
judgmentally determined using available market information.
The fair value of nonperforming loans and loans delinquent more than 30 days
is estimated by discounting estimated future cash flows using current interest
rates with an additional risk adjustment reflecting the individual
characteristics of the loans.
(E) INTEREST RECEIVABLE
For interest receivable, the carrying amount is a reasonable estimate of
fair value.
(F) MORTGAGE SERVICING RIGHTS
The fair value of mortgage servicing rights is estimated on a loan by loan
basis using market prices under comparable servicing sale contracts, when
available or, using a cash flow model with current assumptions with respect to
prepayments, servicing costs and other significant factors.
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE P--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
(G) DEPOSIT LIABILITIES
Under SFAS No. 107, the fair value of deposits with no stated maturity, such
as noninterest bearing demand deposits, savings and money market accounts, is
equal to the amount payable on demand on December 31, 1999 and 1998. The fair
value of time deposits, is based on the discounted value of contractual cash
flows. The discount rate is based on rates currently offered for deposits of
similar size and remaining maturities.
(H) OTHER BORROWINGS AND SUBORDINATED NOTES
The discounted value of contractual cash flows at market interest rates for
debt with similar terms and remaining maturities are used to estimate the fair
value of existing debt.
(I) COMMITMENTS TO FUND MORTGAGE LOANS
The fair value of commitments to fund fixed-rate mortgage loans represents
the estimated gain (loss) to the Company of fully funding its commitments at
current interest rates and selling the underlying loans in the secondary market.
(J) COMMITMENTS TO FUND OTHER LOANS
The fair value of commitments to fund other loans represents fees currently
charged to enter into similar agreements with similar remaining maturities.
(K) FORWARD CONTRACTS TO SELL MBS
The fair value of forward contracts to sell MBS represents the difference
between current rates for similar quantities and delivery dates of
mortgage-backed securities as compared to the contractual rates.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents.......................... $20,555 $ 20,555 $ 42,187 $ 42,187
Investments........................................ 76,705 75,661 60,410 60,552
Loans held for sale................................ -- -- 32,620 32,633
Portfolio loans, net............................... 306,514 307,377 261,275 271,730
Interest receivable................................ 2,792 2,792 2,996 2996
Mortgage servicing rights.......................... 32 312 305 1,351
LIABILITIES:
Deposits........................................... 369,509 342,092 364,720 351,625
Other borrowings................................... 4,695 4,695 1,371 1,429
Subordinated notes................................. -- -- 12,000 12,000
OFF BALANCE SHEET FINANCIAL INSTRUMENTS:
Commitments to fund mortgage loans................. -- 112
Commitments to fund other loans.................... 393 284
Forward contracts to sell MBS...................... -- (38)
</TABLE>
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE Q--COMMITMENTS AND CONTINGENCIES
Certain lawsuits and claims arising in the ordinary course of business have
been filed or are pending against the Company or its subsidiaries. Based upon
information available to the Company, its review of such lawsuits and claims and
consultation with its counsel, the Company believes the liability relating to
these actions, if any, would not have a material adverse effect on its
consolidated financial statements.
A listing of financial instruments whose contract amounts represent credit
risk is as follows:
<TABLE>
<CAPTION>
CONTRACT OR NOTIONAL AMOUNT
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit.......................... $38,285,000 $63,620,000
Standby letters of credit............................. 539,000 557,000
</TABLE>
NOTE R-- CONDENSED FINANCIAL INFORMATION OF REDWOOD EMPIRE BANCORP
(PARENT ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash........................................................ $ 119 $ 2,335
Investment in subsidiaries.................................. 37,961 47,678
Capitalized debt issuance costs............................. -- 473
Other assets................................................ 707 132
------- -------
Total assets.............................................. $38,787 $50,618
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable............................................ $ 1,343 $ (22)
Subordinated notes.......................................... -- 12,000
------- -------
Total liabilities......................................... 1,343 11,978
------- -------
Shareholders' equity:
Preferred stock, no par value; authorized 2,000,000 shares;
issued and outstanding: no shares -- --
Common stock, no par value: authorized 10,000,000 shares;
issued and outstanding:
1999--3,228,771 shares; 1998--3,363,565 shares............ 22,033 25,801
Retained earnings........................................... 15,950 12,600
Accumulated other comprehensive (loss) income, net (539) 239
------- -------
Shareholders' equity...................................... 37,444 38,640
------- -------
Total liabilities and shareholders' equity................ $38,787 $50,618
======= =======
</TABLE>
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating income:
Management service fees................................... $ -- $ -- $ 186
Dividends from subsidiaries............................... 10,900 1,200 860
Interest income from subsidiaries......................... 32 274 274
------- ------ ------
Total operating income.................................. 10,932 1,474 1,320
------- ------ ------
Expenses:
Interest expense.......................................... 151 1,107 1,107
Operating expenses........................................ 741 486 732
------- ------ ------
Total expenses.......................................... 892 1,593 1,839
------- ------ ------
(Loss) income before undistributed income of subsidiaries... 10,040 (119) (519)
Equity in undistributed (distributed) income of
subsidiaries.............................................. (5,940) 4,713 3,378
------- ------ ------
Income before income taxes and extraordinary item........... 4,100 4,594 2,859
Extraordinary item.......................................... (276) -- --
Income tax benefit.......................................... (338) (497) (582)
------- ------ ------
Net income.................................................. $ 4,162 $5,091 $3,441
======= ====== ======
</TABLE>
64
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 4,162 $ 5,091 $ 3,441
-------- ------- -------
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization and depreciation........................... 6 17 26
Equity in undistributed (distributed) income of
subsidiaries.......................................... 5,940 (4,713) (3,378)
Change in other assets.................................. 2,891 (113) 745
Change in other liabilities............................. 1,365 (257) (216)
-------- ------- -------
Total adjustments..................................... 10,202 (5,066) (2,823)
-------- ------- -------
Net cash provided by operating activities............. 14,364 25 618
-------- ------- -------
Cash flows used in financing activities:
Subordinated note redemption.............................. (12,000) -- --
Stock issuance............................................ 414 180 298
Stock repurchase.......................................... (4,182) -- --
Cash dividends............................................ (812) (515) (449)
-------- ------- -------
Net cash provided by (used in) financing activities..... (16,580) (335) (151)
-------- ------- -------
Increase (decrease) in cash................................. (2,216) (310) 467
Cash at beginning of year................................... 2,335 2,645 2,178
-------- ------- -------
Cash at end of year......................................... $ 119 $ 2,335 $ 2,645
======== ======= =======
</TABLE>
65
<PAGE>
QUARTERLY RESULTS
UNAUDITED QUARTERLY STATEMENTS OF OPERATIONS DATA
(dollars in thousands)
<TABLE>
<CAPTION>
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income....................... $4,422 $4,430 $4,715 $4,491 $4,759 $4,837 $4,973 $5,118
Provision for credit losses............... 510 510 510 510 300 200 200 50
Other operating income from continuing
operations.............................. 1,347 1,237 1,395 1,646 1,325 1,378 1,193 1,301
Other operating expenses from continuing
operations.............................. 4,020 4,171 4,044 4,642 3,805 4,151 4,200 4,010
------ ------ ------ ------ ------ ------ ------ ------
Income from continuing operations before
income taxes and extraordinary item..... 1,239 986 1,556 985 1,979 1,864 1,766 2,359
Provision for income taxes................ 484 385 608 385 768 684 714 927
Income from continuing operations before
extraordinary item...................... 755 601 948 600 1,211 1,180 1,052 1,432
Income (loss) from discontinued
operations, net of tax.................. 352 610 387 838 83 38 (686) 128
Extraordinary item, net of tax............ -- -- -- -- 276 -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Net income................................ $1,107 $1,211 $1,335 $1,438 $1,018 $1,218 $ 366 $1,560
====== ====== ====== ====== ====== ====== ====== ======
Net income available for common stock
shareholders............................ $ 995 $1,211 $1,335 $1,438 $1,018 $1,218 $ 366 $1,560
====== ====== ====== ====== ====== ====== ====== ======
Per share:
Basic earnings per share:
Income from continuing operations
before extraordinary item........... $ .23 $ .19 $ .28 $ .18 $ .36 $ .35 $ .31 $ .43
Income (loss) from discontinued
operations.......................... .09 .19 .11 .25 .02 .01 (.20) .04
Income before extraordinary item...... .36 .39 .40 .43 .38 .36 .11 .47
Net income available for common stock
shareholders........................ .36 .39 .40 .43 .30 .36 .11 .47
Diluted earnings per share:
Income from continuing operations
before extraordinary item........... $ .22 $ .17 $ .27 $ .17 $ .35 $ .34 $ .30 $ .42
Income (loss) from discontinued
operations.......................... .10 .18 .11 .24 .02 .01 (.20) .04
Income before extraordinary item...... .32 .35 .38 .41 .37 .35 .11 .46
Net income available for common stock
shareholders........................ .32 .35 .38 .41 .29 .35 .11 .46
Common Stock Prices:
High.................................... $20.50 $21.88 $21.25 $17.50 $29.00 $27.25 $24.00 $23.94
Low..................................... 16.63 17.75 14.13 13.00 17.00 21.88 17.75 17.75
Close................................... 18.88 20.75 16.38 17.06 24.75 23.88 18.63 19.13
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
66
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item can be found in Redwood's Definitive
Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of
1934, and is by this reference incorporated herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item can be found in Redwood's Definitive
Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of
1934, and is by this reference incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item can be found in Redwood's Definitive
Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of
1934, and is by this reference incorporated herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) TRANSACTIONS WITH MANAGEMENT AND OTHERS.
During the year ended December 31, 1999, 1998, and 1997, the Company's
operating subsidiary, National Bank of the Redwoods, paid $130,354, $174,577,
and $496,557 pursuant to various construction contracts with Colombini
Construction in which Colombini Construction acted as a general contractor.
Richard Colombini, who is a director of the Company, is also the President and
majority owner of Colombini Construction. The amounts paid to Colombini
Construction included subcontractor costs. The construction contracts involved
leasehold improvements for one of the Bank's branches and two operations
centers. Substantially all of the contracts entered into with Colombini
Construction were granted based upon competitive bids.
NBR leases 22,000 square feet of an office building for its main office.
Prior to June 1997, a partnership of which Richard Colombini is a minority
partner, owned the building. Total lease payments made to the partnership for
the year ended December 31, 1997 was $440,000.
(b) CERTAIN BUSINESS RELATIONSHIPS.
Except as disclosed elsewhere in this Item, management is not aware of any
business relationships required to be disclosed hereunder.
(c) INDEBTEDNESS OF MANAGEMENT.
Some of the Company's directors and executive officers and their immediate
families, as well as the companies with which they are associated, are customers
of or have had banking transactions with the Company in the ordinary course of
the Company's business, and the Company expects to have banking transactions
with such persons in the future. In management's opinion, all such loans and
commitments to lend were made in the ordinary course of business, in compliance
with applicable laws, on substantially the same terms, including interest rates
and collateral, as those prevailing for comparable transactions with other
persons of similar credit worthiness and, in the opinion of management, did not
involve more than a normal risk of collectibility or present other unfavorable
features. The Company has a strong policy regarding review of the adequacy and
fairness to the Company of loans to its directors and officers. At December 31,
1999, there were no outstanding balances under extensions of credit to directors
and executive officers of the Company and companies with which directors are
associated.
67
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
1. The following consolidated financial statements of Redwood and its
subsidiaries, and independent auditors' report included for the years ended
December 31, 1999, 1998 and 1997 are included in Item 8.
Independent Auditors' Report
Consolidated Financial Statements of Redwood Empire Bancorp
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES.
All financial statement schedules have been omitted, as inapplicable.
3. EXHIBITS.
The following documents are included or incorporated by reference in this
Annual Report on Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3. Amended and restated By-Laws of the Registrant, filed as
Exhibit 3 to the Registrant's 1994 Annual Report on Form
10-K and by this reference incorporated herein.
3.1 Articles of Incorporation of the Registrant.
10. Executive Salary Continuation Agreement between Patrick W.
Kilkenny and Redwood Empire Bancorp.
10.1 Executive Severance Agreement between Patrick W. Kilkenny
and Redwood Empire Bancorp.
10.2 Executive Salary Continuation Agreement between James E.
Beckwith and Redwood Empire Bancorp.
10.3 Executive Severance Agreement between James E. Beckwith and
Redwood Empire Bancorp.
10.4 The Registrant's 401 (k) Profit Sharing Plan, filed as
Exhibit 28.1 to the Registrant's Registration Statement on
Form S-8 dated June 12, 1990 (Registration No. 33-35377),
and by this reference incorporated herein.
10.5 The Registrant's Amended and Restated 1991 Stock Option
Plan, filed as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 filed on July 8, 1992 (Registration
No. 33-49372), and by this reference incorporated herein.
10.6 The Registrant's Executive Salary Continuation Plan, filed
as Exhibit 10.9 to the Registrant's Registration Statement
on Form S-2 dated December 13, 1993 (Registration
No. 33-71324), and by this reference incorporated herein.
10.7 Dividend Reinvestment and Stock Purchase Plan on Form S-3
dated April 28, 1993 (Registration No. 3361750), and by this
reference incorporated herein.
10.8 Lease, Dated June 1, 1999, between National Bank of the
Redwoods and Advanced Development & Investments.
10.9 Asset Sale Agreement dated September 10, 1999 between
National Bank of the Redwoods and Valley Financial
Acquisition, Inc.
11. Statement re Computation of Per Share Earnings.
12.1 Statement re Computation of Ratio of Earnings to Fixed
Charges.
12.2 Statement re Computation of Ratio of Earnings to Fixed
Charges and Preferred Dividends.
21. Subsidiaries of the Registrant.
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
23. Consent of Deloitte & Touche LLP.
27. Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K.
On November 3, 1999 the Company filed a Form 8-K reporting third quarter
1999 financial results.
On December 2, 1999 the Company filed a Form 8-K in which it declared an
increase of quarterly cash dividend on its Common stock and announced
completion of an initial share repurchase and authorization of a new share
repurchase.
(c) EXHIBITS.
See Item 14(a)3 and the Index to Exhibits.
(d) EXCLUDED FINANCIAL STATEMENTS
Not applicable.
69
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C> <C>
REDWOOD EMPIRE BANCORP
By: /S/ PATRICK W. KILKENNY Dated: March 21, 2000
-------------------------------------------
Patrick W. Kilkenny
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)
And By: /S/ JAMES E. BECKWITH Dated: March 21, 2000
-------------------------------------------
James E. Beckwith
EXECUTIVE VICE PRESIDENT
CHIEF OPERATING OFFICER
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
70
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<S> <C>
/S/ RICHARD I. COLOMBINI
- ------------------------------------------- Dated: March 21, 2000
Richard I. Colombini, DIRECTOR
/S/ ROBERT D. COOK
- ------------------------------------------- Dated: March 21, 2000
Robert D. Cook, DIRECTOR
/S/ MARGIE HANDLEY
- ------------------------------------------- Dated: March 21, 2000
Margie Handley, DIRECTOR
/S/ DANA R. JOHNSON
- ------------------------------------------- Dated: March 21, 2000
Dana R. Johnson, DIRECTOR
/S/ PATRICK W. KILKENNY
- ------------------------------------------- Dated: March 21, 2000
Patrick W. Kilkenny, DIRECTOR
/S/ PATRICIA PADI SELWYN
- ------------------------------------------- Dated: March 21, 2000
Patricia "Padi" Selwyn, DIRECTOR
/S/ GREGORY J. SMITH
- ------------------------------------------- Dated: March 21, 2000
Gregory J. Smith, DIRECTOR
/S/ WILLIAM B. STEVENSON
- ------------------------------------------- Dated: March 21, 2000
William B. Stevenson, DIRECTOR
/S/ TOM D. WHITAKER
- ------------------------------------------- Dated: March 21, 2000
Tom D. Whitaker, DIRECTOR AND CHAIRMAN OF THE BOARD
</TABLE>
71
<PAGE>
Exhibit 3.1
---------------------------------------
ENDORSED
FILED
In the office of the Secretary of State
of the State of California
AUG 12 1988
[ILLEGIBLE]: Secretary of State
---------------------------------------
ARTICLES OF INCORPORATION
OF
REDWOOD EMPIRE BANCORP
ONE: NAME
The name of the Corporation is:
Redwood Empire Bancorp
TWO: PURPOSE
The purpose of this Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporations Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
THREE: AUTHORIZED STOCK
The Corporation is authorized to issue only one class of shares of stock,
designated "Common Stock," and the total number of shares which the corporation
is authorized to issue is 10,000,000.
FOUR: DIRECTOR LIABILITY
The liability of the directors of the Corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
FIVE: INDEMNIFICATION
The Corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) for breach of duty
to the Corporation and its stockholders through bylaw provisions or through
agreements with the agents, or both, in excess of indemnification otherwise
permitted by Section 317 of the California Corporations Code, subject to the
limits on such excess indemnification set forth in Section 204 of the California
Corporations Code.
SIX: AGENT FOR SERVICE OF PROCESS
The name and address in this State of this corporation's initial agent for
service of process is:
Gary Steven Findley, Attorney at Law
2700 East Imperial Highway, Suite J
Brea, California 92621
<PAGE>
IN WITNESS WHEREOF, for the purpose of forming this corporation under the
laws of the State of California, the undersigned, constituting the incorporator
of this corporation, has executed these Articles of Incorporation.
Dated: July 25, 1988
--------------
/s/ Gary Steven Findley
-------------------------------------
Gary Steven Findley
I hereby declare that I am the person who executed the foregoing Articles
of Incorporation, which execution is my act and deed.
/s/ Gary Steven Findley
-------------------------------------
Gary Steven Findley
<PAGE>
Exhibit 10
EXECUTIVE SALARY CONTINUATION AGREEMENT
THIS EXECUTIVE SALARY CONTINUATION AGREEMENT ("Agreement") is made and
entered into this 1st day of November, 1993, by and between REDWOOD EMPIRE
BANCORP, a California corporation, NATIONAL BANK OF THE REDWOODS, a national
banking association (collectively the "Corporation"), and PATRICK W. KILKENNY
(the "Executive").
W I T N E S S E T H
WHEREAS, the Executive is employed by the Corporation as its President and
Chief Executive Officer; and
WHEREAS, the experience of the Executive, his knowledge of the affairs of
the Corporation, and his reputation and contacts in the banking industry are so
valuable that assurance of his continued service is essential for the future
growth and profitability of the Corporation and it is in the best interests of
the Corporation and its shareholders to arrange terms of his continued
employment for the Executive so as to reasonably assure his remaining in the
Corporation's employment during his lifetime or until the age of retirement; and
WHEREAS, it is the desire of the Corporation that the Executive's
services be retained as herein provided; and
WHEREAS, the Executive is willing to continue in the employ of the
Corporation provided the Corporation agrees to pay the Executive or his
beneficiaries certain benefits in accordance with the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the services to be performed in
the future as well as the mutual promises and covenants herein contained, it is
hereby agreed as follows:
<PAGE>
ARTICLE 1.
1.1. Beneficiary. The term "Beneficiary" shall mean the person or
persons whom the Executive shall designate in writing to receive the benefits
provided hereunder.
1.2. Disability. The term "Disability" shall mean the same as the
term "Total Disability" as defined in that certain Disability Income Policy
issued by Royal Maccabees Life Insurance Company, Policy Number ___________,
wherein the Executive is the insured; provided that in the event another policy
or policies are from time to time obtained or substituted, the definition of
"Disability" shall mean the same as "Total Disability" in the then current
policy.
1.3. Named Fiduciary and Plan Administrator. The Corporation
Fiduciary and Plan Administrator of this Plan shall be Corporation.
1.4. Change of Control. A "Change of Control" shall be deemed to
have occurred if (I) a tender offer shall be made and consummated for the
ownership of twenty-five percent (25%) or more of the outstanding voting
securities of the Corporation; (ii) the Corporation shall be merged or
consolidated with another bank or corporation and as a result of such merger or
consolidation less than seventy-five percent (75%) of the outstanding voting
securities of the surviving or resulting bank or corporation shall be owned in
the aggregate by the former shareholders of the Corporation, other than
affiliates (within the meaning of the Securities Exchange Act of 1934) of any
party to such merger or consolidation, as the same shall have existed
immediately prior to such merger or consolidation; (iii) the Corporation shall
sell substantially all of its assets to another bank or corporation which is not
a wholly owned subsidiary; or (iv) a person, within the meaning of Section
3(a)(9) or of Section 13(d)(3) (as in effect on the date hereof) of the
Securities Exchange Act of 1934, shall acquire twenty-five (25%) or more of the
outstanding voting securities of the Corporation (whether directly, indirectly,
beneficially or of record). For purposes hereof, ownership of voting securities
shall take into account and shall include ownership as determined by applying
the provisions of Rule 13d-3(d)(1)(I)(as in effect on the date hereof) pursuant
to the Securities Exchange Act of 1934.
<PAGE>
1.5. Cause. The term "Cause" shall mean any act of embezzlement,
fraud, breach of fiduciary duty, dishonesty, deliberate or repeated disregard of
the policies and rules of the Corporation as adopted by the Board of Directors
of the Corporation, unauthorized x use or disclosure of any fo the trade secrets
or confidential information of the Corporation, competition with the
Corporation, inducement of any customer of the Corporation to breach a contract
with the Corporation, inducement of any principal for whom the Corporation acts
as agent to termination such agency relationship gross negligence adversely
impacting the Corporation, willful breach of this Agreement, or any other
willful misconduct.
ARTICLE 2.
2.1. Employment. The Corporation agrees to employ the Executive in
such capacity as the Corporation may determine from time to time. The Executive
shall continue in the employ of the Corporation in such capacity and with such
duties and responsibilities as may be assigned to him, and with such
compensation as may be determined from time to time by the Board of Directors of
the Corporation. Notwithstanding anything herein to the contrary, except a
Change of Control, Corporation may transfer an Executive to one of its
subsidiaries from another subsidiary from time to time, provided, however, that
Executive's compensation, position or responsibilities shall not be diminished.
2.2. Full Efforts. Executive shall devote his full business time and
efforts to the business and affairs of the Corporation or the successor to the
Corporation by which Executive is then employed pursuant to this Agreement;
provided, however, this provision shall not preclude Executive, with prior
approval of the Corporation, from serving as a director or member of a committee
of any other organization involving no conflict of interests with the interests
of the Corporation, from engaging in charitable and community activities, and
from managing his persona] investments, provided that such activities do not
interfere with the regular performance of his duties and responsibilities to the
Corporation.
<PAGE>
2.3. Fringe Benefits. The salary continuation benefits provided by
this Agreement are granted by the Corporation as a fringe benefit to the
Executive and are not part of any salary reduction plan or any arrangement
deferring a bonus or a salary increase. The Executive has no option to take any
current payment or bonus in lieu of these salary continuation benefits.
ARTICLE 3.
3.1. Retirement. If the Executive shall continue in the employment
of the Corporation until he attains the age of sixty-five (65), he may retire
from active daily employment as of the first day of the month next following
attainment of age sixty-five (65) or upon such later date as may be mutually
agreed upon by the Executive and the Corporation ("Retirement Date").
3.2. Payment. The Corporation agrees that upon such Retirement Date
it will pay the Executive the annual benefit of Sixty-six Thousand One Hundred
Seventy-five ($66,175) ("Annual Benefit"), adjusted upward initially at the rate
of four (4) percent per year from the date of this Agreement payable on a
monthly basis on the first day of each month following such Retirement Date for
a period of one hundred eighty (180) months, subject to the conditions and
limitations set faith in this Agreement. The rate of the annual adjustment of
the Annual Benefit shall be reviewed every two years on the anniversary date of
this Agreement (or as soon thereafter as practicable) and may be amended, but
not adjusted downward below four (4) percent. However, the Corporation is not
obligated hereunder to make any such adjustment.
3.3. Death After Retirement. The Corporation agrees that if the
Executive dies after the Retirement Date but shall die before receiving the full
amount of monthly payments to which he is entitled under this Agreement, the
Corporation will continue to make such monthly payments to the Executive's
designated Beneficiary for the remaining period. If a valid Beneficiary
Designation is not in effect, the payments shall be made to the Executive's
surviving spouse or, if none, said payments shall be made to the duly qualified
personal representative, executor or administrator of the Executive's estate.
<PAGE>
3.4. Early Retirement. Executive shall be entitled to early
retirement when he attains age fifty-five (55) and has completed fifteen (15)
years of service. In the event that Executive chooses to retire early at age
fifty-five (55) but before his Retirement Date, he shall be vested in and shall
be entitled to receive the annual benefit set forth in Section 3.2 according to
the schedule set forth below.
Percentage of
Age at Early Retirement Vested Benefit
- ----------------------- --------------
55 years 25%
56 years and 3 months 30%
57 years and 6 months 35%
58 years and 9 months 40%
60 years 50%
61 years 60%
62 years 70%
63 years 80%
64 years 90%
ARTICLE 4.
4.1. Death Prior to Retirement. In the event the Executive should
die while employed by the Corporation at any time after the date of this
Agreement but prior to his Retirement Date, the Corporation shall pay a yearly
benefit of One Hundred Thirty-four Thousand and Fifty-eight dollars ($134,058),
payable on a monthly basis to the Executive's designated Beneficiary for a
period of one hundred eighty (180) months. If a valid Beneficiary Designation is
not in effect, the payments shall be made to the Executive's surviving spouse
or, if none, said payments shall be made to the duly qualified personal
representative, executor or administrator of the executive's estate. The said
monthly payments shall begin the first day of the month following the month of
the death of the Executive. Provided, however, that anything hereinabove to the
contrary notwithstanding, no death benefit shall be payable hereunder if it is
determined that the Executive's death was caused by suicide.
<PAGE>
4.2. Disability Prior to Retirement. In addition to the benefits
pursuant to Section 3.2 hereof, in the event the Executive should become
Disabled while actively employed by the Corporation at any time after the date
of this Agreement but prior to his Retirement Date, the Executive shall receive
his current salary for an additional period of twelve (12) months. Said amounts
shall be paid to the Executive on a monthly basis beginning on the first day of
the month after the Executive has become Disabled.
ARTICLE 5.
5.1. Termination of Employment for Cause. The Corporation reserves
the right to terminate the employment of the Executive at any time prior to his
Retirement Date for Cause. In the event that the employment of the Executive
shall be terminated prior to the Executive's Retirement Date for cause, then
this Agreement shall terminate upon the date of such termination of employment
and Executive shall not be entitled to any payments pursuant to the terms of
this Agreement.
5.2. Termination of Employment Without Cause. The Corporation
reserves the right to terminate the employment of the Executive at anytime prior
to his Retirement date without Cause or Executive may choose to resign from his
employment with the Corporation. In the event that the employment of the
Executive shall be terminated without cause or if Executive shall resign before
Executive's Retirement date, then Executive shall be entitled to receive the
Accrued Salary Continuation Liability for the appropriate Plan Year, payable
within thirty (30) days of the last day of Executive's employment.
5.3. Termination of Employment As a Result of Change of Control.
Anything hereinabove to the contrary notwithstanding, if within two (2) years of
a Change of Control of the Corporation (i) the Executive's employment with the
Corporation is terminated; (ii) Executive's annual compensation and benefits are
reduced from their levels on the date of a Change of Control of the Corporation;
or (iii) Executive's duties, responsibilities and authority are reduced from
those of his current position or those of the position then held by the
Executive on the date of the change of Control of the Corporation; then he shall
be entitled to receive the greater of two (2)
<PAGE>
times the Executive's current annual salary or the Accrued Salary Continuation
Liability for the appropriate Plan Year.
ARTICLE 6.
6.1. Termination of Agreement by Reason of Change in Law. The
Corporation is entering into this Agreement upon the assumption that certain
existing tax laws will be continued in effect in substantially their current
form. In the event of any changes in such federal laws which materially affect
this Agreement, the Corporation shall have the option to terminate or modify
this Agreement, however, in the event that the new or modified Agreement is not
at least as beneficial to Executive as this Agreement, then Executive shall then
be paid the Accrued Salary Continuation Liability for the appropriate Plan year.
The payment of said amount shall be made upon such terms and conditions and at
such time as the Corporation shall determine, but in no event commencing later
than the Executive's Retirement Date.
ARTICLE 7.
7.1. Non-Assignable. Neither the Executive, his spouse, nor any
other Beneficiary under this Agreement shall have any power or right to
transfer, assign, anticipate, hypothecate, mortgage, commute, modify, or
otherwise encumber in advance any of the benefits payable hereunder, nor shall
any of said benefits be subject to seizure for the payment of any debts,
judgments, alimony or separate maintenance, owed by the Executive or his
beneficiary or any of them, or be transferable by operation of law in the event
of bankruptcy, insolvency or otherwise.
<PAGE>
ARTICLE 8.
8.1. Claims Procedure. The Corporation shall make all determinations
as to rights to benefits under this Agreement. Any decision by the Corporation
denying a claim by the Executive or his Beneficiary for benefits under this
Agreement shall be stated in writing and delivered or mailed to the Executive or
such Beneficiary. Such decision shall set forth the specific reasons for the
denial, written to the best of the Corporation's ability in a manner calculated
to be understood without legal or actuarial counsel. In addition, the
Corporation shall provide a reasonable opportunity to the Executive or such
Beneficiary for full and fair review of the decision denying such claim.
ARTICLE 9.
9.1. Unsecured General Creditor. The Executive's rights are limited
to the right to receive payment as provided in this Agreement and the
Executive's position with respect thereto is that of a general unsecured
creditor of the Corporation.
ARTICLE 10.
10.1. Reorganization. The Corporation shall not voluntarily engage
in a Change of Control of the Corporation unless and until such succeeding or
continuing corporation, firm or person agrees to assume and discharge the
obligations of the Corporation under this Agreement. Upon the occurrence of such
event, the term "Corporation" as used in this Agreement shall be deemed to refer
to such successor or survivor corporation, firm or person.
<PAGE>
ARTICLE 11.
11.1. Not a Contract of Employment. This Agreement shall not be
deemed to constitute a contract of employment between the parties hereto, nor
shall any provision hereof restrict the right of the Corporation to discharge
the Executive, or restrict the right of the Executive to terminate his
employment.
ARTICLE 12.
12.1. Liquidated Damages. The parties hereto, before entering
into this Agreement have been concerned with the fact that substantial
damages will be suffered by Executive in the event that the Corporation shall
fail to perform according to this Agreement. In the event of non-performance
by the Corporation, Executive shall be entitled to liquidated damages of Two
Thousand Five Hundred Dollars ($2,500.00) for each payment due hereunder
which is not made by the Corporation within forty-five (45) days of the date
such payment was scheduled to have been made. This provision shall not be
applicable in the event that such non-payment is the result of a prohibition
of such payment by law, regulation or order of a bank regulatory agency.
ARTICLE 13.
13.1. Successors and Assigns; Assignment. The rights and obligations
of this Agreement shall be binding upon and inure to the benefit of the
successors, assigns, heirs and personal representatives of the parties hereto.
Executive may not assign this Agreement or any of Executive's rights hereunder
except with the prior written consent of the Corporation.
13.2. Severability. If any provision of this Agreement, as applied
to either party or to any circumstances, is judged by a court to be void or
unenforceable, in whole or in part, the same shall in no way affect any other
provision of this Agreement, the application of such provision in any other
circumstances, or the validity or enforceability of this Agreement.
13.3. Applicable Law; Jurisdiction and Venue. This Agreement and all
matters or issues collateral hereto shall be governed by the laws of she State
of California applicable to contracts performed entirely therein. Executive and
Corporation each
<PAGE>
consent to the jurisdiction of, and any action concerning this Agreement shall
be brought and tried in, the United States District Court for the Northern
District of California or the Superior or Municipal Court for the County of
Sonoma.
13.4. Waiver. A waiver by either party of any of the terms or
conditions of this Agreement in any one instance shall not be deemed or
construed to be a waiver of such terms or conditions for the future, or of any
subsequent breach thereof. All remedies, rights, undertakings, obligations, and
agreements contained in this Agreement shall be cumulative, and none of them
shall be in limitation of any other remedy, right, undertaking, obligation, or
agreement of either party.
13.5. Attorney's Fees. If any legal action or other proceeding is
brought for the enforcement of this Agreement, or because of an alleged dispute,
breach, default, or misrepresentation in connection with any of the provisions
of this Agreement, the successful or prevailing party or parties shall be
entitled to recover reasonable attorneys' fees and other costs incurred in that
action or proceeding, in addition to any other relief to which it or they may be
entitled.
13.6. Headings. The headings in this Agreement are for convenience
only and shall not in any manner affect the interpretation or construction of
the Agreement or any of its provisions.
13.7. Notice. Any notice or other communications to be given under
this Agreement shall be in writing and shall be deemed to have been duly given
on the date of service if personally served, or if mailed, upon deposit in the
United States mail, first class postage prepaid, express or certified, return
receipt requested, and properly addressed to the parties as follows: if to
Executive at his last address shown in the Corporation's records; if to
Corporation at:
Redwood Empire Bancorp
111 Santa Rosa Avenue
Santa Rosa, CA 95404
Attn: Corporate Secretary
Either party may designate a new address for purposes of this Section 13.7. by
giving the other notice of the new address as provided herein
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
duly executed by its proper officer and the Executive has hereunto set his hand
at Santa Rosa, California, on the day and year first above written.
REDWOOD EMPIRE BANCORP, INC
By: /s/ John H. Downey
-----------------------------------
Its: Chairman of the Board
----------------------------------
NATIONAL BANK OF THE REDWOODS
By: /s/ John H. Downey
-----------------------------------
Its: Chairman of the Board
----------------------------------
EXECUTIVE
/s/ Patrick W. Kilkenny
---------------------------------------
PATRICK W. KILKENNY
<PAGE>
FIRST AMENDMENT TO THE EXECUTIVE SALARY CONTINUATION AGREEMENT
THIS FIRST AMENDMENT TO THE EXECUTIVE SALARY CONTINUATION AGREEMENT
("Amendment") is made and entered into this 25th day of April, 1996, by and
between REDWOOD EMPIRE BANCORP, a California Corporation, and NATIONAL BANK OF
THE REDWOODS, a National Banking Association (collectively the "Corporation"),
and Patrick W. Kilkenny (the "Executive").
WITNESSETH:
WHEREAS, the Executive is employed by the Corporation as its Chief
Executive Officer; and
WHEREAS, the Executive and the Corporation are parties to an
agreement dated November 1, 1993, that is designated as the "Executive Salary
Continuation Agreement" (the "Agreement");
WHEREAS, it is the desire of the Corporation and the Executive that
the terms of the Agreement be modified as herein provided; and
WHEREAS, the Executive is willing to continue in the employ of the
Corporation provided the Corporation agrees to the modification to the Agreement
according to the terms and conditions of the Amendment as hereinafter set forth;
NOW, THEREFORE, in consideration of the services to be performed in
the future as well as the mutual promises and covenants herein contained, it is
hereby agreed as follows:
<PAGE>
1. Section 5.3 of Article 5 is amended to read as follows:
"5.3. VOLUNTARY TERMINATION. Notwithstanding
anything herein to the contrary, in the event of a
Change of Control, Executive shall have ninety (90) days
from the date of Executive's receipt of written notice
from the Corporation notifying Executive of the
occurrence of the Change of Control ("Election Period")
within which to elect to terminate employment. If
Executive elects to terminate employment within the
Election Period, this Agreement and his/her employment
shall terminate on the date that Executive gives notice
of the election to terminate and the Corporation shall
pay him/her the payment provided for in this Section 5.3
("Separation Payment"). The Separation Payment shall be
equal to one (1) times Executive's annual base salary
then in effect at the time of the Change of Control,
payable to Executive no later than one (1) business day
after the termination of employment. Executive shall not
be entitled to any other payments under Article 5 if
he/she elects to receive the Separation Payment."
2. Article 5 of the Agreement is amended by the addition of
the following section:
"5.4. PAYMENT RESULTING FROM A CHANGE OF CONTROL. If,
within two (2) years of a Change of Control, (i)
Executive's employment with the Corporation is
terminated; (ii) Executive's annual compensation and/or
the Executive's fringe benefits are reduced by ten
percent (10%) or more from the levels in effect on the
date of the Change of Control; or (iii) Executive's
duties, responsibilities and authority are materially
modified from those of his/her current position or those
of the position that he/she held on the date of the
Change of Control; then Executive shall receive one (1)
times Executive's current annual base salary or the
annual base salary in effect on the date of the Change
of Control, whichever is greater, ("Control Payment")
payable in one (1) lump sum within sixty (60) days after
the occurrence of the event triggering the payment
herein. Executive shall be entitled to receive only one
(1) Control Payment under the terms of this Article 5
and hereby waives all other claims arising out of the
events triggering the payment of the Control Payment.
For purposes of this Agreement, a material modification
to Executive's duties, responsibilities, and authority
shall mean a change in reporting relationship of two (2)
or more levels in the line of the organization."
3. The Agreement is hereby ratified and approved by
Executive and the Corporation as modified herein.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Amendment to be
duly executed by its proper officer and Executive has hereunto set his hand at
Santa Rosa, California, on the day and year first above written.
CORPORATION
REDWOOD EMPIRE BANCORP,
A California Corporation
By: /s/ John H. Downey
-----------------------------------------
Its: Chairman of the Board
----------------------------------------
NATIONAL BANK OF THE REDWOODS,
A National Banking Association
By: /s/ John H. Downey
-----------------------------------------
Its: Chairman of the Board
----------------------------------------
EXECUTIVE
/s/ Patrick W. Kilkenny
----------------------------------------
<PAGE>
SECOND AMENDMENT TO THE EXECUTIVE SALARY CONTINUATION AGREEMENT
THIS SECOND AMENDMENT TO THE EXECUTIVE SALARY CONTINUATION AGREEMENT
("Amendment") is made and entered into this 16th day of November, 1999, by and
between REDWOOD EMPIRE BANCORP, a California Corporation, and NATIONAL BANK OF
THE REDWOODS, a National Banking Association (collectively the "Corporation"),
and Patrick W. Kilkenny (the "Executive").
WITNESSETH:
WHEREAS, the Executive is employed by the Corporation as its Chief
Executive Officer; and
WHEREAS, the Executive and the Corporation are parties to an
agreement dated November 1, 1993, that is designated as the "Executive Salary
Continuation Agreement" (the "Agreement");
WHEREAS, it is the desire of the Corporation and the Executive that
the terms of the Agreement be modified as herein provided; and
WHEREAS, the Executive is willing to continue in the employ of the
Corporation provided the Corporation agrees to the modification to the Agreement
according to the terms and conditions of the Amendment as hereinafter set forth;
NOW, THEREFORE, in consideration of the services to be performed in
the future as well as the mutual promises and covenants herein contained, it is
hereby agreed as follows:
<PAGE>
1. Section 5.3 of Article 5 is amended to read as follows:
"5.3. Voluntary Termination. Notwithstanding
anything herein to the contrary, in the event of a
Change of Control, Executive shall have ninety (90) days
from the date of Executive's receipt of written notice
from the Corporation notifying Executive of the
occurrence of the Change of Control ("Election Period")
within which to elect to terminate employment. If
Executive elects to terminate employment within the
Election Period, this Agreement and his/her employment
shall terminate on the date that Executive gives notice
of the election to terminate and the Corporation shall
pay him/her the payment provided for in this Section 5.3
("Separation Payment"). The Separation Payment shall be
equal to two (2) times Executive's annual base salary
then in effect at the time of the Change of Control,
payable to Executive no later than one (1) business day
after the termination of employment. Executive shall not
be entitled to any other payments under Article 5 if
he/she elects to receive the Separation Payment."
2. Article 5 of the Agreement is amended by the addition of
the following section:
"5.4. Payment Resulting From a Change of Control. If,
within two (2) years of a Change of Control, (i)
Executive's employment with the Corporation is
terminated; (ii) Executive's annual compensation and/or
the Executive's fringe benefits are reduced by ten
percent (10%) or more from the levels in effect on the
date of the Change of Control; or (iii) Executive's
duties, responsibilities and authority are materially
modified from those of his/her current position or those
of the position that he/she held on the date of the
Change of Control; then Executive shall receive two (2)
times Executive's current annual base salary or the
annual base salary in effect on the date of the Change
of Control, whichever is greater, ("Control Payment")
payable in one (1) lump sum within sixty (60) days after
the occurrence of the event triggering the payment
herein. Executive shall be entitled to receive only one
(1) Control Payment under the terms of this Article 5
and hereby waives all other claims arising out of the
events triggering the payment of the Control Payment.
For purposes of this Agreement, a material modification
to Executive's duties, responsibilities, and authority
shall mean a change in reporting relationship of two (2)
or more levels in the line of the organization."
3. The Agreement is hereby ratified and approved by
Executive and the Corporation as modified herein.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Amendment to be
duly executed by its proper officer and Executive has hereunto set his hand at
Santa Rosa, California, on the day and year first above written.
CORPORATION
REDWOOD EMPIRE BANCORP,
A California Corporation
By: /s/ Tom D. Whitaker
-----------------------------------------
Its: Chairman of the Board
----------------------------------------
NATIONAL BANK OF THE REDWOODS,
A National Banking Association
By: /s/ Tom D. Whitaker
-----------------------------------------
Its: Chairman of the Board
----------------------------------------
EXECUTIVE
/s/ Patrick W. Kilkenny
----------------------------------------
<PAGE>
Exhibit 10.1
EXECUTIVE
SEVERANCE AGREEMENT
This Severance Agreement ("Agreement") is made and entered into as of November
16, 1999 by and between Redwood Empire Bancorp and National Bank of the Redwoods
(collectively the "Employer"), and Patrick W. Kilkenny ("Executive").
Employer desires to employ Executive and Executive desires to be employed by
Employer, for the period and under the terms and conditions set forth in this
document. Therefore, in consideration of the mutual covenants and conditions
contained in this Agreement, the parties agree to the following:
To establish by this Agreement a mutually agreed upon Severance Agreement in the
event that the Employer no longer desires to retain the services of the
Executive.
1. TERM
The term of this Agreement shall be for five (5) years, terminating November 16,
2004. However, nothing in this Agreement should be interpreted as modifying
Employer's policy of at-will employment. Employer shall have the right to
terminate the Agreement at any time in accordance with the provisions of Section
Three. If this Agreement is terminated in such manner, all rights and duties of
Executive and Employer per this Agreement shall end. "Term" shall refer to the
entire period of employment of Executive by Employer, whether for the period
described above, whether terminated earlier, or extended by mutual agreement.
Notice of intent to extend and/or renegotiate the Agreement may be given to
Executive by Employer at least six months prior to the end of the term. Employer
and Executive agree that this document contains the entire understanding and
agreement between them regarding employment. The at-will nature of this
employment cannot be amended or supplemented in any respect except by further
written agreement.
2. COMPENSATION
Executive may also be eligible for participation in a Compensation Agreement.
That agreement would be a separate and a stand-alone agreement and not part of
this agreement.
3. TERMINATION
Employer has the right to terminate this agreement for any of the following
reasons, by providing written notice to Executive:
<PAGE>
a) Willful breach of or habitual neglect of or failure to perform or
inability to perform the Executive's duties and obligations, as determined
by Employer;
b) Conduct constituting a crime involving moral turpitude, illegal conduct or
conviction of a felony as determined by the Employer's legal counsel, or
any conduct detrimental to the interests of Employer as determined by the
Board of Directors;
c) Physical or mental disability rendering Executive incapable of performing
the duties for which they are employed for a consecutive period of 180
days, or by death; or
d) Determination by the Board that the continued employment of Executive is
detrimental to the best interests of Employer, or for any reason
whatsoever as determined by the Board and in the sole and absolute
discretion of the Board.
I. If this Agreement is terminated for any of the reasons listed in
(a), (b), or (c) above, Executive will be paid one month's salary.
This termination pay will be considered to be in full and complete
satisfaction of any and all rights which Executive may enjoy under
the terms of this Agreement other than rights, if any, provided for
in other written agreements with Employer. Insurance benefits will
continue to be provided by Employer until the end of the month in
which termination occurs. If the Executive is terminated for the
reason listed in (c) above (disability), and he receives an enhanced
disability payment based on an Executive Salary Continuation
Agreement, or other agreement, which is greater than one month's
salary, then this one month's salary would not be paid.
II. If this Agreement is terminated for any reason listed in (d), above,
Executive shall be entitled to termination pay in a lump sum equal
to one years salary. This termination pay shall be considered to be
in full and complete satisfaction of any and all rights which
Executive may enjoy under the terms of this Agreement except for
rights, if any, provided for in other written contracts with
Employer. Executive must sign a release of liability in order to
receive any termination pay representing three months pay or more.
Insurance benefits shall be continued to be provided until the end
of the month in which termination occurs.
III. If Executive is party to a separate salary continuation agreement in
his/her capacity as an executive then the termination benefits in
the salary continuation agreement are the only benefits that he will
receive upon termination initiated by change of control. Section 3
paragraph II with regards to the lump sum payment of the severance
agreement will not be applicable. However, all other terms and
conditions in Section 3 paragraph II will be applicable to a
termination initiated by the change of control agreement.
A change in job duties (including transfer to a different subsidiary) will not
constitute termination within this agreement.
2
<PAGE>
Executive shall provide thirty days notice, in writing, in the event he
voluntarily terminates his employment.
4. EMPLOYEE BENEFITS
Employer will provide Executive with all employee benefits afforded all other
employees, as outlined in the Employer's Employee Handbook and other employee
communications. Except as may be stated in this Agreement, Executive is subject
to the same changes in benefits and other related plans (additions,
modification, deletions) as every other employee of Employer.
Executive may also be eligible for participation in an Employer Stock Option
Plan and/or Executive Salary Continuation Plan, as determined by the appropriate
Board of Directors. These would be separate and stand-alone Agreements, and not
part of this Severance Agreement unless specifically referenced within the
Severance Agreement.
5. NONCOMPETITION AND CONFIDENTIALITY
In the event Executive's employment is involuntarily terminated for any reason
listed in section 3 (d) above, Executive shall not, for a period of one year,
directly or indirectly, without the prior written consent of Employer's Board of
Directors (i) own, manage, operate, control, finance or participate in the
ownership, management, operation, control or financing of, or be connected as an
officer, director, employee, partner, principal, agent, representative,
consultant or otherwise with, any business or enterprise engaged in any business
which is competitive with or similar to Employer's banking business, within
Sonoma County or a 25 mile radius of Employer's banking operations (the
"Territory"); (ii) engage in any other manner, within the Territory, in any
business that is competitive with or similar to Employer's banking operations;
or (iii) induce or attempt to induce any person who is a customer, supplier,
distributor, officer or employee of Employer immediately prior to Executive's
termination to terminate such person's relationships with, or to take any action
that would be disadvantageous to Employer. Notwithstanding the above, Executive
shall not be deemed to be engaged directly or indirectly in and business in
contravention of paragraphs (i) or (ii) above, if (1) Executive participates in
any such business solely as a passive investor in up to 10% of the equity
securities or 10% of the debt securities of a company or partnership, or (2)
Executive is employed by a business or enterprise that is engaged primarily in a
business other than that which is competitive with or similar to Employer's
banking operations and Executive does not apply his expertise at such business
or enterprise to that part of such business or enterprise that is competitive
with or similar to employer's business or banking operations.
3
<PAGE>
In addition, throughout their employment and following any termination,
Executive shall not make any use of trade secrets and other confidential
information relating to the business and properties of Employer. Upon
termination, Executive shall deliver all confidential documents now possessed or
acquired later.
6. CHANGE OF CONTROL
This Agreement shall not be terminated by the dissolution of Employer. However,
in the event proceedings for liquidation are commenced by the regulatory
authorities, this Agreement and all related rights and benefits shall terminate.
In the event of any merger or consolidation where Employer is not the surviving
or resulting corporation, or upon transfer of all or substantially all of the
assets of Employer, Executive shall be paid in accordance with the Executive
Salary Continuation Agreement (if such agreement is applicable), which is a
stand alone benefit program and not an Employment Agreement. This payment, if
applicable, shall be considered to be in full and complete satisfaction of any
and all rights which Executive may enjoy under the terms of this Agreement
except for rights, if any, provided for in other written contracts with
Employer.
7. RETURN OF DOCUMENTS & TRADE SECRETS
Executive agrees that all manuals, documents, programs, files, reports, studies,
instruments or other materials used and/or developed by Executive during the
term of employment are the sole property of Employer. Upon termination of this
Agreement, Executive or a representative shall promptly deliver all such
property to Employer, in good condition.
Without limiting the generality of section 5 above, and at all times after the
date of Executive's termination of employment with Employer, Executive (i) shall
make no use of any and all secrets and other confidential information, ideas,
knowledge, know-how, techniques, secret processes, improvements, discoveries,
methods, inventions, sales financial information, customer lists, plans,
concepts, strategies or products, as well as all documents, reports, drawings,
designs, plans and proposals otherwise pertaining to same, relating to the
business and properties of Employer of which Executive has acquired, or may
hereafter acquire, knowledge and possession as the Chief Executive Officer
(hereinafter referred to as "Trade Secrets"), or any other part thereof, (ii)
shall not disclose the Trade Secrets, or any other part thereof, to any other
person, and (iii) shall deliver, on and after Executive's termination, all
documents, reports, drawings, designs, plans, proposals, and other tangible
evidence of Trade Secrets, now possessed or hereafter acquired by Executive, to
Employer.
4
<PAGE>
8. NOTICES
Any notice or other communication required or permitted by this Agreement shall
be considered to be properly given when personally served in writing, when
delivered via the US mail, or when communicated via facsimile, addressed as
follows:
To Employer: To Executive:
Redwood Empire Bancorp Patrick W. Kilkenny
111 Santa Rosa Avenue 111 Santa Rosa Avenue
Santa Rosa, CA 95404 Santa Rosa, CA 95404
Attn.: Board of Directors
9. APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with the laws of
the State of California, except to the extent governed by the laws of the United
States.
10. PARAGRAPH HEADINGS
Paragraph headings used in this Agreement are for convenience only, and are not
a part of this Agreement and shall not be used in construing it.
11. INVALID PROVISIONS
If any provision of this Agreement is, for any reason, declared invalid, void or
unenforceable, the remaining portions shall continue in full force without being
affected in any way.
12. CONFIDENTIALITY
This agreement is to be held confidential. Breach of this confidentiality by
Executive will make him subject to termination under this Agreement.
13. ARBITRATION
If any disputes arise under this Agreement, the parties will first make a good
faith attempt at mediation. If this attempt is not successful, any remaining
controversy or claim arising out of or relating to this Agreement, or the breach
thereof, shall be settled pursuant to an arbitration agreement to be entered
into by the parties. In the event there is no arbitration
5
<PAGE>
agreement, the rules of judicial arbitration will be used. Judgment upon the
award rendered by the arbitrator(s) may be entered into any court having
jurisdiction.
14. LEGAL COSTS
If either party commences an action against the other party arising out of or in
connection with this Agreement, the prevailing party shall be entitled to have
and recover reasonable attorney's fees and costs of suit or arbitration from the
losing party.
If an arbitration agreement is in place, costs will be covered per that
agreement. If a mediator is used, the parties will share said costs.
REDWOOD EMPIRE BANCORP EXECUTIVE
NATIONAL BANK OF THE REDWOODS
By: /s/ Tom Whitaker /s/ Patrick W. Kilkenny
------------------------- --------------------------------------
Tom Whitaker Patrick W. Kilkenny
Chairman of the Board
Date: November 16, 1999 Date: November 16, 1999
----------------------------- --------------------------------
6
<PAGE>
Exhibit 10.2
EXECUTIVE SALARY CONTINUATION AGREEMENT
THIS EXECUTIVE SALARY CONTINUATION AGREEMENT ("Agreement") is made and entered
into this 16th day of November, 1999, by and between REDWOOD EMPIRE BANCORP, a
California corporation and National Bank of the Redwoods, a national banking
association (collectively the "Corporation"), and JAMES BECKWITH (the
"Executive").
W I T N E S S E T H:
WHEREAS, the Executive is employed by the Corporation as its Chief
Financial Officer; and by the Bank as its Chief Operating Officer, Chief Credit
Officer and Chief Financial Officer; and
WHEREAS, the experience of the Executive, his knowledge of the
affairs of the Corporation, and his reputation and contacts in the banking
industry are so valuable that assurance of his continued service is essential
for the future growth and profitability of the Corporation and it is in the best
interests of the Corporation and its shareholders to arrange terms of his
continued employment; and
WHEREAS, it is the desire of the Corporation that the Executive's
services be retained as herein provided; and
WHEREAS, the Executive is willing to continue in the employ of the
Corporation provided the Corporation agrees to pay the Executive or his
beneficiaries certain benefits in accordance with the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the services to be performed in
the future as well as the mutual promises and covenants herein contained, it is
hereby agreed as follows:
ARTICLE 1.
1.1. Named Fiduciary and Plan Administrator. The Corporation
Fiduciary and Plan Administrator of this Plan shall be the Corporation.
1.2. Change of Control. A "Change of Control" shall be deemed to
have occurred if (i) a tender offer shall be made and consummated for the
ownership of twenty-five percent (25%) or more of the outstanding voting
securities of the Corporation; (ii) the Corporation shall be merged or
Page 1
<PAGE>
consolidated with another bank or corporation and as a result of such merger or
consolidation less than seventy-five percent (75%) of the outstanding voting
securities of the surviving or resulting bank or corporation shall be owned in
the aggregate by the former shareholders of the Corporation, other than
affiliates (within the meaning of the Securities Exchange Act of 1934) of any
party to such merger or consolidation, as the same shall have existed
immediately prior to such merger or consolidation; (iii) the Corporation shall
sell substantially all of its assets to another bank or corporation which is not
a wholly owned subsidiary; or (iv) a person, within the meaning of Section 3(a)
(9) or of Section 13(d) (3) (as in effect on the date hereof) of the Securities
Exchange Act of 1934, shall acquire twenty-five percent (25%) or more of the
outstanding voting securities of the Corporation (whether directly, indirectly,
beneficially or of record). For purposes hereof, ownership of voting securities
shall take into account and shall include ownership as determined by applying
the provisions of Rule 13d-3(d) (1) (i) (as in effect on the date hereof)
pursuant to the Securities Exchange Act of 1934.
ARTICLE 2.
2.1. Employment. The Corporation agrees to employ the Executive in
such capacity as the Corporation may determine from time to time. The Executive
shall continue in the employ of the Corporation in such capacity and with such
duties and responsibilities as may be assigned to him, and with such
compensation as may be determined from time to time by the Board of Directors of
the Corporation.
2.2. Full Efforts. Executive shall devote his full business time and
efforts to the business and affairs of the Corporation or the successor to the
Corporation by which Executive is then employed pursuant to this Agreement;
provided, however, this provision shall not preclude Executive, with prior
approval of the Corporation, from serving as a director or member of a committee
of any other organization involving no conflict of interests with the interests
of the Corporation, from engaging in charitable and community activities, and
from managing his personal investments, provided that such activities do not
interfere with the regular performance of his duties and responsibilities to the
Corporation.
2.3. Fringe Benefits. The salary continuation benefits provided by
this Agreement are granted by the Corporation as a fringe benefit to the
Executive and are not part of any salary
Page 2
<PAGE>
reduction plan or any arrangement deferring a bonus or a salary increase. The
Executive has no option to take any current payment or bonus in lieu of these
salary continuation benefits.
ARTICLE 3.
3.1. Voluntary Termination. In the event of a Change of Control,
Executive shall have ninety (90) days from the date of Executive's receipt of
written notice from the Corporation notifying Executive of the occurrence of the
Change of Control ("Election Period") within which to elect to terminate
employment. If Executive elects to terminate employment within the Election
Period, this Agreement and his employment shall terminate on the date that
Executive gives notice of the election to terminate and the Corporation shall
pay him the payment provided for in Section 3.2 hereof ("Separation Payment").
3.2. Separation Payment. The Separation Payment shall be equal to
two (2) times the Executive's annual base salary then in effect at the time of
the Change of Control, payable to Executive, no later than one (1) business day
after termination of employment. Executive shall not be entitled to any payment
under Article 4 if he elects to receive the Separation Payment.
ARTICLE 4.
4.1. Payment Resulting From a Change of Control. If, within two (2)
years of a Change of Control, (i) the Executive's employment with the
Corporation is terminated; (ii) Executive's annual compensation and/or the
Executive's fringe benefits are reduced by ten percent (10%) or more from the
levels in effect on the date of the Change of Control; or (iii) Executive's
duties, responsibilities and authority are materially modified from those of his
current position or those of the position that he held on the date of the Change
of Control; then the Executive shall receive two (2) times the Executive's
current annual base salary or the annual base salary in effect on the date of
the Change of Control, whichever is greater, ("Control Payment") payable in one
(1) lump sum within sixty (60) days after the occurrence of the event triggering
the payment herein. Executive shall be entitled to receive only one (1) Control
Payment under the terms of this Article 4 and hereby waives all other claims
arising out of the events triggering the payment of the Control Payment. For
purposes of this Agreement, a material modification to Executive's duties,
responsibilities, and authority shall mean a change in reporting relationship of
two (2) or more
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<PAGE>
levels in the line of the organization.
ARTICLE 5.
5.1. Non-Assignable. Neither the Executive, his spouse, nor any
other party under this Agreement shall have any power or right to transfer,
assign, anticipate, hypothecate, mortgage, commute, modify, or otherwise
encumber in advance any of the benefits payable hereunder, nor shall any of said
benefits be subject to seizure for the payment of any debts, judgments, alimony
or separate maintenance, owed by the Executive or his beneficiary or any of
them, or be transferable by operation of law in the event of bankruptcy,
insolvency or otherwise.
ARTICLE 6.
6.1. Claims Procedure. The Corporation shall make all determinations
as to rights to benefits under this Agreement. Any decision by the Corporation
denying a claim by the Executive or his Beneficiary for benefits under this
Agreement shall be stated in writing and delivered or mailed to the Executive.
Such decision shall set forth the specific reasons for the denial, written to
the best of the Corporation's ability in a manner calculated to be understood
without legal or actuarial counsel. In addition, the Corporation shall provide a
reasonable opportunity to the Executive for full and fair review of the decision
denying such claim.
ARTICLE 7.
7.1. Unsecured General Creditor. The Executive's rights are limited
to the right to receive payments as provided in this Agreement and the
Executive's position with respect thereto is that of a general unsecured
creditor of the Corporation.
ARTICLE 8.
8.1. Reorganization. The Corporation shall not voluntarily engage in
a Change of Control of the Corporation unless and until such succeeding or
continuing corporation, firm or person agrees to assume and discharge the
obligations of the Corporation under this Agreement. Upon the occurrence of such
event, the term "Corporation" as used in this Agreement shall be deemed to refer
to such successor or survivor corporation, firm or person.
Page 4
<PAGE>
ARTICLE 9.
9.1. Not a Contract of Employment. This Agreement shall not be
deemed to constitute a contract of employment between the parties hereto, nor
shall any provision hereof restrict the right of the Corporation to discharge
the Executive, or restrict the right of the Executive to terminate his
employment.
ARTICLE 10.
10.1. Liquidated Damages. The parties hereto, before entering into
this Agreement have been concerned with the fact that substantial damages will
be suffered by Executive in the event that the Corporation shall fail to perform
according to this Agreement. In the event of non-performance by the Corporation,
Executive shall be entitled to liquidated damages of Two Thousand Five Hundred
Dollars ($2,500.00) for each payment due hereunder which is not made by the
Corporation within forty-five (45) days of the date such payment was scheduled
to have been made. This provision shall not be applicable in the event that such
non-payment is the result of a prohibition of such payment by law, regulation or
order of a bank regulatory agency.
ARTICLE 11.
11.1. Successors and Assigns; Assignment. The rights and obligations
of this Agreement shall be binding upon and inure to the benefit of the
successors, assigns, heirs and personal representatives of the parties hereto.
Executive may not assign this Agreement or any of Executive's rights hereunder
except with the prior written consent of the Corporation.
11.2. Severability. If any provision of this Agreement, as applied
to either party or to any circumstances, is judged by a court to be void or
unenforceable, in whole or in part, the same shall in no way affect any other
provision of this Agreement, the application of such provision in any other
circumstances, or the validity or enforceability of this Agreement.
11.3. Applicable Law; Jurisdiction and Venue. This Agreement and all
matters or issues collateral hereto shall be governed by the laws of the State
of California applicable to contracts performed entirely therein. Executive and
Corporation each consent to the jurisdiction of, and any action concerning this
Agreement shall be brought and tried in, the United States District
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<PAGE>
Court for the Northern District of California or the Superior or Municipal Court
for the County of Sonoma.
11.4. Waiver. A waiver by either party of any of the terms or
conditions of this Agreement in any one instance shall not be deemed or
construed to be a waiver of such terms or conditions for the future, or of any
subsequent breach thereof. All remedies, rights, undertakings, obligations, and
agreements contained in this Agreement shall be cumulative, and none of them
shall be in limitation of any other remedy, right, undertaking, obligation or
agreement of either party.
11.5. Attorneys' Fees. If any legal action or other proceeding is
brought for the enforcement of this Agreement, or because of an alleged dispute,
breach, default, or misrepresentation in connection with any of the provisions
of this Agreement, the successful or prevailing party or parties shall be
entitled to recover reasonable attorneys' fees and other costs incurred in that
action or proceeding, in addition to any other relief to which it or they may be
entitled.
11.6. Headings. The headings in this Agreement are for convenience
only and shall not in any manner affect the interpretation or construction of
the Agreement or any of its provisions.
11.7. Notice. Any notice or other communication to be given under
this Agreement shall be in writing and shall be deemed to have been duly given
on the date of service if personally served, or if mailed, upon deposit in the
United States mail, first class postage prepaid, express or certified, return
receipt requested, and properly addressed to the parties as follows: if to
Executive at his last address shown in the Corporation's records; if to
Corporation at:
Redwood Empire Bancorp
111 Santa Rosa Avenue
Santa Rosa, CA 95404
Attn: Corporate Secretary
Either party may designate a new address for purposes of this Section 12.7 by
giving the other notice of the new address as provided herein.
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<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
duly executed by its proper officer and the Executive has hereunto set his hand
at Santa Rosa, California, on the day and year first above written.
CORPORATION
REDWOOD EMPIRE BANCORP,
A California Corporation
By: /s/ Tom Whitaker
---------------------------------------
Its: Chairman of the Board
---------------------------------------
NATIONAL BANK OF THE REDWOODS
By: /s/ Tom Whitaker
---------------------------------------
Its: Chairman of the Board
---------------------------------------
EXECUTIVE
/s/ James Beckwith
--------------------------------------------
JAMES BECKWITH
Page 7
<PAGE>
Exhibit 10.3
EXECUTIVE
SEVERANCE AGREEMENT
This Severance Agreement ("Agreement") is made and entered into as of November
16, 1999 by and between Redwood Empire Bancorp and National Bank of the Redwoods
(collectively the "Employer"), and James E. Beckwith ("Executive").
Employer desires to employ Executive and Executive desires to be employed by
Employer, for the period and under the terms and conditions set forth in this
document. Therefore, in consideration of the mutual covenants and conditions
contained in this Agreement, the parties agree to the following:
To establish by this Agreement a mutually agreed upon Severance Agreement in the
event that the Employer no longer desires to retain the services of the
Executive.
1. TERM
The term of this Agreement shall be for five (5) years, terminating November 16,
2004. However, nothing in this Agreement should be interpreted as modifying
Employer's policy of at-will employment. Employer shall have the right to
terminate the Agreement at any time in accordance with the provisions of Section
Three. If this Agreement is terminated in such manner, all rights and duties of
Executive and Employer per this Agreement shall end. "Term" shall refer to the
entire period of employment of Executive by Employer, whether for the period
described above, whether terminated earlier, or extended by mutual agreement.
Notice of intent to extend and/or renegotiate the Agreement may be given to
Executive by Employer at least six months prior to the end of the term. Employer
and Executive agree that this document contains the entire understanding and
agreement between them regarding employment. The at-will nature of this
employment cannot be amended or supplemented in any respect except by further
written agreement.
2. TERMINATION
Employer has the right to terminate this agreement for any of the following
reasons, by providing written notice to Executive:
a) Willful breach of or habitual neglect of or failure to perform or
inability to perform the Executive's duties and obligations, as determined
by Employer;
b) Conduct constituting a crime involving moral turpitude, illegal conduct or
conviction of a felony as determined by the Employer's legal counsel, or
any conduct detrimental to the interests of Employer as determined by the
Board of Directors;
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c) Physical or mental disability rendering Executive incapable of performing
the duties for which they are employed for a consecutive period of 180
days, or by death; or
d) Determination by the Board that the continued employment of Executive is
detrimental to the best interests of Employer, or for any reason
whatsoever as determined by the Board and in the sole and absolute
discretion of the Board.
I. If this Agreement is terminated for any of the reasons listed in
(a), (b), or (c) above, Executive will be paid one month's salary.
This termination pay will be considered to be in full and complete
satisfaction of any and all rights which Executive may enjoy under
the terms of this Agreement other than rights, if any, provided for
in other written agreements with Employer. Insurance benefits will
continue to be provided by Employer until the end of the month in
which termination occurs. If the Executive is terminated for the
reason listed in (c) above (disability), and he receives an enhanced
disability payment based on an Executive Salary Continuation
Agreement, or other agreement, which is greater than one month's
salary, then this one month's salary would not be paid.
II. If this Agreement is terminated for any reason listed in (d), above,
Executive shall be entitled to termination pay in a lump sum equal
to two (2) years salary inclusive of the accrued salary continuation
liability for the appropriate Plan year as referenced in an
Executive Salary Continuation Plan (if applicable) and any accrued
but unused vacation leave. This termination pay shall be considered
to be in full and complete satisfaction of any and all rights which
Executive may enjoy under the terms of this Agreement except for
rights, if any, provided for in other written contracts with
Employer. Any pay in lieu of vacation will be considered to be
included in this termination pay. Executive must sign a release of
liability in order to receive any termination pay representing three
months pay or more. Insurance benefits shall be continued to be
provided until the end of the month in which termination occurs.
III. If Executive is party to a separate salary continuation agreement in
his/her capacity as an executive then the termination benefits in
the salary continuation agreement are the only benefits that he will
receive upon termination initiated by change of control. Section 3
paragraph II with regards to the lump sum payment of the severance
agreement will not be applicable. However, all other terms and
conditions in Section 3 paragraph II will be applicable to a
termination initiated by the change of control agreement.
A change in job duties (including transfer to a different subsidiary) will not
constitute termination within this agreement.
Executive shall provide thirty days notice, in writing, in the event he
voluntarily terminates his employment.
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3. EMPLOYEE BENEFITS
Employer will provide Executive with all employee benefits afforded all other
employees, as outlined in the Employer's Employee Handbook and other employee
communications. Except as may be stated in this Agreement, Executive is subject
to the same changes in benefits and other related plans (additions,
modification, deletions) as every other employee of Employer.
Executive may also be eligible for participation in an Employer Stock Option
Plan and/or Executive Salary Continuation Plan, as determined by the appropriate
Board of Directors. These would be separate and stand-alone Agreements, and not
part of this Severance Agreement unless specifically referenced within the
Severance Agreement.
4. NONCOMPETITION AND CONFIDENTIALITY
In the event Executive's employment is involuntarily terminated for any reason
listed in section 3 (d) above, Executive shall not, for a period of one year,
directly or indirectly, without the prior written consent of Employer's Board of
Directors (i) own, manage, operate, control, finance or participate in the
ownership, management, operation, control or financing of, or be connected as an
officer, director, employee, partner, principal, agent, representative,
consultant or otherwise with, any business or enterprise engaged in any business
which is competitive with or similar to Employer's banking business, within
Sonoma County or a 25 mile radius of Employer's banking operations (the
"Territory"); (ii) engage in any other manner, within the Territory, in any
business that is competitive with or similar to Employer's banking operations;
or (iii) induce or attempt to induce any person who is a customer, supplier,
distributor, officer or employee of Employer immediately prior to Executive's
termination to terminate such person's relationships with, or to take any action
that would be disadvantageous to Employer. Notwithstanding the above, Executive
shall not be deemed to be engaged directly or indirectly in and business in
contravention of paragraphs (i) or (ii) above, if (1) Executive participates in
any such business solely as a passive investor in up to 10% of the equity
securities or 10% of the debt securities of a company or partnership, or (2)
Executive is employed by a business or enterprise that is engaged primarily in a
business other than that which is competitive with or similar to Employer's
banking operations and Executive does not apply his expertise at such business
or enterprise to that part of such business or enterprise that is competitive
with or similar to employer's business or banking operations.
In addition, throughout their employment and following any termination,
Executive shall not make any use of trade secrets and other confidential
information relating to the business and properties of Employer. Upon
termination, Executive shall deliver all confidential documents now possessed or
acquired later.
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5. CHANGE OF CONTROL
This Agreement shall not be terminated by the dissolution of Employer. However,
in the event proceedings for liquidation are commenced by the regulatory
authorities, this Agreement and all related rights and benefits shall terminate.
In the event of any merger or consolidation where Employer is not the surviving
or resulting corporation, or upon transfer of all or substantially all of the
assets of Employer, Executive shall be paid in accordance with the Executive
Salary Continuation Agreement (if such agreement is applicable), which is a
stand alone benefit program and not an Employment Agreement. This payment, if
applicable, shall be considered to be in full and complete satisfaction of any
and all rights which Executive may enjoy under the terms of this Agreement
except for rights, if any, provided for in other written contracts with
Employer.
6. RETURN OF DOCUMENTS & TRADE SECRETS
Executive agrees that all manuals, documents, programs, files, reports, studies,
instruments or other materials used and/or developed by Executive during the
term of employment are the sole property of Employer. Upon termination of this
Agreement, Executive or a representative shall promptly deliver all such
property to Employer, in good condition.
Without limiting the generality of section 5 above, and at all times after the
date of Executive's termination of employment with Employer, Executive (i) shall
make no use of any and all secrets and other confidential information, ideas,
knowledge, know-how, techniques, secret processes, improvements, discoveries,
methods, inventions, sales financial information, customer lists, plans,
concepts, strategies or products, as well as all documents, reports, drawings,
designs, plans and proposals otherwise pertaining to same, relating to the
business and properties of Employer of which Executive has acquired, or may
hereafter acquire, knowledge and possession as the Chief Executive Officer
(hereinafter referred to as "Trade Secrets"), or any other part thereof, (ii)
shall not disclose the Trade Secrets, or any other part thereof, to any other
person, and (iii) shall deliver, on and after Executive's termination, all
documents, reports, drawings, designs, plans, proposals, and other tangible
evidence of Trade Secrets, now possessed or hereafter acquired by Executive, to
Employer.
7. NOTICES
Any notice or other communication required or permitted by this Agreement shall
be considered to be properly given when personally served in writing, when
delivered via the US mail, or when communicated via facsimile, addressed as
follows:
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To Employer: To Executive:
Redwood Empire Bancorp James E. Beckwith
111 Santa Rosa Avenue 27344 East El Macero Drive
Santa Rosa, CA 95404 El Macero, CA 95618
Attn.: Board of Directors
8. APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with the laws of
the State of California, except to the extent governed by the laws of the United
States.
9. PARAGRAPH HEADINGS
Paragraph headings used in this Agreement are for convenience only, and are not
a part of this Agreement and shall not be used in construing it.
10. INVALID PROVISIONS
If any provision of this Agreement is, for any reason, declared invalid, void or
unenforceable, the remaining portions shall continue in full force without being
affected in any way.
11. CONFIDENTIALITY
This agreement is to be held confidential. Breach of this confidentiality by
Executive will make him subject to termination under this Agreement.
12. ARBITRATION
If any disputes arise under this Agreement, the parties will first make a good
faith attempt at mediation. If this attempt is not successful, any remaining
controversy or claim arising out of or relating to this Agreement, or the breach
thereof, shall be settled pursuant to an arbitration agreement to be entered
into by the parties. In the event there is no arbitration agreement, the rules
of judicial arbitration will be used. Judgment upon the award rendered by the
arbitrator(s) may be entered into any court having jurisdiction.
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13. LEGAL COSTS
If either party commences an action against the other party arising out of or in
connection with this Agreement, the prevailing party shall be entitled to have
and recover reasonable attorney's fees and costs of suit or arbitration from the
losing party.
If an arbitration agreement is in place, costs will be covered per that
agreement. If a mediator is used, the parties will share said costs.
REDWOOD EMPIRE BANCORP EXECUTIVE
NATIONAL BANK OF THE REDWOODS
By: /s/ Tom Whitaker /s/ James E. Beckwith
------------------------- --------------------------------------
Tom Whitaker James E. Beckwith
Chairman of the Board
Date: November 16, 1999 Date: November 16, 1999
----------------------------- --------------------------------
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Exhibit 10.8
STANDARD OFFICE LEASE - GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
(LOGO)
1. Basic Lease Provisions ("Basic Lease Provisions")
1.1 Parties; This Lease, dated, for reference purposes only, June 1 1999,
is made by and between Advanced Development & Investments, (herein called
"Lessor") and National Bank of the Redwoods, doing business under the name of
National Bank of the Redwoods (herein called "Lessee").
1.2 Premises: Suite Number(s) 100 first & second floors, consisting of
approximately 21,609 rentable square feet, more or less, as defined in paragraph
2 and as shown on Exhibit "A" hereto (the "Premises"). Said premises has been
verified by the building architect using BOMA standards of measurement for
office building.
1.3 Building: Commonly described as being located at 111 Santa Rosa Avenue
in the City of Santa Rosa, County of Sonoma, State of California, as more
particularly described in Exhibit B-1&B-2 hereto, and as defined in paragraph 2.
1.4 Use: General banking and mortgage loan business and related uses,
subject to paragraph 6.
1.5 Term: 5 years/60 months commencing October 1, 1999 ("Commencement
Date") and ending September 30, 2004, as defined in paragraph 3.
1.6 Base Rent: $43,215 per month, payable on the first day of each month,
per paragraph 4.1.
1.7 Base Rent Increases: On See Rent Schedule, Addendum #50 the monthly
Base Rent payable under paragraph 1.6 above shall be adjusted as provided in
Addendum #50.
1.8 Rent Paid Upon Execution: $32,801 for first month rent, October 1999.
1.9 Security Deposit N/A waived.
1.10 Lease's Share of Operating Expense Increase 33.7% as defined in
paragraph 4.2.
2. Premises, Parking and Common Areas.
2.1 Premises: The Premises are a portion of a building, herein sometimes
referred to as the "Building" identified in paragraph 1.3 of the Basic Lease
Provisions. "Building" shall include adjacent parking structures used in
connection therewith. The Premises, the Building, the Common Areas, the land
upon which the same are located, along with all other buildings and improvements
thereon or thereunder are herein collectively referred to as the "Office
Building Project", Lessor hereby leases to Lessee and Lessee leases from Lessor
for the term, at the rental, and upon all of the conditions set forth herein,
the real property referred to in the Basic Lease Provisions, paragraph 1.2 as
the "Premises", including rights to the Common Areas as hereinafter specified.
2.2 Vehicle Parking: So long as Lessee is not in default and subject to
the rules and regulations attached hereto, and as established by Lessor from
time to time, Lessee shall be entitled to rent and use (See Addendum #58)
parking spaces in the office Building Project at no fee or charge.
2.2.1 If Lessee commits, permits or allows any of the prohibited
activities described in the Lease or the rules then in effect, then Lessor shall
have the right, without notice, in addition to such other rights and remedies
that it may have, to remove or tow away the vehicle involved and charge the cost
to the lessee, which cost shall be immediately payable upon demand by Lessor.
2.3 Common Areas -Definition. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Office Building Project that are provided and designated by the Lessor
from time to time for the general non-exclusive use of Lessor, Lessee and of
other lessees of the Office Building Project and their respective employees,
suppliers, shippers, customers and invitees, including but not limited to common
entrances, lobbies, corridors, stairways and stairwells, public restrooms,
elevators, escalators, parking areas to the extent not otherwise prohibited by
this Lease, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, ramps, driveways, landscaped areas and decorative walls.
2.4 Common Areas - Rules and Regulations. Lessee agrees to abide by and
conform to the rules and regulations attached hereto as Exhibit B with respect
to the Office Building Project and Common Areas, and to cause its employees,
suppliers, shippers, customers, and invitees to so abide and conform. Lessor or
such other person(s) as Lessor may appoint shall have the exclusive control and
management of the Common Areas and shall have the right, from time to time, to
modify, amend and enforce said rules and regulations. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees, their agents, employees and invitees of the Office Building
Project.
2.5 Common Areas - Changes. Lessor shall have the right, in Lessor's sole
discretion, from time to time:
(a) To make changes to the Building interior and exterior and Common
Areas, including, without limitation, changes in the location, size, shape,
number, and appearance thereof, including but not limited to the lobbies,
windows, stairways, air shafts, elevators, escalators, restrooms, driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, decorative walls, landscaped areas and walkways;
provided, however, Lessor shall at all times provide the parking facilities
requited by applicable law;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land and improvements outside the boundaries
of the Office Building Project to the a part of the Common Areas, provided that
such other land and improvements have a reasonable and functional relationship
to the Office Building Project;
(d) To add additional buildings and improvements to Common Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Office Building Project, or any
portion thereof;
(f) To do and perform such other acts and make such other changes
in, to or with respect to the Common Areas and Office Building Project as
Lessor may, in the exercise of sound business judgment deem to be appropriate.
3. Term.
3.1 Term. The term and Commencement Date of this Lease shall be as
specified in paragraph 1.5 of the Basic Lease Provisions.
3.2 Delay in Possession. Notwithstanding said Commencement Date, if for
any reason Lessor cannot deliver possession of the Premises to Lessee on said
date and subject to paragraph 3.2.2, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease or
the obligations of Lessee hereunder or extend the term hereof; but, in such
case, Lessee shall not be obligated to pay rent or perform any other obligation
of Lessee under the terms of this Lease, except as may be otherwise provided in
this Lease, until possession of the Premises is tendered to Lessee, as
hereinafter defined; provided, however, that if Lessor shall not have delivered
possession of the Premises within sixty (60) days following said Commencement
Date as the same may be extended under the terms of a Work Letter executed by
Lessor and Lessee, Lessee may, at Lessee's
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option, by notice in writing to Lessor within ten (10) days thereafter, cancel
this Lease, in which event the parties shall be discharged from all obligations
hereunder; provided, however, that, as to Lessee's obligations, Lessee first
reimburses Lessor for all costs incurred for Non-Standard Improvements and, as
to Lessor's obligations, Lessor shall return any money previously deposited by
Lessee (less any offsets due Lessor for Non-Standard Improvements); and provided
further, that if such written notice by Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect.
3.2.1 Possession Tendered - Defined. Possession of the Premises
shall be deemed tendered to Lessee ("Tender of Possession") when (1) the
improvements to be provided by Lessor under this Lease are substantially
completed, (2) the Building utilities are ready for use in the Premises, (3)
Lessee has reasonable access to the Premises, and (4) ten (10) days shall have
expired following advance written notice to Lessee of the occurrence of the
matters described in (1), (2) and (3), above of this paragraph 3.2.1.
3.2.2 Delays Caused by Lessee. There shall be no abatement of rent,
and the sixty (60) day period following the Commencement Date before which
Lessee's right to cancel this Lease accrues under paragraph 3.2 shall be deemed
extended to the extent of any delays caused by acts or omissions of Lessee,
Lessee's agents, employees and contractors.
3.3 Early Possession, if Lessee occupies the Premises prior to said
Commencement Date, such occupancy shall be subject to all provisions of this
Lease, such occupancy shall not change the termination date, and Lessee shall
pay rent for such occupancy.
3.4 Uncertain Commencement. In the event commencement of the Lease term is
defined as the completion of the improvements, Lessee and Lessor shall execute
an amendment to this Lease establishing the date of Tender of Possession (as
defined in paragraph 3.2.1) or the actual taking of possession by Lessee,
whichever first occurs, as the Commencement Date.
4. Rent.
4.1 Base Rent. Subject to adjustment as hereinafter provided in paragraph
4.3 and except as may be otherwise expressly provided in this Lease, Lessee
shall pay to Lessor the Base Rent for the Premises set forth in paragraph 1.6 of
the Basic Lease Provisions, without offset or deduction. Lessee shall pay Lessor
upon execution hereof the advance Base Rent described in paragraph 1.8 of the
Basic Lease Provisions. Rent for any period during the term hereof which is for
less than one month shall be prorated based upon the actual number of days of
the calendar month involved. Rent shall be payable in lawful money of the
United States to Lessor at the address stated herein or to such other persons
or at such other places as Lessor may designate in writing.
4.2 Operating Expenses Increase. See Addendum #56. Lessee shall pay to
Lessor during the term hereof, in addition to the Base Rent, Lessee's Share, as
hereinafter defined, of the amount by which all Operating Expenses, as
hereinafter defined, for each Comparison Year exceeds the amount of all
Operating Expenses for the Base Year, such excess being hereinafter referred to
as the "Operating Expense increase", in accordance with the following
provisions:
(a) "Lessee's Share" is defined, for purposes of this Lease, as the
percentage set forth in paragraph 1.10 of the Basic Lease Provisions, which
percentage has been determined by dividing the approximate square footage of the
Premises by the total approximate square footage of the rentable space contained
in the Office Building Project. It is understood and agreed that the square
footage figures set forth in the Basic Lease Provisions are approximations which
Lessor and Lessee agree are reasonable and shall not be subject to revision
except in connection with an actual change in the size of the Premises or a
change in the space available for lease in the Office Building Project.
(b) "Base Year" is defined as the calendar year in which the Lease
term commences. The base year shall be calendar year 2000.
(c) "Comparison Year" is defined as each calendar year during the
term of this Lease subsequent to the Base Year; provided, however, Lessee shall
have no obligation to pay a share of the Operating Expense Increase applicable
to the first twelve (12) months of the Lease Term (other than such as are
mandated by a governmental authority, as to which government mandated expenses
Lessee shall pay Lessee's Share, notwithstanding they occur during the first
twelve (12) months). Lessee's Share of the Operating Expense increase for the
first and last Comparison Years of the Lease Term shall be prorated according to
that portion of such Comparison Year as to which Lessee is responsible for a
share of such increase.
(d) "Operating Expenses" is defined, for purposes of this Lease, to
include all costs, if any, incurred by Lessor in the exercise of its reasonable
discretion for:
(i) The operation, repair, maintenance, and replacement, in
neat, clean, safe, good order and condition, of the Office Building Project,
including but not limited to, the following:
(aa) The Common Areas, including their surfaces,
coverings, decorative items, carpets, drapes and window coverings and including
parking areas, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, stairways, parkways, driveways, landscaped areas, striping, bumpers,
irrigation systems, Common Area lighting facilities, building exteriors and
roofs, fences and gates;
(bb) All heating, air conditioning, plumbing, electrical
systems, life safety equipment, telecommunication and other equipment used in
common by, or for the benefit of, lessees or occupants of the Office Building
Project, including elevators and escalators, tenant directories, fire detection
systems including sprinkler system maintenance and repair.
(ii) Trash disposal, janitorial and security services;
(iii) Any other service to be provided by Lessor that is
elsewhere in this Lease stated to be an "Operating Expense";
(iv) The cost of the premiums for the liability and property
insurance policies to be maintained by Lessor under paragraph 8 hereof;
(v) The amount of the real property taxes to be paid by Lessor
under paragraph 10.1 hereof;
(vi) The cost of water, sewer, gas, electricity, and other
publicly mandated services to the Office Building Project;
(vii) Labor, salaries and applicable fringe benefits and
costs, materials, supplies and tools, used in maintaining and/or cleaning the
Office Building Project and accounting and a management fee attributable to the
operation of the Office Building Project;
(viii) Replacing and/or adding improvements mandated by any
governmental agency and any repairs or removals necessitated thereby amortized
over its useful life according to Federal income tax regulations or guidelines
for depreciation thereof (including interest on the unamortized balance as is
then reasonable in the judgment of Lessor's accountants);
(ix) Replacements of equipment or improvements that have a
useful life for depreciation purposes according to Federal income tax guidelines
of five (5) years or less, as amortized over such life.
(e) Operating Expenses shall not include the costs of replacements
of equipment or improvements that have a useful life for Federal income tax
purposes in excess of five (5) years unless it is of the type descried in
paragraph 4.2 (d)(viii), in which case their cost shall be included as above
provided.
(f) Operating Expenses shall not include any expenses paid by any
lessee directly to third parties, or as to which Lessor is otherwise reimbursed
by any third party, other tenant, or by insurance proceeds.
(g) Lessee's Share of Operating Expense Increase shall be payable by
Lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time in advance of Lessee's Share
of the Operating Expense Increase for any Comparison Year and the same shall be
payable monthly or quarterly as Lessor shall designate, during each Comparison
Year of the Lease term, on the same day as the Base Rent is due hereunder. In
the event that Lessee pays Lessor's estimate of Lessee's Share of Operating
Expense Increase as aforesaid, Lessor shall deliver to Lessee within sixty (60)
days after the expiration of each Comparison Year a reasonably detailed
statement showing Lessee's Share of the actual Operating Expense Increase
incurred during such year. If Lessee's payments under this paragraph 4.2(g)
during said Comparison Year exceed Lessee's share as indicated on said
statement, Lessee shall be entitled to credit the amount of such overpayment
against Lessee's Share of Operating Expense Increase next falling due. If
Lessee's payments under this paragraph during said Comparison Year were less
than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor
the amount of the deficiency within thirty (30) days after delivery by Lessor to
Lessee of said statement. Lessor and Lessee shall forthwith adjust between them
by cash payment any balance determined to exist with respect to that portion of
the last Comparison Year for which Lessee is responsible to Operating Expense
Increases, notwithstanding that the Lease term may have terminated before the
end of such Comparison Year.
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5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof
the security deposit set forth in paragraph 1.9 of the Basic Lease Provisions
as security for Lessee's faithful performance of Lessee's obligations
hereunder. If Lessee fails to pay rent or other charges due hereunder, or
otherwise defaults with respect to any provision of this Lease, Lessor may
use, apply or retain all or any portion of said deposit for the payment of
any rent or other charge in default for the payment of any other sum to which
Lessor may become obligated by reason of Lessee's default, or to compensate
Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so
uses or applies all or any portion of said deposit, Lessee shall within ten
(10) days after written demand therefor deposit cash with Lessor in an amount
sufficient to restore said deposit to the full amount then required of
Lessee. If the monthly Base Rent shall, from time to time, increase during
the term of this Lease, Lessee shall, at the time of such increase, deposit
with Lessor additional money as a security deposit so that the total amount
of the security deposit held by Lessor shall at all times bear the same
proportion to the then current Base Rent as the initial security deposit
bears to the initial Base Rent set forth in paragraph 1.6 of the Basic Lease
Provisions. Lessor shall not be required to keep said security deposit
separate from its general accounts. If Lessee performs all of Lessee's
obligations hereunder, said deposit, or so much thereof as has not heretofore
been applied by Lessor, shall be returned, without payment of interest or
other increment for its use, to Lessee (or, at Lessor's option, to the last
assignee, if any, or Lessee's interest hereunder) at the expiration of the
term hereof, and after Lessee has vacated the Premises. No trust relationship
is created herein between Lessor and Lessee with respect to said Security
Deposit.
6. Use
6.1 Use. The Premises shall be used and occupied only for the purpose set
forth in paragraph 1.4 of the Basic Lease Provisions or any other use which is
reasonably comparable to that use and for no other purpose.
6.2 Compliance with Law.
(a) Lessor warrants to Lessee that the Premises, in the state
existing on the date that the Lease term commences, but without regards to
alterations or improvements made by Lessee or the use for which Lessee will
occupy the Premises, does not violate any covenants or restrictions of record
including all recently passed ADA Laws and Regulations or any applicable
building code, regulation or ordinance in effect on such Lease term
Commencement Date. In the event it is determined that this warranty has been
violated then it shall be the obligation of the Lessor after written notice
from Lessee, to promptly, at Lessor's sole cost and expense, rectify any such
violation. Further, Lessor shall continuously be responsible for all ADA
compliance as it pertains to all building common areas.
(b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's
expense, promptly comply with all applicable statutes, ordinances, rules,
regulations, orders, covenants and restrictions of record, and requirements of
any fire insurance underwriters or rating bureaus, now in effect or which may
hereafter come into effect, whether or not they reflect a change in policy from
that now existing, during the term or any part of the term hereof, relating in
any manner to the Premises and the occupation and use by Lessee of the Premises.
Lessee shall conduct its business in a lawful manner and shall not use or permit
the use of the Premises or the Common Areas in any manner that will tend to
create waste or a nuisance or shall tend to disturb other occupants of the
Office Building Project.
6.3 Condition of Premises.
(a) Lessor shall deliver the Premises to Lessee in a clean condition
on the Lease Commencement Date (unless Lessee is already in possession) and
Lessor warrants to Lessee that the plumbing, lighting, air conditioning and
heating system in the Premises shall be in good operating condition. In the
event that it is determined that this warranty has been violated, then it shall
be the obligation of Lessor, after receipt of written notice from Lessee setting
forth with specificity the nature of the violation, to promptly, at Lessor's
sole cost, rectify such violation.
(b) Except as otherwise provided in this Lease, Lessee hereby
accepts the Premises and the Office Building Project in their condition
existing as of the Lease Commencement Date or the date that Lessee takes
possession of the Premises, whichever is earlier, subject to all applicable
zoning, municipal, county and state laws, ordinances and regulations
governing and regulating the use of the Premises, and any easements,
covenants or restrictions of record, and accepts this Lease subject thereto
and to all matters disclosed thereby and by any exhibits attached hereto.
Lessee acknowledges that it has satisfied itself by its own independent
investigation that the Premises are suitable for its intended use, and that
neither Lessor nor Lessor's agent or agents has made any representation or
warranty as to the present or future suitability of the Premises, Common
Areas, or Office Building Project for the conduct of Lessor's business.
7. Maintenance, Repairs, Alterations and Common Area Services.
7.1 Lessor's Obligations. Lessor shall keep the Office Building Project,
including the Premises, interior and exterior walls, roof and common areas, and
the equipment whether used exclusively for the Premises or in common with other
premises, in good condition and repair; provided, however, Lessor shall not be
obligated to paint, repair or replace wall coverings, or to repair or replace
any improvements that are not ordinarily a part of the Building or are above
then Building standards. Except as provided in paragraph 9.5, there shall be no
abatement of rent or liability of Lessee, on account of any injury or
interference with Lessee's business with respect to any improvements,
alterations or repairs made by Lessor to the Office Building Project or any
part thereof. Lessee expressly waives the benefits of any statute now or
hereafter in effect which would otherwise afford Lessee the right to make
repairs at Lessor's expense or to terminate this Lease because of Lessor's
failure to keep the Premises in good order, condition and repair.
7.2 Lessee's Obligations.
(a) Notwithstanding Lessor's obligation to keep the Premises in good
condition and repair, Lessee shall be responsible for payment of the cost
thereof to Lessor as additional rent for that portion of the cost of any
maintenance and repair of the Premises, or any equipment (wherever located) that
serves only Lessee or the Premises, to the extent such cost is attributable to
causes beyond normal wear and tear. Lessee shall be responsible for the cost of
painting, repairing or replacing wall coverings, and to repair or replace any
Premises improvements that are not ordinarily a part of the Building or that are
above then Building standards. Lessor may, at its option, upon reasonable
notice, elect to have Lessee perform any particular such maintenance or repairs
the cost of which is otherwise Lessee's responsibility hereunder
(b) On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same condition
as received, ordinary wear and tear excepted, clean and free of debris. Any
damage or deterioration of the Premises shall not be deemed ordinary wear and
tear if the same could have been prevented by good maintenance practices by
Lessee. Lessee shall repair any damage to the Premises occasioned by the
installation or removal of Lessee's trade fixtures, alterations, furnishings and
equipment. Except as otherwise stated in this Lease, Lessee shall leave the air
lines, power panels, electrical distribution system, lighting fixtures, air
conditioning, window coverings, wall coverings, carpets, wall panelling,
ceilings and plumbing on the Premises and in good operating condition.
7.3 Alterations and Additions.
(a) Lessee shall not, without Lessor's prior written consent make
any alterations, improvements, additions, Utility Installations or repairs
in, on or about the Premises, or the Office Building Project. As used in this
paragraph 7.3 the term "Utility Installation" shall mean carpeting, window
and wall coverings, power panels, electrical distribution systems, lighting
fixtures, air conditioning, plumbing, and telephone and telecommunication
wiring and equipment. At the expiration of the term, Lessor may require the
removal of any or all of said alterations, improvements, additions or Utility
Installations, and the restoration of the Premises and the Office Building
Project to their prior condition, at Lessee's expense. Should Lessor permit
Lessee to make its own alterations, improvements, additions or Utility
Installations, Lessee shall use only such contractor as has been expressly
approved by Lessor and Lessor may require Lessee to provide Lessor at
Lessee's sole cost and expense, a lien and completion bond in an amount equal
to one and one-half times the estimated cost of such improvements, to insure
Lessor against any liability for mechanic's and materialmen's liens and to
insure completion of the work. Should Lessee make any alterations,
improvements, additions or Utility Installations without the prior approval
of Lessor, or use a contractor not expressly approved by Lessor, Lessor may,
at any time during the term of this Lease, require that Lessee remove any
part or all of the same.
(b) Any alterations, improvements, additions or Utility
Installations in or about the Premises or the Office Building Project that
Lessee shall desire to make shall be presented to Lessor in written form, with
proposed detailed plans. If Lessor shall give its consent to Lessee's making
such alteration, improvement, addition or Utility Installation, the consent
shall be deemed conditioned upon Lessee acquiring a permit to do so from the
applicable governmental agencies, furnishing a copy thereof to Lessor prior to
the commencement of the work, and compliance by Lessee with all conditions of
said permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises, the Building or the Office Building
Project, or any interest therein.
(d) Lessee shall give Lessor not less than ten (10) days notice
prior to the commencement of any work in the Premises by Lessee, and Lessor
shall have the right to post notices of non-responsibility in or on the
Premises or the Building as provided by law. If the Lessee shall, in good
faith, contest the validity of any such lien, claim or demand, then Lessee
shall, at its sole expense defend itself and Lessor against the same and
shall pay and satisfy
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any such adverse judgment that may be rendered thereon before the enforcement
thereof against the Lessor of the Premises, the Building or the Office Building
Project, upon the condition that if Lessor shall require, Lessee shall furnish
to Lessor a surety bond satisfactory to Lessor in an amount equal to such
contested lien claim or demand indemnifying Lessor against liability for the
same and holding the Premises, the Building and the Office Building Project free
from the effect of such lien or claim. In addition, Lessor may require Lessee to
pay Lessor's reasonable attorneys' fees and costs in participating in such
action if Lessor shall decide it is to Lessor's best interest so to do.
(e) All alterations, improvements, additions and Utility
Installations (whether or not such Utility Installations constitute trade
fixtures or Lessee), which may be made to the Premises by Lessee, including but
not limited to, floor coverings, panelings, doors, drapes, built-ins, moldings,
sound attenuation, and lighting and telephone or communication systems, conduit,
wiring and outlets, shall be made and done in a good and workmanlike manner and
of good and sufficient quality and materials and shall be the property of Lessor
and remain upon and be surrendered with Premises at the expiration of the Lease
term, unless Lessor requires their removal pursuant to paragraph 7.3(a).
Provided Lessee is not in default, notwithstanding the provisions of this
paragraph 7.3(e), Lessee's personal property and equipment, other than that
which is affixed to the Premises so that it cannot be removed without material
damage to the Premises or the Building , and other than Utility Installations,
shall remain the property of Lessee and may be removed by Lessee subject to the
provisions of paragraph 7.2.
(f) Lessee shall provide Lessor with as-built plans and
specifications for any alterations, improvements, additions or Utility
Installations.
7.4 Utility Additions. Lessor reserves the right to install new or
additional utility facilities throughout the Office Building Project for the
benefit of Lessor or Lessee, or any other lessee of the Office Building Project,
including, but not by way of limitation, such utilities as plumbing, electrical
systems, communication systems, and fire protection and detection systems, so
long as such installations do not unreasonably interfere with Lessee's use of
the Premises.
8. Insurance, Indemnity.
8.1 Liability Insurance - Lessee. Lessee shall, at Lessee's expense,
obtain and keep in force during the term of this Lease a policy of Comprehensive
General Liability insurance utilizing an Insurance Service Office standard form
with Broad Form General Liability Endorsement (GL0404), or equivalent, in an
amount of not less than $1,000,000 per occurrence of bodily injury and property
damage combined or in a greater amount as reasonably determined by Lessor and
shall insure Lessee with Lessor as an additional insured against liability
arising out of the use, occupancy or maintenance of the Premises. Compliance
with the above requirement shall not, however, limit the liability of Lessee
hereunder.
8.2 Liability Insurance - Lessor. Lessor shall obtain and keep in force
during the term of this Lease a policy of Combined Single Limit Bodily Injury
and Broad Form Property Damage Insurance, plus coverage against such other risks
Lessor deems advisable from time to time, insuring Lessor, but not Lessee,
against liability arising out of the ownership, use, occupancy or maintenance of
the Office Building Project in an amount not less than $5,000,000.00 per
occurrence.
8.3 Property Insurance - Lessee. Lessee shall, at Lessee's expense, obtain
and keep in force during the term of this Lease for the benefit of Lessee,
replacement cost fire and extended coverage insurance, with vandalism and
malicious mischief, sprinkler leakage and earthquake sprinkler leakage
endorsements, in an amount sufficient to cover not less than 100% of the full
replacement cost, as the same may exist from time to time, of all of Lessee's
personal property, fixtures, equipment and tenant improvements.
8.4 Property Insurance - Lessor. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies of insurance covering loss
or damage to the Office Building Project improvements, but not Lessee's
personal property, fixtures, equipment or tenant improvements, in the amount
of the full replacement cost thereof, as the same may exist from time to
time, utilizing Insurance Services Office standard form, or equivalent,
providing protection against all perils including within the classification
of fire, extended coverage, vandalism malicious mischief, plate glass, and
such other perils as Lessor deems advisable or may be required by a lender
having a lien on the Office Building Project. In addition, Lessor shall
obtain and keep in force, during the term of this Lease, a policy of rental
value insurance covering a period of one year, with loss payable to Lessor,
which insurance shall also cover all Operating Expenses for said period.
Lessee will not be named in any such policies carried by Lessor and shall
have no right to any proceeds therefrom. The policies required by these
paragraphs 8.2 and 8.4 shall contain such deductibles as Lessor or the
aforesaid lender may determine. In the event that the Premises shall suffer
an insured loss as defined in paragraph 9.1(f) hereof, the deductible amounts
under the applicable insurance policies shall be deemed an Operating Expense.
Lessee shall not do or permit to be done anything which shall invalidate the
insurance policies carried by Lessor, Lessee shall pay the entirety of any
increase in the property insurance premium for the Office Building Project
over what it was immediately prior to the commencement of the term of this
Lease if the increase is specified by Lessor's insurance carrier as being
caused by the nature of Lessee's occupancy or any act or omission of Lessee.
8.5 Insurance Policies. Lessee shall deliver to Lessor copies of liability
insurance policies required under paragraph 8.1 or certificates evidencing the
existence and amounts of such insurance within seven (7) days after the
Commencement Date of this Lease. No such policy shall be cancellable or subject
to reduction of coverage or other modification except after thirty (30) days
prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to
the expiration of such policies, furnish Lessor with renewals thereof.
8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other,
for direct or consequential loss or damage arising out of or incident to the
perils covered by property insurance carried by such party, whether due to the
negligence of Lessor or Lessee or their agents, employees, contractors and/or
invitees. If necessary all property insurance polices required under this Lease
shall be endorsed to so provide.
8.7 Indemnity. Lessee shall indemnify and hold harmless Lessor and its
agents, Lessor's master or ground Lessor, partners and lenders, from and against
any and all claims for damage to the person or property of anyone or any entity
arising from Lessee's use of the Office Building Project, or from the conduct of
Lessee's business or from any activity, work or things done, permitted or
suffered by Lessee in or about the Premises or elsewhere and shall further
indemnify and hold harmless Lessor from and against any and all claims, costs
and expenses arising from any breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this Lease, or
arising from any act or omission of Lessee, or any of Lessee's agents,
contractors, employees, or invitees, and from and against all costs, attorney's
fees, expenses and liabilities incurred by Lessor as the result of any such use,
conduct, activity, work, things done, permitted or suffered, breach, default,
negligence, and in dealing reasonably therewith, including but not limited to
the defense or pursuit of any claim or action or proceeding involved therein;
and in case any action or proceeding be brought against Lessor by reason of any
such matter, Lessee upon notice from Lessor shall defend the same at Lessee's
expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate
with Lessee in such defense. Lessor need not have first paid any such claim in
order to be so indemnified. Lessee, as a material part of the consideration to
Lessor, hereby assumes all risk of damage to property of Lessee or injury to
persons, in, upon or about the Office Building Project arising from any cause
other than due to Lessor's negligence or misconduct and Lessee hereby waives all
claims in respect thereof against Lessor.
8.8 Exemption of Lessor from Liability. Other than Lessor's gross
negligence, Lessee hereby agrees that Lessor shall not be liable for injury to
Lessee's business or any loss of income therefrom or for loss of or damage to
the goods, wares, merchandise or other property of Lessee, Lessee's employees,
invitees, customers, or any other person in or about the Premises or the Office
Building Project, nor shall Lessor be liable for injury to the person of Lessee,
Lessee's employees, agents or contractors, whether such damage or injury is
caused by or results from theft, fire, steam, electricity, gas, water or rain,
or from the breakage, leakage, obstruction or other defects of pipes,
sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures,
or from any other cause, whether said damage or injury results from conditions
arising upon the Premises or upon other portions of the Office Building Project,
or from other sources or places, or from new construction or the repair,
alteration or improvement of any part of the Office Building Project, or of the
equipment, fixtures or appurtenances applicable thereto, and regardless of
whether the cause of such damage or injury or the means of repairing the same is
inaccessible, Lessor shall not be liable for any damages arising from any act or
neglect or any other lessee, occupant or user of the Office Building Project,
nor from the failure of Lessor to enforce the provisions of any other lease of
any other lessee of the Office Building Project.
8.9 No Representation of Adequate Coverage. Lessor makes no representation
that the limits or forms of coverage of insurance specified in this paragraph 8
are adequate to cover Lessee's property or obligations under this Lease.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Damage" shall mean if the Premises are damaged or
destroyed to any extent.
(b) "Premises Building Partial Damage" shall mean if the Building of
which the Premises are a part is damaged or destroyed to the extent that the
cost to repair is less than fifty percent (50%) of the then Replacement Cost of
the building.
(c) "Premises Building Total Destruction" shall mean if the Building
of which the Premises are a part is damaged or destroyed to the extent that the
cost to repair is fifty percent (50%) or more of the then Replacement Cost of
the building.
(d) "Office Building Project Buildings" shall mean all of the
buildings on the Office Building Project site.
(e) "Office Building Project Buildings Total Destruction" shall mean
if the Office Building Project Buildings are damaged or destroyed to the extent
that the cost to repair is fifty percent (50%) of the then Replacement Cost of
the Office Building Project Buildings.
(f) "Insured Loss" shall mean damage or destruction which was caused
by an event required to be covered by the insurance described in paragraph 8.
The fact that an insured Loss has a deductible amount shall not make the loss an
uninsured loss.
(g) "Replacement Cost" shall mean the amount of money necessary to
be spent in order to repair or rebuild the damaged area to the condition that
existed immediately prior to the damage occurring, excluding all improvements
made by lessees, other than those installed by Lessor at Lessee's expense.
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9.2 Premises Damage; Premises Building Partial Damage.
(a) Insured Loss: Subject to the provisions of paragraphs 9.4 and
9.5, if at any time during the term of this Lease there is damage which is an
insured Loss and which falls into the classification of either Premises Damage
or Premises Building Partial Damage, then Lessor shall, as soon as reasonably
possible and to the extent the required materials and labor are readily
available through usual commercial channels, at Lessors expense, repair such
damage (but not Lessee's fixtures, equipment or tenant improvements originally
paid for by Lessee) to its condition existing at the time of the damage, and
this Lease shall continue in full force and effect.
(b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and
9.5, if at any time during the term of this Lease there is damage which is not
an insured Loss and which falls into the classification of Premises Damage or
Premises Building Partial Damage, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense), which
damage prevents Lessee from making any substantial use of the Premises, Lessor
may, at Lessor's option either (i) repair such damage as soon as reasonably
possible at Lessor's expense, in which event, this Lease shall continue in full
force and effect, or (ii) give written notice to Lessee within thirty (30) days
after the date of the occurrence of such damage of Lessor's intention to cancel
and terminate this Lease as of the date of the occurrence of such damage, in
which event this Lease shall terminate as of the date of the occurrence of such
damage.
9.3 Premises Building Total Destruction; Office Building Project Total
Destruction: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time
during the term of this Lease there is damage, whether or not it is an Insured
Loss, which falls into the classifications of either (i) Premises Building Total
Destruction, or (ii) Office Building Project Total Destruction, then Lessor may
at Lessor's option either (i) repair such damage or destruction as soon as
reasonably possible at Lessor's expense (to the extent the required materials
are readily available through usual commercial channels) to its condition
existing at the time of the damage, but not Lessee's fixtures, equipment or
tenant improvements, and this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after the date of
occurrence of such damage of Lessor's intention to cancel and terminate this
Lease, in which case this Lease shall terminate as of the date of the occurrence
of such damage.
9.4 Damage Near End of Term.
(a) Subject to paragraph 9.4 (b), if at any time during the last
twelve (12) months of the term of this Lease there is substantial damage to the
Premises, Lessor may at Lessor's option cancel and terminate this Lease as of
the date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within 30 days after the date of occurrence eof such
damage.
(b) Notwithstanding paragraph 9.4 (a), in the event that lessee has
an option to extend or renew this Lease, and the time within which said option
may be exercised has not yet expired, Lessee shall exercise such option, if it
is to be exercised at all, no later than twenty (20) days after the occurrence
of an insured Loss falling within the classification of Premises Damage during
the last twelve (12) months of the term of this Lease. If Lessee duly exercises
such option during said twenty (20) day period, Lessor shall, at Lessor's
expense, repair such damage, but not Lessee's fixtures, equipment or tenant
improvements, as soon as reasonably possible and this Lease shall continue in
full force and effect. If Lessee fails to exercise said option during said
twenty (20) day period, then Lessor may at Lessee's option terminate and cancel
this Lease as of the expiration of said twenty (20) day period by giving written
notice to Lessee of Lessor's election to do so within ten (10) days after
expiration of said twenty (20) day period, notwithstanding any term or provision
of the grant of option to the contrary.
9.5 Abatement of Rent; Lessee's Remedies.
(a) In the event Lessor repairs or restores the Building or Premises
pursuant to the provisions of this paragraph 9, and any part of the Premises are
not usable (including loss of use due to loss of access or essential services)
the rent payable hereunder (including Lessee's Share of Operating Expense
increase) for the period during which such damage, repair or restoration
continues shall be abated, provided (1) the damage was not the result of the
negligence of Lessee, and (2) such abatement shall only be to the extent of the
operation and profitability of Lessee's business as operated from the Premises
is adversely affected. Except for said abatement of rent, if any, Lessee shall
have no claim against Lessor for any damage suffered by reason of any such
damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
or the Building under the Provisions of this paragraph 9 and shall not commence
such repair or restoration within ninety (90) days after such occurrence, or if
Lessor shall not complete the restoration and repair within six (6) months after
such occurrence, Lessee may at Lessee's option cancel and terminate this Lease
by giving Lessor written notice of Lessee's election to do so at any time prior
to the commencement or completion, respectively, of such repair or restoration.
In such event this Lessee shall terminate as of the date of such notice.
(c) Lessee agrees to cooperate with Lessor in connection with any
such restoration and repair, including but not limited to the approval and/or
execution of plans and specifications required.
9.6 Termination - Advance Payments. Upon termination of this Lease
pursuant to this paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in
addition, return to Lessee within 10 business days so much of Lessee's security
deposit as has not theretofore been applied by Lessor.
9.7 Waiver. Lessor and Lessee waive the provisions of any stature which
relates to the termination of leases when leased property is destroyed and agree
that such event shall be governed by the terms of this Lease.
10. Real Property Taxes
10.1 Payment of Taxes. Lessor shall pay the real property tax, as defined
in paragraph 10.3, applicable to the Office Building Project subject to
reimbursement by Lessee of Lessee's share of such taxes n accordance with the
provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2.
10.2 Additional Improvements. Lessee shall not be responsible for paying
any increase in real property tax specified in the tax assessor's records and
work sheets as being caused by additional improvements placed upon the Office
Building Project by other lessees or by Lessor for the exclusive enjoyment of
any other lessee. Lessee shall, however, pay to Lessor at the time that
Operating Expenses are payable under paragraph 4.2(c) the entirety of any
increase in real property tax if assessed solely by reason of additional
improvements placed upon the Premises by Lessee or at Lessee's request.
10.3 Definition of "Real Property Tax." As used herein, the term "real
property tax" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the Office Building Project or any portion thereof
imposed by any authority having the direct or indirect power to tax, including
any city, county, state or federal government, or any school, agricultural,
sanitary, fire, street, drainage or other improvement district thereof, as
against any legal or equitable interest of Lessor in the Office Building Project
or in any portion thereof, as against Lessors' right to rent or other income
therefrom, and as against Lessor's business of leasing the Office Building
Project. The term "real property tax" shall also include any tax, fee, levy,
assessment or charge (i) in substitution of, partially or totally, any tax, fee,
levy assessment or charge hereinabove included within the definition of "real
property tax," or (ii) the nature of which was hereinbefore included within the
definition of "real property tax," or (iii) which is imposed for a service of
right not charged prior to June 1, 1976, or, if previously charged, has been
increased since June 1, 1978, or (iv) which is imposed as a result of change of
ownership, as defined by applicable local statutes for property tax purposes, of
the Office Building Project or which is added to a tax or charge hereinbefore
included within the definition of real property tax by reason of such change of
ownership, or (v) which is imposed by reason of this transaction, any
modifications or changes hereto, or any transfers hereof. Tenant shall pay no
increase in operating expenses due to a sale resulting in a tax increase.
10.4 Joint Assessment. If the improvement or property, the taxes for which
are to be paid separately by Lessee under paragraph 10.2 or 10.5 are not
separately assessed, Lessee's portion of that tax shall be equitably determined
by Lessor from the respective valuations assigned in the assessor's work sheets
or such other information (which may include the cost of construction) as may by
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.5 Personal Property Taxes.
(a) Lessee shall pay prior to delinquency all taxes assessed and
levied upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay to Lessor the taxes attributable to
Lessee within ten (10) days after receipt of a written statement setting forth
the taxes applicable to Lessee's property
11. Utilities
11.1 Services Provided by Lessor. Lessor shall provide heating,
ventilation, air conditioning, and janitorial service as reasonably required,
reasonable amounts of electricity for normal lighting and office machines, water
for reasonable and normal drinking and lavatory use, and replacement light bulbs
and/or fluorescent tubes and ballasts for standard overhead fixtures.
11.2 Utilities to the premises for normal usage of heating, air
conditioning, lighting and water are paid for by Lessor whether separately
metered or prorated from a common meter.
11.3 Hours of Service. Said services and utilities shall be provided
during generally accepted business days and hours or such other days or hours as
may hereafter be set forth. Utilities and services required at other times shall
be subject to advance request and reimbursed by Lessee to Lessor of the cost
thereof. Hours of HVAC Service shall be 8am-6pm Monday through Friday & 9am-1pm
on Saturday.
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11.4 Excess Usage by Lessee. Lessee shall not make connection to the
utilities except by or through existing outlets and shall not install or use
machinery or equipment in or about the Premises that uses excess water, lighting
or power, or suffer or permit any act that causes extra burden upon the
utilities or services, including but not limited to security services, over
standard office usage for the Office Building Project. Lessor shall require
Lessee to reimburse Lessor for any excess expenses or costs that may arise out
of a breach of this subparagraph by Lessee. Lessor may, in its sole discretion,
install at Lessee's expense supplemental equipment and/or separate metering
applicable to Lessee's excess usage or loading.
11.5 Interruptions. There shall be no abatement of rent and Lessor shall
not be liable in any respect whatsoever for the inadequacy, stoppage,
interruption or discontinuance of any utility or service due to riot, strike,
labor dispute, breakdown, accident, repair or other cause beyond Lessor's
reasonable control or in cooperation with governmental request or directions.
12. Assignment and Subletting.
12.1 Lessor's Consent Required. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in the Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a material
default and breach of this Lease without the need for notice to Lessee under
paragraph 13.1. "Transfer" within the meaning of this paragraph 12 shall include
the transfer or transfers aggregating: (a) if Lessee is a corporation, more than
twenty-five percent (25%) of the voting stock of such corporation, or (b) if
Lessee is a partnership, more than twenty-five percent (25%) of the profit and
loss participation in such partnership.
12.2 Lessee Affiliate. Notwithstanding the provisions of paragraph 12.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, all of which are referred to as "Lessee Affiliate";
provided that before such assignment shall be effective (a) said assignee shall
assume, in full, the obligations of Lessee under this Lease and (b) Lessor shall
be given written notice of such assignment and assumption. Any such assignment
shall not, in any way, affect or limit the liability of Lessee under the terms
of this Lease even if after such assignment or subletting the terms of this
Lease are materially changed or altered without the consent of Lessee, the
consent of whom shall not be necessary.
12.3 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, no assignment or subletting
shall release Lessee of Lessee's obligations hereunder or alter the primary
liability of Lessee to pay the rent and other sums due Lessor hereunder
including Lessee's Share of Operating Expense increase, and to perform all other
obligations to be performed by Lessee hereunder.
(b) Lessor may accept rent from any person other than Lessee pending
approval or disapproval of such assignment.
(c) Neither a delay in the approval or disapproval of such
assignment or subletting, nor the acceptance of rent, shall constitute a waiver
or estoppel of Lessor's' right to exercise its remedies for the breach of any of
the terms or conditions of this paragraph 12 or this Lease.
(d) If Lessee's obligations under this Lease have been guaranteed by
third parties, then an assignment or sublease, and Lessor's consent thereto,
shall not be effective unless said guarantors give their written consent to such
sublease and the terms thereof.
(e) The consent by Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent and such
action shall not relieve such persons form liability under this Lease or said
sublease; however, such persons shall not be responsible to the extent any such
amendment or modification enlarges or increases the obligations of the Lessee or
sublessee under this Lease or such sublease.
(f) In the event of any default under this Lease, Lessor may proceed
directly against Lessee, any guarantors or any one else responsible for the
performance of this Lease, including the sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor or Lessee.
(g) Lessor's written consent to any assignment or subletting of the
Premises by Lessee shall not constitute an acknowledgement that no default then
exists under this Lease of the obligations to be performed by Lessee nor shall
such consent be deemed a waiver of any then existing default, except as may be
otherwise stated by Lessor at the time.
(h) The discovery of the fact that any financial statement relied
upon by Lessor in giving its consent to an assignment or subletting was
materially false shall, at Lessor's election, render the Lessor's said consent
null and void.
12.4 Additional Terms and Conditions Applicable to Subletting. Regardless
of Lessor's consent, the following terms and conditions shall apply to any
subletting by Lessee of all or any part of the Premises and shall be deemed
included in all subleases under this Lease whether or not expressly incorporated
therein:
(a) Lessor may collect such rent and income arising from any
sublease heretofore and apply same toward Lessee's obligations under this Lease;
provided, however, that until a default shall occur in the performance of
Lessee's obligations under this Lease, Lessee may receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of this or any
other assignment of such sublease to Lessor nor by reason of the collection of
the rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a default
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents due and to become due under the sublease. Lessee agrees that
such sublessee shall have the right to rely upon any such statement and request
from Lessor, and that such sublessee shall pay such rents to Lessor without any
obligation or right to inquire as to whether such default exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against said sublessee or Lessor for any such rents
so paid by said sublessee to Lessor.
(b) No sublease entered into by Lessee shall be effective unless and
until it has been approved in writing by Lessor. In entering into any sublease,
Lessee shall use only such form of sublessee as is satisfactory to Lessor, and
once approved by Lessor, such sublease shall not be changed or modified without
Lessor's prior written consent. Any sublease shall, by reason of entering into a
sublease under this Lease, be deemed, for the benefit of Lessor, to have assumed
and agreed to conform and comply with each and every obligation herein to be
performed by Lessee other than such obligations as are contrary to or
inconsistent with provisions contained in a sublease to which Lessor has
expressly consented in writing.
(c) In the event Lessee shall default in the performance of its
obligations under this Lease, Lessor at its option and without any obligation to
do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of Lessee under such sublease from the time of
the exercise of said option to the termination of such sublease, provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to Lessee or for any other prior defaults of Lessee under
such sublease.
(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's and Lessee's prior written consent.
(e) With respect to any subletting to which Lessor has consented,
Lessor agrees to deliver a copy of any notice of default by Lessee to the
sublessee. Such sublessee shall have the right to cure a default of Lessee
within three (3) days after service of said notice of default upon such
sublessee, and the sublessee shall have a right of reimbursement and offset from
and against Lessee for any such defaults cured by the sublessee.
12.5 Lessor's Expenses. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable costs and expenses incurred in
connection therewith, including attorneys', architects', engineers' or other
consultants' fees.
12.6 Conditions to Consent. Lessor reserves the right to condition any
approval to assign or sublet upon Lessor's determination that (a) the proposed
assignee or sublessee shall conduct a business on the Premises of a quality
substantially equal to that of Lessee and consistent with the general character
of the other occupants of the Office Building Project and not in violation of
any exclusives or rights then held by other tenants, and (b) the proposed
assignee or sublessee be at least as financially responsible as Lessee was
expected to be at the time of the execution of this Lease or of such assignment
or subletting, whichever is greater.
13. Default; Remedies.
13.1 Default. The occurrence of any one or more of the following events
shall constitute a material default of this Lease by Lessee:
(a) The vacation or abandonment of the Premises by Lessee. Vacation
of the Premises shall include the failure to occupy the Premises for a
continuous period of sixty (60) days or more, whether or not the rent is paid.
(b) The breach by Lessee of any of the covenants, conditions or
provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment or
subletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency), 13.1(f)
(false statement), 16(a) (estoppel certificate), 30(b) (subordination), 33
(auctions), or 41.1 (easements), all of which are hereby deemed to be material,
non-curable defaults without the necessity of any notice by Lessor to Lessee
thereof.
(c) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three (3) days after receipt of written
notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee
with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer
statutes such Notice to Pay Rent or Quit shall also constitute the notice
required by this subparagraph.
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(d) The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed by
Lessee other than those referenced in subparagraphs (b) and (c), above, where
such failure shall continue for a period of thirty (30) days after written
notice thereof from Lessor to Lessee; provided, however, that if the nature of
Lessee's noncompliance is such that more than thirty (30) days are reasonably
required for its cure, then Lessee shall not be deemed to be in default if
Lessee commenced such cure within said thirty (30) day period and thereafter
diligently pursues such cure to completion. To the extent permitted by law, such
thirty (30) day notice shall constitute the sole and exclusive notice required
to be given to Lessee under applicable Unlawful Detainer statutes.
(e)(i) The making by Lessee of any general arrangement or general
assignment for the benefit of creditors; (ii) Lessee becoming a "debtor" as
defined in 11 U.S.C. ss.101 or any successor statute thereto (unless, in the
case of a petition against Lessee, the same is dismissed within sixty (60));
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within thirty
(30) days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged within thirty (30)
days. In the event that any provision of this paragraph 13.1(e) is contrary to
any applicable law, such provision shall be of no further force or effect.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee, or its successor in interest or bye any guarantor of Lessee's
obligation hereunder, was materially false.
13.2 Remedies. In the event of any material or breach of this Lease by
Lessee, Lessor may at any time thereafter, with or without notice or demand and
without limiting Lessor in the exercise of any right or remedy which Lessor may
have by reason of such default:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee all damages incurred by
Lessor by reason of Lessee's default including, but not limited to, the cost of
recovering possession of the Premises, expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorneys' fees,
and any real estate commission actually paid; the worth at the time of award by
the court having jurisdiction thereof of the amount by which the unpaid rent for
the balance of the term after the time of such award exceeds the amount of such
rental loss for the same period that Lessee proves could be reasonably avoided;
that portion of the leasing commission paid by Lessor pursuant to paragraph 15
applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this Lease
shall continue in effect whether or not Lessee shall have vacated or abandoned
the Premises. In such event Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located. Unpaid installments of rent and other unpaid monetary obligations of
Lessee under the terms of this Lease shall bear interest from the date due at
the maximum rate then allowable by law.
13.3 Default by Lessor. Lessor shall not be in default unless Lessor fails
to perform obligations required of Lessor within a reasonable time, but in no
event later than thirty (30) days after written notice by Lessee to Lessor and
to the holder of any first mortgage or deed of trust covering the Premises whose
name and address shall have theretofore been furnished to Lessee in writing,
specifying wherein Lessor has failed to perform such obligation; provided,
however, that if the nature of Lessor's obligation is such that more than thirty
(30) days are required for performance then Lessor shall not be in default if
Lessee commences performance within such 30-day period and thereafter diligently
pursues the same to completion.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
to Lessor of Base Rent, Lessee's Share of Operating Expense Increase or other
sums due hereunder will cause Lessor to incur costs not contemplated by this
Lease, the exact amount of which will be extremely difficult to ascertain. Such
costs include, but are not limited to, processing and accounting charges, and
late charges which may be imposed on Lessor by the terms of any mortgage or
trust deed covering the Office Building Project. Accordingly, if any installment
of Base Rent, Operating Expense Increase, or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within ten (10) business days
after such amount shall be due, then, without any requirement for notice to
Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's default with respect to such overdue amount, nor prevent
Lessor from exercising any of the other rights and remedies granted hereunder.
14. Condemnation. If the Premises or any portion thereof or the Office Building
Project are taken under the power of eminent domain, or sold under the threat of
the exercise of said power (all of which are herein called "condemnation"), this
Lease shall terminate as to the part so taken as of the date the condemning
authority takes title or possession, whichever first occurs, provided that if so
much of the Premises or the Office Building Project are taken by such
condemnation as would substantially and adversely affect the operation and
profitability of Lessee's business conducted from the Premises, Lessee shall
have the option, to be exercised only in writing within thirty (30) days after
Lessor shall have given Lessee written notice of such taking (or in the absence
of such notice, within thirty (30) days after the condemning authority shall
have taken possession), to terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the rent and Lessee's
Share of Operating Expense Increase shall be reduced in the proportion that the
floor area of the Premises taken bears to the total floor area of the Premises.
Common Areas taken shall be excluded from the Common Areas usable by Lessee and
no reduction of rent shall occur with respect thereto or by reason thereof.
Lessor shall have the option in its sole discretion to terminate this Lease as
of the taking of possession by the condemning authority, by giving written
notice to Lessee of such election within thirty (30) days after receipt of
notice of a taking by condemnation of any part of the Premises or the Office
Building Project, Any award for the taking of all or any part of the Premises or
the Office Building Project under the power of eminent domain or any payment
made under threat of the exercise of such power shall be the property of Lessor,
whether such award shall be made as compensation for diminution in value of the
leasehold or for the taking of the fee, or as severance damages; provided,
however, that Lessee shall be entitled to any separate award for loss of damage
to Lessee's trade fixtures, removable personal property and unamortized tenant
improvements that have been paid for by Lessee. For that purpose the cost of
such improvements shall be amortized over the original term of this Lease
excluding any options. In the event that this Lease is not terminated by reason
of such condemnation, Lessor shall to the extent of severance damages
received by Lessor in connection with such condemnation, repair any damage to
the Premises caused by such condemnation except to the extent that Lessee has
been reimbursed therefor by the condemning authority. Lessee shall pay any
amount in excess of such severance damages required to complete such repair.
15. Broker's Fee
(a) The brokers involved in this transaction are Keegan & Coppin Company,
Inc as "listing broker" and Keegan & Coppin Company, Inc. as "cooperating
broker", licensed real estate broker(s). A "cooperating broker" is defined as
any broker other than the listing broker entitled to a share of any
commission arising under this Lease. Upon execution of this Lease by both
parties, Lessor shall pay to said brokers jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
agreement between Lessor and said broker(s), or in the event there is no
separate agreement between Lessor and said broker(s), the sum of $ see
separate agreement, for brokerage services rendered by said broker(s) to
Lessor in this transaction.
(b) Lessor further agrees that (i) if Lessee exercises any Option, as
defined in paragraph 39.1 of this Lease, which is granted to Lessee under this
Lease, or any subsequently granted option which is substantially similar to an
Option granted to Lessee under this Lease, or (ii) if Lessee acquires any rights
to the Premises or other premises described in this Lease which are
substantially similar to what Lessee would have acquired had an Option herein
granted to Lessee been exercised, or (iii) if Lessee remains in possession of
the Premises after the expiration of the term of this Lease after having failed
to exercise an Option, or (iv) if said broker(s) are the procuring cause of any
other lease or sale entered into between the parties pertaining to the Premises
and/or any adjacent property in which Lessor has an interest, or (v) if the Base
Rent is increased, whether by agreement or operation of an escalation with the
schedule of said broker(s) in effect at the time of execution of this Lease.
Said fee shall be paid at the time such increased rental is determined.
(c) Lessor agrees to pay said fee not only on behalf of Lessor but also on
behalf of any person, corporation, association, or other entity having an
ownership interest in said real property or any or any part thereof, when such
fee is due hereunder. Any transferee of Lessor's interest in this Lease, whether
such transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessor's obligation under this paragraph 15. Each listing and
cooperating broker shall be a third party beneficiary of the provisions of this
paragraph 15 to the extent of their interest in any commission arising under
this Lease and may enforce that right directly against Lessor; provided,
however, that all brokers having a right to any part of such total commission
shall be a necessary party to any suit with respect thereto.
(d) Lessee and Lessor each represent and warrant to the other that neither
has had any dealings with any person, firm, broker or lender (other than the
person(s), if any, whose names are set forth in paragraph 15(a), above) in
connection with the negotiation of this Lease and/or the consummation of the
transaction contemplated hereby, and no other broker or other person, firm or
entity is entitled to any commission or finder's fee in connection with said
transaction and Lessee and Lessor do each hereby indemnify and hold the other
harmless from and against any costs, expenses, attorneys' fees or liability for
compensation or charges which may be claimed by any such unnamed broker, finder
or other similar party by reason of any dealings or actions of the indemnifying
party.
16. Estoppel Certificate.
(a) Each party (as "responding party") shall at any time upon not less
than ten (10) business days' prior written notice from the other party
("requesting party") execute, acknowledge and deliver to the requesting party a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this lease, as so modified, is in full force and effect and the
date
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to which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to the responding party's knowledge, any
uncured defaults on the part of the requesting party or specifying such defaults
if any are claimed. Any such statement may be conclusively relied upon by any
prospective purchaser or encumbrancer of the Office Building Project or of the
business of Lessee.
(b) At the requesting party's option, the failure to deliver such
statement within such time shall be a material default of this Lease by the
party who is to respond, without any further notice to such party, or it shall
be conclusive upon such party that (i) this Lease is in full force and effect,
without modification except as may be represented by the requesting party, (ii)
there are no uncured defaults in the requesting party's performance, and (iii)
if Lessor is the requesting party, not more than one month's rent has been paid
in advance.
(c) If Lessor desires to finance, refinance, or sell the Office Building
Project, or any part thereof, Lessee hereby agrees to deliver to any lender or
purchaser designated by Lessor such financial statements of Lessee as may be
reasonably required by such lender or purchaser. Such statements shall include
the past three (3) years' financial statements of Lessee. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean only the
owner or owners, at the time in question, of the fee title or a lessee's
interest in a ground lease of the Office Building Project, and except as
expressly provided in paragraph 15. In the event of any transfer of such title
or interest, Lessor herein named (and in case of any subsequent transfers then
the grantor) shall be relieved from and after the date of such transfer of all
liability as respects Lessor's obligations thereafter to be performed, provided
that any funds in the hands of Lessor or the then grantor at the time of such
transfer, in which Lessee has an interest, shall be delivered to the grantee.
The obligations contained in this Lease to be performed by Lessor shall, subject
as aforesaid, be binding on Lessor's successors and assigns, only during their
respective periods of ownership.
18. Severability. The invalidity of any provision of this Lease as determined by
a court of competent jurisdiction shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-due Obligations. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear interest at the maximum rate
then allowable by law or judgments from the date due. Payment of such interest
shall not excuse or cure any default by Lessee under this Lease; provided,
however, that interest shall not be payable on late charges incurred by Lessee
nor on any amounts upon which late charges are paid by Lessee.
20. Time of Essence. Time is of the essence with respect to the obligations to
be performed under this Lease.
21. Additional Rent. All monetary obligations of Lessee to Lessor under the
terms of this Lease, including but not limited to Lessee's Share of Operating
Expense increase and any other expenses payable by Lessee hereunder shall be
deemed to be rent.
22. Incorporation of Prior Agreements; Amendments. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
or contemporaneous agreement or understanding pertaining to any such matter
shall be effective. This Lease may be modified in writing only, signed by the
parties in interest at the time of the modification. Except as otherwise stated
in this Lease, Lessee hereby acknowledges that neither the real estate broker
listed in paragraph 15 hereof nor any cooperating broker on this transaction nor
the Lessor or any employee or agents of any of the said persons has made any
oral or written warranties or representations to Lessee relative to the
condition or use by Lessee of the Premises or the Office Building Project and
Lessee acknowledges that Lessee assumes all responsibility regarding the
Occupational Safety Health Act, the legal use and adaptability of the Premises
and the compliance thereof with all applicable laws and regulations in effect
during the term of this Lease.
23. Notices. Any notice required or permitted to be given hereunder shall be in
writing and may be given by personal delivery or by certified or registered
mail, and shall be deemed sufficiently given if delivered or addressed to Lessee
or to Lessor at the address noted below or adjacent to the signature of the
respective parties, as the case may be. Mailed notices shall be deemed given
upon actual receipt at the address required, or forty-eight hours following
deposit in the mail, postage prepaid, whichever first occurs. Either party may
by notice to the other specify a different address for notice purposes except
that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for notice purposes. A copy of all notices required
or permitted to be given to Lessor hereunder shall be concurrently transmitted
to such party or parties at such addressee as Lessor may from time to time
hereafter designate by notice to Lessee.
24. Waivers. No waiver by Lessor of any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent to
or approval of any subsequent act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.
26. Holding Over. If Lessee, with Lessor's consent, remains in possession of the
Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of this
Lease pertaining to the obligations of Lessee, except that the rent payable
shall be one hundred twenty five percent (125%) of the rent payable immediately
preceding the termination date of this Lease, and all Options, if any, granted
under the terms of this Lease shall be deemed terminated and be of no further
effect during said month to month tenancy.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. Each provision of this Lease performable by Lessee
shall be deemed both a covenant and a condition.
29. Binding Effect; Choices of Law. Subject to any provisions hereof restricting
assignment or subletting by Lessee and subject to the provisions of paragraph
17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State
where the Office Building Project is located and any litigation concerning this
Lease between the parties hereto shall be initiated in the county in which the
Office Building Project is located.
30. Subordination.
(a) This Lease, and any Option or right of first refusal granted hereby,
at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of
trust, or any other hypothecation or security now or hereafter placed upon the
Office Building Project and to any and all advances made on the security thereof
and to all renewals, modifications, consolidations, replacements and extensions
thereof. Notwithstanding such subordination, Lessee's right to quiet possession
of the Premises shall not be disturbed if Lessee is not in default and so long
as Lessee shall pay the rent and observe and perform all of the provisions of
this Lease, unless this Lease is otherwise terminated pursuant to its terms. If
any mortgagee, trustee or ground lessor shall elect to have this Lease and any
Options granted hereby prior to the lien of its mortgage, deed of trust or
ground lease, and shall give written notice thereof to Lessee, this Lease and
such Options shall be deemed prior to such mortgage, deed of trust or ground
lease, whether this Lease or such Options are dated prior to subsequent to the
date of said mortgage, deed of trust or ground lease or the date of recording
thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination, or to make this Lease or any Option granted herein
prior to the lien of any mortgage, deed of trust or ground lease, as the case
may be. Lessee's failure to execute such documents within ten (10) days after
written demand shall constitute a material default by Lessee hereunder without
further notice to Lessee or, at Lessor's option, Lessor shall execute such
documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby
make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and
in Lessee's name, place and stead, to execute such documents in accordance with
this paragraph 30(b).
31. Attorneys' Fees. Each party shall pay for their respective legal fees.
31.3 Lessor shall be entitled to reasonable attorneys' fees and all other
costs and expenses incurred in the preparation and service of notice of default
and consultations in connection therewith, whether or not a legal transaction is
subsequently commenced in connection with such default.
32. Lessor's Access.
32.1 Lessor and Lessor's agents shall have the right to enter the Premises
at reasonable times for the purpose of inspecting the same, performing any
services required of Lessor, showing the same to prospective purchasers,
lenders, or lessees, taking such safety measures erecting such scaffolding or
other necessary structures, making such alterations, repairs, improvements or
additions to the Premises or to the Office Building Project as Lessor may
reasonably deem necessary or desirable and the erecting, using and maintaining
of utilities, services, pipes and conduits through the Premises and/or other
premises as long as there is no material adverse effect to Lessee's use of the
Premises. Lessor may at any time place on or about the Premises of the Building
any ordinary "For Sale" signs and Lessor may at any time during the last 120
days of the term hereof place on or about the Premises any ordinary "For Lease"
signs.
32.2 All activities of Lessor pursuant to this paragraph shall be without
abatement of rent, nor shall Lessor have any liability to Lessee for the same.
Initials: /s/ [Illegible]
FORM OFG-0-6/84
(c) 1984 American Industrial Real Estate Association
FULL SERVICE-GROSS
PAGE 8 OF 10 PAGES
<PAGE>
32.3 Lessor shall have the right to retain keys to the Premises and to
unlock all doors in or upon the Premises other than to files, vaults and safes,
and in the case of emergency to enter the Premises by any reasonably appropriate
means, and any such entry shall not be deemed a forceable or unlawful entry or
detainer of the Premises or an eviction. Lessee waives any charges for damages
or injuries or interference with Lessee's property or business in connection
therewith.
33. Auctions. Lessee shall not conduct, or permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises or the Common Areas
without first having obtained Lessor's prior written consent. Notwithstanding
anything to the contrary in this Lease, Lessor shall not be obligated to
exercise any standard of reasonableness in determining whether to grant such
consent. The holding of any auction on the Premises or Common Areas in violation
of this paragraph shall constitute a material default of this Lease.
34. Signs. Lessee shall not place any sign upon the Premises or the Office
Building Project without Lessor's prior written consent. Under no circumstances
shall Lessee place a sign on any roof of the Office Building Project.
35. Merger. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
36. Consents. Except for paragraphs 33 (auctions) and 34 (signs) hereof,
wherever in this Lease the consent of one party is required to an act of the
other party such consent shall not be unreasonably withheld or delayed.
37. Guarantor. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. Quiet Possession. Upon Lessee paying the rent for the Premises and observing
and performing all of the covenants, conditions and provisions on Lessee's part
to be observed and performed hereunder, Lessee shall have quiet possession of
the Premises for the entire term hereof subject to all of the provisions of this
Lease. The individuals executing this Lease on behalf of Lessor represent and
warrant to Lessee that they are fully authorized and legally capable of
executing this Lease on behalf of Lessor and that such execution is binding upon
all parties holding an ownership interest in the Office Building Project.
39. Options.
39.1 Definition. As used in this paragraph the word "Option" has the
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (2) the option of right of first refusal to lease the
Premises or the right of first offer to lease the Premises or the right of first
refusal to lease other space within the Office Building Project or other
property of Lessor or the right of first offer to lease other space within the
Office Building Project or other property of Lessor; (3) the right or option to
purchase the Premises or the Office Building Project or the right of first
refusal to purchase the Premises, or the Office Building Project, or the right
of first offer to purchase the Premises or the Office Building Project, or the
right or option to purchase other property of Lessor, or the right of first
refusal to purchase other property of Lessor or the right of first offer to
purchase other property of Lessor.
39.2 Options Personal. Each Option granted to Lessee in this Lease is
personal to the original Lessee and may be exercised only by the original Lessee
while occupying the Premises who does so without the intent of thereafter
assigning this Lease or subletting the Premises or any portion thereof, and may
not be exercised or be assigned, voluntarily or involuntarily, by or to any
person or entity other than Lessee; provided, however, that an Option may be
exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of
this Lease. The Options, if any, herein granted to Lessee are not assignable
separate and apart from this Lease, nor may any Option be separated from this
Lease in any manner, either by reservation or otherwise.
39.3 Multiple Options. In the event that Lessee has any multiple options
to extend or renew this Lease a later option cannot be exercised unless the
prior option to extend or renew this Lease has been so exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary, (i) during
the time commencing from the date Lessor gives to Lessee a notice of default
pursuant to paragraph 13.1(c) or 13.1(d) and continuing until the non-compliance
alleged in said notice of default is cured, or (ii) during the period of time
commencing on the day after a monetary obligation to Lessor is due from Lessee
and unpaid (without any necessity for notice thereof to Lessee) and continuing
until the obligation is paid, or (iii) in the event that Lessor has given to
Lessee three or more notices of default under paragraph 13.1(c), or paragraph
13.1(d), whether or not the defaults are cured, during the 12 month period of
time immediately prior to the time that Lessee attempts to exercise the subject
Option, (iv) if Lessee has committed any non-curable breach, including without
limitation those described in paragraph 13.1(b), or is otherwise in default of
any of the terms, covenants or conditions of this Lease.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to
commence to cure a default specified in paragraph 13.1(d) within thirty (30)
days after the date that Lessor gives notice to Lessee of such default and/or
Lessee fails thereafter to diligently prosecute said cure to completion, or
(iii) Lessor gives to Lessee three or more notices of default under paragraph
13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, or (iv) if
Lessee has committed any non-curable breach, including without limitation those
described in paragraph 13.1(b), or is otherwise in default of any of the terms,
covenants and conditions of this Lease.
40. Security Measures-Lessor's Reservations.
40.1 Lessee hereby acknowledges that Lessor shall have no obligation
whatsoever to provide guard service or other security measures for the benefit
of the premises or the Office Building Project. Lessee assumes all
responsibility for the protection of Lessee, its agents, and invitees and the
property of Lessee and of Lessee's agents and invitees from acts of third
parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option,
from providing security protection for the Office Building Project or any part
thereof, in which event the cost thereof shall be included within the definition
of Operating Expenses, as set forth in paragraph 4.2(b).
40.2 Lessor shall have the following rights:
(a) To change the name, address or title of the Office Building
Project or building in which the Premises are located upon not less than 90 days
prior written notice;
(b) To, at Lessee's expense, provide and install Building standard
graphics on the door of the Premises and such portions of the Common Areas as
Lessor shall reasonably deem appropriate;
(c) To permit any lessee the exclusive right to conduct any business
as long as such exclusive does not conflict with any rights expressly given
herein;
(d) To place such signs, notices or displays as Lessor reasonably
deems necessary or advisable upon the roof, exterior of the buildings or the
Office Building Project or on pole signs in the Common Areas.
40.3 Lessee shall not:
(a) Use a representation (photographic or otherwise) of the Building
or the Office Building Project or their name(s) in connection with Lessee's
business;
(b) Suffer or permit anyone, except in emergency, to go upon the
roof of the Building.
41. Easements.
41.1 Lessor reserves to itself the right, from time to time, to grant such
easements, rights and dedications that Lessor deems necessary or desirable, and
to cause the recordation of Parcel Maps and restrictions, so long as such
easements, rights, dedications, Maps and restrictions do not unreasonably
interfere with the use of the Premises by Lessee. Lessee shall sign any of the
aforementioned documents upon request of Lessor and failure to do so shall
constitute a material default of this Lease by Lessee without the need for
further notice to Lessee.
41.2 The obstruction of Lessee's view, air, or light by any structure
erected in the vicinity of the Building, whether by Lessor or third parties,
shall in no way affect this Lease or impose any liability upon Lessor.
42. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one party to the other under the provisions
hereof, the party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment, and there shall survive the right on the part
of said party to institute suit for recovery of such sum. If it shall be
adjudged that there was no legal obligation on the part of said party to pay
such sum or any part thereof, said party shall be entitled to recover such sum,
or so much thereof as it was not legally required to pay under the provisions of
this Lease.
Initials: /s/ [Illegible]
FORM OFG-0-6/84
(c) 1984 American Industrial Real Estate Association
FULL SERVICE-GROSS
PAGE 9 OF 10 PAGES
<PAGE>
43. Authority. If Lessee is a corporation, trust, or general or limited
partnership, Lessee, and each individual executing this Lease on behalf of such
_____________________ entity represent and warrant that such individual is duly
authorized to execute and deliver this Lease on behalf of said entity. If Lessee
is a corporation, trust or partnership, Lessee shall, within thirty (30) days
after execution of this Lease, deliver to Lessor evidence of such authority
satisfactory to Lessor.
44. Conflict. Any conflict between the printed provisions, Exhibits or Addenda
of this Lease and the typewritten or handwritten provisions, if any, shall be
controlled by the typewritten or handwritten provisions.
45. No Offer. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to Lessee to lease.
This Lease shall become binding upon Lessor and Lessee only when fully executed
by both parties.
46. Lender Modification. Lessee agrees to make such reasonable modifications to
this Lease as may be reasonably required by an institutional lender in
connection with the obtaining of normal financing or refinancing of the Office
Building Project.
47. Multiple Parties. If more than one person or entity is named as either
Lessor or Lessee herein, except as otherwise expressly provided herein, the
obligations of the Lessor or Lessee herein shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee,
respectively.
48. Work Letter. This Lease is supplemented by that certain Work Letter of even
date executed by Lessor and Lessee, attached hereto as Exhibit C, and
incorporated therein by this reference.
49. Attachments. Attached hereto are the following documents which constitute a
part of this Lease:
Addendum #50-60
Exhibit A - Floor Plan
Exhibit B - Rules & Regulations
Exhibit B1 - Premises Plan
Exhibit B2 - Site Plan
Exhibit C - Work Letter
Leasing Disclosure regarding Real Estate Agency
Standard Lease Disclosure Addendum
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS
MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL
ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION
RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR
OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
LESSOR LESSEE
Advanced Development & Investments National Bank of the Redwoods
- ---------------------------------- ---------------------------------
By /s/ [Illegible] By /s/ [Illegible]
-------------------------------- -------------------------------
Its MANAGING DIRECTOR Its President
--------------------------- --------------------------
By________________________________ By_______________________________
Its___________________________ Its__________________________
Executed at_______________________ Executed at______________________
on________________________________ on_______________________________
Address 7/16/99 Address__________________________
---------------------------
(c) 1984 American Industrial Real Estate Association
FULL SERVICE-GROSS
PAGE 10 OF 10 PAGES
For these forms write or call the American Industrial Real Estate Association,
700 South Flower Street, Suite 600, Los Angeles, CA 90017. (213) 687-8777.
(c) 1984 -- By American Industrial Real Estate Association. All rights reserved.
No part of these words may be reproduced in any form without permission in
writing.
Initials: /s/ [Illegible]
FORM OFG-0-6/84
<PAGE>
Addendum #1 To The Standard Office Lease
By and Between
Advanced Development & Investments (Lessor)
And
National Bank of the Redwoods (Lessee)
The parties hereby agree as follows:
50. Rent Schedule:
Year 1: $2.00 psf, per mo., full service ($43,218.00 per month)
(Subject to Addendum #51 below)
Year 2: $2.05 psf, per mo., full service ($44,298.45 per month)
Year 3: $2.10 psf, per mo., full service ($45,378.90 per month)
Year 4: $2.15 psf, per mo., full service ($46,459.35 per month)
Year 5: $2.20 psf, per mo., full service ($47,539.80 per month)
51. Rent Credit:
Lessor shall grant Lessee a rental credit in the amount of $10,417 per
month for the first twelve (12) months of the lease, as an off-set for the
Lessee paying for their own interior improvement work. Actual Rent for
month one shall be $32,801.00.
52. Financial Statement Approval:
Lessor has previously reviewed and approved Tenant's Financial Statements
and Credit Report.
53. Tenant Improvements:
All tenant improvements shall be designed and constructed by the Lessee at
the Lessee's cost per Exhibit A, A-1 & A-2 (first and second floor plans)
and Exhibit C--Work letter, attached herein. Lessor will pay for all costs
of space planning and architectural fees. Lessee shall construct said
premises to meet all applicable codes including ADA requirements and
codes. Lessee shall be responsible to provide all tenant workstations and
other personal property, including all telephone, data and computer
equipment.
Lessor and Lessee to approve plan and specifications covering the layout
of the premises and the scope of responsibility of the Tenant Improvements
between Lessor and Lessee as stipulated in lease. Said approval shall be
forthcoming within ten (10) days of acceptance hereof.
Lessee to install Tenant Improvements in a quality good workmanlike manner
in accordance with approved plans and specifications in a timely fashion.
Lessee shall have full responsibility as indicated above and additionally
Lessee shall remove all mechanics liens, to satisfy all claims and meet
all contract requirements with suppliers, contractors and employees
arising out of said installation of improvements. Lessee to have workman
compensation and liability insurance with a minimum $500,000 per
occurrence for said installation and to name Lessor additional insured.
Lessee shall indemnify and hold harmless Lessor for all claims of
employees, invitees, materialmen, supplier arising out of said
installation.
Area Measurement: Lessee has reviewed and approved the system of
measurement, the usable and rental square footage of the subject premises.
<PAGE>
54. Use Permit:
If deemed necessary Lessee shall obtain a use permit for the use stated
herein from the applicable Governmental Agency, within 30 calendar days of
acceptance hereof. Lessor shall use due diligence in pursuing the use
permit. Any permit application costs associated with obtaining the use
permit shall be borne by Lessee.
55. Signage:
Lessee shall be allowed to maintain all existing signage. Any additional
signage must be approved by the Lessor and paid for by the Lessee.
56. Operating Expenses:
Lessee shall receive a new base year which period shall be from the
commencement date through calendar year 2000. Annual increases if any
shall be capped at 4%.
57. Architecture:
The Lessor shall provide all architectural services (space planning and
construction drawings) and permit fees outside of the Lessee's tenant
improvement allowance.
58. Parking:
Lessee is entitled to a ratio equal to 2.81/1000 on-site free of charge or
approximately 63 spaces, approximately 1/2 surface level and 1/2 in the
subterranean garage.
59. Dual Agency:
In all dual agency transactions, Keegan & Coppin Company, Inc., is agent
for both the Lessor and Lessee, and each party acknowledges that they have
been advised about agency relationship by Keegan & Coppin Company, Inc.,
and agree to the dual agency relationship.
60. Building Maintenance:
Notwithstanding Lessor's obligations contained in this lease, Lessor shall
at a minimum:
a. Wash all exterior windows 4 times per year.
b. Powerwash the exterior facade once a year.
c. Sweeping of parking lot once a month.
d. Pest control service once a month, including roof maintenance.
e. Fire sprinkler monitoring 4 times per year.
f. Elevator maintenance and service monthly.
g. Check or refill all fire extinguishers annually.
h. Perform full HVAC maintenance every 3 months.
The herein agreement, upon execution by both parties, is herewith made an
integral part of the aforementioned Standard Office Lease.
Lessor Lessee
/s/ [Illegible] /s/ Patrick W. Kilkenny
- --------------------------- ------------------------------
President
- --------------------------- ------------------------------
Date: 7/16/96 Date: July 8, 1999
<PAGE>
EXHIBIT A-1
FLOOR PLAN
[GRAPHIC OMITTED]
<PAGE>
EXHIBIT A2
SECOND FLOOR PLAN
[GRAPHIC OMITTED]
<PAGE>
PARKING GARAGE PLAN
[GRAPHIC OMITTED]
<PAGE>
RULES AND REGULATIONS FOR
STANDARD OFFICE LEASE
[LOGO]
Dated: June 1, 1999
By and Between Advanced Development & Investments (Lessor) and National Bank of
the Redwoods (Lessee)
GENERAL RULES
1. Lessee shall not suffer or permit the obstruction of any Common Areas,
including driveways, walkways and stairways.
2. Lessor reserves the right to refuse access to any persons Lessor in
good faith judges to be a threat to the safety, reputation, or property of the
Office Building Project and its occupants.
3. Lessee shall not make or permit any noise or odors that annoy or
interfere with other lessees or persons having business within the Office
Building Project.
4. Lessee shall not keep animals or birds within the Office Building
Project, and shall not bring bicycles, motorcycles or other vehicles into areas
not designated as authorized for same.
5. Lessee shall not make, suffer or permit litter except in appropriate
receptacles for that purpose.
6. Lessee shall not alter any lock or install new or additional locks or
bolts.
7. Lessee shall be responsible for the inappropriate use of any toilet
rooms, plumbing or other utilities. No foreign substances of any kind are to be
inserted therein.
8. Lessee shall not deface the walls, partitions or other surfaces of the
premises or Office Building Project.
9. Lessee shall not suffer or permit anything in or around the Premises
or Building that causes excessive vibration or floor loading in any part of the
Office Building Project.
10. Furniture, significant freight and equipment shall be moved into or
out of the building only with the Lessor's knowledge and consent, and subject to
such reasonable limitations, techniques and timing, as may be designated by
Lessor. Lessee shall be responsible for any damage to the Office Building
Project arising from any such activity.
11. Lessee shall not employ any service or contractor for services or
work to be performed in the Building, except as approved by Lessor.
12. Lessor reserves the right to close and lock the Building on Saturdays,
Sundays and legal holidays, and on other days between the hours of __ P.M. and
__ A.M. of the following day. If Lessee uses the Premises during such periods,
Lessee shall be responsible for securely locking any doors it may have opened
for entry.
13. Lessee shall return all keys at the termination of its tenancy and
shall be responsible for the cost of replacing any keys that are lost.
14. No window coverings, shades or awnings shall be installed or used by
Lessee.
15. No Lessee, employee or invitee shall go upon the roof of the Building.
16. Lessee shall not suffer or permit smoking or carrying of lighted
cigars or cigarettes in areas reasonably designated by Lessor or by applicable
governmental agencies as non-smoking areas.
17. Lessee shall not use any method of heating or air conditioning other
than as provided by Lessor.
18. Lessee shall not install, maintain or operate any vending machines
upon the Premises without Lessor's written consent.
19. The Premises shall not be used for lodging or manufacturing, cooking
or food preparation.
20. Lessees shall comply with all safety, fire protection and evacuation
regulations established by Lessor or any applicable governmental agency.
21. Lessor reserves the right to waive any one of these rules or
regulations and/or as to any particular lessee, and any such waiver shall not
constitute a waiver of any other rule or regulation or any subsequent
application thereof to such Lessee.
22. Lessee assumes all risks from theft or vandalism and agrees to keep
its Premises locked as may be required.
23. Lessor reserves the right to make such other reasonable rules and
regulations as it may from time to time deem necessary for the appropriate
operation and safety of the Office Building Project and its occupants. Lessee
agrees to abide by these and such rules and regulations.
PARKING RULES
1. Parking areas shall be used only for parking by vehicles no longer than
full size passenger automobiles herein called "Permitted Size Vehicles."
Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized
Vehicles."
2. Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or
invitees to be loaded, unloaded, or parked in areas other than those designated
by Lessor for such activities.
3. Parking stickers or identification devices shall be the property of
Lessor and be returned to Lessor by the holder thereof upon termination of the
holder's parking privileges. Lessee will pay such replacement charge as is
reasonably established by Lessor for the loss of such devices.
4. Lessor reserves the right to refuse the sale of monthly identification
devices to any person or entity that willfully refuses to comply with the
applicable rules, regulations, laws and/or agreements.
5. Lessor reserves the right to relocate all or a part of parking spaces
from floor to floor, within one floor, and/or to reasonably adjacent offsite
location(s), and to reasonably allocate them between compact and standard size
spaces, as long as the same complies with applicable laws, ordinances and
regulations.
6. Users of the parking area will obey all posted signs and park only in
the areas designated for vehicle parking.
7. Unless otherwise instructed, every person using the parking area is
required to park and lock his own vehicle. Lessor will not be responsible for
any damage to vehicles, injury to persons or loss of property, all of which
risks are assumed by the party using the parking area.
8. Validation if established, will be permissible only by such method
or methods as Lessor and/or its licensee may establish at rates generally
applicable to visitor parking.
9. The maintenance, washing, waxing or cleaning of vehicles in the parking
structure or Common Areas is prohibited.
10. Lessee shall be responsible for seeing that all of its employees,
agents and invitees comply with the applicable parking rules, regulations, laws
and agreements.
11. Lessor reserves the right to modify these rules and/or adopt such
other reasonable and non-discriminatory rules and regulations, as it may deem
necessary for the proper operation of the parking area.
12. Such parking use as is herein provided is intended merely as a
license only and no bailment is intended or shall be created hereby.
Initials: [ILLEGIBLE]
---------
FORM OFG-O-6/84
(Copyright) 1984 American Industrial Real Estate Association
FULL SERVICE--GROSS
EXHIBIT B
PAGE 1 OF 1 PAGES
<PAGE>
EXHIBIT B-1
PREMISES PLAN
[GRAPHIC OMITTED]
<PAGE>
EXHIBIT B-2
SITE PLAN
[GRAPHIC OMITTED]
<PAGE>
WORK LETTER TO STANDARD OFFICE LEASE
Dated: June 1, 1999
By and between: Advanced Development & Investments (Lessor) and Natonal Bank of
the Redwoods (Lessee)
The Premises shall be constructed in accordance with Lessor's Standard
Improvements as follows: using building standard materials, approved by the
Lessor, with Lessee responsible for the cost of all interior modifications. See
Exhibit A and A-1, and addendum #53
1. Partitions
TBD
2. Wall Surfaces
TBD
3. Draperies
TBD
4. Carpeting
TBD
5. Doors
TBD
6. Electrical and Telephone Outlets
TBD
7. Ceiling
TBD
8. Lighting
TBD
9. Heating and Air Conditioning Ducts
TBD
10. Sound Proofing
TBD
11. Plumbing
TBD
Initials: [ILLEGIBLE]
---------
FORM OFG-0-6/84
(Copyright) 1984 American Industrial Real Estate Association
FULL SERVICE--GROSS
EXHIBIT C
PAGE 1 OF 2 PAGES
<PAGE>
12. Entrance Doors
13. Completion of Improvements
Lessor shall construct and complete improvements to the Premises in
accordance with the plans and specifications prepared by Joel Desilva CDT
AIA's, dated _______________, consisting of sheets _______________, (the
"Improvements").
14. Preparation of Plans and Specifications
Within ______ days after the date of this Lease Lessor shall prepare at
its cost and deliver to Lessee for its approval _________________ copies of
preliminary plans and specifications for the completion of the Improvements,
which plans and specifications shall itemize the work to be done by each party,
including a cost estimate of any work required of Lessor in excess of Lessor's
Standard Improvements. Lessee shall approve said preliminary plans and
specifications and preliminary cost estimate or specify with particularity its
objection thereto within _________ days following receipt thereof. Failure to
so approve or disapprove within said period of time shall constitute approval
thereof. If Lessee shall reject said preliminary plans and specifications either
partially or totally, and they cannot in good faith be modified within ten (10)
days after such rejection to be acceptable to Lessor and Lessee, this Lease
shall terminate and neither party shall thereafter be obligated to the other
party for any reason whatsoever having to do with this Lease, except that Lessee
shall be refunded any security deposit or prepaid rent. The plans and
specifications, when approved by Lessee, shall supercede any prior agreement
concerning the Improvements.
15. Construction
If Lessor's cost of constructing the Improvements to the Premises exceeds
the cost of Lessor's Standard Improvements, Lessee shall pay to Lessor in cash
before the commencement of such construction a sum equal to such excess.
If the final plans and specifications are approved by Lessor and Lessee,
and Lessee pays Lessor for such excess, then Lessor shall, at its sole cost and
expense, construct the Improvements in accordance with said approved final plans
and specifications and all applicable rules, regulations, laws or ordinances.
16. Completion
16.1 Lessor shall obtain a building permit to construct the Improvements
as soon as possible.
16.2 Lessor shall complete the construction of the Improvements as soon as
reasonably possible after the obtaining of necessary building permits.
16.3 The term "Completion," as used in this Work Letter, is hereby defined
to mean the date the building department of the municipality having jurisdiction
of the Premises shall have made a final inspection of the Improvements and
authorized a final release of restrictions on the use of public utilities in
connection therewith and the same are in a broom-clean condition.
16.4 Lessor shall use its best efforts to achieve Completion of the
Improvements on or before the Commencement Date set forth in paragraph 1.5 of
the Basic Lease Provisions or within one hundred eighty (180) days after Lessor
obtains the building permit from the applicable building department, whichever
is later.
16.5 In the event that the Improvements or any portion thereof have not
reached Completion by the Commencement Date, this Lease shall not be invalid but
rather Lessor shall complete the same as soon thereafter as is possible and
Lessor shall not be liable to Lessee for damages in any respect whatsoever.
16.6 If Lessor shall be delayed at anytime in the progress of the
construction of the Improvements or any portion thereof by extra work, changes
in construction ordered by Lessee, or by strikes, lockouts, fire, delay in
transportation, unavoidable casualties, rain or weather conditions, governmental
procedures or delay, or by any other cause beyond Lessor's control, then the
Commencement Date established in paragraph 1.5 of the Lease shall be extended by
the period of such delay.
17. Term
Upon Completion of the Improvements as defined in paragraph 16.3 above,
Lessor and Lessee shall execute an amendment to the Lease setting forth the date
of Tender of Possession as defined in paragraph 3.2.1 of the Lease or of actual
taking of possession, whichever first occurs, as the Commencement Date of this
Lease.
18. Work Done by Lessee
Any work done by Lessee shall be done only with Lessor's prior written
consent and in conformity with a valid building permit and all applicable rules,
regulations, laws and ordinances, and be done in a good and workmanlike manner
with good and sufficient materials. All work shall be done only with union labor
and only by contractors approved by Lessor, it being understood that all
plumbing, mechanical, electrical wiring and ceiling work are to be done only by
contractors designated by Lessor.
19. Taking of Possession of Premises
Lessor shall notify Lessee of the Estimated Completion Date at least ten
(10) days before said date. Lessee shall thereafter have the right to enter the
Premises to commence construction of any Improvements Lessee is to construct and
to equip and fixturize the Premises, as long as such entry does not interfere
with Lessor's work. Lessee shall take possession of the Premises upon the tender
thereof as provided in paragraph 3.2.1 of the Lease to which this Work Letter is
attached. Any entry by Lessee of the Premises under this paragraph shall be
under all of the terms and provisions of the Lease to which this Work Letter is
attached.
20. Acceptance of Premises
Lessee shall notify Lessor in writing of any items that Lessee deems
incomplete or incorrect in order for the Premises to be acceptable to Lessee
within ten (10) days following Tender of Possession as set forth in paragraph
3.2.1 of the Lease to which this Work Letter is attached. Lessee shall be deemed
to have accepted the Premises and approved construction if Lessee does not
deliver such a list to Lessor within said number of days.
Initials: [ILLEGIBLE]
---------
FORM OFG-0-6/84
(Copyright) 1984 American Industrial Real Estate Association
FULL SERVICE--GROSS
EXHIBIT C
PAGE 2 OF 2 PAGES
NOTE: [ILLEGIBLE]
<PAGE>
LEASING DISCLOSURE REGARDING
REAL ESTATE AGENCY RELATIONSHIP
When you enter into a discussion with a real estate agent regarding a real
estate transaction, you should from the outset understand what type of agency
relationship or representation you wish to have with the agent in the
transaction.
LANDLORD'S AGENT
A Landlord's agent under a listing agreement with the Landlord acts as the agent
for the Landlord. A Landlord's agent or a subagent of that agent has the
following affirmative obligations:
To the Landlord:
(a) A fiduciary duty of utmost care, integrity, honesty and loyalty in dealing
with the Landlord.
To the Tenant and the Landlord:
(a) Diligent exercise of reasonable skill and care in performance of the agent's
duties.
(b) A duty of honest and fair dealing and good faith.
(c) A duty to disclose all facts known to the agent materially affecting the
value or desirability of the property that are not known to, or within the
diligent attention and observation of, the parties.
An agent is not obligated to reveal to either party any confidential information
obtained from the other party which does not involve the affirmative duties set
forth above.
TENANT'S AGENT
A Tenant's agent can, with a Tenant's consent, agree to act as agent for the
Tenant only. In these situations, the agent is not the Landlord's agent, even if
by agreement the agent may receive compensation for services rendered, either in
full or in part from the Landlord. An agent acting only for a Tenant has the
following affirmative obligations:
To the Tenant:
(a) A fiduciary duty of utmost care, integrity, honesty and loyalty in dealings
with the Tenant.
To the Tenant and the Landlord:
(a) Diligent exercise of reasonable skill and care in performance of the agent's
duties.
(b) A duty of honest and fair dealing and good faith.
(c) A duty to disclose all facts known to the agent materially affecting the
value or desirability of the property that are not known to, or within the
diligent attention and observation of, the parties.
An agent is not obligated to reveal to either party any confidential information
obtained from the other party which does not involve the affirmative duties set
forth above.
AGENT REPRESENTING BOTH LANDLORD AND TENANT
A real estate agent, either acting directly or through one or more associate
licensees, can legally be the agent of both the Landlord and the Tenant in a
transaction, but only with the knowledge and consent of both the Landlord and
the Tenant.
In a dual agency situation, the agent has the following affirmative obligations
to both the Landlord and the Tenant.
(a) A fiduciary duty of utmost care, integrity, honest and loyalty in the
dealings with either Landlord or Tenant.
(b) Other duties to the Landlord and the Tenant as stated above in their
respective sections.
In representing both Landlord and Tenant, the agent may not, without the express
permission of the respective party, disclose to the other party that the
Landlord will accept a rent less than the listed rent or that the Tenant will
pay a rent greater than the rent offered.
The above duties of the agent in a real estate transaction do not relieve a
Landlord or Tenant from the responsibility to protect their own interests. You
should carefully read all agreements to assure that they adequately express your
understanding of the transaction. A real estate agent is a person qualified to
advise about real estate. If legal or tax advice is desired, consult a
competent professional.
You should read its contents each time it is presented to you, considering the
relationship between you and the real estate agent in your specific transaction.
We acknowledge receipt of a copy of this disclosure.
Landlord/Tenant /s/ Patrick W. Kilkenny Date July 8, 1999
------------------------------
Landlord/Tenant /s/ [ILLEGIBLE] Date 7/16/99
------------------------------
================================================================================
SIGN BELOW TO AUTHORIZE TYPE OF AGENCY
Keegan & Coppin Co., Inc., is the agent of (check one):
(Name of Listing Agent)
|_| The Landlord exclusively; or
|x| Both the Tenant and Landlord
CONFIRMED AND AUTHORIZED:
Landlord /s/ [ILLEGIBLE] Date 7/16/99
------------------------------ -------
Landlord Date
------------------------------ -------
Agent Keegan & Coppin Company Company, Inc. By Date
------------------------------------- -------------- -------
- --------------------------------------------------------------------------------
Keegan & Coppinn Company, Inc., is the agent of (check one):
(Name of Tenant's agent)
|_| The Tenant exclusively; or
|_| The Landlord exclusively; or
|X| Both the Tenant and Landlord
CONFIRMED AND AUTHORIZED:
Tenant /s/ Patrick W. Kilkenny Date July 8, 1999
------------------------------ ----------------------
Tenant Date
------------------------------ ----------------------
Agent Keegan & Coppin Company Company, Inc. By Date
------------------------------------- -------------- -------
<PAGE>
STANDARD LEASE DISCLOSURE ADDENDUM
Notice to Owners, Buyers and Tenants Regarding Hazardous Wastes or Substances
- -----------------------------------------------------------------------------
and Underground Storage Tanks
- -----------------------------
Comprehensive federal and state laws and regulations have been enacted in the
last few years in an effort to develop controls over the use, storage, handling,
cleanup, removal and disposal of hazardous wastes or substances. Some of these
laws and regulations, such as, for example, the so-called "Super Fund Act",
provide for broad liability schemes wherein an owner, tenant or other user
of the property may be liable for cleanup costs and damages regardless of fault.
Other laws and regulations set standards for the handling of asbestos or
establish requirements for the use, modification, abandonment, or closing of
underground storage tanks.
It is not practical or possible to list all such laws and regulations in this
Notice. Therefore, lessors and lessees are urged to consult legal counsel to
determine their respective rights and liabilities with respect to the issues
described in this Notice as well as other aspects of the proposed transaction.
If various materials that have been or may be in the future determined to be
toxic, hazardous or undesirable, or are going to be used, stored, handled or
disposed of on the property, or if the property has or may have underground
storage tanks for storage of such hazardous materials, or that such materials
may be in the equipment, improvements or soil, it is essential that legal and
technical advice be obtained to determine, among other things, what permits and
approvals have been or may be required, if any, the estimated costs and expenses
associated with the use, storage, handling, cleanup, removal or disposal of the
hazardous wastes or substances and what contractual provisions and protection
are necessary or desirable. It may also be important to obtain expert assistance
for site investigations and building inspections. The past uses of the property
may provide valuable information as to the likelihood of hazardous wastes or
substances, or underground storage tanks being on the property.
The term "hazardous wastes or substances" is used in this Notice in its very
broadest sense and includes, but is not limited to, all those listed under
Proposition 65, petroleum base products, paints and solvents, lead, cyanide,
DDT, printing inks, acids, pesticides, ammonium compounds, asbestos, PCBs and
other chemical products. Hazardous wastes or substances and underground storage
tanks may be present on all types of real property. This Notice is, therefore,
meant to apply to any transaction involving any type of real property, whether
improved or unimproved.
Although Keegan & Coppin Co., Inc. or its salespeople, will disclose any
knowledge it actually possesses with respect to the existence of hazardous
wastes or substances, or underground storage tanks on the property, Keegan &
Coppin Co., Inc. has not made investigations or obtained reports regarding the
subject matter of this Notice, except as may be described in a separate written
document, studies or investigation by experts. Therefore, unless there are
additional documents or studies attached to this notice, lease or contract, this
will serve as notification that Keegan & Coppin Co., Inc. or its salespeople
make no representation regarding the existence or non-existence of hazardous
wastes or substances, or underground storage tanks on the property. You should
contact a professional, such as a civil engineer, geologist, industrial
hygienist or other persons with experience in these matters to advise you
concerning the property.
Americans with Disabilities Act (ADA)
On July 26, 1991, the federal legislation known as the Americans with
Disabilities Act (ADA) was signed into law by President Bush. The purpose of the
ADA is to integrate persons with disabilities into the economic and social
mainstream of American life. Title III of the ADA applies to Lessors and Lessees
of "places of public accommodation" and "commercial facilities", and requires
that places of public accommodation undertake "readily achievable" removal of
communication and access barriers to the disabled. This requirement of Title III
of the ADA is effective January 26, 1992.
It is important that building owners identify and undertake "readily achievable"
removal of any such barriers in the common areas, sidewalks, parking lots and
other areas of the building under their control.
The lessor and lessee are responsible for compliance with ADA relating to
removal of barriers within the workplace i.e., arrangement of interior
furnishings and access within the premises, and any improvements installed by
lessor and lessee.
Keegan & Coppin Company, Inc. recommends that both parties seek expert advice
regarding the implications of the Act as it affects this agreement.
Alquist-Priolo:
- ---------------
"The property which is the subject of this contract may be situated in a Special
Study Zone as designated under the Alquist-Priolo Geologic Hazard Act, Sections
2621-2625, inclusive, of the California Public Resources Code; and, as such, the
construction or development on this property of any structure for human
occupancy may be subject to the findings of a geologic report prepared by a
geologist registered in the State of California, unless such report is waived by
the City or County under the terms of that act. No representations on the
subject are made by the lessor or agent, and the lessee should make his own
inquiry or investigation".
Flood Hazard Area Disclosure
- ----------------------------
The subject property may be situated in a "Special Flood Hazard Area" as set
forth on a Federal Emergency Management Agency (FEMA) "Flood Insurance Rate Map"
(FIRM) or "Floor Hazard Boundary Map" (FHBM). The law provides that, as a
condition of obtaining financing on most structures located in a "Special Floods
Hazard Area", lender requires flood insurance where the property or its
attachments are security for a loan. Lessee should consult with experts
concerning the possible risk of flooding.
Acknowledgment:
Lessee /s/ Patrick W. Kilkenny Date: July 8, 1999
------------------------- ----------------
Lessor: /s/ [ILLEGIBLE] Date: 7/16/99
------------------------- ----------------
[ILLEGIBLE]
<PAGE>
Exhibit 10.9
ASSET SALE AGREEMENT
Asset Sale Agreement (together with all Schedules and Exhibits hereto, the
"Agreement"), dated as of September 10, 1999, by and among National Bank of the
Redwoods, a National Association organized under the laws of the United States
("Seller"), and Valley Financial Acquisition, Inc., a Delaware corporation
("Buyer").
RECITALS
A. Seller is engaged in the commercial and mortgage banking business, including
for the purpose of this Agreement the origination of mortgage loans, the
servicing of such mortgage loans and the sale of such mortgage loans and
servicing rights (the "Business").
B. All of the assets being sold hereunder are owned by the Seller.
C. Seller desires to sell to Buyer, and Buyer desires to purchase from Seller,
certain assets of the Seller.
In consideration of the premises and the respective representations, warranties
and agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follow:
ARTICLE I.
DEFINITIONS
1.1 Certain Defined Terms. As used in this Agreement, the following terms
shall have the following meanings (such definitions to be equally
applicable to both the singular and plural forms of the terms defined):
<PAGE>
"Affiliate" means any person or entity which (i) owns a voting interest in
Seller or Buyer; (ii) in which Seller or Buyer owns a voting interest; or (iii)
which is under common control with Seller or Buyer, whether direct or indirect.
"Affiliated Businesses" has the meaning specified in Section 2.1(e).
"Agreement" means this Asset Sale Agreement, including all schedules and
exhibits hereto, as it may be further amended from time to time as herein
provided.
"Assumed Liabilities" has the meaning specified in Section 2.3(a).
"Books and Records" has the meaning specified in Section 2.1(g).
"Business" has the meaning specified in the recitals of this Agreement.
"Closing" and "Closing Date" means the closing and date thereof,
respectively, of the transactions contemplated by this Agreement as specified in
Section 3.1.
"Disclosure Schedules" means all schedules and exhibits prepared for or
delivered in connection with this Agreement and elsewhere described herein.
"Excluded Liabilities" has the meaning specified in Section 2.3(a).
"Governmental Entity" means any instrumentality, commission, division,
subdivision, department, agency or procuring office or other entity of any
federal, state, local or foreign government.
"Intellectual Property" means all copyrights, service marks, trademarks,
patents, trade names, software and software licenses, copyright registration and
applications, service mark registrations and applications, trade mark
registrations and applications, patent registrations and applications,
unpatented inventions, databases and documentation, trade secrets and other
confidential information, technology and know-how, licenses and processes, if
any, used in or necessary or required by the Buyer as it presently conducts its
business as specified in Schedule 2.
2
<PAGE>
"Lien" has the meaning specified in Section 2.1.
"Permitted Lien" has the meaning specified in Section 2.1.
"Purchased Assets" has the meaning specified in Section 2.1.
"Servicing" means all mortgage servicing associated with CUSO, that
consists of all departments accounted for in the 6000 series of the Seller's
General Ledger as of June 30, 1999, as set forth on Schedule 3.
"Taxes" means all income, franchise or other taxes imposed or assessed by
any Governmental Entity.
"Transaction Documents" has the meaning specified in Section 2.3(a).
"Valley" means Valley Financial, a division of Seller.
ARTICLE II.
PURCHASE AND SALE OF ASSETS
2.1 Sale of Assets. Subject to the terms and conditions herein set forth and
in consideration of the payment of the purchase price at the Closing,
Seller shall sell, assign, transfer and deliver the Buyer and Buyer shall
purchase from Seller the following assets (the "Purchased Assets"):
(a) All furniture, fixtures, equipment and other fixed assets as set
forth on Schedule 1;
(b) The name "Valley Financial" and all other Intellectual Property as
set forth on Schedule 2;
3
<PAGE>
(c) All Servicing as set forth on Schedule 3; and
(d) All contracts and agreements relating to the Business as set forth on
Schedule 4.
(e) Seller's capital stock or other equity interests in the entities that
own the businesses affiliated with Valley as set forth on Schedule 6 (the
"Affiliated Businesses").
(f) All deposits made by borrowers and held by Seller in escrow, as set
forth on Schedule 7.
(g) All books and records relating exclusively to the Business or the
Affiliated Businesses (the "Books and Records").
The Purchased Assets shall be sold, transferred and conveyed to Buyer free and
clear of all liens, claims, pledges, security interests, equities, options,
charges, restrictions or other encumbrances of any kind whatsoever ("Liens"),
except for any Liens with respect to contingent liabilities that may exist with
respect to Servicing that can be satisfied solely by the payment of money in a
maximum aggregate amount of up to Eighty-Five Thousand Dollars ($85,000) which
are further described on Schedule 5 (the "Permitted Lien").
2.2 Excluded Assets. The Seller shall retain all assets of Seller other than
the Purchased Assets.
2.3 Assumption of Liabilities.
(a) Notwithstanding anything to the contrary contained in this Agreement
or any agreement, document, certificate or instrument being
delivered pursuant to this Agreement (collectively, the "Transaction
Documents") and regardless of whether such liability is disclosed in
this Agreement, in any of the Transaction Documents or on any
Schedule or Exhibit hereto or thereto, Buyer will not assume, agree
to pay, perform or discharge or
4
<PAGE>
in any way be responsible for any debts, liabilities or obligations
of Seller or any Affiliate of Seller of any kind or nature
whatsoever, whether known or unknown, absolute or contingent,
liquidated or unliquidated and whether due or to become due (all
such debts, liabilities and obligations not being assumed by Buyer,
including without limitation those liabilities described in Section
2.3(b) and those set forth on Schedule 8, are referred to as
"Excluded Liabilities"), except for and to the extent such debts,
liabilities and obligations are listed on Schedule 9, such debts,
liabilities and obligations, to the extent listed on Schedule 9,
shall be assumed by Buyer and are referred to herein as the "Assumed
Liabilities." Notwithstanding anything to the contrary contained in
this Agreement or any Transaction Document, the Assumed Liabilities
shall not include, and Seller shall remain solely liable for, any
liability or obligation arising out of or in connection with any
breach of any contract or agreement listed on Schedule 4 occurring
at or prior to the Closing.
(b) Without Limiting the generality of Section 2.3(a) above, Buyer is
expressly not assuming, and Seller shall remain solely liable for,
all claims, suits or actions which arise, directly or indirectly,
out of facts, circumstances or conditions existing as of, or events
occurring at or prior to, the Closing.
2.4 Purchase Price and Payment of Assets. Subject to the terms and conditions
herein set forth and in consideration of the sale, assignment, transfer
and delivery to Buyer of the Purchased Assets, Buyer shall (a) pay to
Seller at the Closing an amount equal to Four Hundred Seventy-Eight
Thousand Four Hundred Seventy-Nine Dollars and 51/100 ($478,479.53) plus
5
<PAGE>
Forty-One Thousand Eight Hundred Thirty-Nine Dollars and 24/100
($41,839.24) for the Affiliated Businesses and (b) assume the Assumed
Liabilities.
ARTICLE III.
CLOSING
3.1 Closing. The consummation of the purchase and sale of the Purchased Assets
(the "Closing") shall take place at the offices of National Bank of the
Redwoods located at 111 Santa Rosa Avenue, Santa Rosa, California at 10:00
a.m., local time, on [Buyer will use reasonable efforts to close by
September 10, 1999 but Closing will occur no later than September 17,
1999]. The date and time of the closing are referred to herein as the
"Closing Date."
3.2 Seller Obligations At Closing. At the Closing, Seller shall deliver or
cause to be delivered to Buyer:
(a) A schedule of all furniture, fixtures, equipment and other fixed
assets of Seller used or held for use in the operation of the
Business, which shall be consistent with the assets included in the
six thousand (6,000) series of the Seller's general ledger.
(Schedule 1);
(b) A schedule of all Intellectual Property of Seller used or held for
use in the operation of the Business (Schedule 2);
(c) A schedule of all loans being serviced as of the Closing Date on the
CUSO Servicing System (Schedule 3);
6
<PAGE>
(d) A schedule of all contracts and agreements to which Seller is a
party or by which it is bound which relate primarily to the Business
(Schedule 4);
(e) A schedule of the Affiliated Businesses, Seller's ownership interest
in such Affiliated Businesses, the percentage of the equity
interests in such Affiliated Businesses owned by the Seller and the
assets owned by such Affiliated Businesses (Schedule 6), Seller
represents and warrants to the Purchaser that the ownership
interests set forth on Schedule 6 represent all of Seller's
ownership interests in such Affiliated Businesses and such
Affiliated Businesses have no liabilities, claims or obligations
arising prior to the Closing or relating to facts, circumstances or
conditions existing as of, or events occurring at or prior to,
Closing, other than contract and other commitments set forth on
Schedule 4;
(f) A schedule of all deposits of borrowers held by the Seller in escrow
(Schedule 7). Upon the mutual agreement of Buyer and Seller, Buyer
may deduct the amount of such deposits from the purchase price due
to Seller at the Closing pursuant to Section 2.4;
(g) All Books and Records;
(h) A bill of sale for the Purchased Assets and any and all assignments
requested by Buyer of contracts and agreements set forth on Schedule
4, in substantially the forms attached hereto as Exhibit A;
(i) A written acknowledgement to Buyer that Seller has terminated the
individuals currently employed by Seller which are to be hired by
Buyer or Buyer's nominee as set forth on
7
<PAGE>
Schedule 10 in substantially the form attached hereto as Exhibit B.
The Seller will transfer to Buyer funds representing any vacation
accrual associated with the individuals being hired by Buyer or
Buyer's nominee. Upon the mutual agreement of Buyer and Seller,
Buyer may deduct the amount of such funds from the purchase price
due to Seller at Closing pursuant to Section 2.4; and
(j) Certificates of duly authorized officers of Seller, dated as of the
Closing Date, certifying as to their authority to sign this
Agreement and the Transaction Documents on behalf of Seller, in
substantially the form attached hereto as Exhibit C.
3.3 Buyer Obligations At Closing: At the Closing, Buyer shall deliver or cause
to be delivered to Seller:
(a) The purchase price, by wire transfer of immediately available funds
to the Seller's account at Federal Reserve Bank San Francisco,
Routing Number 1211-41000, Attn: Patrick W. Kilkenny;
(b) An executed Indemnification Agreement by Clark Donley, Mark
Vanderveen, Jack Burns and Joseph Polizzi indemnifying the Seller
from any further obligations under real property leases known as the
(1) Shopping Center Lease dated November 24, 1997 and ending
November 23, 2000, (2) Office and Building Lease in the name of
Allied Bank F.S.B. and Clark Donley dated July 25, 1996 including
three addendums ending January 1,2002, and (3) Hacienda Professional
Building lease dated February 14, 1997 in the name of Allied Bank
and Paine Webber Mortgage Partners ending February 14, 2000, in
substantially the form attached hereto as Exhibit D;
8
<PAGE>
(c) Resignations of all officers of Valley, in substantially the form
attached hereto as Exhibit E;
(d) A written acknowledgment that Buyer will be providing positions for
the individuals currently employed by the Seller and set forth on
Schedule 10, in substantially the form attached hereto as Exhibit F;
(e) Evidence of the assumption by Buyer of (i) all contracts and
agreements set forth on Schedule 4 and (ii) all liabilities set
forth on Schedule 9; and
(f) Certificates of duly authorized officers of Buyer, dated the Closing
Date, certifying as to their authority to sign this Agreement and
the Transaction Documents on behalf of the Buyer, in substantially
the form attached hereto as Exhibit G.
(g) Buyer agrees to cause its affiliate, Pacific Guarantee Mortgage
Corporation, to provide services to the Seller pursuant to the terms
of that certain Residential Mortgage Loan Services and Purchase
Agreement between Pacific Guarantee Mortgage Corporation and the
Seller, dated August 27, 1999, attached hereto as Exhibit I.
9
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer as follows:
4.1 Organization. Seller is a National Association duly organized, validly
existing and in good standing under the laws of the United States of
America and has full corporate power to own and sell the Purchased Assets.
4.2 Authorization.
(a) Seller has full corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of Seller. This Agreement
has been duly executed and delivered by Seller. This Agreement
constitutes a legal, valid and binding obligation of Seller,
enforceable against Seller in accordance with its terms, except as
the enforceability thereof may be limited by bankruptcy, insolvency,
receivership, conservatorship, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights
generally and general principles of equity (regardless of whether
enforceability is considered in a proceeding at law or in equity).
(b) Except for items otherwise set forth herein, no consent, waiver,
approval, order or authorization of, notice to, or registration,
declaration, designation, qualification or filing with, any
Governmental Entity or third Person, domestic or foreign, is or has
been or will be required on the part of Seller in connection with
the execution and delivery
10
<PAGE>
of this Agreement by Seller or the consummation by Seller of the
transactions contemplated hereby.
4.3 Financial Exhibits. Schedule 11 contains a statement of assets purchased
at book value of the Business as of the Closing Date, which balance sheet
was prepared consistently with Seller's past accounting practices with
respect to the Business and is true and correct in all material respects.
4.4 Absence of Undisclosed Liabilities. Except as set forth on Schedule 12,
Seller does not have any liabilities which are in the aggregate, material
to the Purchased Assets. Seller agrees to accept responsibility for all
liabilities (other than Assumed Liabilities) incurred, arising or relating
to periods on or prior to the Closing Date. Any ordinary course
liabilities incurred prior to the Closing Date, but not received by the
Seller or the Buyer until after the Closing will be paid by Seller for the
period ending on the Closing Date and by Buyer for the period beginning
the day after the Closing Date.
4.5 Title To Assets. As of the date of this Agreement, Seller has, and as of
the Closing Date Seller will have, good and marketable title to, or, in
the case of leases and licenses, valid and subsisting leasehold interests
and licenses in, all of the Purchased Assets, free and clear of all Liens
other than the Permitted Lien. The Purchased Assets include substantially
all of the assets required to conduct the Business as presently conducted
and are in good operating condition and repair.
11
<PAGE>
4.6 Litigation. Except as listed on Schedule 13, there is no action pending
or, to the knowledge of Seller, threatened against Seller which relates to
the Business, the Purchased Assets, the Assumed Liabilities or the
transactions contemplated hereby.
4.7 Employee Benefit Plans. The Seller will not continue to provide any
employee benefits for those individuals set forth on Schedule 10. As
provided in Section 3.2(i) hereof, Seller will transfer the economic value
of accrued vacation to Buyer or its nominee for those individuals set
forth on Schedule 10 who have such accruals. Seller will comply with all
applicable laws and provide employee services required by law or
consistent with existing agreements to provide such services after
termination. All salary payments will cease on the Closing Date. Payments
made on behalf of individuals employed by the Seller prior to Closing
Date, but effective beyond the Closing Date will remain in effect without
proration of expense.
4.8 Contracts and Commitments. Any contract or commitments not set forth on
Schedule 4 that is in the name of the Seller, but created for the benefit
of Valley will be transferred, assigned or conveyed to the Buyer only upon
the Buyer's request. If the contract represents a liability, the Buyer
agrees to assume the outstanding liability from the Closing Date to the
extent not related to a breach occurring on or prior to the Closing Date.
The Seller is not in default under any commitment, contract or agreement
constituting Purchased Assets, and to the knowledge of Seller, no other
party thereto is in default thereunder.
4.9 Permits and Other Operating Rights. The Seller makes no representation
that Seller is transferring to Buyer any permits or operating rights other
than those permits which are
12
<PAGE>
transferable by Seller and are required for Buyer to operate the Business
after the Closing, all of which are being transferred by Seller to Buyer
hereunder.
4.10 Mortgage Servicing Portfolio
(a) Schedule 3 sets forth, as of the Closing Date, a listing of (i) all
CUSO investors with which Seller has a mortgage servicing agreement,
listing for each such investor its name, address and the unpaid
principal amount of mortgage loans subject to such agreement, and
(ii) all such loans subject to loan servicing agreements, organized
by the name of the investor, including (1) the outstanding principal
amount and the loan number, (2) a statement of arrears, organized by
mortgagor and loan number. (3) a statement of prepayments in trust
accounts not applied to principal balances of such loans and (4)
escrows in trust accounts by loan number. Each such loan is
evidenced by a note or other evidence of indebtedness, complied at
the time it was made with all applicable regulations and the
requirements of any investor which acquired the loan, and is duly
secured by a mortgage or deed of trust with customary terms, each
such mortgage or deed of trust constituting a security interest that
has been duly perfected and maintained and is in full force and
effect.
(b) Schedule 14 contains a true and complete list, as of the Closing
Date, of (i) all outstanding loan commitments and standby loan
commitments made by Seller, (ii) the commitments of investors, if
any, to purchase the resulting mortgage loans and (iii) the
discount/purchase price of each such commitment.
13
<PAGE>
(c) Seller has the exclusive right to service all mortgage loans
included in its mortgaging loan servicing portfolio. To the best
knowledge of Seller, Seller is not in default under any of its
mortgage loan servicing agreements, which default could have a
material adverse effect on the Business or Buyer.
4.11 Compliance With Laws; Agreements With Regulators. Seller is not in
violation of any material law, rule, regulation or order of any
Governmental Entity to which Seller is or was bound and which relates to
the Business or the transactions contemplated hereby. As of the Closing
Date, Seller is not (a) a party to any formal agreement or memorandum of
understanding with, (b) a party to any commitment letter or similar
undertaking to, (c) subject to any order of any Governmental Entity, or
(d) the recipient of any extraordinary supervisory letter from, any
Governmental Entity or official thereof restricting the conduct of the
Business.
4.12 No Brokers. Neither Seller not any of its directors, officers or employees
has employed any broker, finder or investment banker or incurred any
liability for any brokerage fees, commissions, finders' fees or similar
fees in connection with the transactions contemplated by this Agreement.
4.13 Disclaimer. Seller makes no representations or warranties to Buyer in
connection with this Agreement and the transactions contemplated hereby,
except as provided in this Agreement. Except as otherwise expressly set
forth in this Agreement, Seller disclaims any representations or
warranties of any kind or nature, express or implied, as to the condition,
value or quality of the Purchased Assets.
14
<PAGE>
ARTICLE V.
REPRESENTATIVES AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as follows:
5.1 Organization. Buyer is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and has full
corporate power and authority to carry on its business as and where it is
now being conducted.
5.2 Authorization. Buyer has full corporate power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of Buyer. This Agreement has been
duly executed and delivered by Buyer. This Agreement constitutes a legal,
valid and binding obligation of Buyer, enforceable against Buyer in
accordance with its terms, except as the enforceability thereof may be
limited by bankruptcy, insolvency, receivership, conservatorship,
reorganization, moratorium or other similar laws affecting the enforcement
of creditors' rights generally and general principles of equity
(regardless of whether enforceability is considered in a proceeding at law
or in equity).
52 Availability of Funds. Buyer has available and will have available on the
Closing Date sufficient funds to enable it to consummate the transactions
contemplated by this Agreement.
5.4 No Broken. Neither Buyer nor any of its directors, officers or employees
has employed any broker, finder or investment banker or incurred any
liability for any brokerage fees
15
<PAGE>
commissions, finders' fees or similar fees in connection with the
transactions contemplated by this Agreement.
ARTICLE VI.
CERTAIN COVENANTS
6.1 Joint Marketing Agreement. Seller and Buyer are desirous to entering into
a Joint Marketing Agreement to facilitate the processing of single family
mortgages for Seller's customers and prospects. Further it is the desire
of Seller and Buyer to provide construction loans for the clients of the
Buyer or nominee. It is agreed that the parties will enter into an
agreement with respect to the foregoing by September 30, 1999.
6.2 Authorizations. Each of Buyer and Seller, on the Closing Date or, if
permissible, as promptly as practicable after the Closing Date, shall (a)
deliver, or cause to be delivered, all notices and make, or cause to be
made, all such declarations, designations, registrations, filings and
submissions under all laws, rules and regulations applicable to it as may
be required for it to consummate the sale of the Purchased Assets and the
other transactions contemplated hereby in accordance with the terms of
this Agreement; (b) use commercially reasonable efforts to obtain, or
cause to be obtained, all authorizations, approvals, orders, consents and
waivers from all Governmental Entities and other persons necessary to
consummate the foregoing; and (c) use commercially reasonable efforts to
take, or cause to be taken, all other actions necessary, proper or
advisable in order for it to fulfill its respective obligations hereunder
and to carry out the intentions of the parties expressed herein.
16
<PAGE>
6.3 Acknowledgement by Buyer. THE REPRESENTATIONS AND WARRANTIES SET FORTH IN
THIS AGREEMENT CONSTITUTE THE SOLE AND EXCLUSIVE REPRESENTATIONS AND
WARRANTIES OF SELLER TO BUYER IN CONNECTION WITH THE TRANSACTIONS
CONTEMPLATED HEREBY. THERE ARE NO REPRESENTATIONS, WARRANTIES, COVENANTS,
UNDERSTANDINGS OR AGREEMENTS, ORAL OR WRITTEN, IN RELATION THERETO BETWEEN
THE PARTIES OTHER THAN THOSE INCORPORATED HEREIN AND TO BE DELIVERED
HEREUNDER. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES EXPRESSLY SET
FORTH IN THIS AGREEMENT, BUYER DISCLAIMS RELIANCE ON ANY REPRESENTATIONS
OR WARRANTIES, EITHER EXPRESS OR IMPLIED, BY SELLER OR ITS EMPLOYEES,
REPRESENTATIVES OR AGENTS.
6.4 Public Announcements. After the date hereof, neither Buyer, Seller nor the
representatives of either of them shall make any public announcement with
respect to this Agreement or the transactions contemplated hereby without
the prior written consent of the other party hereto. The foregoing
notwithstanding, any such public announcement may be made if required by
applicable law or a securities exchange rule, provided that the party
required to make such public announcement shall confer with the other
party concerning the timing and content of such public announcement before
the same is made.
6.5 Assignment of Contracts.
(a) On or prior to the Closing Date, Seller, at its expense, shall
obtain or cause to be obtained all consents and other approvals of
all lessors, lenders, Governmental Entities
17
<PAGE>
and other third persons which are required to be obtained by Seller
as a result of the transactions contemplated by this Agreement and
as set forth on Schedule 15, which consents and approvals shall
continue each applicable lease, loan or other arrangement related to
the Business on substantially identical terms as exist on the date
hereof.
(b) To the extent that the assignment hereunder by the Seller to Buyer
of any contract or agreement is not permitted or is not permitted
without the consent of any other party to the contract or agreement,
this Agreement shall not be deemed to constitute an assignment of
any such contract or agreement if such consent is not given or if
such assignment otherwise would constitute a breach of, or cause a
loss of contractual benefits under, any such contract or agreement,
and Buyer shall not assume any obligations or liabilities
thereunder. Without in any way limiting Seller's obligations to
obtain all consents and waivers necessary for the sale, transfer,
assignment and delivery of the contracts and agreements and the
Purchased Assets to Buyer hereunder, if any such consent is not
obtained or if such assignment is not permitted irrespective of
consent and the Closing hereunder is consummated, Seller shall
continue to use their best efforts to obtain such consents and shall
cooperate with Buyer in any arrangement designed to provide Buyer
with the rights and benefits (subject to the obligations) under any
such contracts or agreements. If Seller is able to provide Buyer
with the benefits of any such contract, Buyer will assume or
reimburse to Seller the obligations thereunder.
18
<PAGE>
6.6 Non-Solicitation/Non-Hire
(a) Non-Solicitation of Employees or Agents. Seller hereby agrees that
from the date of this Agreement until the earlier of (i) three (3)
years from the Closing Date, or (ii) the expiration of the longest
period of time allowed by law, Seller shall not hire or engage in
soliciting, diverting, hiring or inducing, or attempting to solicit,
divert, hire or induce, directly or indirectly (whether on its own
behalf or that of any other person, business or entity), any
employee or agent of Buyer or its Affiliates, who was employed by or
under contract with Seller, Buyer or any Affiliate of Buyer within
one (1) year of the date of such solicitation, to terminate his or
her relationship with Buyer or any such Affiliate of Buyer
(b) Non-Solicitation of Customers and Referral Sources. Seller hereby
agrees that from the date of this Agreement until the earlier of (i)
three (3) years from the Closing Date or (ii) the longest period of
time allowed by law, Seller shall not, either directly or
indirectly, engage in calling upon, soliciting, diverting or
inducing, or attempting to call upon, solicit, divert or induce, and
shall not, directly or indirectly, use any non-public information
relating to a customer of Seller, Buyer or its Affiliates, for
calling upon, diverting, soliciting or inducing, or attempting to
call upon, divert, solicit or induce, any customer or referral
source relating to mortgage business of Seller, Buyer or any
Affiliate of Buyer including any individual or entity which has done
business with Seller, Buyer or its Affiliates, (i) to do business
with a competitor of Buyer or of any Affiliate of Buyer or (ii) not
to do business with Buyer or any of its Affiliates. Notwithstanding
the foregoing, the Seller may engage (i) in the business of funding
19
<PAGE>
wholesale construction mortgage loans and (ii) in the retail
mortgage banking and brokering business but only with respect to
individuals who are customers of the Seller prior to the Seller's
solicitation or the initiation of such individual's mortgage banking
or brokerage business.
6.7 Lynden Loan. Seller will assign to Buyer the loan known as the "Lynden et
al" loan within sixty (60) days after the Closing Date pursuant to an
Assignment Agreement in substantially the form set forth attached hereto
as Exhibit H.
6.8 CUSO Servicing Indemnification. Buyer agrees to indemnify Seller for up to
a maximum of Eighty-Five Thousand Dollars ($85,000), in the aggregate, for
claims made by the original sellers of the Servicing.
6.9 Transitional Services. Buyer agrees to provide services at reasonable cost
to the Seller for any services now being performed by Valley for Seller in
their current arrangement which for whatever reason cannot be assigned to
the Buyer until such time the current contact or current agreement is not
in effect, terminates or expires.
ARTICLE VII.
INDEMNIFICATION
7.1 Survival of Representations and Warranties. The representations and
warranties of Seller in Article IV hereof and of Buyer in Article V hereof
shall survive for a period of thirty-six (36) months from the Closing. If
written notice of a claim has been given prior to the
20
<PAGE>
expiration of the applicable representations and warranties by a party in
whose favor such representations and warranties have been made to the
party that made such representations and warranties, then the relevant
representations and warranties shall survive as to such claim, until the
claim has been finally resolved.
7.2 Indemnification by Seller. Except as otherwise limited by Section 7.1 or
this Section 7.2, Buyer and its officers, directors, employees,
subsidiaries, successors and assigns shall be indemnified and held
harmless by Seller for any and all losses, damages, liabilities, claims,
costs and expenses, interest, awards, judgments and penalties (including
reasonable legal costs and expenses) suffered or incurred by them arising
out of, relating to or resulting directly or indirectly from (a) the
inaccuracy of any representation or warranty of Seller set forth in this
Agreement, (b) any other breach or violation of this Agreement by Seller,
(c) any liability arising from or relating to any Excluded Asset or
Excluded Liability, (d) any and all liabilities, claims, or obligations of
the Affiliated Businesses arising prior to the Closing or relating to
facts, circumstances, or conditions existing as of, or events occurring at
or prior to Closing, and (e) any and all debts, liabilities and
obligations, other than Assumed Liabilities, arising from the operation of
the Business prior to the Closing or relating to facts, circumstances or
conditions existing as of, or events occurring at or prior to the Closing.
Any such payment shall constitute an adjustment of the Purchase Price.
7.3 Indemnification by Buyer. Except as otherwise limited by Section 7.1 or
this Section 73, Seller and its officers, directors, employees,
subsidiaries, successors and assigns shall be indemnified and held
harmless by Buyer for any and all losses, damages, liabilities, claims,
costs and expenses, interest, awards, judgments and penalties (including
reasonable legal
21
<PAGE>
costs and expenses) actually suffered or incurred by them arising out of
or resulting from (a) the inaccuracy of any representation or warranty of
Buyer set forth in this Agreement, (b) any other breach or violation of
this Agreement by Buyer, (c) any Assumed Liability, and (d) any
liabilities (other than Excluded Liabilities) arising solely from the
ownership or use of the Purchased Assets, or the operation of the
Business, after the Closing.
ARTICLE VIII.
TAX MATTERS
8.1 Taxes. Buyer shall be liable for all Taxes which relate to the Business to
the extent related to periods or portions thereof occurring after the
Closing. Seller shall be liable for all Taxes which relate to the Business
to the extent related to periods or portions thereof occurring on or prior
to the Closing.
8.2 Notification and Defense. Buyer shall promptly notify Seller in writing
upon receipt by Buyer or any affiliate of Buyer of notice of any pending
or threatened action relating to any Tax of Seller for periods ending
prior to or including the Closing Date. Seller shall have the sole right
to represent the taxpayer's interest in any such action with respect to
periods or portions thereof ending on or prior to the Closing, and to
employ counsel of its choice at its expense. Buyer agrees that it will
cooperate fully with Seller and its counsel at Seller's cost and expense
in the defense against or compromise of any claim in any such action.
22
<PAGE>
ARTICLE IX.
GENERAL PROVISIONS
9.1 Expenses, Taxes, Etc. Each party will pay all fees and expenses incurred
by it in connection with this Agreement and the transactions contemplated
hereby.
9.2 Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or
made as of the date delivered or mailed if delivered personally or mailed
by registered or certified mail (postage prepaid, return receipt
requested) or sent by facsimile transmission, (confirmation received) to
the parties at the following addresses and facsimile transmission numbers
(or at such other address or number for a party as shall be specified by
like notice), except that notices after the giving of which there is a
designated period within which to perform an act and notices of changes of
address or number shall be effective only upon receipt:
(a) if to Seller:
National Bank of the Redwoods
P.O. Box 402
Santa Rosa, California 95402
Attention: Patrick W. Kilkenny
Telecopy No.: (707) 526-2109
Telephone No.: (707) 573-4911
(b) if to Buyer:
Valley Financial Acquisition, Inc.
c/o Prism Mortgage Company
440 North Orleans Street
Chicago, Illinois 60610
Attention: President
Telecopy No.: (312) 494-0273
Telephone No.: (312) 494-0020
23
<PAGE>
9.3 Disclosure Schedules. The Disclosure Schedules shall be divided into
sections corresponding to the sections and subsections of this Agreement.
Disclosure of any fact or item in any section of the Disclosure Schedules
shall, should the existence of the fact or item or its contents be
relevant to any other section of the Disclosure Schedules, be deemed to be
disclosed with respect to that other section or sub section of the
Disclosure Schedule whether or not any explicit cross-reference appears
therein if the wording of the relevant disclosure makes it clearly related
to such other Section hereof. Disclosure of any matter in the Disclosure
Schedules shall not be deemed to imply that such matter is or is not
material. Disclosure of any matter in the Disclosure Schedules shall not
constitute an admission or raise any inference that such matter
constitutes a violation of law or an admission of liability or facts
supporting liability.
9.4 Interpretation. When a reference is made in this Agreement to Sections,
subsections, Schedules or Exhibits, such reference shall be to a Section,
subsection, Schedule or Exhibit to this Agreement unless otherwise
indicated. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation." The word "herein" and similar references mean, except where a
specific Section, subsection or Article reference is expressly indicated,
the entire Agreement rather than any specific Section, subsection or
Article. The table of contents and the headings contained in this
Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. Any references to the
"best knowledge" or
24
<PAGE>
"knowledge" of a Person shall mean the actual knowledge of the Persons
listed on Schedule 16.
9.5 Severability. If any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in
any manner adverse to any party. Upon such determination that any term or
other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so
as to effect the original intent of the parties as closely as possible in
an acceptable manner to the end that transactions contemplated hereby are
fulfilled to the greatest extent possible.
9.6 Assignment This Agreement may not be assigned by operation of law or
otherwise, except that Buyer may assign its rights and obligations
hereunder (a) to any affiliate of Buyer and (b) in connection with the
sale or transfer of substantially all of the assets of Buyer.
9.7 No Third-Party Beneficiaries, This Agreement is for the sole benefit of
the parties hereto and their permitted assigns and nothing herein
expressed or implied shall give or be construed to give to any Person,
other than the parties hereto and such assigns, any legal or equitable
rights hereunder.
9.8 Amendment. This Agreement may not be amended or modified except by an
instrument in writing signed by Seller and Buyer.
25
<PAGE>
9.9 Further Assurances. Each party agrees to cooperate fully with the other
parties and to execute such further instruments, documents and agreements
and to give such further written assurances as may be reasonably requested
by any other party to evidence and reflect the transactions described
herein and contemplated hereby and to carry into effect the intents and
purposes of this Agreement
9.10 Mutual Drafting. This Agreement is the joint product of Buyer and Seller
and each provision hereof has been subject to the mutual consultation,
negotiation and agreement of Buyer and Seller and shall not be construed
for or against any party hereto.
9.11 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California (without giving
effect to its choice of law principles).
9.12 Dispute Resolution. Any dispute, controversy or claim between the parties
relating to, arising out of or in connection with this Agreement (or any
subsequent agreements or amendments thereto), including as to its
existence, enforceability, validity, interpretation, performance, breach
or damages, including claims in tort, whether arising before or after the
termination of this Agreement, shall be settled only by binding
arbitration pursuant to the Commercial Arbitration Rules, as then amended
and in effect, of the American Arbitration Association (the "Rules"),
subject to the following:
(a) The arbitration shall take place in Santa Rosa, California.
(b) There shall be three arbitrators, who shall be selected under the
normal procedures prescribed in the Rules, except that one such
arbitrator shall be a certified public
26
<PAGE>
accountant and one arbitrator (who shall chair the arbitration
panel) shall be a member of the American Board of Trial Advocates or
the American College of Trial Lawyers.
(c) Subject to legal privileges, each party shall be entitled to
discovery in accordance with the Federal Rules of Civil Procedure.
(d) At the arbitration hearing, each party may make written and oral
presentations to the arbitrator, present testimony and written
evidence and examine witnesses.
(e) The arbitrators' decision shall be in writing, shall be binding and
final and may be entered and enforced in any court of competent
jurisdiction.
(f) No party shall be eligible to receive, and the arbitrators shall not
have the authority to award, exemplary or punitive damages.
(g) Each party to the arbitration shall pay one-half of the fees and
expenses of the arbitrators and the American Arbitration
Association.
9.13 Counterparts. This Agreement may be executed in two or more counterparts,
and by the different parties hereto in separate counterparts, each of
which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
9.14 Entire Agreement. This Agreement, together with all Schedules and Exhibits
hereto, and the documents and instruments and other agreements among the
parties delivered pursuant hereto, constitute the entire agreement and
supersede all prior agreements and undertakings.
27
<PAGE>
both written and oral, among Seller and Buyer with respect to the subject
matter hereof and are not intended to confer upon any other Person any
rights or remedies hereunder, except as otherwise expressly provided
herein.
* * * * *
[Remainder of Page Intentionally Left Blank]
28
<PAGE>
IN WITNESS WHEREOF, Seller and Buyer have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
NATIONAL BANK OF THE REDWOODS,
a National Association
By: /s/ Patrick W. Kilkenny
---------------------------------
Name: Patrick W. Kilkenny
Title: President
VALLEY FINANCIAL ACQUISITION INC.,
a Delaware Corporation
By: /s/ [ILLEGIBLE]
---------------------------------
Name:
--------------------------------
Title: President
<PAGE>
EXHIBIT 11
Redwood Empire Bancorp
EARNINGS PER COMMON SHARE
See Note B to the Consolidated Financial Statements.
<PAGE>
EXHIBIT 12.1
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
EXCLUDING INTEREST ON DEPOSITS
Income (loss) from continuing operations....... $ 4,875 $ 2,904 $ 2,377 $(4,270) $ 1,456
Taxes.......................................... 3,093 1,862 1,579 (2,910) 1,049
Fixed charges:
Other interest expense....................... 210 1,107 1,107 1,115 1,100
------- ------- ------- ------- -------
Earnings from continuing operations (loss)
before taxes and fixed charges............... $ 8,178 $ 5,873 $ 5,063 $(6,065) $ 3,605
======= ======= ======= ======= =======
Ratio of earnings from continuing operations to
fixed charges................................ 38.94 5.31 4.57 (5.44) 3.28
======= ======= ======= ======= =======
INCLUDING INTEREST ON DEPOSITS
Fixed charges, per above....................... $ 210 $ 1,107 $ 1,107 $ 1,115 $ 1,100
Interest on deposits........................... 10,736 11,392 14,708 17,588 22,457
------- ------- ------- ------- -------
Total fixed charges and interest on deposits... $10,946 $12,499 $15,815 $18,703 $23,557
======= ======= ======= ======= =======
Earnings from continuing operations before
taxes and fixed charges, per above........... $ 8,178 $ 5,873 $ 5,063 $(6,065) $ 3,605
Interest on deposits........................... 10,736 11,392 14,708 17,588 22,457
Total earnings from continuing operations
before taxes, fixed charges and interest on
deposits..................................... $18,914 $17,265 $19,771 $11,523 $26,062
======= ======= ======= ======= =======
Ratio of earnings from continuing operations to
fixed charges................................ 1.73 1.38 1.25 0.62 1.11
======= ======= ======= ======= =======
Surplus........................................ $ 7,968 $ 4,766 $ 3,956 $ 7,180 $ 2,505
======= ======= ======= ======= =======
</TABLE>
The 1999 earnings are adequate to cover fixed charges by the amount noted above.
The 1998 earnings are adequate to cover fixed charges by the amount noted above.
The 1997 earnings are adequate to cover fixed charges by the amount noted above.
The 1996 earnings are inadequate to cover fixed charges by the amount noted
above.
The 1995 earnings are adequate to cover fixed charges by the amount noted above.
73
<PAGE>
EXHIBIT 12.2
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENT
(IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
EXCLUDING INTEREST ON DEPOSITS
Income (loss) from continuing operations....... $ 4,875 $ 2,904 $ 2,377 $(4,270) $ 1,456
Taxes.......................................... 3,093 1,862 1,579 (2,910) 1,049
Other interest expense......................... 210 1,107 1,107 1,115 1,100
------- ------- ------- ------- -------
Earnings from continuing operations before
taxes and fixed charges...................... $ 8,178 $ 5,873 $ 5,063 $(6,065) $ 3,605
======= ======= ======= ======= =======
Fixed charges per above........................ $ 210 $ 1,107 $ 1,107 $ 1,115 $ 1,100
Preferred stock dividends...................... -- 112 449 449 336
------- ------- ------- ------- -------
Fixed charges including preferred stock
dividends.................................... $ 210 $ 1,219 $ 1,556 $ 1,564 $ 1,436
======= ======= ======= ======= =======
Ratio of earnings to fixed charges and
preferred stock dividend requirements........ 38.94 4.82 3.25 (3.88) 2.51
======= ======= ======= ======= =======
INCLUDING INTEREST ON DEPOSITS
Fixed charges, including preferred stock
dividends.................................... $ 210 $ 1,219 $ 1,556 $ 1,564 $ 1,436
Interest on deposits........................... 10,736 11,392 14,708 17,588 22,457
======= ======= ======= ======= =======
Total fixed charges and interest on deposits... $10,946 $12,611 $16,264 $19,152 $23,893
======= ======= ======= ======= =======
Earnings from continuing operations before
taxes and fixed charges, per above........... $ 8,178 $ 5,873 $ 5,063 $(6,065) $ 3,605
Interest on deposits........................... 10,736 11,392 14,708 17,588 22,457
------- ------- ------- ------- -------
Total earnings from continuing operations
before taxes, fixed charges and interest on
deposits..................................... $18,914 $17,265 $19,771 $11,523 $26,062
======= ======= ======= ======= =======
Ratio of earnings from continuing operations to
fixed charges................................ 1.73 1.37 1.22 0.60 1.09
======= ======= ======= ======= =======
Surplus........................................ $ 7,968 $ 4,654 $ 3,507 $ 7,629 $ 2,169
======= ======= ======= ======= =======
</TABLE>
The 1999 earnings are adequate to cover fixed charges by the amount noted above.
The 1998 earnings are adequate to cover fixed charges by the amount noted above.
The 1997 earnings are adequate to cover fixed charges by the amount noted above.
The 1996 earnings are inadequate to cover fixed charges by the amount noted
above.
The 1995 earnings are adequate to cover fixed charges by the amount noted above.
74
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
DECEMBER 31, 1999
<TABLE>
<S> <C> <C>
REDWOOD EMPIRE BANCORP (REB)
Santa Rosa, California
a California corporation
NATIONAL BANK OF THE REDWOODS (NBR)
Santa Rosa, California
a national bank
Owned 100% by REB
VALLEY FINANCIAL MORTGAGE REDWOOD MERCHANT SERVICES, INC. ALLIED DIVERSIFIED CREDIT
CORPORATION Santa Rosa, California Santa Rosa, California
Santa Rosa, California (Formerly Redwood Empire a California corporation
(Formerly NBR Mortgage Company Datacorp) Owned 100% by NBR
Inc. Owned 100% by NBR Inactive
dba Santa Rosa Mortgage and Inactive
Investment Company)
Owned 100% by NBR
Inactive
</TABLE>
75
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-49372 on Form S-8, Registration Statement No. 33-24642 on Form S-4 and
Registration Statement No. 33-61750 on Form S-3 of Redwood Empire Bancorp of our
report dated January 26, 2000 appearing in the Annual Report on Form 10-K of
Redwood Empire Bancorp for the year ended December 31, 1999.
/s/ Deloitte & Touche LLP
San Francisco, California
March 24, 2000
76
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND IN
THE COMPANY'S FORM 10-K FOR THE YEAR 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 20,555
<SECURITIES> 76,705
<RECEIVABLES> 0
<ALLOWANCES> 7,931
<INVENTORY> 0
<CURRENT-ASSETS> 330,672
<PP&E> 12,791
<DEPRECIATION> 9,746
<TOTAL-ASSETS> 423,046
<CURRENT-LIABILITIES> 385,602
<BONDS> 0
0
0
<COMMON> 22,033
<OTHER-SE> 15,411<F1>
<TOTAL-LIABILITY-AND-EQUITY> 423,046
<SALES> 0
<TOTAL-REVENUES> 24,884
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 16,166
<LOSS-PROVISION> 750
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,968
<INCOME-TAX> 3,093
<INCOME-CONTINUING> 4,875
<DISCONTINUED> (437)
<EXTRAORDINARY> (276)
<CHANGES> 0
<NET-INCOME> 4,162
<EPS-BASIC> 1.45
<EPS-DILUTED> 1.41
<FN>
<F1>INCLUDES UNREALIZED LOSS ON SECURITIES AFS OF (539)
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND IN
THE COMPANY'S FORM 10-K FOR THE YEAR 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 42,187
<SECURITIES> 60,410
<RECEIVABLES> 0
<ALLOWANCES> 8,041
<INVENTORY> 0
<CURRENT-ASSETS> 323,661
<PP&E> 15,884
<DEPRECIATION> 11,802
<TOTAL-ASSETS> 422,299
<CURRENT-LIABILITIES> 371,659
<BONDS> 12,000
0
0
<COMMON> 25,801
<OTHER-SE> 12,839<F1>
<TOTAL-LIABILITY-AND-EQUITY> 422,299
<SALES> 0
<TOTAL-REVENUES> 23,683
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 16,877
<LOSS-PROVISION> 2,040
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,766
<INCOME-TAX> 1,862
<INCOME-CONTINUING> 2,904
<DISCONTINUED> 2,187
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,091
<EPS-BASIC> 0.92
<EPS-DILUTED> 0.84
<FN>
<F1>INCLUDES UNREALIZED LOSS ON SECURITIES AFS OF 239
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND IN
THE COMPANY'S FORM 10-K FOR THE YEAR 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 56,064
<SECURITIES> 72,565
<RECEIVABLES> 0
<ALLOWANCES> 7,645
<INVENTORY> 0
<CURRENT-ASSETS> 321,680
<PP&E> 14,275
<DEPRECIATION> 10,220
<TOTAL-ASSETS> 446,719
<CURRENT-LIABILITIES> 401,476
<BONDS> 12,000
0
5,750
<COMMON> 19,656
<OTHER-SE> 7,837<F1>
<TOTAL-LIABILITY-AND-EQUITY> 446,719
<SALES> 0
<TOTAL-REVENUES> 23,960
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 17,904
<LOSS-PROVISION> 2,100
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,956
<INCOME-TAX> 1,579
<INCOME-CONTINUING> 2,377
<DISCONTINUED> 1,064
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,441
<EPS-BASIC> 0.86
<EPS-DILUTED> 0.70
<FN>
<F1>INCLUDES UNREALIZED LOSS ON SECURITIES AFS OF (187).
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND IN
THE COMPANY'S FORM 10-K FOR THE YEAR 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 45,788
<SECURITIES> 52,633
<RECEIVABLES> 0
<ALLOWANCES> 7,040
<INVENTORY> 0
<CURRENT-ASSETS> 404,036
<PP&E> 13,363
<DEPRECIATION> 9,314
<TOTAL-ASSETS> 499,466
<CURRENT-LIABILITIES> 457,734
<BONDS> 12,000
0
5,750
<COMMON> 19,281
<OTHER-SE> 4,701<F1>
<TOTAL-LIABILITY-AND-EQUITY> 499,466
<SALES> 0
<TOTAL-REVENUES> 28,521
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 29,439
<LOSS-PROVISION> 6,262
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,180)
<INCOME-TAX> (2,910)
<INCOME-CONTINUING> (4,270)
<DISCONTINUED> 2,784
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,486)
<EPS-BASIC> (1.57)
<EPS-DILUTED> (1.57)
<FN>
<F1>INCLUDES UNREALIZED LOSS ON SECURITIES AFS OF (331).
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND IN
THE COMPANY'S FORM 10-K FOR THE YEAR 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 55,557
<SECURITIES> 43,964
<RECEIVABLES> 0
<ALLOWANCES> 5,037
<INVENTORY> 0
<CURRENT-ASSETS> 456,865
<PP&E> 13,780
<DEPRECIATION> 7,219
<TOTAL-ASSETS> 557,910
<CURRENT-LIABILITIES> 514,325
<BONDS> 12,000
0
5,750
<COMMON> 18,728
<OTHER-SE> 7,107<F1>
<TOTAL-LIABILITY-AND-EQUITY> 557,910
<SALES> 0
<TOTAL-REVENUES> 25,259
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 21,164
<LOSS-PROVISION> 1,590
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,505
<INCOME-TAX> 1,049
<INCOME-CONTINUING> 1,456
<DISCONTINUED> 1,857
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,313
<EPS-BASIC> 0.54
<EPS-DILUTED> 0.46
<FN>
<F1>INCLUDES UNREALIZED LOSS ON SECURITIES AFS OF 140.
</FN>
</TABLE>
