FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission file number: 033-76832
MCB FINANCIAL CORPORATION
(Name of small business issuer in its charter)
California 68-0300300
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1248 Fifth Avenue,
San Rafael, California 94901
(415) 459-2265
(Address and telephone number of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
None
(Title of class)
Securities registered under Section 12(g) of the Exchange Act:
None
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No .
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ].
The issuer's revenues for its most recent fiscal year were $12,338,826.
At March 23, 1998, the aggregate market value of the voting stock held by
non-affiliates of the issuer was approximately $16,123,176. For purposes of
this information, the outstanding shares of Common Stock owned by directors and
executive officers of the issuer were deemed to be shares of Common Stock held
by affiliates.
At March 23, 1998, the issuer had outstanding 1,382,202 shares of Common
Stock, no par value, which is the issuer's only class of common stock.
Documents Incorporated by Reference:
Part II of this Form 10-KSB incorporates information by reference from certain
portions of the issuer's 1997 Annual Report to Shareholders. The information
required to be furnished pursuant to Part III of this Form 10-KSB will be set
forth in, and incorporated by reference from, the registrant's definitive proxy
statement for the annual meeting of stockholders to be held May 20, 1998, which
definitive proxy statement will be filed by the issuer with the Securities and
Exchange Commission not later than 120 days after the end of the fiscal year
ended December 31, 1997.
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business 3
MCB Financial 3
Metro Commerce 3
Competition 5
Insurance 5
Employees 6
Supervision and Regulation 6
MCB Financial 6
Metro Commerce 10
Restrictions on Transfers of Funds to
MCB Financial by Metro Commerce 25
Item 2. Description of Property 27
Item 3. Legal Proceedings 27
Item 4. Submission of Matters to a Vote of Security Holders 27
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 28
Item 6. Management's Discussion and Analysis 28
Item 7. Financial Statements 33
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 33
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 34
Item 10. Executive Compensation 34
Item 11. Security Ownership of Certain Beneficial Owners and
Management 34
Item 12. Certain Relationships and Related Transactions 34
Item 13. Exhibits and Reports on Form 8-K 34
PART I
Item 1. Description of Business.
MCB Financial
MCB Financial is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended ("BHC Act"). MCB Financial was incorporated
under the laws of the State of California on January 20, 1993.
On October 1, 1993, MCB Financial began operations as a bank holding company
with Metro Commerce Bank (Metro Commerce) as its wholly-owned subsidiary. MCB
Financial's only significant asset is its investment in Metro Commerce. The
principal business and activity of MCB Financial is to serve as the bank holding
company for Metro Commerce and its principal source of income is dividends paid
by Metro Commerce.
Metro Commerce
Metro Commerce was licensed by the Office of the Comptroller of the Currency
("Comptroller") on June 12, 1989, and commenced operations as a national banking
association on December 8, 1989. As a national banking association, Metro
Commerce is subject to primary supervision, examination and regulation by the
Comptroller. Metro Commerce is also subject to certain other federal laws and
regulations. In addition, Metro Commerce is subject to applicable provisions of
California law insofar as such provisions do not conflict with or are not
preempted by federal banking laws. The deposits of Metro Commerce are insured
under the Federal Deposit Insurance Act up to the applicable limits thereof and,
like all national banks, Metro Commerce is a member of the Federal Reserve
System. Metro Commerce is a wholly-owned subsidiary of MCB Financial and
presently has no subsidiaries or other affiliates.
Metro Commerce is engaged in substantially all of the business operations
customarily conducted by independent commercial national banks in California.
Metro Commerce's banking services include the acceptance of checking and savings
deposits, and the making of commercial, construction, mortgage, real estate,
small business administration, home equity and other installment loans and term
extensions of credit. Metro Commerce also offers travelers' checks, notary
public and other customary bank services to its customers. Metro Commerce is
not a credit card issuing bank; however, it offers Visa cards through one of its
correspondent banks.
From 1992 through 1996, Metro Commerce was an active wholesale mortgage lender.
Due to continued changes in the mortgage industry and the unfavorable prospects
for future improvement, Metro Commerce decided to wind down its wholesale
mortgage banking operations at the end of 1996. Metro Commerce will continue to
offer limited retail mortgage lending through its commercial bank. Prior to
winding down its wholesale operations, Metro Commerce originated and sold its
mortgage loans in the secondary market to both government and private mortgage
purchasers. Until the end of 1994, Metro Commerce retained servicing rights to
certain mortgage loans. Mortgage loan servicing primarily encompasses the
collection of payments due, impound accounting, investor remitting and
foreclosure processing. Metro Commerce sold all of its mortgage servicing
rights in 1994 and discontinued its mortgage servicing operations.
In January 1995, Metro Commerce began a Small Business Administration ("SBA")
Loan Division. SBA is an agency of the U.S. Government that offers guaranteed
loan programs for small businesses which might not otherwise qualify for
standard bank credit. SBA offers various business loan programs secured by both
residential and commercial real estate and business property. Metro Commerce
primarily sells the guaranteed portion of SBA loans in the secondary market to
private investors. Loan fundings through this division began during the first
quarter of 1995.
Metro Commerce does not operate a trust department; however, it has arranged
with a correspondent institution to offer trust services to Metro Commerce's
customers upon request. Metro Commerce also does not offer international
banking services although such services are offered indirectly through
correspondent institutions.
Currently, Metro Commerce conducts its business operations through its head
office located in San Rafael, California, and through its four branch office
locations in San Francisco, South San Francisco, Hayward, and Upland,
California. An application to establish the branch in South San Francisco,
California was approved by the Comptroller on September 7, 1993, and an
application to establish the branch in Upland, California was approved by the
Comptroller on February 27, 1995. The South San Francisco office was opened on
May 9, 1994, and the Upland office was opened on February 28, 1995. An
application to establish the branch in San Francisco was approved by the
Comptroller on December 10, 1997. This office opened January 8, 1998.
Metro Commerce's primary service area is central Marin County along with the
cities of San Francisco, South San Francisco, Hayward and Upland. Most of Metro
Commerce's loans and deposits originate from small and medium sized businesses
and professionals located within Metro Commerce's primary service areas.
Metro Commerce's business has little, if any, emphasis on foreign sources and
application of funds. Metro Commerce's business, based upon performance to
date, does not appear to be seasonal. Metro Commerce is not dependent upon a
single customer or group of related customers for a material portion of its
deposits, nor is a material portion of Metro Commerce's loans concentrated
within a single industry or group of related industries. Management of Metro
Commerce is unaware of any material effect upon Metro Commerce's capital
expenditures, earnings or competitive position as a result of federal, state or
local environmental regulation.
Metro Commerce holds no patents, licenses (other than licenses obtained from
bank regulatory authorities), franchises or concessions.
Competition
The banking business in California is highly competitive with respect to both
loans and deposits, and is dominated by a relatively small number of major banks
with many offices operating over a wide geographic area. Metro Commerce
competes for deposits and loans principally with other commercial banks and also
with non-bank financial intermediaries, including savings and loan associations,
credit unions, thrift and loans, mortgage companies, money market and mutual
funds, finance and insurance companies and other financial and non-financial
institutions. In addition, other entities (both governmental and private
industry) seeking to raise capital through the issuance and sale of debt or
equity securities and instruments provide competition for Metro Commerce in the
acquisition of deposits.
Among the advantages certain of these institutions have over Metro Commerce are
their ability to finance wide-ranging and effective advertising campaigns and to
allocate their investment resources to regions of highest yield and demand.
Many of the major commercial banks operating in Metro Commerce's service area
offer certain services (such as international banking and trust services) which
are not offered directly by Metro Commerce. In addition, by virtue of their
greater total capitalization, such banks have substantially higher lending
limits than does Metro Commerce (legal lending limits to each customer are
restricted to a percentage of a bank's capital, the exact percentage depending
on the nature of the particular loan transaction involved).
From the time Metro Commerce commenced its operations, officers and employees of
Metro Commerce have continually engaged in marketing activities, including the
evaluation and development of new services, involvement in community service
groups, and direct marketing in order to retain and improve Metro Commerce's
competitive position in its service areas.
Insurance
Metro Commerce maintains insurance at levels deemed adequate by its Board of
Directors to protect against certain business risks, operational losses, and
property damage. In accordance with rulings promulgated by the Comptroller and
pursuant to Metro Commerce's Articles of Association and certain contractual
obligations, the officers and directors are entitled to indemnification by Metro
Commerce, under certain circumstances, for certain expenses, liabilities and
losses including, but not limited to, costs of defense, settlements and
judgments rendered against them. However, indemnification is not authorized
when a supervisory action results in a final order assessing civil money
penalties or when a supervisory action requires affirmative action in the form
of payments by an individual to Metro Commerce. Metro Commerce has directors
and officers liability insurance to cover certain costs of indemnification.
Employees
Except for its officers, currently MCB Financial has no full-time or part-time
employees. It is anticipated that MCB Financial will rely on its officers and
will utilize the employees of Metro Commerce until it becomes actively engaged
in additional business activities. MCB Financial reimburses Metro Commerce for
a fair and reasonable amount for all services furnished to it.
As of December 31, 1997, Metro Commerce had a total of 53 full-time equivalent
employees. The management of Metro Commerce believes that its employee
relations are satisfactory.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. The following discussion of statutes and regulations is
only a summary and does not purport to be complete. This discussion is
qualified in its entirety by reference to such statutes and regulations. No
assurance can be given that such statutes or regulations will not change
significantly in the future.
MCB Financial
MCB Financial, as a registered bank holding company, is subject to
regulation under the BHC Act. MCB Financial is required to file with the
Federal Reserve Board quarterly and annual reports and such additional
information regarding its business operations and those of its subsidiaries as
the Federal Reserve Board may require pursuant to the BHC Act. MCB Financial
and its subsidiaries are also subject to examination by the Federal Reserve
Board.
Under the BHC Act, MCB Financial is required to obtain the prior approval
of the Federal Reserve Board before acquiring, directly or indirectly, ownership
or control of more than 5 percent of the outstanding shares of any class of
voting securities, unless it already owns a majority of the voting securities,
or substantially all of the assets of any bank or bank holding company. Prior
approval of the Federal Reserve Board is also required for the merger or
consolidation of MCB Financial and another bank holding company. Furthermore,
the BHC Act provides that the Federal Reserve Board will not approve any such
acquisition that would result in or further the creation of a monopoly, or the
effect of which may be substantially to lessen competition, unless the
anticompetitive effects of the proposed transaction are clearly outweighed by
the probable effect in meeting the convenience and needs of the community to be
served.
Under the BHC Act, MCB Financial is, except in certain statutorily
prescribed instances, prohibited from (i) acquiring direct or indirect ownership
or control of more than 5 percent of the outstanding voting shares of any
company which is not a bank or bank holding company or (ii) engaging, directly
or indirectly, in activities other than those of banking, managing or
controlling banks or furnishing services to its subsidiaries. However, MCB
Financial may, subject to the prior approval of the Federal Reserve Board,
engage in any, or acquire shares of companies engaged in, activities that are
deemed by the Federal Reserve Board to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making any
such determination, the Federal Reserve Board is required to consider whether
the performance of such activities by MCB Financial or an affiliate can
reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices. The
Federal Reserve Board is also empowered to differentiate between activities
commenced de novo and activities commenced by acquisition, in whole or in part,
of a going concern.
The Federal Reserve Board has by regulation determined that certain
activities are so closely related to banking as to be a proper incident thereto
within the meaning of the BHC Act. These activities include, but are not
limited to the following: making, acquiring or servicing loans or other
extensions of credit such as would be made by a mortgage company, finance
company, credit card company, or factoring company; operating an industrial loan
company, industrial bank or Morris Plan bank; performing certain data processing
operations; providing investment and financial advice or operating as a trust
company in certain instances; selling travelers' checks, U.S. savings bonds and
certain money orders; providing certain courier services; performing real estate
appraisals; providing management consulting advice to nonaffiliated depository
institutions in some instances; acting as an insurance agent for certain types
of credit-related insurance and underwriting certain types of credit-related
insurance; leasing property or acting as agent, broker or advisor for leasing
property on a "full payout basis"; acting as a consumer financial counselor,
including providing tax planning and return preparation services; providing
futures and options advisory services, check guarantee services and discount
brokerage services; operating a collection agency or credit bureau; or
performing personal property appraisals.
During 1996, the Federal Reserve Board increased the types of activities
in which bank holding companies can engage, and made it easier to engage in such
activities, by adopting interim regulations to implement Section 2208 of the
Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the "Economic
Growth Act"). The Economic Growth Act permits certain well-capitalized bank
holding companies to engage (de novo or by acquisition) in activities previously
approved by regulation without submitting a prior application. Under the new
procedure, a qualifying bank holding company can engage in new permitted
activities after providing 12 business days advance notice to the Federal
Reserve Board. To qualify, the bank holding company must be well-capitalized
and must have received a sufficiently high composite rating and management
rating during its last examination.
The interim rule defines well-capitalized for purposes of the new
procedures. In general, in order for a bank holding company to be considered
well capitalized, it must (a) have a total risk-based capital ratio of 10% or
more, (b) have a Tier 1 risk-based capital ratio of 6% or more, (c) have either
(i) a Tier 1 leverage ratio of 5% or more or (ii) a composite rating of 1 or use
a market risk adjustment to its risk-based capital ratio, and have a tier 1
leverage ratio of 3% or more, and (d) not be subject to any written agreement,
order or capital directive issued by the Federal Reserve Board. This change in
the law provides an advantage to a well-capitalized bank holding company,
permitting it to engage in new activities more freely and quickly. MCB
Financial is considered well-capitalized under this rule.
The Federal Reserve Board also has determined that certain other
activities are not so closely related to banking as to be a proper incident
thereto within the meaning of the BHC Act. Such activities include the
following: real estate brokerage and syndication; real estate development;
property management; underwriting of life insurance not related to credit
transactions; and, with certain exceptions, securities underwriting and equity
funding. In the future, the Federal Reserve Board may add to or delete from the
list of activities permissible for bank holding companies.
Under the BHC Act, a bank holding company and its subsidiaries are
generally prohibited from acquiring any voting shares of or interest in all or
substantially all of the assets of any bank located outside the state in which
the operations of the bank holding company's banking subsidiaries are
principally conducted, unless the acquisition is specifically authorized by the
law of the state in which the bank to be acquired is located, or unless the
transaction qualifies under federal law as an "emergency interstate acquisition"
of a closed or failing bank. (See "Other Items - Interstate Banking and
Branching," herein.)
Under the BHC Act and regulations adopted by the Federal Reserve Board, a
bank holding company and its non-banking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, sale or lease of property or furnishing of services. For example, with
certain exceptions, a bank may not condition an extension of credit on a promise
by its customer to obtain other services provided by it, its holding company or
other subsidiaries, or on a promise by its customer not to obtain other services
from a competitor. In 1995, the Federal Reserve Board loosened the anti-tying
restrictions somewhat, permitting banks to vary the consideration for a
traditional bank product on condition that the customer obtain another
traditional product from an affiliate of the bank.
Federal law also imposes certain restrictions on transactions between MCB
Financial and its subsidiaries, including Metro Commerce. As an affiliate of
Metro Commerce, MCB Financial is subject, with certain exceptions, to provisions
of federal law imposing limitations on, and requiring collateral for, extensions
of credit by Metro Commerce to its affiliates. (See "RESTRICTIONS ON TRANSFERS
OF FUNDS TO MCB FINANCIAL BY METRO COMMERCE", herein.)
The Federal Reserve Board may require that MCB Financial terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
or the subsidiary or affiliate constitutes a serious risk to the financial
safety, soundness or stability of any of its banking subsidiaries and is
inconsistent with sound banking principles or the purposes of the BHC Act or the
Financial Institutions Supervisory Act of 1966, as amended. The Federal Reserve
Board also has the authority to regulate provisions of certain bank holding
company debt, including authority to impose interest ceilings and reserve
requirements on such debt. Under certain circumstances, MCB Financial must file
written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
Furthermore, MCB Financial is required by the Federal Reserve Board to
maintain certain levels of capital. The Federal Reserve Board's risk-based
capital guidelines establish a minimum level of qualifying total capital to
risk-weighted assets of 8.00% (of which at least 4.00% should be in the form of
Tier I capital). Tier I capital generally consists of common shareholder's
equity less goodwill. The regulations set forth minimum requirements, and the
Federal Reserve Board has reserved the right to require that companies maintain
higher capital ratios. As of December 31, 1997, MCB Financial had a ratio of
total qualifying capital to risk-weighted assets of 12.4% of which 11.5% was in
the form of Tier I capital. Additionally, the Federal Reserve Board has
established a minimum leverage ratio of 4.00%, except that the most highly rated
bank holding companies may operate at a minimum leverage ratio of 3.00%. The
leverage ratio consists of Tier I capital divided by quarterly average assets,
excluding goodwill. As of December 31, 1997, MCB Financial's leverage ratio was
8.1%. For a more complete description of the Federal Reserve Board's risk-based
and leverage capital guidelines, see "Effect of Governmental Policies and
Legislation - Capital Adequacy Guidelines."
Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving
as a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both. This doctrine has become known as the
"source of strength" doctrine. Although the United States Court of Appeals for
the Fifth Circuit found the Federal Reserve Board's source of strength doctrine
invalid in 1990, stating that the Federal Reserve Board had no authority to
assert the doctrine under the BHC Act, the decision, which is not binding on
federal courts outside the Fifth Circuit, was reversed by the United States
Supreme Court on procedural grounds. The validity of the source of strength
doctrine is likely to continue to be the subject of litigation until
definitively resolved by the courts or by Congress.
MCB Financial is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, MCB Financial and its
subsidiaries are subject to examination by, and may be required to file reports
with, the California Department of Financial Institutions.
A California corporation such as MCB Financial may make a distribution to
its shareholders if the corporation's retained earnings equal at least the
amount of the proposed distribution. In the event sufficient retained earnings
are not available for the proposed distribution, such a corporation may
nevertheless make a distribution to its shareholders if, after giving effect to
the distribution, the corporation's assets equal at least 125 percent of its
liabilities and certain other conditions are met. Since the 125 percent ratio
translates into a minimum capital ratio of 20 percent, most bank holding
companies, including MCB Financial based on its current capital ratios, are
unable to meet this last test and so must have sufficient retained earnings to
fund the proposed distribution.
The primary source of funds for payment of dividends by MCB Financial to
its shareholders is the receipt of dividends from the Bank. MCB Financial's
ability to receive dividends from the Bank is limited by applicable federal law.
Under FDICIA, a bank may not make any capital distribution, including the
payment of dividends, if after making such distribution the bank would be in any
of the "undercapitalized" categories under the FDIC's Prompt Corrective Action
regulations. A bank is undercapitalized for this purpose if its leverage ratio,
Tier 1 risk-based capital level and total risk-based capital ratio are not at
least four percent, four percent and eight percent, respectively. See "Prompt
Corrective Regulatory Action."
In addition, the National Bank Act prohibits 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, the bank may not pay
dividends. 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.
The FRB and the OCC have authority to prohibit a bank holding company or a
bank from engaging in practices which are considered to be unsafe and unsound.
Depending on the financial condition of the Bank and upon other factors, the FRB
or the OCC could determine that payment of dividends or other payments by MCB
Financial or the Bank might constitute an unsafe or unsound practice. Finally,
any dividend that would cause a bank to fall below required capital levels could
also be prohibited.
Metro Commerce
Metro Commerce, as a national banking association, is subject to primary
supervision, periodic examination and regulation by the Comptroller of the
Currency. If, as a result of an examination of Metro Commerce, the OCC should
determine that the financial condition, capital resources, asset quality,
earnings prospects, management, liquidity, or other aspects of Metro Commerce's
operations are unsatisfactory or that Metro Commerce or its management is
violating or has violated any law or regulation, various remedies are available
to the OCC. Such remedies include the power to enjoin "unsafe or unsound"
practices, to require affirmative action to correct any conditions resulting
from any violation or practice, to issue an administrative order that can be
judicially enforced, to direct an increase in capital, to restrict the growth of
Metro Commerce, to assess civil monetary penalties, to remove officers and
directors, and ultimately to terminate Metro Commerce's deposit insurance. The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") has
provided the Federal Deposit Insurance Corporation ("FDIC") with similar
enforcement authority in the absence of action by the OCC and upon a finding
that a bank is in an unsafe or unsound condition, is engaging in unsafe or
unsound activities, or that its conduct poses a risk to the deposit insurance
fund or may prejudice the interests of its depositors. Metro Commerce has never
been the subject of any such actions by the OCC or the FDIC.
The deposits of Metro Commerce are insured by the FDIC, which currently
insures deposits of each member bank generally to a maximum of $100,000 per
depositor. For this protection, Metro Commerce, as is the case with all insured
banks, pays a semi-annual statutory assessment and is subject to certain of the
rules and regulations of the FDIC. (See "SUPERVISION AND REGULATION - Effect on
Governmental Policies and Legislation - Federal Deposit Insurance Corporation
Improvement Act of 1991 - Deposit Insurance Assessments", herein.) Metro
Commerce is also a member of the Federal Reserve System, and as such is subject
to the applicable provisions of the Federal Reserve Act, as amended, and
regulations thereunder. Metro Commerce is also subject to applicable provisions
of California law, insofar as they do not conflict with or are not preempted by
federal banking law.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of Metro Commerce. (See
"SUPERVISION AND REGULATION - Effect of Government Policies and Recent
Legislation", herein.) State and federal statutes and regulations relate to
many aspects of Metro Commerce's operations, including but not limited to
capital to assets ratios, reserves against deposits, maximum lending
limitations, loans, investments, mergers and acquisitions, borrowings, dividends
and locations of branch offices.
Furthermore, Metro Commerce is required by the OCC to maintain certain
levels of capital. For a description of the risk-based capital regulations, see
"SUPERVISION AND REGULATION - Effect on Governmental Policies and Legislation -
Federal Deposit Insurance Corporation Improvement Act of 1991 - Prompt
Corrective Action"; and "Capital Adequacy Guidelines".
Supervision, regulation and examination of Metro Commerce by the OCC and
other banking regulatory agencies are generally intended to protect depositors
and are not intended for the protection of Metro Commerce's shareholders.
The OCC has the authority to prohibit a bank from engaging in what, in the
OCC's opinion, constitutes an unsafe or unsound practice in conducting its
business. Depending upon the financial condition of Metro Commerce and upon
other factors, the OCC could assert that the payment of dividends or other
payments by Metro Commerce to MCB Financial might be such an unsafe or unsound
practice. Furthermore, the payment of dividends by Metro Commerce to MCB
Financial is subject to certain restrictions. (See "RESTRICTIONS ON TRANSFERS
OF FUNDS TO MCB FINANCIAL BY METRO COMMERCE," herein.) Also, if Metro Commerce
were to experience either significant loan losses or rapid growth in loans or
deposits, or if some other event resulting in a depletion or deterioration of
Metro Commerce's capital account were to occur, MCB Financial might be compelled
by federal or state bank regulatory authorities to invest additional capital in
Metro Commerce in an amount necessary to return the capital account to a
satisfactory level.
Metro Commerce is also subject to certain restrictions imposed by federal
law on any extensions of credit by Metro Commerce to MCB Financial or other
affiliates. (See "RESTRICTIONS ON TRANSFERS OF FUNDS TO MCB FINANCIAL BY METRO
COMMERCE," herein.)
Effect of Governmental Policies and Legislation
Government Fiscal and Monetary Policies. Banking is a business which
depends in large part on rate differentials. In general, the difference between
the interest rate paid by Metro Commerce on its deposits and its other
borrowings and the interest rate received by Metro Commerce on loans extended to
its customers and securities held in Metro Commerce's portfolio comprise a major
portion of Metro Commerce's earnings. These rates are highly sensitive to many
factors that are beyond the control of Metro Commerce. Accordingly, the
earnings and growth of Metro Commerce and MCB Financial are subject to the
influence of domestic and foreign economic conditions, including recession,
unemployment and inflation.
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession) by
its open-market operations in United States Government securities, by adjusting
the required level of reserves for financial institutions and intermediaries
subject to its reserve requirements and by varying the discount rates applicable
to borrowings by depository institutions. The actions of the Federal Reserve
Board in these areas influence the growth of bank loans, investments and
deposits and also affect interest rates charged on loans and paid on deposits.
The nature and impact of any future changes in monetary policies cannot be
predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions and intermediaries. Proposals to change the laws and
regulations governing the operations and taxation of banks, bank holding
companies and other financial institutions and intermediaries are frequently
made in Congress, in the California legislature and before various bank
regulatory and other professional agencies. The likelihood of any major changes
and the impact such changes might have on Metro Commerce or MCB Financial are
impossible to predict. Certain of the potentially significant changes which
have been enacted, and proposals which have been made recently, are discussed
below.
Federal Deposit Insurance Corporation Improvement Act of 1991. In 1991
FDICIA was enacted into law. Set forth below is a summary of certain provisions
of that law and enabling regulations that have been adopted or proposed by the
Federal Reserve Board, the OCC, the Office of Thrift Supervision and the FDIC
(collectively, the "federal banking agencies").
Prompt Corrective Regulatory Action. FDICIA requires each federal banking
agency to take prompt corrective action to resolve the problems of insured
depository institutions that fall below one or more prescribed minimum capital
ratios. The purpose of this law is to resolve the problems of insured
depository institutions at the least possible long-term cost to the appropriate
deposit insurance fund. The prompt corrective action provisions of FDICIA
provide for certain mandatory and discretionary actions by the appropriate
federal banking regulatory agency, and defines the following five categories in
which any insured depository institution will be placed based on the level of
its capital ratios: "Well capitalized" (significantly exceeding the required
minimum capital requirements), "adequately capitalized" (meeting the required
capital requirements), "undercapitalized" (failing to meet any one of the
capital requirements", "significantly undercapitalized" (significantly below any
one capital requirement), and "critically undercapitalized" (failing to meet all
capital requirements).
In 1992 the federal banking agencies issued substantially uniform final
regulations implementing the prompt corrective action provisions of FDICIA.
Under the regulations, an insured depository institution will be deemed to be:
- -"well capitalized" if it has (i) a total risk-based capital ratio of 10% or
greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a
leverage ratio of 5% or greater and (iv) is not subject to any written
agreement, order or capital directive or prompt corrective action directive to
meet and maintain a specific capital level for any capital measure;
- -"adequately capitalized" if it has (i) a total risk-based capital ratio of 8%
or greater, (ii) a Tier 1 risk-based capital ratio of 4% or greater, (iii) a
leverage ratio of 4% or greater (or a leverage ratio of 3% or greater if the
institution is rated composite 1 under the applicable regulatory rating system
in its most recent report of examination); and (iv) does not meet the
definition of a well capitalized bank;
- -"undercapitalized" if it has (i) a total risk-based capital ratio of less than
8%, (ii) a Tier 1 risk-based capital ratio of less than 4% or (iii) a leverage
ratio of less than 4% (or a leverage ratio of less than 3% if the institution
is rated composite 1 under the applicable regulatory rating system in its most
recent report of examination);
- -"significantly undercapitalized" if it has (i) a total risk-based capital ratio
of less than 6%, (ii) a Tier 1 risk-based capital ratio of less than 3% or
(iii) a leverage ratio of less than 3%; and
- -"critically undercapitalized" if it has a ratio of tangible equity to total
assets equal to or less than 2%.
The federal banking agencies may also, under certain circumstances,
reclassify a "well capitalized" institution as "adequately capitalized" or
require an "adequately capitalized" or "undercapitalized" institution to comply
with supervisory actions as if it were in the next lower capital category. The
federal banking agencies may take such action upon a showing that an institution
is in an unsafe or unsound condition or is engaged in an unsafe or unsound
practice (including failure to correct certain unsatisfactory examination
ratings).
Insured depository institutions are subject to certain incremental
supervisory restraints based on their actual or imputed ranking within the five
capital categories. All such institutions are prohibited from paying management
fees to controlling persons or, with certain limited exceptions, making a
capital distribution if, after such transaction, the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital plan unless, among other things, it determines that the plan (i)
specifies the steps the institution will take to become adequately capitalized,
(ii) is based on realistic assumptions and (iii) is likely to succeed in
restoring the depository institution's capital. Finally, the appropriate
federal banking agency may impose any of the additional restrictions or
sanctions that it may impose on significantly undercapitalized institutions if
it determines that such action will further the purpose of the prompt corrective
action provisions. Also, Federal Reserve Bank advances to such institutions
(and institutions rated composite 5 under the applicable regulatory rating
system in its most recent report of examination) for more than 60 days are
generally restricted. In order to receive regulatory approval of the required
capital restoration plan, a company controlling an undercapitalized institution
is required to guarantee its subsidiary's compliance with the capital
restoration plan, up to an amount equal to the lesser of 5% of the subsidiary
bank's assets or the amount of the capital deficiency when the bank first failed
to comply with the plan.
Significantly or critically undercapitalized insured depository
institutions and undercapitalized insured depository institutions which fail to
submit or in a material respect to implement an acceptable capital restoration
plan are subject to one or more of the following additional regulatory actions
(one or more of which is mandatory): (i) forced sale of voting shares to raise
capital or, if grounds exist for conservatorship or receivership, a forced
merger; (ii) restrictions on affiliate transactions; (iii) limitations on
interest rates paid on deposits; (iv) restrictions on asset growth or required
shrinkage; (v) alteration or curtailment of activities determined by the
regulators to pose excessive risk to the institution: (vi) replacement of
directors or senior executive officers, subject to certain grandfather
provisions for those elected prior to enactment of FDICIA; (vii) prohibition on
acceptance of correspondent bank deposits; (viii) restrictions on capital
distributions by the holding companies of such institutions; (ix) forced
divestiture of an institution's subsidiaries or divestiture by a bank holding
company of an institution or a financially troubled non-banking affiliate; or
(x) other actions as determined by the appropriate federal regulator. The
appropriate federal banking agency has discretion to determine which of the
foregoing restrictions or sanctions it will seek to impose; however, it is
required to force a sale of voting shares or merger, impose restrictions on
affiliate transactions and impose restrictions on rates paid on deposits unless
it determines that such actions would not further the purpose of the prompt
corrective action provisions. In addition, without the prior written approval
of the appropriate federal banking agency, a significantly undercapitalized
institution may not pay any bonus to its senior executive officers or provide
compensation to any of them at a rate that exceeds such officer's average rate
of base compensation during the 12 calendar months preceding the month in which
the institution became undercapitalized.
FDICIA and its enabling regulations provide for further restrictions
applicable solely to critically undercapitalized insured depository
institutions, including at a minimum, prohibitions on the following activities
without the appropriate federal regulator's prior written consent: (i) entering
into material transactions other than in the usual course of business; (ii)
extending credit for highly leveraged transactions; (iii) amending an
institution's charter or bylaws; (iv) making a material change in accounting
methods; (v) engaging in certain transactions with affiliates; (vi) paying
excessive compensation or bonuses; or (vii) paying rates on new or renewed
liabilities significantly in excess of market rates. Additionally, 60 days
after becoming critically undercapitalized, an institution may not make payments
of interest or principal on subordinated debt without the permission of the FDIC
and its primary federal regulator. Most importantly, however, except under
limited circumstances, the appropriate federal banking agency, not later than 90
days after an insured depository institution becomes critically
undercapitalized, is required to appoint a conservator or receiver for the
institution. The board of directors of an insured depository institution will
not be liable to the institution's shareholders or creditors for consenting in
good faith to the appointment of a receiver or conservator or to an acquisition
or merger as required by the regulator.
Although Metro Commerce was deemed to be well capitalized as of December
31, 1997 under the prompt corrective action provisions of FDICIA, a subsequent
reduction in Metro Commerce's capital could cause it to fall within a lower
capital category and subject it to the mandatory and discretionary sanctions
applicable to that category. Further, as noted above, an institution that,
based upon its capital levels, is adequately capitalized or undercapitalized
can, under certain circumstances, be reclassified to the next lower capital
category.
Rules Governing Insiders. Directors, officers and principal shareholders
of MCB Financial, and the companies with which they are associated, may conduct
banking transactions with the Bank in the ordinary course of business. Any
loans and commitments to loans included in such transactions must be made in
accordance with applicable law, on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons of similar creditworthiness, and on terms not
involving more than the normal risk of collectability or presenting other
unfavorable features.
FDICIA restates and enhances the scope of the Federal Reserve Act
limitations on extensions of credit to officers, directors, and principal
shareholders of member banks. FDICIA expands the scope of the Federal Reserve
Act restrictions to include all state nonmember banks. Under FDICIA, insider
loan limitations applicable to banks will also be made applicable to their
subsidiaries.
FDICIA also provides that the total of all extensions of credit by an
institution to all insiders and related interests may not exceed the bank's
unimpaired capital and unimpaired surplus. FDICIA empowers the Federal Reserve
Board to impose more stringent limitations on such loans. Extensions of credit
that were valid on the date of FDICIA's enactment are not affected.
Standards for Safety and Soundness. In 1995 the federal banking agencies
adopted safety and soundness standards establishing operational and managerial
standards for all insured depository institutions. In 1996, the agencies
adopted additional guidelines for asset quality and earnings. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. The effect of the guidelines on Metro Commerce depends on how they
are implemented by the OCC. Metro Commerce expects that the guidelines may
increase the cost of doing business, since it must now document compliance with
all of the requirements in the guidelines.
Brokered Deposits. The FDIC has adopted regulations pursuant to FDICIA
which govern the receipt of brokered deposits. Under the regulations, brokered
deposits include any deposit obtained from or through a deposit broker, and
include deposits, however obtained, of institutions that offer rates
"significantly higher" than those in the market area. An institution may only
accept brokered deposits if it is (i) "well capitalized" or (ii) "adequately
capitalized" and receives a waiver from the FDIC. "Adequately capitalized"
institutions that receive waivers to accept brokered deposits are, however,
subject to certain limits on the maximum rates which they may pay on such
deposits. "Undercapitalized" institutions may not accept brokered deposits, nor
may they offer deposit instruments yielding in excess of 75 basis points over
prevailing yields offered on comparable instruments in the relevant market area.
Also, FDICIA provides that the FDIC shall not, in most circumstances, provide
deposit insurance coverage on a "pass-through" basis for certain employee
benefit plans to institutions prohibited from accepting brokered deposits. The
definitions of "well capitalized," "adequately capitalized" and
"undercapitalized" for purposes of the brokered deposit regulations generally
conform with the definitions of those terms adopted by the FDIC for purposes of
implementing the prompt corrective action provisions of FDICIA. (See "Effect of
Governmental Policies and Legislation - Federal Deposit Insurance Corporation
Improvement Act of 1991 - Prompt Corrective Regulatory Action.") Metro Commerce
does not believe that the application of these rules will have a material effect
on its ability to fund operations or its financial condition.
Real Estate Lending Standards. Pursuant to authority contained in
FDICIA, the federal banking agencies adopted regulations which require insured
depository institutions to establish and maintain written internal real estate
lending policies. These policies must be consistent with safe and sound banking
practices and be appropriate for the size and nature of the institution
involved. Additionally, they must be established by each institution only after
it has considered the Interagency Guidelines for Real Estate Lending Policies,
which are made a part of the final regulations. The regulations require that
certain specific standards be addressed relating to loan portfolio
diversification standards, prudent underwriting standards (including loan-to-
value limits), loan administration procedures, and documentation, approval and
reporting requirements. Each institution's lending policies must be reviewed
and approved by the institution's board of directors at least once a year.
Finally, each institution is expected to monitor conditions in its real estate
market to ensure that its lending policies are appropriate for current market
conditions. The regulations do not set forth specific loan-to-value limits, but
the Interagency Guidelines do provide certain limits which should not be
exceeded except under limited circumstances.
Deposit Insurance Assessments. The FDIC has established a risk-based
deposit insurance premium system that was mandated by FDICIA. Under these
regulations, members of the Bank Insurance Fund ("BIF") are subject to an
assessment rate schedule of 0 cents per $100 of deposits to 27 cents per $100 of
deposits.
To determine the risk-based assessment for each institution, the FDIC
categorizes an institution as well capitalized, adequately capitalized or
undercapitalized based on its capital ratios. The FDIC also assigns each
institution to one of three subgroups based upon reviews by the institution's
primary federal or state regulator, statistical analyses of financial
statements, and other information relevant to evaluating the risk posed by the
institution. As a result, the assessment rates for 1998 within each of three
capital categories will be as follows (expressed as cents per $100 of deposits):
Supervisory
Subgroup
A B C
Well Capitalized 0 3 17
Adequately capitalized 3 10 24
Undercapitalized 10 24 27
Under the 1998 risk-related premium schedule, Metro Commerce is exempt
from the BIF premium.
BIF and SAIF Recapitalization. FDICIA provided the FDIC with three
additional sources of funds to protect deposits insured by the BIF: The FDIC
was authorized to borrow up to $30 billion dollars from the U.S. Treasury; to
borrow from the Federal Financing Bank up to 90% of the fair market value of
assets of institutions acquired by the FDIC as receiver; and to borrow from
financial institutions that are members of the BIF. Any borrowings not repaid
by asset sales are to be repaid through insurance premiums assessed to member
institutions. These premiums must be sufficient to repay any borrowed funds
within 15 years and to provide insurance fund reserves of $1.25 for each $100 of
insured deposits. The result of these provisions is that the assessment rate on
deposits of BIF members could increase in the future. The FDIC also has
authority to impose special assessments against insured deposits.
In addition, the crisis in the savings and loan industry during the late
1980's led to the dissolution of the Federal Savings and Loan Insurance
Corporation and the insurance of thrift deposits through a separate fund of the
FDIC called the Saving Association Insurance fund ("SAIF"), as well as the
issuance of bonds by the Financing Corporation ("FICO") to cover some of the
losses incurred by failed savings associations. As the banking industry in
general has become more healthy since 1990, deposit insurance premiums for well-
managed and strongly-capitalized BIF insured institutions have decreased to the
low levels described above. However, because of the cost of carrying the FICO
bonds and because the SAIF still needed to build reserves, deposit insurance
premiums for SAIF insured institutions have not decreased along with the
premiums for BIF insured institutions. This created a large disparity between
the cost of deposit insurance for healthy banks and similarly situated thrifts,
leading healthy thrifts to seek ways to either convert to BIF insurance or to
obtain BIF insurance for some portions of their deposits in order to remain
competitive with banks. This migration of deposits increased the pressure on
the remaining thrifts to build up reserves at the SAIF and to pay the cost of
servicing the FICO bonds.
Subtitle G of the Economic Growth Act required the remaining SAIF
institutions to pay a one-time deposit assessment of $.657 per $100 of insured
deposits in order to recapitalize the SAIF fund, and required the banking
agencies to take action to prevent the migration of deposits from the SAIF to
the BIF funds until the year 2000. In addition, the cost of carrying the FICO
bonds is now allocated between BIF insured institutions and SAIF insured
institutions, with BIF insured institutions paying 1/5 the amount paid by SAIF
insured institutions. The FDIC recently estimated that BIF institutions will
pay an assessment of approximately $.0128 annually per $100 insured deposits,
and that SAIF institutions will pay approximately $.0644 annually per $100 of
insured deposits. Starting in the year 2000, BIF and SAIF institutions will
share the FICO bond costs equally, with an estimated assessment of $.0243
annually per $100 of insured deposits.
This legislation will increase Metro Commerce's premiums, as it will now
be required to share in the cost of carrying the FICO bonds. The increase will
be slight until the year 2000, at which time it will increase.
Improved Examinations. All insured depository institutions must undergo a
full-scope, on-site examination by their appropriate federal banking agency at
least once every 18 months. The cost of examinations of insured depository
institutions and any affiliates may be assessed by the appropriate federal
banking agency against each institution or affiliate as it deems necessary or
appropriate.
Other Items. FDICIA also, among other things, (i) directs the appropriate
federal banking agency to determine the amount of readily marketable purchased
mortgage servicing rights that may be included in calculating an institution's
tangible, core and risk-based capital; and (ii) provides, that, subject to
certain limitations, any federal savings association may acquire or be acquired
by any insured depository institution.
The impact of FDICIA on Metro Commerce and MCB Financial remains uncertain
to some extent. Certain provisions, such as those relating to the establishment
of the risk-based premium system, may adversely affect Metro Commerce's results
of operations.
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act") permits a bank holding
company that is adequately capitalized and managed to acquire an existing bank
located in another state without regard to state law. A bank holding company is
not permitted to make such an acquisition if, upon consummation, it would
control (a) more than 10% of the total amount of deposits of insured depository
institutions in the United States or (b) 30% or more of the deposits in the
state in which the bank is located. A state may limit the percentage of total
deposits that may be held in that state by any one bank or bank holding company
if doing so does not discriminate against out-of-state banks. An out-of-state
bank holding company may not acquire a state bank that has been in existence for
less than the minimum length of time prescribed by state law, except that a
state may not impose more that a five year existence requirement.
The Interstate Act permited, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the acquired
bank into branches of the resulting bank, although each state may adopt
legislation to prohibit interstate mergers, either in that state by out-of-state
banks or in other states by that state's banks. The same concentration limits
discussed in the preceding paragraph apply. The Interstate Act also permits a
national or state bank to establish branches in a state other than its home
state if permitted by the laws of that state, subject to the same requirements
and conditions as for a merger transaction.
The Riegle-Neal Amendments Act of 1997 amends federal law to provide that
branches of state banks that operate in other states will be governed in most
cases by the laws of the home state, rather than the laws of the host state.
Exceptions are that a host state may apply its own laws of community
reinvestment, consumer protection, fair lending and interstate branching. Host
states cannot supplement or restrict powers granted by a bank's home state. The
amendment will assure state chartered banks with interstate branches uniform
treatment in most areas of their operation.
In 1995 California enacted state legislation in accordance with the
Riegle-Neal Act. The state law permits banks headquartered outside California
to acquire or merge with California banks that have been in existence for at
least five years, and to thereby establish one or more California branch
offices. An out-of-state bank may not enter California by acquiring one or more
branches of a California bank or other operations constituting less than the
whole bank. The law authorizes waiver of the 30% limit on state-wide market
share for deposits as permitted by the Riegle-Neal Act. This law also
authorizes California state-licensed banks to conduct certain banking activities
(including receipt of deposits and loan payments and conducting loan closings)
on an agency basis on behalf of out-of-state banks and to have out-of-state
banks conduct similar agency activities on their behalf.
The Interstate Act also authorizes California state-chartered banks to
appoint unaffiliated banks in other states to act as agents of the California
state-chartered bank by accepting deposits and evaluating loan applications on
behalf of the principal bank. Since national banks may only establish agency
relationships with affiliated banks, the expanded authority for state-chartered
banks could place national banks in California at a disadvantage in the event
many state-chartered banks use agency relationships with unaffiliated entities
to increase their business. Other than that possibility, management of MCB
Financial does not believe that the Interstate Act nor the California interstate
banking law has had or will have any material effect on Metro Commerce, MCB
Financial or the market for MCB Financial's common stock.
The Riegle Community Development and Regulatory Improvement Act of 1994.
The Riegle Community Development and Regulatory Improvement Act of 1994
("Community Development Act") involves many aspects of banking regulation.
However, management does not anticipate that the Community Development Act will
have any material effect on Metro Commerce or its operations.
Capital Adequacy Guidelines. The Federal Reserve Board and the OCC have
issued guidelines to implement risk-based capital requirements. The guidelines
establish a systematic analytical framework that makes regulatory capital
requirements more sensitive to differences in risk profiles among banking
organizations, takes off-balance sheet items into account in assessing capital
adequacy, and minimizes dis-incentives to holding liquid, low-risk assets.
Under these guidelines, assets and credit equivalent amounts of off-balance
sheet items, such as letters of credit and outstanding loan commitments are
assigned to one of several risk categories, which range from 0% for risk-free
assets, such as cash and certain U.S. Government securities, to 100% for
relatively high-risk assets, such as loans and investments in fixed assets,
premises and other real estate owned. The aggregated dollar amount of each
category is then multiplied by the risk weight associated with that category.
The resulting weighted values from each of the risk categories are then added
together to determine the amount of total risk-weighted assets.
A banking organization's qualifying total capital consists of two
components: Tier 1 capital (core capital) and Tier 2 capital (supplementary
capital). Tier 1 capital consists primarily of common stock, related surplus,
retained earnings and certain perpetual preferred stocks and minority interests
in the equity accounts of consolidated subsidiaries. Intangibles, such as
goodwill are generally deducted from Tier 1 capital; however purchased mortgage
servicing rights and purchase credit card relationships may be included subject
to certain limitations. At least 50% of a banking organization's total
regulatory capital must consist of Tier 1 capital, less goodwill.
Tier 2 capital may consist of (i) the allowance for possible loan and
lease losses in an amount up to 1.25% of risk weighted assets; (ii) cumulative
perpetual preferred stock and long-term preferred stock (which for bank holding
companies must have an original maturity of 20 years or more) and related
surplus; (iii) hybrid capital instruments (instruments with characteristics of
both debt and equity), perpetual debt and mandatory convertible debt securities;
and (iv) eligible term subordinated debt and intermediate-term preferred stock
with an original maturity of five years or more, including related surplus, in
an amount up to 50% of Tier 1 capital. The inclusion of the foregoing elements
of Tier 2 capital is subject to certain requirements and limitations of the
federal banking agencies.
The Federal Reserve Board and the OCC have each adopted a minimum leverage
ratio of Tier 1 capital to total assets of 4.00%, except that the highest rated
banks may operate at a minimum leverage ratio of 3.00%. The leverage ratio is
only a minimum. Institutions experiencing or anticipating significant growth or
those with other than minimum risk profiles will be expected to maintain capital
well above the minimum levels.
Under the so-called "prompt corrective action" provisions of FDICIA and
the regulations promulgated thereunder, Metro Commerce will be considered
"adequately capitalized" if it has a ratio of qualifying total capital to risk-
weighted assets of 8.00%, Tier 1 capital to risk-weighted assets of 4.00% and a
leverage ratio of 4.00% or greater. To be considered "well capitalized" Metro
Commerce must have a ratio of qualifying total capital to risk-weighted assets
of 10.00%, Tier 1 capital to risk-weighted assets of 6.00% and a leverage ratio
of 5.00% or greater as well as not be subject to any order or directive. Under
certain circumstances, the OCC may require an "adequately capitalized"
institution to comply with certain mandatory or discretionary supervisory
actions as if Metro Commerce were undercapitalized. (see "SUPERVISION AND
REGULATION - Effect of Governmental Policies and Recent Legislation - Federal
Deposit Insurance Corporation Improvement Act of 1991 - Prompt Corrective
Action", herein.)
The capital adequacy guidelines of the Federal Reserve Board are generally
applicable to bank holding companies, such as MCB Financial, while the
guidelines of the OCC are generally applicable to national banks, such as Metro
Commerce. However, the Federal Reserve Board's guidelines do not apply to bank
holding companies with total consolidated assets of less than $150 million. As
of December 31, 1997, MCB Financial had total consolidated assets of $139.9
million. Accordingly, MCB Financial is not subject to any capital requirements
other than those of the OCC that are applicable to Metro Commerce.
In 1996 the federal banking agencies adopted a joint agency policy
statement to provide guidance on managing interest rate risk. The statement
indicated that the adequacy and effectiveness of a bank's interest rate risk
management process and the level of its interest rate exposures are critical
factors in the agencies' evaluation of the bank's capital adequacy. If a bank
has material weaknesses in its risk management process or high levels of
exposure relative to its capital, the agencies will direct it to take corrective
action. Such directives may include recommendations or directions to raise
additional capital, strengthen management expertise, improve management
information and measurement systems, reduce levels of exposure, or some
combination of these actions.
In 1995 the federal banking agencies issued a rule relating to capital
standards and the risks arising from the concentration of credit and
nontraditional activities. Pursuant to the rule, institutions which have
significant amounts of their assets concentrated in high risk loans or
nontraditional banking activities and who fail to adequately manage these risks,
will be required to set aside capital in excess of the regulatory minimums. The
federal banking agencies have not imposed any quantitative assessment for
determining when these risks are significant, but have identified these issues
as important factors they will review in assessing an individual bank's capital
adequacy.
The federal banking agencies have also issued an interagency policy
statement that, among other things, establishes certain benchmark ratios of loan
loss reserves to certain classified assets. The benchmark set forth by such
policy statement is the sum of (i)100% of assets classified loss; (ii) 50% of
assets classified doubtful; (iii) 15% of assets classified substandard; and (iv)
estimated credit losses on other assets over the upcoming 12 months. This
amount is neither a "floor" nor a "safe harbor" level for an institution's
allowance for loan losses.
Federally supervised banks and savings associations are currently required
to report deferred tax assets in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109. (See "SUPERVISION AND REGULATION -
Effect of Governmental Policies and Legislation - Accounting Changes," herein.)
The federal banking agencies have issued rules governing banks and bank holding
companies which limit the amount of deferred tax assets that are allowable in
computing an institution's regulatory capital. Deferred tax assets that can
only be realized through future taxable earnings are limited for regulatory
capital purposes to the lesser of (i) the amount that can be realized within one
year of the quarter-end report date or (ii) 10% of Tier 1 capital. The amount
of deferred taxes in excess of this limit, if any, would be excluded from Tier 1
capital and total assets in regulatory capital calculations. Management does
not expect implementation of these rules to have a material impact on Metro
Commerce's regulatory capital levels.
Community Reinvestment Act Developments. The federal banking agencies
substantially amended the Community Reinvestment Act ("CRA") regulations in
1995, and issued guidelines and explanations of the new regulations in 1996.
CRA assesses a bank's record of meeting the credit needs of its entire
community, including minorities and low and moderate income groups.
Under the revised CRA regulations, the agencies determine a bank's rating
under the CRA by evaluating its performance on lending, service and investment
tests, with the lending test being the most important. The tests are applied in
an "assessment context" that is developed for the particular institution and
that takes into account demographic data about the bank's community, the
community's characteristics and needs, the institution's capacities and
constraints, the institution's product offerings and business strategy, the
institution's prior performance, and data on similarly situated lenders. Since
the assessment context is developed by the agencies, a particular bank will not
know whether its CRA programs and efforts have been sufficient until it is
examined.
The revised regulations require larger institutions to compile and report
certain data on their lending activities in order to measure performance. Some
of this data is already required under other laws, such as the Equal Credit
Opportunity Act.
Small institutions (those with less than $250 million in assets) are now
examined on a "streamlined assessment method." The streamlined method focuses
on the institution's loan to deposit ratio, degree of local lending, record of
lending to borrowers and neighborhoods of differing income levels, and record of
responding to complaints. The federal regulators have reported that under the
new regulations the time spent at the banks to conduct CRA examinations is
reduced, and that the banks spend less time on paperwork evidencing compliance.
On March 8, 1996, the federal banking agencies issued joint examination
procedures applicable to compliance examination under the new CRA regulations.
On October 21, 1996, the Consumer Compliance Task Force of the Federal Financial
Institutions Examination Council issued additional guidelines for CRA
compliance. Beginning July 1, 1997, the new procedures and guidelines were
applied to larger institutions.
Large and small institutions have the option of being evaluated for CRA
purposes in relation to their own pre-approved strategic plan. Such a strategic
plan must be submitted to the institution's regulator three months before its
effective date and must be published for public comment.
Metro Commerce is currently considered a small institution under the CRA
regulations and it will be a small institution until it has assets of greater
than $250 million at the ends of two years in a row. The initial impact of this
amendment on the business of Metro Commerce will be less than the impact when
Metro Commerce no longer qualifies as a small institution. At that time, the
new regulations will increase the amount of reports Metro Commerce is required
to prepare and submit, and it could cause Metro Commerce to change its asset mix
in order to meet the performance standards. At this time, the new regulations
have increased the uncertainty of Metro Commerce's business, both as the rating
and examination procedures change and as Metro Commerce grows to the extent that
it and may no longer qualify as a small institution.
The federal regulators are required to take an institution's CRA record
into account when evaluating an application for new deposit facilities, such as
a bank merger, establishment of a branch, a new charter or relocation of a
branch or home office. In the Metro Commerce's most recent compliance
examination dated August 31, 1995, Metro Commerce received a "satisfactory"
rating for its CRA performance.
Accounting Changes.
In June 1996, Statement of Financial Accounting Standards ("SFAS") No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" was issued. This Statement establishes
standards for when transfers of financial assets, including those with
continuing involvement by the transferor, should be considered a sale. SFAS No.
125 also establishes standards for when a liability should be considered
extinguished. This statement is effective for transfers of assets and
extinguishments of liabilities after December 31, 1996. In December 1996, the
Financial Accounting Standards Board ("FASB") reconsidered certain provisions of
SFAS No. 125 and issued SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125" to defer for one year the effective date
of implementation for transactions related to repurchase agreements, dollar-roll
repurchase agreements, securities lending and similar transactions. Management
determined that the effect of adoption of SFAS No. 125 on the Company's
financial statements was not material and believes that the effect of adoption
of SFAS No. 127 will also not be material.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share".
This Statement simplifies the standards for computing earnings per share ("EPS")
and makes them comparable to international EPS standards. SFAS No. 128 replaces
the presentation of primary EPS with a presentation of basic EPS. In addition,
all entities with complex capital structures are required to provide a dual
disclosure of basic and diluted EPS on the face of the income statement and a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. This Statement
applies to entities with publicly held common stock or potential common stock
and is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods, and requires restatement of all
prior period EPS data presented.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which requires that an enterprise report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources; and 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. Adoption of these statements
will not impact the Company's consolidated financial position, results of
operations or cash flows, and any effect will be limited to the form and content
of its disclosures. Both statements are effective for fiscal years beginning
after December 15, 1997, with earlier application permitted.
Environmental Regulation
Federal, state and local regulations regarding the discharge of materials
into the environment may have an impact on both MCB Financial and Metro
Commerce. Under federal law, liability for environmental damage and the cost
of cleanup may be imposed upon any person or entity who owns or operates
contaminated property. State law provisions, which were modeled after Federal
law, impose substantially similar requirements. Both federal and state laws
were amended in 1996 to provide generally that a lender who is not actively
involved in operating the contaminated property will not be liable to clean up
the property, even if the lender has a security interest in the property or
becomes an owner of the property through foreclosure.
The Economic Growth Act includes protection for lenders from liability
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA") by adding a new section which specifies the actions a lender
may take with respect to lending and foreclosure activities without incurring
environmental clean-up liability or responsibility. Under the new section
typical contractual provisions regarding environmental issues in the loan
documentation and due diligence inspections conducted in connection with lending
transactions will not lead to lender liability for clean-up, and a lender may
foreclose on contaminated property, so long as the lender merely maintains the
property and moves to divest it at the earliest possible time.
Under California law, a lender generally will not be liable to the State
for the cost associated with cleaning up contaminated property unless the lender
realized some benefit from the property, failed to divest the property promptly,
caused or contributed to the release of the hazardous materials, or made the
loan primarily for investment purposes. This amendment to California law became
effective with respect to judicial proceedings filed and orders issued after
January 1, 1997.
The extent of the protection provided by both the federal and state lender
protection statutes will depend on the interpretation of those statutes
administrative agencies and courts, and Metro Commerce cannot predict whether it
will be adequately protected for the types of loans made by Metro Commerce.
In addition, MCB Financial and Metro Commerce remain subject to the risk
that a borrower's financial position will be impaired by liability under the
environmental laws and that property securing a loan made by Metro Commerce may
be environmentally impaired and therefore not provide adequate security for
Metro Commerce. California law provides some protection against the second risk
by establishing certain additional, alternative remedies for a lender in
circumstances where the property securing a loan is later found to be
environmentally impaired, permitting the lender to pursue remedies against the
borrower other than foreclosure under the deed of trust.
Metro Commerce attempts to protect its position against the remaining
environmental risks by performing prudent due diligence. Environmental
questionnaires and information on use of toxic substances are requested as part
of Metro Commerce's underwriting procedures. Metro Commerce makes lending based
upon its evaluation of the collateral, the net worth of the borrower and the
borrower's capacity for unforeseen business interruptions or risks.
Americans With Disabilities Act
The Americans With Disabilities Act ("ADA"), in conjunction with similar
California legislation, has increased the cost of doing business for banks. The
legislation requires employers with 15 or more employees and all businesses
operating "commercial facilities" or "public accommodations" to accommodate
disabled employees and customers. The ADA has two major objectives: (1) to
prevent discrimination against disabled job applicants, job candidates and
employees, and (2) to provide disabled persons with ready access to commercial
facilities and public accommodations. Commercial facilities, such as Metro
Commerce, must ensure that all new facilities are accessible to disabled
persons, and in some instances may be required to adapt existing facilities to
make them accessible.
Economic Growth and Regulatory Paperwork Reduction Act of 1996
In addition to the provisions discussed above, the Economic Growth Act
also included many regulatory relief provisions applicable to MCB Financial and
Metro Commerce. National banks no longer need to submit branch applications
with respect to ATM machines. Application procedures for MCB Financial to
engage in certain non-banking activities will be streamlined, so long as MCB
Financial maintains an adequate financial position and is considered well-
managed. The lending restrictions on directors and officers have been relaxed
to permit loans having favorable terms under employee benefit plans. The
Federal Reserve Board and the department of Housing and Urban Development
("HUD") are required to simplify and improve their regulations with respect to
disclosures relating to certain mortgage loans, and certain exemptions from the
disclosure requirements were added.
The Economic Growth Act also provides protection for lenders who self-test
for compliance with the Equal Credit Opportunity Act (the "ECOA") and the Fair
Housing Act ("FHA"). The ECOA now provides that the results or report generated
or obtained by a bank from a self-test may not be obtained by an agency,
department or applicant to be used with respect to any proceeding or civil
action alleging a violation of the ECOA. This change in the law protects Metro
Commerce against liability based on the results of internal tests done to
enhance compliance with the law and encourages Metro Commerce to use self-
testing to evaluate its compliance with the ECOA and the FHA.
On November 20, 1996, the OCC issued final regulations permitting national
banks to engage in a wider range of activities through subsidiaries. "Eligible
institutions" (that is, national banks that are well capitalized, have a high
overall rating and a satisfactory CRA rating, and are not subject to an
enforcement order) may engage in activities related to banking through operating
subsidiaries after going through a new expedited application process. In
addition, the new regulations include a provision whereby a national bank may
apply to the OCC to engage in an activity through a subsidiary in which the bank
itself may not engage. In determining whether to permit the subsidiary to
engage in the activity, the OCC will evaluate why the bank itself is not
permitted to engage in the activity and whether a Congressional purpose will be
frustrated if the OCC permits the subsidiary to engage in the activity.
Although Metro Commerce is not currently intending to enter into any new
type of business, either relating to banking or that is not currently permitted
for a bank, this regulation could help Metro Commerce if it determines to expand
its operations in the future. The amount of the benefit to Metro Commerce
depends on the extent to which the OCC permits banks to engage in new lines of
business, and whether Metro Commerce qualifies as an "eligible institution" at
such time as it might decide to expand.
Self-Test Privilege Under ECOA
In January 1998 the Federal Reserve Board revised its regulations under the
ECOA to create a legal privilege for information developed by creditors as a
result of "self-tests" they voluntarily conduct to determine the level of their
compliance with ECOA. The privilege protects against use of such information by
a government agency for examination purposes or by private litigants in any
proceeding alleging a violation of the ECOA. The privilege applies only if the
institution takes appropriate corrective action to address possible violations
that are discovered in the test.
OCC Corporate Activities and Transaction Regulations
Effective December 31, 1996 the OCC completely revised its rules to
simplify and streamline the procedures for corporate applications and notices by
national banks, including branch applications, fiduciary powers applications,
change in bank control, and changes in capital. Metro Commerce is not currently
anticipating filing any corporate applications with the OCC, but the new rules
could have an effect on Metro Commerce if any such application is required.
New and Proposed Legislation and Regulation
Legislation enacted in 1996 provides for the merger of the BIF and SAIF on
January 1, 1999, if there are no savings associations in existence on that date.
Pursuant to that legislation, the Department of Treasury in May 1997 recommended
in a report to Congress that the separate charters for thrifts and banks be
abolished. Various proposals to eliminate the federal thrift charter, create a
uniform financial institutions charter, conform holding company regulation and
abolish the Office of Thrift supervision ("OTS") have been introduced in
Congress. The House Committee on Banking and Financial Services has considered
and reported H.R. 10, the Financial Services Competition Act of 1997, including
Title III, the "Thrift Charter Transition Act of 1997." This act would (i)
require federal savings associations to convert to national banks or some type
of state charter within two years of enactment: (ii) merge the BIF and SAIF; and
(iii) combine the OTS with the OCC. A converted federal thrift generally would
be permitted to continue to engage in any activity, including the holding of any
asset, lawfully conducted on the date prior to enactment, retain all branches
established or proposed in a pending application as of enactment and establish
new branches in any state in which it has a branch. Otherwise it may establish
new branches only under national bank rules. Beginning two years after
enactment, national banks would be authorized to exercise all powers formerly
authorized for federal savings associations.
Under H.R. 10, holding companies for converted savings associations
generally would become subject to the same regulation as bank holding companies,
with a grandfather provision for former unitary savings and loan holding
companies. Grandfathered companies would be permitted to maintain and establish
affiliations with any type of company and to acquire additional depository
institutions, as long as any acquired depository institution is merged into its
converted savings association and such institution continues to comply with both
the qualified thrift lender test and certain asset and investment limitations to
which it was subject as a federal savings association. Such a converted holding
company would be subject to the same capital requirements (if any) applicable
under OTS regulation if it were a savings and loan holding company on June 19,
1997, and for three years would be subject to substantially similar regulation,
reporting and examination as implemented by the OTS as of January 1, 1997.
H.R. 10, if adopted, would substantially repeal the Glass-Steagall Act
restrictions on bank affiliations with securities firms and thereby allow
commercial banking and investment banking to be combined. It would also repeal
restrictions on bank affiliations with insurance companies.
Various revisions and alternatives to H.R. 10 have been proposed. There
can be no assurance as to whether H.R. 10 or any other such legislation will be
enacted, what the provisions of any such final legislation may be, or the extent
to which the legislation would restrict, disrupt or otherwise have a material
effect on operations.
Certain legislative and regulatory proposals that could affect MCB
Financial, Metro Commerce and the banking business in general are pending, or
may be introduced, before the United States Congress, the California State
Legislature, and Federal and state government agencies. The United States
Congress in particular is considering numerous bills that could reform the
banking laws substantially. Other proposals to permit banks to engage in
related financial services and to permit other financial services companies to
offer banking-related services are pending and, if adopted, would increase
competition for Metro Commerce.
It is not known to what extent, if any, these proposals will be enacted
and what effect such legislation would have on the structure, regulation and
competitive relationship of financial institutions. It is likely, however, that
many of these proposals would subject MCB Financial and Metro Commerce to
increased regulation, disclosure and reporting requirements and would increase
competition for Metro Commerce and increase its cost of doing business.
In addition to pending legislative changes, the various banking regulatory
agencies frequently propose rules and regulations to implement and enforce
already existing legislation. It cannot be predicted whether or in what form
any such legislation or regulations will be enacted or the effect that such
legislation may have on Metro Commerce's business.
RESTRICTIONS ON TRANSFERS OF FUNDS TO MCB FINANCIAL BY METRO COMMERCE
Federal Reserve Board policy prohibits a bank holding company from
declaring or paying a cash dividend which would impose pressure on the capital
of subsidiary banks or would be funded only through borrowings or other
arrangements that might adversely affect the holding company's financial
position. The policy further declares 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. Other Federal Reserve Board policies forbid the
payment by bank subsidiaries to their parent companies of management fees which
are unreasonable in amount or exceed the fair market value of the services
rendered (or, if no market exists, actual cost plus a reasonable profit).
MCB Financial is a legal entity separate and distinct from Metro Commerce.
At present, substantially all of MCB Financial's revenues, including funds
available for the payments of dividends and other operating expenses, are
expected to be obtained from dividends paid to MCB Financial from Metro
Commerce. Metro Commerce paid dividends in the amount of $138,000, $50,000 and
$300,000 to MCB Financial in July, 1997, October, 1996 and February, 1994,
respectively. Until that time, funds to cover certain costs of MCB Financial in
connection with the Reorganization were provided by a $90,000 loan made to MCB
Financial by John Cavallucci, MCB Financial's President and Chief Executive
Officer and Metro Commerce's Chief Executive Officer. (See "INFORMATION
CONCERNING THE BUSINESS AND PROPERTIES OF MCB FINANCIAL - MCB Financial",
herein.)
There are statutory and regulatory limitations on the amount of dividends
which may be paid to MCB Financial by Metro Commerce. Sections 56 and 60 of
Title 12 of the United States Code contain the major limitations on the payment
of dividends by national banks. Section 56 generally prohibits national banks
from paying dividends out of capital, and Section 60 further limits dividends,
absent the OCC's approval, to the amount of a national bank's recent earnings.
Pursuant to Title 12, Metro Commerce may declare dividends from funds
legally available therefor, when and as declared by the Metro Commerce Board of
Directors; provided, however, that dividends may not be paid from Metro
Commerce's capital. Dividends must be paid out of available net profits, after
deduction of all current operating expenses, actual losses, accrued dividends on
preferred stock, if any, and all federal and state taxes. Additionally, a
national bank is prohibited from declaring a dividend on its shares of common
stock until its surplus fund equals its common capital, or, if its surplus fund
does not equal its common capital, until at least one-tenth of such bank's net
profits, for the preceding half year in the case of quarterly or semi-annual
dividends, or the preceding two half years in the case of an annual dividend,
are transferred to its surplus fund each time dividends are declared. Title 12
also provides that the approval of the Comptroller is required if the total of
all dividends declared by a national bank in any calendar year exceeds the total
of its net profits for 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. Furthermore, the Comptroller also has
authority to prohibit the payment of dividends by a national bank when it
determines such payment to be an unsafe and unsound banking practice.
At December 31, 1997, Metro Commerce had available $1,714,029 for the
payment of dividends.
Under the prompt corrective action rules of FDICIA, no depository
institution, such as Metro Commerce, may issue a dividend or pay a management
fee if it would cause the institution to become undercapitalized. Additionally,
undercapitalized institutions are subject to restrictions on dividends and
management fees, as well as other automatic actions. Other supervisory actions
may be taken against institutions that are significantly undercapitalized, as
well as undercapitalized institutions that fail to submit any acceptable capital
restoration plan as required by law or that fail in any material respect to
implement an accepted plan.
The OCC also has authority to prohibit Metro Commerce from engaging in
what, in the OCC's opinion, constitutes an unsafe or unsound practice in
conducting its business. It is possible, depending upon the financial condition
of the bank in question and other factors, that the OCC could assert that the
payment of dividends or other payments might, under some circumstances, be such
an unsafe or unsound practice. Further, the OCC and the Federal Reserve Board
have established guidelines with respect to the maintenance of appropriate
levels of capital by banks or bank holding companies under their jurisdiction.
Compliance with the standards set forth in such guidelines could limit the
amount of dividends which Metro Commerce or MCB Financial may pay. (See "Effect
of Governmental Policies and Recent Legislation - Federal Deposit Insurance
Corporation Improvement Act of 1991" for a discussion of additional restrictions
on capital distributions.)
Metro Commerce is subject to certain restrictions imposed by federal law
on any extension of credit to, or the issuance of a guarantee or letter of
credit on behalf of, MCB Financial or other affiliates, the purchase of or
investment in stock or other securities thereof, the taking of such securities
as collateral for loans and the purchase of assets of MCB Financial or other
affiliates. Such restrictions prevent MCB Financial and such other affiliates
from borrowing from Metro Commerce unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by Metro Commerce in MCB Financial or in any other affiliate are limited to 10%
of Metro Commerce's capital and surplus (as defined by federal regulations) and
such secured loans and investments are limited, in the aggregate, to 20% of
Metro Commerce's capital and surplus (as defined by federal regulation).
Additional restrictions on transactions with affiliates may be imposed on Metro
Commerce under the prompt corrective action provisions of FDICIA. (See
"SUPERVISION AND REGULATION - Effect of Governmental Policies and Recent
Legislation - Federal Deposit Insurance Corporation Improvement Act of 1991 -
Prompt Corrective Action", herein.)
It is impossible to predict with any degree of accuracy the competitive
impact these laws have on commercial banking in general or on the business of
Metro Commerce in particular. However, there appears to be a lessening of the
historical distinction between the services offered by insured depository
institutions and other businesses offering financial services. It is
anticipated that commercial banks will experience increased competition for
deposits and loans and increases in their cost of funds in the future.
Item 2. Description of Property
Currently, MCB Financial does not own or lease any property. MCB Financial
is not actively engaged in any business activities outside of the activities of
Metro Commerce. Therefore, Metro Commerce's property is not significantly used
by MCB Financial. MCB Financial will continue to utilize the premises of Metro
Commerce until it becomes actively engaged in additional business activities.
MCB Financial currently reimburses Metro Commerce for a fair and reasonable
amount for all services furnished to it.
Metro Commerce leases the land and the buildings at which its office
facilities are located. Metro Commerce has five full-service banking offices.
The head office of Metro Commerce is located at 1248 Fifth Avenue, San Rafael,
California and consists of approximately 10,000 square feet of office space. In
1995, Metro Commerce consolidated its mortgage operations into the head office
site. Metro Commerce occupies the premises for its head office under a lease
which will expire in June 2014, with two five-year options to renew.
Metro Commerce's four branch offices in San Francisco, South San Francisco,
Hayward and Upland, California occupy approximately 2,015, 12,300, 14,000 and
5,000 square feet, respectively, under leases that expire at various dates
through the year 2005.
Metro Commerce believes that its existing facilities are adequate for its
current needs and anticipated growth.
Item 3. Legal Proceedings
MCB Financial is not a party to any pending legal proceeding and is unaware
of any proceeding being contemplated against it by any governmental authority.
There are various legal actions pending against MCB Financial arising from
the normal course of business. MCB Financial is also named as defendant in
various lawsuits in which damages are sought. Management, upon the advice of
legal counsel handling such actions, believes that the ultimate resolution of
these actions will not have a material effect on the financial position of MCB
Financial.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The information required to be furnished pursuant to this item is set forth
under the caption "Market Price of MCB Financial Corporation" in the Annual
Report, which is incorporated herein by reference to Exhibit No. (13) of this
report.
Item 6. Management's Discussion and Analysis.
Except for the information provided below, the information required to be
furnished pursuant to this item is set forth under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and in
the Notes to Consolidated Financial Statements in the Annual Report, which are
incorporated herein by reference to Exhibit No. (13) of this report.
The maturities and weighted average yields of investment securities are
presented in the following table:
Maturities of Investment Securities at December 31, 1997 (At book value)
After 1 Year After 5 Years
Within 1 Year Within 5 Years Within 10 Years Total
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
Mortgage-backed
securities(1) $383 5.37% $1,792 5.76% $2,175 5.69%
U.S. Treasury and U.S.
government agencies 1,990 6.32% 22,760 6.38% $6,497 6.51% 31,247 6.40%
Corporate securities 1,992 6.32% 1,992 6.32%
States and
Municipalities(2) 40 6.84% 100 6.48% 140 6.58%
Total $2,413 6.18% $26,644 6.33% $6,497 6.51% $35,554 6.36%
(1)Mortgage securities are shown at stated maturities; however, these
securities are subject to substantial prepayments which will accelerate
actual maturities.
(2)Weighted-average yield calculated on a tax equivalent basis using
statutory rates.
Maturities of Loans at December 31, 1997
Currently, MCB Financial's data processing system does not have the
capability to provide, and therefore MCB Financial has not provided herein, the
dollar amount of floating rate loans maturing within one year, after one year
but within five years, and in more than five years or the total amount of loans
due after one year which have floating interest rates. As of December 31, 1997,
the percentage of loans held for investment with fixed and floating interest
rates was 67% and 33%, respectively.
The following table provides typical terms of maturity ranges offered by
MCB Financial for each loan category indicated:
Loan Category Typical Term in Years
Commercial Loans 1 to 3
Real Estate Loans:
Commercial 5
Construction 1
Land 1
Home Equity 5
Loans to Consumers and Individuals 1 to 5
Asset/Liability Management
Net interest income and the net interest margin are largely dependent on
MCB Financial's ability to closely match interest-earning assets with interest-
bearing liabilities. As interest rates change, MCB Financial must constantly
balance maturing and repricing liabilities with maturing and repricing assets.
This process is called asset/liability management and is commonly measured by
the maturity/repricing gap. The maturity/repricing gap is the dollar difference
between maturing or repricing assets and maturing or repricing liabilities at
different intervals of time.
The following tables sets forth rate sensitive interest-earning assets and
interest-bearing liabilities as of December 31, 1997, the interest rate
sensitivity gap (i.e. interest sensitive assets minus interest sensitive
liabilities), the cumulative interest rate sensitivity gap, the interest rate
sensitivity gap ratio (interest sensitive assets divided by interest sensitive
liabilities) and the cumulative interest rate sensitivity gap ratio. For the
purposes of the following table, an asset or liability is considered rate
sensitive within a specified period when it matures or can be repriced within
that period pursuant to its original contractual terms (dollar amounts in
thousands):
December 31, 1997 Over 90 Over 180 After One After
90 days days to days to Year to Five
or less 180 days 365 days Five Years Years Total
Earning Assets
(Rate Sensitive):
Federal funds sold 4,900 4,900
Interest-bearing deposits
with other banks 90 196 286
Investment securities 1,126 126 1,548 26,257 6,497 35,554
Loans, gross of allowance
for possible losses 35,184 3,539 1,593 29,099 18,771 88,186
Total 41,300 3,665 3,337 55,356 25,268 128,926
Interest-Bearing Liabilities
(Rate Sensitive):
Interest-bearing
transaction deposits 32,752 42,736 75,488
Time deposits,
$100,000 or more 4,359 3,388 3,388 430 11,565
Savings and
other time deposits 3,048 287 3,964 2,629 21,493
Other borrowings 750 750
Total 8,157 3,675 40,104 45,795 109,296
Period GAP 33,143 (10) (36,767) 9,561 25,268
Cumulative GAP 33,143 33,133 (3,634) 5,927 31,195
Interest Sensitivity
GAP Ratio 80.25% (0.27%)(1101.80%) 17.27% 100.00%
Cumulative Interest
Sensitivity 80.25% 73.69% (7.52%) 5.72%) 24.20%
The Company classifies its interest-bearing transaction accounts and
savings accounts into the over 180 days to 365 days time period as well as the
after one year to five years time period. This is done to adjust for the
relative insensitivity of these accounts to changes in interest rates. Although
rates on these accounts can be contractually reset at the Company's discretion,
historically these accounts have not demonstrated strong correlations to changes
in the prime rate. Generally, a positive gap at one year indicates that net
interest income and the net interest margin will increase if interest rates rise
in the future. If interest rates decline in the future, a positve gap generally
indicates that net interest income and the net interest margin will decrease.
The Company neither currently utilizes financial derivatives to hedge its
asset/liability position nor has any plans to employ such strategies in the near
future.
The following table summarizes, for the periods indicated, loan balances
at the end of each period and average balances during the period, changes in the
allowance for possible credit losses arising from credit losses, recoveries of
credits losses previously incurred, additions to the allowance for possible
credit losses charged to operating expense, and certain ratios relating to the
allowance for possible credit losses:
Analysis of the Allowance for Possible Credit Losses
(Dollars in thousands) 1997 1996
Allowance for loan losses:
Beginning balance $ 944 $ 752
Provision for loan losses 120 220
Charge-offs:
Commercial 105 47
Real estate
Consumer 3
Total charge-offs 108 47
Recoveries:
Commercial 51 16
Real estate
Consumer 3
Total recoveries 51 19
Net charge-offs 57 28
Ending balance $ 1,007 $ 944
Loans (net of unearned income)
outstanding at December 31 (1) $88,186 $81,713
Average loans (net of unearned income)
outstanding at December 31 (1) $82,959 $72,393
Ratios:
Allowance to loans (net of unearned income)* 1.14% 1.16%
Net charge-offs to average loans
(net of unearned income)* .07% .04%
Net charge-offs to allowance 5.66% 2.97%
(1) Includes mortgage loans sold and mortgage loans held for sale reported on
the Consolidated Balance Sheets.
Based upon growth in the loan portfolio, MCB Financial provided $120,000
to the allowance for possible credit losses during 1997 as compared to $220,000
during the same period of 1996. Net charge-offs totaled $57,000 and $28,000,
respectively.
The following table sets forth the allocation of the allowance for
possible credit losses as of the dates indicated:
Allocation of the Allowance for Possible Credit Losses
1997 1996
Percent Percent
of loans of loans
Allowance in Each Allowance in Each
for Possible Category to For Possible Category to
(Dollars in thousands) Credit Losses Total Loans Credit Losses Total Loans
Commercial $ 570 41.79% $583 42.85%
Real estate 245 52.39% 202 50.27%
Consumer 43 5.82% 48 6.88%
Not allocated 149 N/A 111 N/A
Total $1,007 100.00% $944 100.00%
The allowance is available to absorb losses from all loans, although
allocations have been made for certain loans and loan categories. The
allocation of the allowance as shown below should not be interpreted as an
indication that charge-offs in future periods will occur in these amounts or
proportions, or that the allocation indicates future charge-off trends. In
addition to the most recent analysis of individual loans and pools of loans,
management's methodology also places emphasis on historical loss data,
delinquency and nonaccrual trends by loan classification category and expected
loan maturity. This analysis, management believes, identifies potential losses
within the loan portfolio and therefore results in allocation of a large portion
of the allowance to specific loan categories.
Time Certificates, $100,000 and Over
The following table sets forth the time remaining to maturity of MCB
Financial's time deposits in amounts of $100,000 or more (dollar amounts in
thousands):
Time remaining to maturity December 31, 1997
Three months or less $ 4,359
After three months to six months 3,388
After six months to one year 3,388
After twelve months 430
Total $11,565
Item 7. Financial Statements.
The information required to be furnished pursuant to this item is contained
in the Consolidated Financial Statements and the Notes to Consolidated
Financial Statements in the Annual Report. Such information and the
Independent Auditors'Report in the Annual Report are incorporated herein by
reference to Exhibit No. (13) of this report.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
The information required to be furnished pursuant to this item will be set
forth under the captions "Election of Directors" and "Executive Officers" in the
registrant's proxy statement (the "Proxy Statement") to be furnished to
stockholders in connection with the solicitation of proxies by MCB Financial's
Board of Directors for use at the 1998 Annual Meeting of Shareholders to be held
on May 20, 1998, and is incorporated herein by reference.
Item 10. Executive Compensation
The information required to be furnished pursuant to this item will be set
forth under the caption "Executive Compensation of MCB Financial and Metro
Commerce" of the Proxy Statement, and is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required to be furnished pursuant to this item will be set
forth under the captions "Security Ownership of Certain Beneficial Owners" and
"Security Ownership of Management" of the Proxy Statement, and is incorporated
herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information required to be furnished pursuant to this item will be set
forth under the caption "Certain Relationships and Related Transactions
Regarding MCB Financial and Metro Commerce" of the Proxy Statement, and is
incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K.
(a) List of Exhibits:
Exhibits:
(2) -- Plan of acquisition, reorganization (incorporated by reference to
the registrant's registration statement on Form S-4
(File No. 33-76832).
(3)(a) -- Articles of incorporation (incorporated by reference to the
registrant's registration statement on Form S-4
(File No. 33-76832).
(3)(b) -- By-laws (incorporated by reference to the
registrant's registration statement on Form S-4
(File No. 33-76832).
(10)(a)(1) -- Stock Option Plan (incorporated by reference to the
registrant's registration statement on Form S-4
(File No. 33-76832).
(10)(a)(2) -- Deferred Compensation Plan for Executives (incorporated by
reference to Exhibit (10)(a)(2) to the registrant's Annual Report
on Form 10-KSB for its fiscal year ended December 31, 1994).
(10)(b) -- Leases
(10)(b)(1) -- San Rafael Office Lease (incorporated by reference to
Exhibit (10)(b)(1) to the registrant's Annual Report on Form
10-KSB for its fiscal year ended December 31, 1994).
(10)(b)(2) -- South San Francisco Office Lease (incorporated by reference
to Exhibit (10)(b)(2) to the registrant's Annual Report on
Form 10-KSB for its fiscal year ended December 31, 1994).
(10)(b)(3) -- Hayward Office Lease (incorporated by reference to
Exhibit (10)(b)(3) to the registrant's Annual Report on Form
10-KSB for its fiscal year ended December 31, 1994).
(10)(b)(4) -- Upland Office Lease (incorporated by reference to
Exhibit (10)(b)(4) to the registrant's Annual Report on Form
10-KSB for its fiscal year ended December 31, 1994).
(10)(b)(5) -- San Francisco Office Lease
(11) -- Statement re: computation of per share earnings (the
information required to be furnished pursuant to this exhibit is
contained in the Consolidated Financial Statements and the Notes
to Consolidated Financial Statements in the Annual Report, which
are incorporated herein by reference to Exhibit No. (13) of this
report).
(13) -- 1997 Annual Report to Shareholders (only those portions expressly
incorporated by reference herein shall be deemed filed with the
Commission).
(21) -- Subsidiaries of the small business issuer (the information
required to be furnished pursuant to this exhibit is contained in
the Notes to Consolidated Financial Statements in the Annual
Report, which is incorporated herein by reference to Exhibit No.
of this report).
(27) -- Financial Data Schedule
(b) Reports on Form 8-K. MCB Financial filed the following Current Report
on Form 8-K during the last quarter of the period covering this report:
(i) None.
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, on the 26th day of March,
1998.
By /s/ John Cavallucci
John Cavallucci
Chairman, President and
Chief Executive Officer
(Principal Executive Officer);
Director
By /s/ Patrick E. Phelan
Patrick E. Phelan
Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 26th day of March, 1998.
Name Title
/s/ John Cavallucci Chairman; Director
John Cavallucci
/s/ Robert E. Eklund Director
Robert E. Eklund
/s/ Timothy J. Jorstad Director
Timothy J. Jorstad
/s/ Catherine H. Munson Director
Catherine H. Munson
/s/ Gary T. Ragghianti Vice Chairman; Director
Gary T. Ragghianti
/s/ Michael J. Smith Director
Michael J. Smith
/s/ Edward P. Tarrant Director
Edward P. Tarrant
/s/ Randall J. Verrue Director
Randall J. Verrue
EXHIBIT 10(b)(5)
353 SACRAMENTO STREET
OFFICE LEASE AGREEMENT
This Office Lease Agreement ("Lease") is made and entered into as of December
1997, by and between JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, a Massachusetts
corporation ("Landlord"), and METRO COMMERCE BANK, a [California
Corporation]("Tenant").
Section 1. Premises
1.1 Subject to all of the terms and conditions set forth in this Lease, Landlord
hereby leases to Tenant and Tenant hereby leases from Landlord those certain
premises (the "Leased Premises"), as described in the attached Exhibit A. The
Leased Premises are part of the of floe building known as 353 Sacramento Street
(the "Building''), located in San Francisco, California. The Leased Premises
and the Building contain the Rentable Area set forth in the Basic Lease
Information. The Building, the land and improvements under and surrounding the
Building and designated from time to time by Landlord as land or common areas
appurtenant to the Building, together with utilities, facilities, drives,
walkways and other amenities appurtenant to or servicing the Building are herein
sometimes collectively called the "Real Property. " Tenant is hereby granted
the right to the non- exclusive use of the common corridors and hallways,
stairwells, elevators, electrical and telephone closets, restrooms and other
public or common areas; provided, however, that the manner in which the public
and common areas are maintained and operated shall be at Landlord's sole
discretion and the use of the same shall be subject to such rules, regulations
and restrictions as Landlord may make from time to time. Tenant shall also have
the right to the non-exclusive use of the loading dock of the Building without
charge, which use shall also be subject to such rules, regulations and
restrictions as Landlord may make from time to time. Landlord reserves the
right to make alterations or additions to or to change the location of elements
of the Real Property and the common areas of the Real Property and the Building.
1.2 The term "RentableArea" shall be computed by measuring from the inside
surface of the exterior glass of the outer building walls, to the center of
corridor walls, and to the center of all partitions which separate the Leased
Premises from adjoining areas, plus Tenant's pro rata portion of areas common to
all tenants of the Building including, without limitation, corridors, lobbies,
rest rooms, public areas, mechanical, electrical, telephone, janitorial or
equipment room, closet or space, and spaces within the entire Building. Elevator
shafts shall be excluded in computing Rentable Area.
Section 2. Term
2.1 This Lease shall remain in effect for a term (the "Term") commencing
on the date which is the earlier to occur of the Scheduled Term Commencement
Date specified in the Basic Lease Information or the date Tenant occupies any
portion of the Premises (the "Commencement Date',) and expiring at 6:00 P.M. on
the Term Expiration Date specified in the Basic Lease Information (the
"Expiration Date") unless sooner terminated or extended as provided in this
Lease. The earlier of the Expiration Date or the date this Lease is terminated
is herein referred to as the "Termination Date".
2.2 Tenant accepts the Leased Premises in its "as is" condition, as of the
date hereof. Landlord shall have no obligation to modify or improve the Leased
Premises and shall not be liable for any claims or damages arising in connection
with any modifications or improvements.
Section 3. Use, Nuisance or Hazard
3.1The Leased Premises shall be used and occupied by Tenant solely for general
office and commercial banking (excluding retail banking) purposes without
Landlord's prior written consent, which may be given or withheld in Landlord's
sole discretion.
3.2 Tenant shall not use, occupy or permit the use or occupancy of the Leased
Premises for any purpose which Landlord, in its reasonable discretion, deems to
be illegal, immoral or dangerous; permit any public or private nuisance; do or
permit any act or thing which may disturb the quiet enjoyment of any other
tenant or occupant of the Building; keep any substance or carry on or permit any
operation which might introduce offensive odors or conditions into other
portions of the Building; use any apparatus which might make undue noise or set
up vibrations in or about the Building; permit anything to be done which would
increase the premiums paid by Landlord for fire and extended coverage insurance
on the Building or its contents or cause a cancellation of any insurance policy
covering the Building or any part thereof or any of its contents; or take any
action, fail to act or permit anything to be done which is prohibited by or
which shall in any way conflict with any Law. Should Tenant do any of the above
without Landlord's prior written consent, it shall constitute an Event of
Default and Landlord shall be entitled to exercise any of its rights and
remedies under this Lease, at law or in equity. Landlord recognizes that
tenant's business is commercial banking, however, Tenant shall not have any more
than (15) fifteen visitors in any given day.
3.3 Without limiting the generality of the above, Tenant shall promptly comply
with all requirements of the Americans with Disabilities Act (codified at 42
U.S.C. 12101, et seq.) and the regulations promulgated under it in effect
from time to time ("ADA Requirements'') relating to the conduct of Tenant's
business. Tenant shall have exclusive responsibility for compliance with ADA
Requirements pertaining to the interior of the Premises, including the design
and construction of access and egress. Landlord shall have responsibility for
compliance with ADA Requirements which affect the common areas of the Building,
subject to Tenant's obligation to pay for its share of the expense of such
compliance pursuant to Section 5 of this Lease. Tenant shall comply promptly
with any direction of any governmental authority having jurisdiction which
imposes any duty upon Tenant or Landlord with respect to the Premises or with
respect to the use or occupancy thereof. Tenant shall furnish Landlord with a
copy of any such direction promptly after receipt of the same. In addition,
Tenant shall comply with any reasonable plan adopted by Landlord which is
designed to fulfill the requirements of any Laws, including ADA Requirements.
Should compliance by Tenant with this Section 3.3 require Landlord's consent
under Section 14.1, Tenant shall promptly seek such consent, provide the
assurances and documents required by Section 14.1 and, following receipt of such
consent, promptly comply with the provisions of Section 15.1 and this Section
3.3.
If Tenant fails to comply with ADA Requirements as required in this Section 3.3,
then, after notice to Tenant, Landlord may comply or cause such compliance, in
which case Tenant shall reimburse Landlord upon demand for Landlord's costs
incurred in effecting compliance.
Section 4. Rent
4.1 Tenant shall pay to Landlord an initial base annual rental ("Base
Rent") in the amount specified in the Basic Lease Information. Reference to
"Base Rent" shall refer both to the initial Base Rent and the adjustment to it
specified in the Basic Lease Information. The Base Rent shall be due and
payable, without notice, in twelve equal installments ("Monthly Rent") in the
amount described in the Basic Lease Information by check or money order, in
advance, on or before the first day of each calendar month. In addition to the
Base Rent, Tenant shall pay any and all other sums of money as shall be become
due and payable by Tenant as set forth in this Lease ("Additional Rent"). The
Monthly Rent and/or Additional Rent are sometimes collectively called the "Rent"
and shall be paid when due in lawful money of the United States without demand,
deduction, abatement or offset at the address specified in the Basic Lease
Information or such other place as Landlord may designate from time to time.
All Rent and any other charges due and unpaid as of the Termination Date shall
be deemed due and payable on the Termination Date and, if unpaid as of such
date, shall survive the Termination Date. Landlord expressly reserves the right
to apply the payment of Base Rent to any other items of Rent that are not paid
by Tenant.
4.2 If any Rent or other amounts owing under this Lease are not paid
within five (5) days after the date due under this Lease, then Landlord and
Tenant agree that Landlord will incur additional administrative expenses, the
amount of which will be difficult, if not impossible, to determine.
Accordingly, in addition to such required payment, Tenant shall pay to Landlord,
upon demand, an additional late charge ("Late Charge"), as Additional Rent, for
any such late payment in the amount of ten percent (10%) of the amount of such
late payment. Failure to pay any applicable Late Charge shall be deemed a
Monetary Default (as defined in Section 22). This provision for the Late Charge
is in addition to all other rights and remedies available to Landlord under this
Lease, at law or in equity, and shall not be construed as liquidated damages or
limiting Landlord's remedies in any manner. Failure to charge or collect such
Late Charge in connection with any one or more such late payments shall not
constitute a waiver of Landlord's right to charge and collect such Late Charges
in connection with any other late payments.
4.3 If the Term commences on a date other than the first day of a calendar
month or terminates on a date other than the last day of a calendar month, the
Rent for such partial months shall be prorated to the actual number of days the
Lease is in effect for said partial months.
4.4 All Rents and any other amounts payable by Tenant to Landlord, if not
paid when due, shall bear interest from the date due until paid at the rate of
interest publicly announced from time to time by Bank of America National Trust
and Savings Association in San Francisco as its Reference Rate (the "Reference
Rate") plus four percent (4%) per annum, but not in excess of the maximum legal
rate permitted by law. Failure to charge or collect such interest in connection
with any one or more such late payments shall not constitute a waiver of
Landlord's right to charge and collect such interest in connection with any
other payments.
4.5 If Tenant fails to timely make two consecutive payments of Monthly Rent or
makes two consecutive payments of Monthly Rent which are returned to Landlord by
Tenant's financial institution for insufficient funds, Landlord may require, by
giving written notice to Tenant, that all future payments
of Rent shall be made in cashier's check or money order. The above is available
to Landlord under this Lease, at law or in equity.
in addition to all other remedies
4.6 Tenant shall pay to Landlord the first payment of Monthly Rent upon Tenant's
execution of this Lease. This sum shall be applied to the Base Rent for the
first month of the Term. Additionally, upon Tenant's execution of this Lease,
Tenant shall pay to Landlord the security deposit (the "Security Deposit") in
the amount specified in the Basic Lease Information as security for Tenant's
faithful performance of this Lease. Without waiving any of Landlord's other
rights and remedies under this Lease, Landlord may apply any part or all of the
Security Deposit to remedy any failure by Tenant to perform its obligations
under this Lease or to compensate Landlord for damages incurred in connection
with such failure. If Landlord so applies the Security Deposit, Tenant shall
within ten (10) days after demand from Landlord restore the Security Deposit to
the full amount required. Tenant's failure of Tenant to do so shall be an Event
of Default under this Lease. Landlord's application of the Security Deposit
shall in no event be construed as in any way limiting Tenant's liability or
obligation with respect to any such default. If Tenant has kept and performed
all terms, covenants and conditions of this Lease, Landlord will, within thirty
days following termination of this Lease, return the Security Deposit to Tenant
or the last permitted assignee of Tenant's interest under this Lease. Landlord
shall not be required to keep the Security Deposit separate from its general
funds, and Tenant shall not be entitled to interest on the Security Deposit. No
trust or fiduciary relationship is created by this Lease between Landlord and
Tenant with respect to the Security Deposit. If the Security Deposit is in the
form of a letter of credit, the letter of credit shall conform to the Letter of
Credit Requirements provided by Landlord to Tenant and shall be drawable at a
location in the San Francisco Bay Area.
Section 5. Additional Rent; Operating Expenses and Applicable Taxes
5.1 As used in this Lease, the following terms have the meanings set forth
below:
(a) "Expense Base Year" and "Tax Base Year" shall mean calendar year 1998.
(b) "Expense Comparison Year" and "Tax Comparison Year" shall mean each
successive calendar year after calendar year 1998.
(c) "Base Year" shall mean either or both of the Expense Base Year and the Tax
Base Year, and "Comparison Year" shall mean either or both of the Expense
Comparison Year and the Tax Comparison Year.
(d) "Tenant's Expense Share" shall mean the percentage of Operating Expenses set
forth in the Basic Lease Information. Tenant's Expense Share was calculated by
dividing the Rentable Area of the Premises by the total Rentable Area of the of
floe space in the Building. In the event either the Rentable Area of the
Premises and/or the total Rentable Area of the of rice space in the Building is
changed, Tenant's Expense Share shall be appropriately adjusted, and, as to the
Expense Comparison Year in which such change occurs, Tenant's Expense Share for
such year shall be prorated for the periods before and after such change on the
basis of the number of days during such Expense Comparison Year.
(e) "Tenant's Tax Share" shall mean the percentage of Applicable Taxes set forth
in the Basic Lease Information. Tenant's Tax Share was calculated by dividing
the Rentable Area of the Premises by
the total Rentable Area of the office and retail space in the Building. In the
event either the Rentable Area of the Premises or the total Rentable Area of the
office and retail space in the Building is changed, Tenant's Tax Share shall be
appropriately adjusted, and, as to the Tax Comparison Year in which such change
occurs, Tenant's Tax Share for such year shall be prorated for the periods
before and after such change on the basis of the number of days during such Tax
Comparison Year.
(f) "Operating Expenses " shall mean any and all costs and expenses paid or
incurred by Landlord in connection with the operation, maintenance, management,
repair and replacement of the Real Property. By way of illustration but not
limitation, Operating Expenses shall include the following: (i) the cost of
heating, ventilating, air conditioning, electricity, steam, water, sanitary and
storm drainage, refuse disposal and all other utilities, escalators and
elevators and the cost of supplies, equipment, maintenance, service contracts
and repairs and replacements of the systems referenced above in connection with
the same, including without limitation, costs, fees and expenses incurred by
Landlord in connection with any change of the entity providing electric service;
(ii) the cost of repairs and general maintenance and cleaning, including all
services and supplies purchased by Landlord in connection with the same; (iii)
the cost of fire, extended coverage, boiler, sprinkler, liability, property
damage, loss of rent, earthquake and other insurance covering operations of the
Building, including endorsements, all in such amounts as Landlord may reasonably
determine, and the cost of any losses payable by Landlord as a deductible; (iv)
wages, salaries and other labor costs, including supplying, replacing and
cleaning uniforms, taxes, insurance, retirement, medical and other employee
benefits; (v) reasonable fees, charges and other costs of all lawyers,
accountants, consultants and other independent contractors engaged by Landlord
in connection with the Real Property; (vi) the cost of licenses, permits and
inspections and the cost of contesting the validity or applicability of any Laws
which may affect Operating Expenses; (vii) the cost of repairs, changes,
alterations or improvements of any kind to the Building (collectively,
"Changes") in a good faith effort to comply with the requirements of any Laws
that were not applicable to the Building at the time that permits for
construction of the Building were issued, the entire cost of such changes ("Code
Costs',) to be deemed Operating Expenses in the year in which they accrue or are
paid by Landlord, except that if Landlord's accountants determine that any
portion of Code Costs must be capitalized rather than expensed, then each year
Landlord shall include in Operating Expenses only the properly chargeable
portion of capitalized Code Costs during such year based on a determination of
the useful life of the Changes for which the Code Costs were incurred together
with interest on the unamortized balance at the Reference Rate plus two percent
(2%) per annum; (viii) the cost of window coverings, carpeting and other wall or
floor coverings furnished by Landlord from time to time in public corridors and
common areas, to be capitalized, if appropriate, under clause (vii); (ix) the
cost of any capital improvements made to the Building after completion of its
construction as a labor-saving or energy conservation device or to effect other
economies in the operation or maintenance of the Building, to be capitalized if
appropriate under clause (vii); and (x) management fees paid by Landlord to
third parties or to management companies owned by, or management divisions of,
Landlord for management services directly rendered to the Building.
For purposes of computing Tenant's Expense Share under this Section 5.1,
Operating Expenses for the entire Building that are not, in Landlord's sole
discretion, allocable or chargeable solely to either the office or retail space
of the Building shall be allocated between and charged to the of Lice and retail
space of the Building on an equitable basis as determined by Landlord.
For purposes of this Lease, Operating Expenses shall not include Applicable
Taxes covered under clause (g) below, depreciation on the improvements contained
in the Building (except as provided above), the cost of capital improvements
(except as provided above). The computation of Operating Expenses, and whether a
particular item must be capitalized or expensed, shall be consistent with
generally accepted real estate accounting practices.
(g) "Applicable Taxes" shall mean all taxes, assessments and charges levied on
or with respect to the Building, the Real Property, or any personal property of
Landlord used in the operation of the same and payable by Landlord. Applicable
Taxes shall include, without limitation, all general real property taxes and
general and special assessments; fees, assessments or charges for transit,
police, fire, housing, other governmental services, or purported benefits to the
Building; service payments in lieu of taxes; and any tax, fee or excise on the
act of entering into this Lease or on the use or occupancy of the Building or
any part of it, or on the rent payable under any lease or in connection with the
business of renting space in the Building, that are now or hereafter levied on
or assessed against Landlord by, or payable by Landlord as a result of, the
requirements of the United States of America, the State of California, or any
political subdivision, public corporation, district or other political or public
entity. Applicable Taxes shall also include any other tax, fee or other excise,
however described, that may be levied or assessed as a substitute for, or as an
addition to, in whole or in part, any of taxes specified above. Applicable Taxes
shall not include franchise, transfer, inheritance or capital stock taxes or
income taxes measured by the net income of Landlord from all sources, unless,
due to a change in the method of taxation, any of such taxes are levied or
assessed against Landlord as a substitute for, in whole or in part, any other
tax which would otherwise constitute an Applicable Tax. Applicable Taxes shall
also include reasonable legal fees, costs and disbursements incurred in
connection with proceedings to contest, determine or reduce Applicable Taxes.
Notwithstanding anything to the contrary in this Lease, if any Applicable Taxes
are payable in installments, such Applicable Taxes shall be deemed to have been
paid in installments over the longest period available, and Tenant's share of
such Applicable Taxes shall only include those installments which would become
due and payable during the Term.
5.2 If, with respect to any Expense Comparison Year, the Operating Expenses
shall be higher than the Operating Expenses for the Expense Base Year, Tenant
shall pay to Landlord, as Additional Rent, Tenant's Expense Share of such
increase. If, with respect to any Tax Comparison Year, the Applicable Taxes
shall be higher than the Applicable Taxes for the Tax Base Year, Tenant shall
pay to Landlord as Additional Rent Tenant's Tax Share of such increase.
5.3 The payments contemplated under Section 5.2 shall be made as follows:
(a) During each month of each Comparison Year, Tenant shall pay to Landlord,
with each installment of Monthly Rent, such amounts as are reasonably estimated
by Landlord to be one-twelfth ( 1/1 2th) of the amounts payable under Section
5.2 with respect to each of the Tax Comparison Year and the Expense Comparison
Year. Landlord may, by written notice to Tenant, reasonably revise its estimates
for such year and subsequent payments during the Comparison Year shall be based
upon the revised estimates.
(b) With reasonable promptness after the end of each Tax and/or Expense
Comparison Year, Landlord shall deliver to Tenant a statement setting forth the
actual Operating Expenses and Applicable Taxes for the Comparison Year, a
comparison with the Operating Expenses and Applicable Taxes for
the Base Year and a comparison of any amounts payable under Section 5.2 with the
estimated payments made by Tenant. If the amounts payable under Section 5.2 are
less than the estimated payments made by Tenant, the statement shall be
accompanied by a refund of the excess by Landlord to Tenant, or, at Landlord's
election, a notice that Landlord shall credit the excess to the next succeeding
monthly installments of the Monthly Rent. If the amounts payable under Section
5.2 are more than the estimated payments made by Tenant, Tenant shall pay the
deficiency to Landlord within ten (10) days after delivery of such statement.
Statements provided by Landlord shall be final and binding upon Tenant, if
Tenant fails to contest the same within ninety (90) days after the date of
delivery to Tenant.
5.4 If the Expiration Date shall occur on a date other than the first or last
day of a Comparison Year, Tenant's Tax Share and Tenant's Expense Share for such
Comparison Year shall be prorated according to the ratio that the number of days
during said Comparison Year that the Lease was in effect bears to 365.
5.5 Notwithstanding anything to the contrary in this Lease, if during any
Expense Base Year or Expense Comparison Year the Building is less than 95%
occupied, for the purposes of computing Tenant's share of Operating Expenses for
said year, those Operating Expenses which vary based upon occupancy levels shall
be adjusted as though the Building were 95% occupied; provided, however, in no
event shall the aggregate amount billed by Landlord to all tenants in the
Building exceed the actual Operating Expenses for said year.
5.6 Tenant shall reimburse Landlord upon demand for any and all taxes required
to be paid by Landlord (subject to the same exclusions provided for in Section
5.1(g) in connection with Applicable Taxes), whether or not now customary or
within the contemplation of the parties, when:
(a) Said taxes are measured by or reasonably attributable to the cost or value
of Tenant's equipment, furniture, fixtures and other personal property located
in the Premises or by the cost or value of any leasehold improvements made in or
to the Leased Premises by or for Tenant, regardless of whether title to such
improvements shall be vested in Tenant or Landlord;
(b)Said taxes are measured by or reasonably attributable to the Base Rent and/or
Additional Rent payable hereunder, or either of them, including, without
limitation, any gross income tax or excise tax levied by any governmental entity
(local, state or federal), with respect to the receipt of such Base Rent and/or
Additional Rent;
(c) Said taxes are assessed upon or with respect to the possession, leasing,
operation, management, maintenance, alteration, repair, use or occupancy by
Tenant of the Leased Premises or any portion thereof; or
(d) Said taxes are assessed upon this transaction or any document to which
Tenant is a party creating or transferring an interest or an estate in the
Leased Premises.
The portion of any taxes payable by Tenant under this Section 5.6 and other
tenants of the Building under similar provisions in their leases shall be
excluded from Applicable Taxes for purposes of computing Tenant's Tax Share
thereof.
5.7 In the event that it shall not be lawful for Tenant to reimburse Landlord
for the items specified in Section 5.6, the Monthly Rent payable to Landlord
under this Lease shall be increased to net Landlord the same net rent, after
imposition of any such tax upon Landlord, as would have been payable to Landlord
if any such tax had not been imposed.
Section 6. Services to be Provided by Landlord
6.1 Landlord shall furnish to Tenant, while Tenant is occupying the Leased
Premises, the following services:
(a) Electrical facilities to furnish sufficient power for building standard
lighting and customary and usual office machinery in the Leased Premises, such
as typewriters, calculating machines, personal computers, and other machines of
similar low electrical consumption, but not including any item of electrical
equipment which requires electricity in excess of the building standard. Tenant
shall pay to Landlord monthly, as billed, such charges as may be separately
metered (the cost of such meter and its installation shall be borne by Tenant)
or as Landlord's engineer may compute for any electrical service in excess of
that stated above;
(b) Water for lavatory and drinking purposes at those points of supply provided
for general use of all tenants in the Building;
(c) Air conditioning and heating as reasonably required for comfortable use and
occupancy under ordinary office conditions during reasonable and customary
office hours, as determined by Landlord; and
(d) Replacement of all standard fluorescent bulbs in all areas and all
incandescent bulbs in public areas, rest room areas, and stairwells, and routine
maintenance and electric lighting service for all public areas of the Building
in a manner and to the extent deemed by Landlord to be standard.
6.2 Landlord shall not be liable for any loss or damage arising or alleged to
arise in connection with the failure, stoppage or interruption of any such
services; nor shall the same be construed as an eviction of Tenant, result in an
abatement of Rent, entitle Tenant to any reduction in Rent, or relieve Tenant
from the operation of any covenant or condition of this Lease. Landlord reserves
the right to temporarily discontinue such services or any of them at such times
as may be necessary or appropriate by reason of accident, unavailability of
employees, repairs, alterations, or improvements, or strikes, lockouts, riots,
acts of God or any other happening or occurrence beyond Landlord's reasonable
control. In the event of any such failure, stoppage or interruption of services,
Landlord shall use reasonable diligence to have the same restored. Neither
diminution nor shutting off of light or air or both nor any other effect on the
Building by any structure erected or condition now or subsequently existing on
lands adjacent to the Building shall affect this Lease, abate Rent, or otherwise
impose any liability on Landlord.
6.3 Landlord shall have the right to reduce heating, cooling or lighting within
the Leased Premises and in the public area in the Building as required by any
mandatory fuel or energy-saving
program. Landlord shall be entitled to cooperate voluntarily in a reasonable
manner with the efforts of national, state or local governmental bodies or of
utilities suppliers in reducing energy or other resources consumption.
Landlord's acts under this Section 6.3 shall not affect this Lease, abate Rent
or otherwise impose any liability on Landlord.
6.4 Unless otherwise provided by Landlord, Tenant shall separately arrange with
the applicable local public authorities or utilities, as the case may be, for
the furnishing of and payment for all telephone services as may be required by
Tenant in the use of the Leased Premises. Tenant shall directly pay for such
telephone services, including the establishment and connection thereof, at the
rates charged for such services by said authority or utility. Tenant's failure
to obtain or to continue to receive such services for any reason whatsoever
shall not relieve Tenant of any of its obligations under this Lease.
6.5 Landlord shall have the right to contract for electrical service with a
different entity than currently providing electrical service to the Building.
Tenant shall cooperate with Landlord at all times, and as reasonably necessary,
shall allow Landlord or any electrical service provider designated by Landlord,
access to the electric lines, wiring, feeders, risers and other machinery in the
Premises. Landlord shall in no way be liable or responsible for any loss, damage
or expense that Tenant may sustain by reason of any change, failure,
interference, disruption or defect in the supply or character of the electricity
supplied to the Leased Premises as a result of such change in the electric
service provider.
6.6 The above services are the only services which Landlord shall be required to
provide to Tenant. Without limiting the above, Landlord shall not be required to
provide, and Tenant expressly waives, any right to receive, any security
services with respect to the Leased Premises or the Building. It is expressly
understood and agreed that Landlord shall have no liability to Tenant for injury
or losses due to theft or burglary caused by unauthorized persons in the
Building.
Section 7. Repairs and Maintenance by Landlord
7.1 Landlord shall provide for the cleaning and maintenance of the Building in
keeping with the ordinary standard for office buildings similar to the Building
as a part of Operating Expenses. Unless otherwise expressly stipulated herein,
Landlord shall not be required to make any improvements or repairs of any kind
or character to the Leased Premises during the Term, except such repairs as may
be required to the Building's exterior walls, corridors, windows, roof and other
structural elements and equipment of the Building, and such additional
maintenance as may be necessary because of the damage caused by persons other
than Tenant, its agents, employees, licensees or invitees.
7.2 Landlord, or Landlord's officers, agents and representatives (subject to any
security regulations imposed by any governmental authority) shall have the right
to enter all parts of the Leased Premises at all reasonable hours to inspect,
make repairs, alterations, and additions to the Building or the Leased Premises
which Landlord may deem necessary or desirable, to make repairs to adjoining
spaces, to cure any Event of Default that Landlord elects to cure, to show the
Leased Premises to prospective Tenants, or to provide any service which it is
obligated or elects to furnish to Tenant. Tenant shall not be entitled to any
abatement or reduction of Rent by reason of Landlord's right of entry. Landlord
shall have the right to enter the Leased Premises at any time and by any means
in the case of an emergency. Tenant hereby waives and releases its right to make
repairs at Landlord's expenses under Sections
1932(1), 1941 and 1942 of the California Civil Code or under any similar law,
statute or ordinance now or subsequently in effect.
Section 8. Repairs and Care of Building by Tenant
8.1 If the Building or any portion of the Building, including without
limitation, the elevators, boilers, engines, pipes and other apparatus, or
elements of the Building (or any of them) used for the purpose of climate
control of the Building or operating the elevators, or if the water pipes,
drainage pipes, electric lighting or other equipment of the Building or the roof
or outside walls of the Building or the Leased Premises' improvements, including
without limitation, the carpet, wall covering, doors and woodwork, become
damaged or are destroyed through negligence, carelessness or misuse by Tenant,
its agents, employees, licensees or invitees, then the cost of the necessary
repairs, replacements or alterations shall be borne by Tenant, who shall
promptly pay the same on demand to Landlord as Additional Rent. Landlord shall
have the exclusive right, but not the obligation, to make any repairs
necessitated by such damage.
At its sole cost and expense, Tenant shall repair or replace any damage or
injury done to the Building, or any part of the Building, caused by Tenant,
Tenant's agents, employees, licensees or invitees which Landlord elects not to
repair. Tenant shall not darnage or injure the Building or the Leased Premises
and shall maintain the Leased Premises in a clean, attractive condition and in
good repair. If Tenant fails to keep the Leased Premises in such good order,
condition and repair as required under this Lease to Landlord's satisfaction,
Landlord may restore the Leased Premises to such good order and condition and
make such repairs without liability to Tenant for any loss or damage that may
accrue to Tenant's Property or business by reason of the same, Tenant shall pay
to Landlord the cost of repairs and of restoring the Leased Premises to good
order and condition, plus an additional charge of fifteen percent (15%) upon
billing by Landlord. Upon the Termination Date, Tenant shall surrender and
deliver up the Leased Premises to Landlord in the same condition as existed at
the Commencement Date, excepting only ordinary wear and tear and damage arising
from any cause not required to be repaired by Tenant.
Section 9. Tenant's Equipment and Installations; Excess Utilities
Except for desk or table mounted typewriters, calculating machines, personal
computers, and other similar office equipment, Tenant shall not install any
fixtures, equipment, facilities or other improvements without Landlord's
specific prior written consent. Tenant shall not, without Landlord's prior
written consent, use heat generating machines other than normal fractional
horsepower office machines, or equipment or lighting, other than building
standard lights in the Leased Premises, which may affect the temperature
otherwise maintained by the air conditioning system or increase the electricity
or water normally furnished for the Leased Premises. If such consent is given,
Landlord shall have the right to install supplementary air conditioning units or
other facilities in the Leased Premises, and the cost thereof, including the
cost of installation, operation and maintenance, increased wear and tear on
existing equipment and other similar charges, shall by paid by Tenant to
Landlord upon billing by Landlord. Said costs shall include the cost of
electrical metering or surveying necessary to determine the additional operating
cost attributable to the supplementary equipment. Landlord shall also have the
right to impose reasonable additional charges (payable by Tenant to Landlord
upon billing) by reason of Tenant's off- hours or additional use of utilities or
services, for the use of non-standard machines,
equipment or lighting, and because of the carelessness of Tenant or the nature
of Tenant's business. Tenant shall not, without Landlord's prior written
consent, install additional lighting or equipment requiring electric current to
be supplied to the Leased Premises in excess of the building standard. If such
consent is given, Tenant shall pay to Landlord upon billing for the cost of such
excess consumption.
Section 10. Force Majeure
Landlord shall not be liable for, and Tenant shall not be entitled to any
reduction of the Base Rent or Additional Rent by reason of, Landlord's failure
to furnish any of the services or utilities described in this Lease whether such
failure is caused by acts of God, accident, breakage, repairs, strikes, lockouts
or other labor disturbances or disputes of any character, interruption of
service by suppliers thereof, unavailability of materials or labor, or by any
other cause, similar or dissimilar, beyond the reasonable control of Landlord,
or by rationing or restrictions on the use of said services and utilities due to
energy shortages or other causes, or the making of repairs, alterations or
improvements to the Leased Premises or Building, whether or not any of the above
result from acts or omissions of Landlord. Furthermore, Landlord shall not be
liable under any circumstances for a loss of or injury to Tenant's Property or
for injury to or interference with Tenant's business, including without
limitation, loss of profits, however occurring, and Tenant shall not be relieved
of its obligation to pay the full Base Rent or Additional Rent by reason of the
same.
Section 11. Mechanic's and Materialman's Liens
11.1 Tenant shall not suffer or permit any mechanic's or materialman's lien to
be filed against the Leased Premises or any portion of the Building by reason of
work, labor, services, or materials supplied or claimed to have been supplied to
Tenant. Nothing in this Lease shall be deemed or construed in any way as
constituting the consent or request of Landlord, expressed or implied, by
inference or otherwise, for any contractor, subcontractor, laborer or
materialman to perform any labor or to furnish any materials or to make any
specific improvement, alteration or repair of or to the Leased Premises or any
portion of the Building, nor of giving Tenant any right, power or authority to
contract for, or permit the rendering of, any services or the furnishing of any
materials that could give rise to the filing of any mechanic's or materialman's
lien against the Leased Premises or any portion of the Building. Landlord shall
have the right at all times to post and keep posted on the Leased Premises any
notices which it deems necessary for protection from such liens.
11.2 If any such mechanic's or materialman's lien shall at any time be filed
against the Leased Premises or any portion of the Building as the result of any
act or omission of Tenant, Tenant covenants that it shall, within ten (10) days
after Tenant has notice of the claim for lien, procure the discharge thereof by
payment or by giving security or in such other manner as may be required or
permitted by law or which shall otherwise satisfy Landlord. If Tenant fails to
take such action, Landlord, in addition to any other right or remedy it may
have, may take such action as may be necessary to protect its interests. Any
amounts paid by Landlord in connection with such action and all reasonable legal
and other expenses of Landlord incurred in connection with the same, including
attorney's fees and costs, court costs and other necessary disbursements shall
be repaid by Tenant to Landlord on billing by Landlord as Additional Rent.
Section 12. Insurance
12.1 Landlord may maintain during the Term a commercial (comprehensive)
liability insurance policy (written on an occurrence, not claims made, basis)
including coverage for contractual liability, public liability and property
damage in a commercially reasonable amount, as determined by Landlord, covering
the Building. Landlord may maintain during the Term a policy of insurance
insuring the Building against loss or damage due to fire and other casualties
covered by a standard "all risk" coverage policy. Such coverage in such amounts
as Landlord may from time to time determine may include the risks of lightning,
vandalism and malicious mischief, and, at the option of Landlord, the risks of
earthquakes and additional hazards, a rental loss endorsement and one or more
loss payee endorsements in favor of the holders of any mortgages or deeds of
trust encumbering the interest of Landlord in the Building or the ground or
underlying lessors. The parties acknowledge that the premiums for insurance
specified in Section 12.1 are Operating Expenses, as defined in Section 5.
12.2 At its own expense, Tenant shall maintain during the Term a commercial
(comprehensive) liability insurance policy (written on an occurrence, not claims
made, basis),including~ ,/ coverage for contractual liability public liability
and property damage in the amount of Four Million and 00/100 Dollars
($4,000,000.00) Per person and per occurrence for personal injuries or deaths of
persons occurring in or about the Leased Premises.
12.3 At its own expense, Tenant shall maintain during the Term "all risk"
casualty insurance for the full replacement value of all Alterations and all of
Tenant's Property and other items in the Premises.
12.4 At its own expense, Tenant shall maintain during the Term workers'
compensation insurance and all such other insurance as may be required by
applicable Laws.
12.5 All insurance required of Tenant shall: (a) as to any liability policies,
name Landlord, and any other party which Landlord so specifies, as additional
insureds; (b) specifically cover the liability assumed by Tenant under this
Lease; (c) be issued by an insurance company which has a general policy holder's
rating of not less than "A", and a financial rating of not less than Class "X",
in the most current edition of Best's Insurance Reports, and which is licensed
to do business in the State of California; (d) be primary insurance as to all
claims thereunder; (e) provide that said insurance shall not be canceled or
coverage changed unless thirty (30) days' prior written notice shall have been
given to Landlord, any other named insured and the holders of any mortgages or
deeds of trust referred to above; and (f) shall not eliminate cross-liability
and shall contain a severability of interest clause. Tenant shall deliver
certificates thereof to Landlord on or before the Commencement Date and at least
thirty days before the expiration dates thereof. In the event Tenant shall fail
to procure such insurance, or to deliver such certificates, Landlord may,
without waiving any of its rights or remedies, procure such policies for the
account of Tenant, and the cost thereof shall be paid by Tenant as Additional
Rent upon billing by Landlord. Tenant's compliance with the provisions of this
Section 12 shall in no way limit Tenant's liability under any of the other
provisions of this Lease. The limits of insurance required to be maintained by
Tenant shall not be a limitation on any obligation of Tenant, including Tenant's
indemnification obligations under Section 21 below. Not more frequently than
once every two years, Landlord may require Tenant to increase the amount of
liability insurance coverage if, in the opinion of Landlord's lender or
insurance consultant, the amount of such coverage is not then adequate.
12.6 Landlord and Tenant shall have their respective insurance companies issuing
property damage insurance waive any rights of subrogation that such companies
may have against Landlord or Tenant, as the case may be, so long as the
insurance carried by Landlord and Tenant, respectively, is not invalidated
thereby. As long as such waivers of subrogation are contained in their
respective insurance policies, Landlord and Tenant hereby waive any right that
either may have against the other on account of any loss or damage to their
respective property to the extent such loss or damage is insured under policies
of insurance for fire and all risk coverage, theft, public liability, worker's
compensation or other similar insurance.
Section 13. Quiet Enjoyment
Provided Tenant has performed all its obligations under this Lease, including
but not limited to the payment of Rent and all other sums due, Tenant shall
peaceably and quietly hold and enjoy the Leased Premises for the Term, without
hindrance by Landlord, subject to the provisions and conditions set forth in
this Lease.
Section 14. Alterations
14.1 Tenant shall not make or allow to be made any alterations, physical
additions, or improvements in or to the Leased Premises (collectively,
"Alteratinfzs") without first obtaining Landlord's written consent in each
instance, which consent may be given or withheld in Landlord's sole discretion.
At the time of said request, Tenant shall submit to Landlord plans and
specifications of the proposed Alterations. Landlord shall have a period of not
less than sixty (60) days in which to review and approve or disapprove said
plans. Tenant shall pay upon demand the reasonable costs of Landlord's review of
such plans and specifications, not to exceed One Thousand Dollars ($1,000.00).
The contractor or person selected by Tenant to make Alterations must be approved
in writing by Landlord prior to commencement of any work. Such contractor or
person shall carry insurance in forms and amounts reasonably satisfactory to
Landlord and shall at all times be subject to Landlord's rules and regulations
while in the Building. All Alterations shall be performed in full compliance
with plans and specifications approved by Landlord, all applicable Laws and the
requirements of the Board of Underwriters, Fire Rating Bureau or similar body.
All Alterations shall be performed at Tenant's sole cost and expense (including
reasonable costs for Landlord's supervision), at such time and in such manner as
Landlord may designate, and shall be promptly completed in a good and
workmanlike manner. Tenant shall pay to Landlord its review and supervision
costs upon billing by Landlord. Landlord's approval of the plans, specifications
and working drawings for Tenant's Alterations shall create no responsibility or
liability on the part of Landlord for their completeness, design sufficiency, or
compliance with all applicable Laws.
14.2 In addition to, and not in limitation of, the sixty (60) day period
Landlord has to review Tenant's plans and specifications for the Alterations,
Tenant shall give to Landlord at least fifteen (15) business days' prior written
notice of commencement of construction of any Alterations. Landlord shall have
the right to require that (a) any contractor hired by Tenant shall, prior to
commencing work in the Leased Premises, provide Landlord with a performance bond
and labor and materials payment bond in the amount of the contract price for the
work, naming Landlord and Tenant (and any other persons designated by Landlord)
as co-obligees, and that (b) any such contractor employ such labor as necessary
to avoid any delay in or interruption to the progress of work undertaken in the
Leased Premises or elsewhere in the Building due to union picket lines. Tenant's
contractors shall not use any portion of the common areas of the Building for
performance of the work unless Landlord's written consent is first obtained. The
granting or withholding of such consent shall be at Landlord's sole discretion.
14.3 All Alterations, whether made by Tenant or Landlord or at either's expense,
including, without limitation, all Tenant Improvement Work and all carpeting and
fixtures of any kind, shall become a part of the Building immediately upon
installation in the Leased Premises, and shall be and remain the property of
Landlord, except for trade fixtures, office supplies and moveable furniture and
furnishings placed on the Premises by Tenant that are removable without damage
to the Building or the Leased Premises, which shall be subject to Section 16.
Notwithstanding any other provisions of this Lease, upon Landlord's written
request made within thirty (30) days prior to the expiration or termination of
this Lease, Tenant at Tenant's sole cost and expense shall promptly remove any
Alterations or Tenant Improvement Work (if any), designated by Landlord to be
removed, and promptly repair any damage to the Premises or the Building
resulting from such removal.
14.4 Tenant shall be responsible for the entire cost of the Alterations,
including any cost or expense of Landlord, relating to the interior of the
Leased Premises, on account of the need to comply with the ADA (as defined in
Section 33) or other Laws. Under no circumstances shall Landlord be responsible
to Tenant or any third party for determining whether the Alterations comply with
all applicable Laws, including the ADA, regardless of whether Tenant must obtain
Landlord's approval of the Alterations or the plans and specifications therefor
as a condition to making them.
14.5 Should any construction, alteration, addition, improvements or decoration
of the Leased Premises, or moving into or out of Building, by Tenant interfere
with harmonious labor relations at the Building, all such work shall be halted
immediately by Tenant until such time as construction can proceed without such
interference.
Section 15. Furniture, Fixtures and Personal Property
15.1 Tenant, at its sole cost and expense, may remove its trade fixtures, of
flee supplies and moveable office furniture and equipment not attached to the
Building or Leased Premises ("Tenant's Property") provided:
(a) such removal is made prior to the Termination Date;
(b) no Event of Default exists at the time of such removal, and
(c) Tenant promptly repairs all damage to the Premises or the Building caused
by such removal.
15.2 If Tenant does not remove Tenant's Property prior to the Termination Date
(unless prior arrangements have been made with Landlord and Landlord has agreed
in writing to permit Tenant to leave any items of Tenant's Property in the
Leased Premises for an agreed period), then, in addition to its other remedies
at law or in equity, Landlord shall have the right to have such items removed
and stored at Tenant's sole cost and expense and all damage to the Building or
the Leased Premises resulting
from said removal shall be repaired at Tenant's cost. Any such items not removed
prior to the Termination Date, shall, at Landlord's option, subject to
applicable Laws, become the property of Landlord upon the Termination Date, and
Tenant shall not have any further rights with respect thereto or reimbursement
therefor.
15.3 All furnishings, fixtures, equipment, effects and property of every kind,
nature and description of Tenant and of all persons claiming by, through or
under Tenant which, during the Term or any occupancy of the Leased Premises by
Tenant or anyone claiming under Tenant, may be on the Leased Premises or
elsewhere in the Building shall be at the sole risk and hazard of Tenant. If the
whole or any part thereof is destroyed or damaged by fire, water or otherwise,
or by the leakage or bursting of water pipes, steam pipes, or other pipes, by
theft, or from any other cause, no part of said loss or damage is to be charged
to or be borne by Landlord.
Section 16. Taxes
During the Term, Tenant shall pay, prior to delinquency, all business and other
taxes, charges, notes, duties and assessments levied, and rates or fees imposed,
charged, or assessed against or in respect of Tenant's occupancy of the Leased
Premises or in respect of the trade fixtures, furnishings, equipment, and all
other personal property of Tenant contained in the Building, and shall hold
Landlord harmless from and against all payment of such taxes, charges, notes,
duties, assessments, rates, and fees. Tenant shall cause said fixtures,
furnishings, equipment, and other personal property to be assessed and billed
separately from the real and personal property of Landlord. In the event any or
all of Tenant's fixtures, furnishings, equipment, and other personal property
shall be assessed and taxed with Landlord's real property, Tenant shall pay to
Landlord Tenant's share of such taxes within ten (10) days after delivery to
Tenant by Landlord of a statement in writing setting forth the amount of such
taxes applicable to Tenant's Property.
Section 17. Assignment and Subletting
17.1 Neither Tenant nor Tenant's legal representatives nor successors in
interest by operation of law or otherwise shall assign this Lease or sublease
the Leased Premises or any part thereof or mortgage, pledge or hypothecate its
leasehold interest, nor make any attempt to do so, without Landlord's prior
written consent. Any such attempt shall be void and constitute an Event of
Default. This prohibition against assigning or subletting shall be construed to
include a prohibition against any assignment or subletting by operation of law.
The voluntary or other surrender of this Lease by Tenant or a mutual
cancellation of it shall not work a merger and shall, at the option of Landlord,
terminate all or any existing subleases or may, at the option of Landlord,
operate as an assignment to Landlord of Tenant's interest in any or all such
subleases.
17.2 The following shall constitute a prohibited assignment subject to Section
17.1: (a) a sale, transfer, pledge or hypothecation by Tenant of all or
substantially all of its assets or all or substantially all of its stock, if
Tenant's stock is publicly traded; (b) a merger of Tenant with another
corporation; (c) the sale, transfer, pledge or hypothecation of fifty percent or
more of Tenant's stock if Tenant's stock is not publicly traded; or (d) the
sale, transfer, pledge or hypothecation of fifty percent (50%) or more Tenant's
beneficial ownership interest if Tenant is a partnership, limited liability
company, or other entity; provided, however, that Landlord's consent shall not
be required for the assignment of the Lease
or subletting of the Leased Premises to a Permitted Affiliate. For purposes
hereof, the term "Permitted Affliate" means a subsidiary of Tenant with an
independent net worth as of the date of the proposed assignment or subletting
equal to or greater than the net worth of Tenant as of the date of this Lease.
17.3 Tenant shall give Landlord written notice of its desire to assign this
Lease or sublease the Leased Premises or any portion thereof. At the time of
giving such notice, Tenant shall provide Landlord with a copy of the proposed
assignment or sublease document, and such information as Landlord may reasonably
request concerning the proposed sublessee or assignee to assist Landlord in
making an informed judgment regarding the financial condition, reputation,
operation and general desirability of the proposed sublessee or assignee.
Landlord shall then have a period of thirty (30) days following receipt of such
notice within which to notify Tenant in writing of Landlord's election to:
(a) terminate this Lease as to the space so affected as of the date specified by
Tenant, in which event Tenant shall be relieved of all obligations accruing
under this Lease after the termination as to the Leased Premises or such
portion, after paying all Rent due as of the Termination Date, or
(b) permit Tenant to assign or sublet the Leased Premises or such portion, or
(c) refuse to consent to Tenant's assignment or subletting of the Leased
Premises or such portion and to continue this Lease in full force and effect as
to the entire Leased Premises.
If Landlord should fail to notify Tenant of its election within the thirty (30)
day period, Landlord shall be deemed to have elected option (c). In the event of
any approved assignment or subletting, the rights of any such assignee or
sublessee shall be subject to all of the terms, conditions and provisions of
this Lease, including without limitation restrictions on use and the covenant to
pay Rent. If Landlord approves the proposed assignment or subletting, Tenant
may, not later than ninety (90) days thereafter, enter into such assignment or
sublease with the proposed assignee or sublessee upon the terms and conditions
set forth in the notice provided to Landlord, and eighty percent (80%) of the
Excess Rent received by Tenant shall be paid to Landlord as and when received by
Tenant. "Excess Rent" means any rent or other consideration received by Tenant
in excess of (i) the Base Rent and Additional Rent payable hereunder (or the
amount thereof proportionate to the portion of the Leased Premises subject to
such sublease in the case of a sublease of a portion of the Premises) and (ii)
reasonable brokerage commissions incurred in connection with such sublease or
assignment. No such consent to or recognition of any such assignment or
subletting shall constitute a release of Tenant or any guarantor of Tenant's
performance from further performance by Tenant or such guarantor of covenants
undertaken to be performed by Tenant. Tenant and/or such guarantor shall remain
liable and responsible for all Rent and other obligations of Tenant under this
Lease. Consent by Landlord to a particular assignment, sublease or other
transaction shall not be deemed a consent to any other or subsequent
transaction. Whether or not Landlord consents to any assignment, sublease or
other transaction, Tenant shall pay Landlord an administrative fee of Five
Hundred Dollars ($500) and any reasonable attorneys' fees or accountant's fees
and costs actually incurred by Landlord in connection with such transaction. All
documents utilized by Tenant to evidence any subletting or assignment for which
Landlord's consent has been requested, shall be subject to prior approval by
Landlord or its attorney.
17.4 If this Lease is assigned to any person or entity under the United States
Bankruptcy Code, 11 U.S.C. Section 101 et. seq. (the "Bankruptcy Code"), any and
all monies or other consideration
payable or otherwise to be delivered in connection with such assignment shall be
paid or delivered to Landlord, shall be and remain the exclusive property of
Landlord, and shall not constitute property of Tenant or of the estate of Tenant
within the meaning of the Bankruptcy Code. Any such monies or other
consideration not paid or delivered to Landlord shall be held in trust for the
benefit of Landlord and shall be promptly paid or delivered to Landlord. Any
person or entity to whom this Lease is so assigned shall be deemed, without
further act or deed, to have assumed all of the obligations arising under this
Lease as of the date of such assignment. Upon demand therefor, any such assignee
shall execute and deliver to Landlord an instrument confirming such assumption.
In no event shall Tenant have any right to sublet or assign if there exists any
Event of Default or circumstances which, with notice or passage of time,
would constitute an Event of Default.
17.5 Subject to the above, any consents required by Landlord under this Section
18 shall not be unreasonably withheld or untimely delayed. In considering a
proposed assignment or sublease, it shall not be unreasonable for Landlord to
consider (a) whether a proposed use is compatible with the tenant mix in the
Building, (b) the extent of Alterations required, (c) financial condition,
character and reputation of the proposed sublessee or assignee, and (d) other
non-economic factors, in considering whether to give its consent.
Section 18. Fire and Casualty
18.1 Tenant shall promptly notify Landlord of any damage to the Leased Premises
resulting from fire or any other casualty. Subject to the remaining provisions
of this Section 19, if the Leased Premises or the Building are damaged by fire
or other casualty insured against by Landlord's fire and all risk coverage
insurance policy, and sufficient proceeds (apart from any applicable deductible)
are made available to Landlord to fully cover the cost of repair, Landlord shall
promptly undertake such repairs, so long as such repairs can, in Landlord's
reasonable opinion, be made within one hundred-eighty (180) days after the date
of such damage and this Lease shall remain in full force and effect. If (a) such
repairs cannot, in Landlord's reasonable opinion, be made within one hundred
eighty (180) days after the date of such damage, or (b) insufficient proceeds
are made available to Landlord to fully cover the cost of repair, or (c) the
casualty is not covered by insurance policies Landlord is required to carry
pursuant to Section 12.1, then Landlord may elect, by written notice to Tenant
given within sixty (60) days after the date of such damage, to either: (i)
restore or repair such damage, in which event this Lease shall continue in full
force and effect, or (ii) terminate this Lease as of a date specified in such
notice, which date shall not be less than thirty (30) nor more than sixty (60)
days after the date such notice is given. In calculating the cost of repair,
Landlord shall be entitled to take into account the cost of bringing the
damaged, destroyed or remaining portions of the Leased Premises and the Building
into compliance with any then-applicable Laws (including ADA Requirements).
18.2 If such fire or other casualty shall have damaged the Leased Premises, and
if such damage is not the result of the negligence or willful misconduct of
Tenant or any persons claiming by, through or under Tenant or any of their
employees, agents, contractors, invitees or licensees, then during the period a
portion of the Leased Premises is rendered unusable by such damage Tenant shall
be entitled to a reduction in the Base Rent and Additional Rent in the
proportion that the Rentable Area of the Leased Premises rendered unusable as a
result of such damage bears to the total Rentable Area of the
Leased Premises. If any damage to the Leased Premises is due to the negligence
or willful misconduct of Tenant or any of the other parties described in the
preceding sentence, then there shall be no abatement of the Base Rent or
Additional Rent by reason of such damages, except to the extent Landlord is
reimbursed for such abatement of the Base Rent or Additional Rent pursuant to
any rental insurance policies Landlord has chosen to obtain pursuant to Section
12.1.
18.3 Notwithstanding any other provision of this Lease, Landlord shall not be
required to repair any injury or damage to or to make any repairs to or
replacements of any Alterations or any other improvements installed in the
Leased Premises by or for Tenant, other than the Tenant Improvements, and Tenant
shall, at Tenant's sole cost and expense, repair and restore all such
Alterations and improvements in the same condition as existed prior to such
event. Except as provided in Section 19.2, Tenant shall not be entitled to any
compensation or damages from Landlord for damage to any Alterations, or Tenant's
Property, for loss of use of the Premises or any part thereof, for any damage to
or interference with Tenant's business, loss of profits, or for any disturbance
to Tenant caused by any casualty or the restoration of the Leased Premises
following such casualty.
18.4 The provisions of this Lease, including this Section 19, constitute an
express agreement between Landlord and Tenant with respect to any and all damage
to, or destruction of, all or any part of the Leased Premises, the Building or
any other portion of the Real Property, and any statute or regulation of the
State of California, including without limitation, Sections 1932(2) and 1933(4)
of the California Civil Code, with respect to any rights or obligations
concerning damage or destruction in the absence of an express agreement between
the parties and any other statute or regulation, now or subsequently in effect,
shall have no application to this Lease or any damage or destruction to all or
any part of the Leased Premises, the Building or any other portion of the Real
Property. Tenant hereby specifically waives all rights to terminate this Lease
under said Civil Code sections or any similar laws.
18.5 If the Building or the Leased Premises are damaged to any extent during the
last twelve months of the Term, Landlord may elect to terminate this Lease by
written notice to the other within thirty (30) days after the damage occurs.
Section 19. Condemnation
19.1 If more than fifty percent (50%) of the Rentable Area ofthe Leased Premises
is taken under power of eminent domain or sold, transferred or conveyed in lieu
thereof, either Landlord or Tenant shall have the right to terminate this Lease
as of the earliest of the date of vesting of title or the date possession is
taken by the condemning authority. Such right shall be exercised by giving of
written notice to the other party on or before said date. If any part of the
Building other than the Leased Premises is taken under power of eminent domain
or sold, transferred or conveyed in lieu thereof, Landlord may terminate this
Lease at its option as of the earlier of the date of vesting of title or the
date possession is taken by the condemning authority. In either of such events,
Landlord shall receive the entire award which may be made in such taking or
condemnation, and Tenant hereby assigns to Landlord any and all rights of Tenant
now or hereafter arising in or to the same whether or not attributable to the
value of the unexpired portion of this Lease; provided, however, that nothing
contained herein shall be deemed to give Landlord any interest in or to require
Tenant to assign to Landlord any award made to Tenant for the taking of Tenant's
Property or for the interruption of or damage to Tenant's business or for
Tenant's moving expenses.
19.2 In the event of a taking of any portion which is less than fifty percent
(50%) of the Rentable Area of the Leased Premises, or a sale, transfer, or
conveyance in lieu thereof, or if this Lease is not terminated by Landlord or
Tenant as provided above, then this Lease shall automatically terminate as to
the portion of the Leased Premises so taken as of the earlier of the date of
vesting of title or the date possession is taken by the condemning authority,
and the Base Rent as well as the Additional Rent shall be apportioned according
to the ratio that the remaining Rentable Area of the Leased Premises bears to
the total original Rentable Area of the Leased Premises. Tenant hereby waives
any and all rights it might otherwise have pursuant to Section 1265.130 of
California Code of Civil Procedure or any similar provisions of Laws now or
hereafter in effect.
19.3 In the event of temporary taking of all or any portion of the Leased
Premises for a period of ninety (90) days or less, then this Lease shall not
terminate but the Base Rent and the Additional Rent shall be abated for the
period of such taking in proportion to the ratio that the remaining Rentable
Area of the Premises bears to the total Rentable Area of the Leased Premises.
Landlord shall be entitled to receive the entire award made in connection with
any such temporary taking.
Section 20. Indemnification
20.1 Landlord shall not be liable to Tenant for and Tenant hereby waives all
claims against Landlord for damage to any property or injury, illness or death
of any person in, upon, or about the Leased Premises, the Building or the Real
Property arising at any time and from any cause whatsoever except to the extent
caused by the gross negligence or willful misconduct of Landlord or its
employees or agents. Without limiting the generality of the foregoing, Landlord
shall not be liable for any damage or damages of any nature whatsoever to
persons or property caused by explosion, fire, theft, breakage or the misconduct
of third parties, by sprinkler, drainage or plumbing systems, by failure for any
cause to supply adequate drainage, by the interruption of any public utility or
service, by steam, gas, water, rain or other substances leaking, issuing or
flowing into any part of the Leased Premises, by the existence of asbestos or
other hazardous or toxic substances in the Building or the Premises as more
particularly described in Section 32, by natural occurrence, acts of a public
enemy, riot, strike, insurrection, war, court order, requisition or order of
governmental body or authority, or for any damage or inconvenience which may
arise through repair, maintenance or alteration of any part of the Building, or
by anything done or omitted to be done by any tenant, occupant or person in the
Building. In addition, Landlord shall not be liable for any loss or damage for
which Tenant is required to insure or for any loss or damage resulting from any
construction, alterations or repair by Landlord or by others.
20.2 Tenant shall defend, with counsel approved by Landlord, indemnify and save
harmless, Landlord, any partner, trustee, stockholder, of ricer, director,
employee or beneficiary of Landlord, holders of mortgages or deed to trust
covering the Leased Premises or the Building and any other party having an
interest therein ( "Indemnif ed Parties ") from and against any and all
liabilities, losses damages, costs, expenses (including reasonable attorneys'
fees and expenses), causes of action, suits, claims, demands or judgments of any
nature (a) to which any Indemnified Party is subject because of its estate or
interest in the Leased Premises, the Building or the Real Property, or (b)
arising from (i) injury to or death of any person, or damage to or loss of
property, on the Leased Premises, the Building or the Real Property, or on
adjoining sidewalks, streets or ways, or connected with the use, condition or
occupancy of any thereof (except to the extent caused by the gross negligence or
willful misconduct of
Landlord or its agents or employees), (ii) any violation by Tenant in the
observance or performance of its obligations under this Lease, or (iii) any act,
fault, omission, negligence or other misconduct of Tenant or its agents,
contractors, licenses, sublessees or invitees. Tenant shall use and occupy the
Leased Premises and other facilities of the Building at its own risk, and hereby
releases the Indemnified Parties from any and all claims for any damage or
injury to the fullest extent permitted by Law.
20.3 The provisions of this Section 21 shall survive the expiration or sooner
termination of this
Lease.
Section 21. Default by Tenant
21.1 The term "Event of Default" refers to the occurrence of any one or more of
the following:
(a) failure of Tenant to pay when due any Base Rent, Additional Rent or any
other monetary sum required to be paid hereunder (a "Monetary Default");
(b) failure of Tenant, after ten (10) days written notice, to observe and
perform any other of Tenant's obligations, covenants or agreements under this
Lease; provided, however, that if such nonmonetary default cannot reasonably be
cured within ten ( 10) days, then the default shall not be deemed to be uncured
if Tenant commences to cure the default promptly, and in any event within ten
(10) days from Landlord's notice, and continues to diligently complete the cure
within a reasonable time;
(c) if Tenant, or any guarantor of Tenant's obligations under this Lease (a
"Guarantor',), admits in writing that it cannot meet its obligations as they
become due; or is declared insolvent according to any law; or assignment of
Tenant's or Guarantor's property is made for the benefit of creditors; or a
receiver or trustee is appointed for Tenant or Guarantor or its property; or the
interest of Tenant or Guarantor under this Lease is levied on under execution or
other legal process; or any petition is filed by or against Tenant or Guarantor
to declare Tenant bankrupt or to delay, reduce or modify Tenant's debts or
obligations; or any petition is filed or other action taken to reorganize or
modify Tenant's or Guarantor's capital structure, if Tenant is a corporation or
other entity; provided that, any involuntary levy, execution, legal process or
petition filed against Tenant or Guarantor shall not constitute an Event of
Default provided Tenant or Guarantor shall vigorously contest the same by
appropriate proceedings and shall remove or vacate the same within sixty days
from the date of its creation, service or filing;
(d) the abandonment of the Leased Premises by Tenant, which shall mean that
Tenant has vacated the Leased Premises for ten (10) consecutive days, whether or
not Tenant is in Monetary Default; or that Tenant, in the judgment of Landlord,
is vacating the Leased Premises by removing furniture and fixtures;
(e) the discovery by Landlord that any financial statement given by Tenant or
any of its assignees, subtenants or successors-in-interests, or Guarantors, was
materially false; or
(f) if Tenant or any Guarantor shall die, cease to exist as a corporation or
partnership or be otherwise dissolved or liquidated or become insolvent, or
shall make a transfer in fraud of creditors.
21.2 Upon the occurrence of any Event Default by Tenant, Landlord may at any
time thereafter, without limiting Landlord in the exercise of any right or
remedy which Landlord may have under this Lease, at law or in equity by reason
of such Event of Default:
(a) Terminate this Lease and recover from Tenant as provided by California Civil
Code Section 1951.2: (i) the worth at the time of award of the unpaid Rent and
other amounts which had been earned at the time of termination; (ii) the worth
at the time of award of the amount by which the unpaid Rent which would have
been earned after termination until the time of award exceeds the amount of such
Rent loss that Tenant proves could have been reasonably avoided; (iii) the worth
at the time of award of the amount by which the unpaid Rent for the balance of
the Term after the time of award exceeds the amount of such Rent loss that
Tenant proves could be reasonably avoided; and (iv) any other amount necessary
to compensate Landlord for all the detriment proximately caused by Tenant's
failure to perform its obligations under this Lease or which, in the ordinary
course of things, would be likely to result therefrom. The "worth at the time of
award" of the amount referred to in (iii) shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). For purposes of computing unpaid Rent which
would have accrued and become payable under this Lease pursuant to the
provisions of this subsection (a), unpaid Rent shall consist of the sum of the
unpaid Base Rent and the Additional Rent as reasonably estimated by Landlord for
the balance of the Term; or
(b) Continue this Lease in effect and enforce all of its rights and remedies
under this Lease, as provided by California Civil Code Section 1951.4, including
the right to recover Base Rent and Additional Rent as they become due, for so
long as Landlord does not terminate Tenant's right to possession; provided,
however, if Landlord elects to exercise its remedies described in this
subsection (b) and Landlord does not terminate this Lease, and if Tenant
requests Landlord's consent to an assignment of this Lease or a sublease of the
Leased Premises, Landlord shall not unreasonably withhold its consent to such
assignment or sublease. Acts of maintenance or preservation, efforts to relet
the Leased Premises, or the appointment of a receiver upon Landlord's initiative
to protect its interest under this Lease, shall not constitute a termination of
Tenant's right to possession; or
(c) With or without terminating this Lease, to reenter the Leased Premises and
remove all persons and property from the Leased Premises. Such property may be
removed and stored in a public warehouse or elsewhere at the cost of and for the
account of Tenant. No such reentry shall constitute an election to terminate
this Lease unless a written notice of such intention is given to Tenant or
unless the termination thereof is decreed by a court of competent jurisdiction.
In addition to its other rights under this Lease, Landlord shall have the right,
even though tenant is in default and has abandoned the Leased Premises, (i) to
maintain this Lease in effect and not terminate Tenant's right to possession,
and (ii) to enforce its rights and remedies under this Lease, including the
right to recover Base Rent and Additional Rent as they become due under this
Lease.
21.3 If Tenant fails to make any payment or cure any Event of Default hereunder
within the time permitted, Landlord, without being under any obligation to do so
and without thereby waiving such Event of Default, may make the payment and/or
remedy the Event of Default for the account of Tenant (and enter the Leased
Premises for such purpose), and Tenant shall pay Landlord, upon demand, all
reasonable costs, expenses and disbursements plus fifteen percent (15%) overhead
cost, incurred by Landlord in connection with such payment or cure.
21.4 Nothing contained in this Section 21 shall limit or prejudice the right of
Landlord to prove and obtain as liquidated damages in any bankruptcy,
insolvency, receivership, reorganization or dissolution proceeding, an amount
equal to the maximum allowed by applicable Law, whether or not such amount is
greater, equal to or less than the amounts recoverable, either as damages or
Rent, referred to in any of the preceding provisions of this Section 21.
Notwithstanding anything contained in this Section 21 to the contrary, any such
proceeding or action involving bankruptcy, insolvency, reorganization,
arrangement, assignment for the benefit of creditors, or appointment of a
receiver or trustee, shall be considered to be an Event of Default only when
such proceeding, action or remedy shall be taken or brought by or against the
then holder of the leasehold estate under this Lease or the guarantor under a
Guaranty of this Lease.
21.5 In connection with an Event of Default, Tenant shall also be liable and
shall pay to Landlord, in addition to any sums provided to be paid above,
broker's fees incurred by Landlord in connection with reletting the whole or any
part of the Leased Premises, the costs of removing and storing Tenant's or other
occupants' property, the costs of repairing, altering, remodeling, or otherwise
putting the Leased Premises into condition acceptable to a new tenant or
tenants, and all reasonable expenses incurred by Landlord in enforcing or
defending Landlord's rights and/or remedies, including reasonable attorneys'
fees whether suit was actually filed or not.
21.6 Landlord is entitled to accept, receive, in check or money order, and
deposit any payment made by Tenant for any reason or purpose or in any amount
whatsoever, and apply them at Landlord's option to any obligation of Tenant, and
such amounts shall not constitute payment of any amount owed except that to
which Landlord has applied them. No endorsement or statement on any check or
letter of Tenant shall be deemed an accord and satisfaction or recognized for
any purpose whatsoever. The acceptance of any such check or payment shall be
without prejudice to Landlord's rights to recover any and all amounts owed by
Tenant and shall not be deemed to cure any other default nor prejudice
Landlord's rights to pursue any other available remedy.
21.7 Landlord shall not be in default unless Landlord fails to perform
obligations required of Landlord within thirty (30) days after written notice
thereof from Tenant to Landlord, and after the notice and other requirements of
Section 35 have been met; provided that, if such default cannot reasonably be
cured within thirty (30) days then Landlord shall not be in default if it
commences to cure the default within the thirty (30) day period and continues
diligently to complete the cure within a reasonable time. Any such notice of
default shall specify the obligation Landlord has allegedly failed to perform,
and shall identify the Lease provision containing such obligation. If, by reason
of the occurrence of any of the events specified in Section 10 hereof, Landlord
is unable to fulfill or is delayed in fulfilling any of Landlord's obligations
under this Lease or any collateral instrument, no such inability or delay shall
constitute an actual or constructive eviction, in whole or in part, or entitle
Tenant to any
abatement or diminution of Base Rent or Additional Rent, or relieve Tenant from
any of its obligations under this Lease, or impose any liability upon Landlord
or its agents by reason of inconvenience or annoyance to Tenant or by reason of
injury to or interruption of Tenant's business, loss of profits, or otherwise.
Tenant hereby waives and releases its right to terminate this Lease under
Section 1932(1) of the California Civil Code or under any similar law, statute
or ordinance now or later in effect.
Section 22. Lien for Rent
To secure the payment of all Rent and the faithful performance of all the other
covenants of this Lease to be performed by Tenant, Tenant hereby gives to
Landlord an express contract lien on and first security interest in and to all
property, equipment, machinery, trade fixtures, chattels and merchandise
("Lien") which may be placed in the Leased Premises and also upon all proceeds
of any insurance which may accrue to Tenant by reason of damage to or
destruction of any such property, and agrees that this
Lease shall constitute a security agreement with respect thereto. All exemption
laws are hereby waived by Tenant. This Lien is given in addition to any
statutory liens and shall be cumulative thereto. Tenant agrees to execute from
time to time at the request of Landlord WCC-l Financing Statements referencing
this security agreement in a form satisfactory to Landlord, and to file
originals of such statements with the clerk of the cities or towns where (a) the
Leased Premises are located, and (b) Tenant maintains its principal business
office or residence, or wherever else such statements would ordinarily be filed
to
protect creditor's rights under California law. In addition to all other rights
of Landlord under this Lease, upon Tenant's default, Landlord shall have all of
the remedies of a secured party with respect to said
property, equipment, machinery, trade fixtures, chattels and merchandise.
Section 23. Right to Relocate
Notwithstanding anything in this Lease to the contrary, Landlord in all cases
shall retain the right and power to relocate Tenant, upon thirty (30) days'
written notice, within the Building to space which is comparable in size and
location and suited to Tenant's use, such right and power to be exercised
reasonably. Landlord shall not be liable or responsible for any claims, damages
or liabilities in connection with such relocation. Landlord's reasonable
exercise of such right and power shall include, but not be limited to, a
relocation to consolidate the Rentable Area occupied in order to provide
Landlord's services more efficiently or a relocation to provide contiguous
vacant space for a prospective tenant. If Landlord shall exercise said option,
the substituted premises shall thereafter be deemed the "Leased Premises" under
this Lease, and a new amended Exhibit A showing the new Leased Premises will be
substituted for the original Exhibit A.
Section 24. Attorneys' Fees
If either party commences litigation against the other in connection with this
Lease, the parties hereby waive any right to a trial by jury. In the event of
such litigation, the prevailing party shall be entitled to recover from the
other party such costs and reasonable attorneys' fees as may have been incurred.
The "prevailing party" shall be the party who receives substantially the result
sought, whether by settlement, dismissal or judgment and shall be conclusively
determined by the court. Further, if for any reason Landlord consults legal
counsel or otherwise incurs any costs or expenses as a result of its rightful
attempt to enforce the provisions of this Lease, even though no litigation is
commenced, or if commenced is not pursued to final judgment, Tenant shall pay to
Landlord, in addition to all other
amounts for which Tenant is obligated, all of Landlord's reasonable costs and
expenses incurred in connection with any such acts, including reasonable
attorneys fees.
Section 25. Non-Waiver
Neither acceptance of any payment by Landlord from Tenant nor failure by
Landlord to complain of any action, non-action, or default of Tenant shall
constitute a waiver of any of Landlord's rights. No action of Landlord shall be
deemed to be an acceptance of a surrender of this Lease by Tenant, including
without limitation, the acceptance of keys from Tenant, unless stated in a
written agreement or other written document signed by Landlord. Time is of the
essence with respect to the performance of every obligation of Tenant under this
Lease. Waiver by Landlord of any right in connection with any Event of Default
shall not constitute a waiver of such right or remedy or any other right or
remedy arising in connection with either a subsequent Event of Default with
respect to the same obligation or any other obligation. No right or remedy of
Landlord or covenant, duty, or obligation of Tenant shall be deemed waived by
Landlord unless such waiver is in writing, signed by Landlord or Landlord's duly
authorized agent.
Section 26. Rules and Regulations
Tenant shall comply with the rules and regulations set forth in Exhibit B.
Landlord shall have the right at all times to change such rules and regulations
or to amend them in any manner as may be deemed advisable by Landlord, all of
which changes and amendments shall be sent by Landlord to Tenant in writing.
Tenant shall thereafter comply with the changed or amended rules and
regulations. Landlord shall have no liability to Tenant for any failure of any
other tenants of the Building to comply with such rules and regulations.
Section 27. Assignment by Landlord
Landlord shall have the right to transfer, in whole or in part, all its rights
and obligations under this Lease and in the Leased Premises and the Building.
Section 28. Liability of Landlord
The obligations of Landlord under this Lease shall be binding upon Landlord and
its successors and assigns and any future owner of the Building only with
respect to events occurring during its and their respective ownership of the
Building. In addition, Tenant shall look solely to Landlord's interest in the
Building for recovery of any judgment against Landlord arising in connection
with this Lease, it being agreed that neither Landlord nor any successor or
assign of Landlord nor any future owner of the Building, nor any trustee,
director, of ricer, employee, beneficiary, partner, shareholder, or agent of any
of the foregoing shall ever be personally liable for any such judgment.
Section 29. Subordination and Attornment
At Landlord's option, this Lease shall be subordinate to any mortgage, deed of
trust (now or subsequently placed upon the Building or the Real Property),
ground lease, declaration of covenants (subsequently placed upon the Building or
the Real Property) regarding maintenance and use of any
areas contained in any portion of the Building or the Real Property, and to any
and all advances made under any mortgage or deed of trust and to all renewals,
modifications, consolidations, replacements and extensions of the same. With
respect to any of the above documents, Tenant agrees that no documentation other
than this Lease shall be required to evidence the subordination. Any holder of a
mortgage or deed of trust may elect, by written notice to Tenant, to make this
Lease superior to the lien of its mortgage or deed of trust, in which case this
Lease shall automatically be deemed prior to such mortgage or deed of trust,
whether this Lease is dated earlier or later than the date of the mortgage or
deed of trust or the date the same was recorded. Tenant shall execute such
documents as may be required to evidence the subordination or to make this Lease
prior to the lien of any mortgage or deed of trust, as the case may be. By
failing to do so within five days after written demand, Tenant does hereby make,
constitute and irrevocably appoint Landlord as Tenant's attorney-in-fact to do
so. This power of attorney is coupled with an interest. Tenant hereby attorns to
all successor owners of the Building, whether or not such ownership is acquired
as a result of a sale through foreclosure of a deed of trust or mortgage, or
otherwise. Additionally, at such time or times as Landlord may request, upon not
less than five days' prior written request by Landlord, Tenant shall sign and
deliver to Landlord a certificate stating whether this Lease is in full force
and effect; whether any amendments or modifications exist; whether there are any
Events of Default or circumstances that, with notice or the passage of time may
become an Event of Default; and such other information and agreements as may be
reasonably requested. Any such statement delivered pursuant to this Section 29
may be relied upon by Landlord and by any prospective purchaser of all or any
portion of Landlord's interest, or a holder or prospective holder of any
mortgage or deed of trust encumbering the Building. Tenant's failure to deliver
such statement within such time shall constitute an Event of Default and shall
conclusively be deemed to be an admission by Tenant of the matters set forth in
the request for an estoppel certificate.
Section 30. Holding Over
In the event Tenant, or any party claiming under Tenant, retains possession of
the Leased Premises after the Termination Date, the possession shall be an
unlawful detainer. No tenancy or interest shall result from such possession, and
such parties shall be subject to immediate eviction and removal. Tenant or any
such party shall pay Landlord, as Rent for the period of such holdover, an
amount equal to two hundred percent (200%) of the Rent otherwise provided for in
this Lease during the time of holdover. Tenant also shall be liable for any and
all damages sustained by Landlord as a result of such holdover. Tenant shall
vacate the Leased Premises and deliver the Leased Premises to Landlord
immediately upon Tenant's receipt of notice from Landlord to so vacate. The Rent
during such holdover period shall be payable to Landlord on demand. No holding
over by Tenant, whether with or without Landlord's consent, shall operate to
extend this Lease.
Section 31. Signs
No sign, symbol or identifying marks shall be put upon the Building or the Real
Property, or in the halls, elevators, staircases, entrances, parking areas or
upon the doors or walls, without Landlord's prior written approval, which may be
given or withheld in Landlord's sole discretion Should such approval be granted,
the signs or lettering shall conform in all respects to the sign and/or
lettering criteria established by Landlord. Landlord, at Landlord's sole cost
and expense, reserves the right to change the door plaques as Landlord deems
reasonably desirable.
Section 32. Hazardous Substances
With respect to Tenant's use of the Building, Tenant at all times, at its own
cost and expense, shall comply with all Laws relating to the use, analysis,
production, storage, sale, disposal or transportation of any hazardous materials
("Hazardous Substance Laws',), including, without limitation, oil or petroleum
products or their derivatives, solvents, PCB's, explosive substances, asbestos,
radioactive materials or waste, and any other toxic, ignitable, reactive,
corrosive, infectious, contaminating or pollution materials ("Hazardous
Substances',) which now or in the future are subject to any governmental
regulation.
Tenant shall not use, generate, store or dispose of any Hazardous Substances in
or on the Leased Premises or the Building (except to the extent and in the
quantities any such Hazardous Substances are commonly used for general office
purposes and then only in strict accordance with all Hazardous Substance Laws).
Except in emergencies or as otherwise required by Law, Tenant shall not take any
remedial action in response to the presence or release of any Hazardous
Substances on or about the Building without first giving written notice of the
same to Landlord. Tenant shall not enter into any settlement agreement, consent
decree or other compromise with respect to any claims relating to any Hazardous
Substances in any way connected with the Building without first notifying
Landlord of Tenant's intention to do so and affording Landlord the opportunity
to participate in any such proceedings.
Landlord shall have the right at all reasonable times to (a) inspect the Leased
Premises, (b) conduct tests and investigations to determine whether Tenant is in
compliance with the above provisions, and (c) request lists of all Hazardous
Substances used, stored or located on the Leased Premises by Tenant. All costs
and expenses incurred by Landlord in connection with any environmental
investigation shall be paid by Landlord (and may be included in Operating
Expenses), except that if any such environmental investigation shows that Tenant
has failed to comply with the provisions of this Section, or that the Building
or the Real Property (including surrounding soil and any underlying or adjacent
groundwater) have become contaminated due to the operations or activities in any
way attributable to Tenant, then all of the costs and expenses of such
investigation shall be paid by Tenant. Tenant's indemnity under Section 20 shall
specifically extend to all liability, including all foreseeable and
unforeseeable consequential damages, directly or indirectly arising out of the
use, generation, disposal or storage of Hazardous Substances by Tenant,
including without limitation the costs of any required repair, cleanup or
detoxification and the preparation of any closure or other required plans,
whether such action is required or necessary prior to or following the
termination of this Lease, to the full extent that such action is proximately
caused by the use, generation, storage, or disposal of Hazardous Substances by
Tenant. Neither the written consent by Landlord to the use, generation, disposal
or storage of Hazardous Substances by Tenant nor the strict compliance by Tenant
with all Hazardous Substances Laws shall excuse Tenant from its indemnity
obligation.
In the event Tenant's occupancy or conduct of business in or on the Leased
Premises, whether or not Landlord has consented to the same, results in any
increase in premiums for the insurance carried from time to time by Landlord
with respect to the Building, Tenant shall pay any such increase in premiums
upon billing by Landlord. In determining whether increased premiums are a result
of Tenant's use or occupancy of the Leased Premises, a schedule issued by the
organization computing the insurance rate on the Building showing the various
components of such rate shall be conclusive evidence of the
several items and charges which make up such rate. Tenant shall promptly comply
with all reasonable requirements of the insurance authority or of any insurer
now or later in effect relating to the Leased Premises.
Landlord hereby discloses to Tenant that a Phase I Environmental Site Assessment
and Limited Asbestos Survey and Hazard Assessment were performed on the Property
by Hygienetics, Inc. of Emeryville, California in 1990. Hygienetics, Inc.
supplemented the Limited Asbestos Survey in June, 1991 and March, 1995. Such
surveys and assessment revealed 13 samples of vinyl tile floor mastic, and two
samples of vinyl floor tiles, in the Building, which contained asbestos and
revealed the presence of limited quantities of hazardous and toxic substances
such as cleaning materials, lead and acid batteries in the basement and diesel
fuel storage tanks. Complete copies of the Site Assessment and Asbestos Surveys
are available for inspection in the Building management office. Except as
disclosed in the Site Assessment and Asbestos Surveys, Landlord has no actual
knowledge of Hazardous Substances in the Building that must be removed in order
for the Building to comply with Hazardous Substances Laws in effect as of the
date of this Lease. Tenant has had the opportunity, prior to execution and
delivery of this Lease, to make such further investigation and inquiry about
such matters as Tenant deems appropriate and Tenant accepts the Premises with
knowledge of the risks that may be associated with the presence of all materials
or conditions disclosed in such surveys and assessment.
Section 33. Compliance with Laws and Other Regulations
At its sole cost and expense, Tenant shall promptly comply with (a) all laws,
statutes, ordinances, decrees, orders, and governmental rules, regulations or
requirements now in force or which may later become in force, of federal, state,
county, and municipal authorities, including but not limited to ADA
Requirements, (b) with the requirements of any board of fire underwriters or
other similar body now or hereafter constituted, (c) with any occupancy
certificate issued pursuant to any law by any public officer or officers and (d)
with any covenants, conditions and restrictions encumbering the Building or the
Real Property, which impose any duty upon Landlord or Tenant, insofar as any
thereof relate to or affect the condition, use, alteration or occupancy of the
Leased Premises (collectively, "Laws").
Section 34. Governing Law; Severability
This Lease shall be construed in accordance with the laws of the State of
California. If any provision of this Lease or the application of it to any
person or circumstance shall be invalid or unenforceable to any extent, it shall
be adjusted, if possible, rather than voided, in order to achieve the intent of
the parties. In any event, the remainder of this Lease and the application of
such provision to the other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by Law. This
Lease shall be construed as though the covenants between Landlord and Tenant are
independent. Tenant hereby expressly waives the benefit of any statute to the
contrary and agrees that if Landlord fails to perform its obligations, Tenant
shall not be entitled to make any repairs or perform any acts at Landlord's
expense or to any set-off of Rent or other amounts owing to Landlord.
Section 35. Notices
All notices, demands, statements or communications (collectively, "Notices")
given or required to be given by either party to the other shall be in writing,
shall be sent by nationally recognized
overnight courier service, or United States certified or registered mail,
postage prepaid, return receipt requested, or delivered personally addressed as
follows:
TO THE LANDLORD: John Hancock Mutual Life Insurance Company
c/o LaSalle Partners Limited
444 Market Street, Suite 2600
San Francisco, CA 94111
Att'n: Kathleen Freer, General Manager
with a copy to: John Hancock Mutual Life Insurance Company
Att'n Investment Officer Real Estate Investment Group
200 Clarendon St. Floor T-53
Boston, MA 02117
TO THE TENANT: Metro Commerce Bank
1248 5th Avenue
San Rafael,CA 94901
Att'n: Charles Hall
Any Notice will be deemed given upon the date actually received. If Tenant is
notified of the identity and address of the holder of any mortgage or deed of
trust given by Landlord, or any ground or underlying lessor, Tenant shall give
to such holder or ground or underlying lessor written notice of any default by
Landlord under the terms of this Lease by registered or certified mail, and such
holder or ground or underlying lessor shall be given a reasonable opportunity to
cure such default prior to Tenant's exercising any termination remedy available
to Tenant. Such addresses may be changed from time-totime by either party
serving notice as provided above.
Section 36. Obligations of Successors, Plurality, Gender
Except as otherwise expressly provided, this Lease shall bind and inure to the
benefit of the parties hereto, their respective heirs, legal representatives,
successors and assigns. If the rights of Tenant are owned by two or more parties
or two or more parties are designated as Tenant, then all such parties shall be
jointly and severally liable for the obligations of Tenant. Whenever the
singular or plural number, masculine or feminine or neuter gender is used, it
shall equally include the other.
Section 37. Entire Agreement
This Lease and any attached addenda or exhibits constitute the entire agreement
between Landlord and Tenant. No prior or contemporaneous written or oral
representations shall be binding. This Lease shall not be amended, changed or
extended except by written instrument signed by Landlord and Tenant.
Section 38. Section Captions
Section captions are for Landlord's and Tenant's convenience only, and neither
limit nor amplify the provisions of this Lease.
Section 39. Changes
Tenant shall consent to a modification of this Lease requested by any mortgagee
or beneficiary under a deed of trust as long as the modification does not
increase Tenant's costs or substantially change Tenant's rights and obligations.
Section 40. Authority
All rights and remedies of Landlord under this Lease, or those which may be
provided by Law, may be exercised by Landlord in its own name individually, or
in its name by its agent, and all legal proceedings for the enforcement of any
such rights or remedies, including actions for Rent, unlawful detainer, and any
other legal or equitable proceedings, may be commenced and prosecuted to final
judgment and be executed by Landlord in its own name individually or in its name
by its agent. Landlord and Tenant each represent to the other that each has full
power and authority to execute this Lease and to make and perform the agreements
contained in it. Tenant expressly stipulates that any rights or remedies
available to Landlord, either by the provisions of this Lease or otherwise, may
be enforced by Landlord in its own name individually or in its name by its agent
or principal.
Section 41. Brokerage
Landlord and Tenant hereby warrant to each other that they have had no dealings
with any real estate broker or agent in connection with the negotiation of this
Lease, excepting only the real estate brokers or agents specified in the Basic
Lease Information, and that they know of no other real estate broker or agent
who is entitled to a commission in connection with this Lease. Each party shall
defend, indemnify and hold the other party harmless from and against all claims,
actions, loss, cost, damage, expense and liability (including without limitation
reasonable attorneys' fees and court costs) with respect to any leasing
commission or equivalent compensation alleged to be owing on account of the
indemnifying party's dealings with any real estate broker or agent other than
that specified herein. Additionally, Tenant acknowledges and agrees that
Landlord shall have no obligation for payment of any brokerage fee or similar
compensation to any person with whom Tenant has dealt or may in the future deal
with respect to leasing of any additional or expansion space in the Building or
renewals or extensions of this Lease.
Section 42. Additions to Lease
Exhibits "A" and "B" are attached hereto and incorporated in this Lease for all
purposes and are hereby acknowledged by both parties to this Lease.
IN WITNESS WHEREOF, Landlord and Tenant, acting herein through duly authorized
individuals, have caused this Lease to be executed in multiple counterparts,
each of which shall have the force and effect of an original as of the date
first above written
TENANT: Metro Commerce Bank
By: /s/Charles Hall
Title President:
TAX ID OR TAX EXEMPT NO. 68-0300300
LANDLORD: JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY,
a Massachusetts corporation
By: /s/Meliha E. Niemann
Its: Investment Officer
EXHIBIT 13
MCB FINANCIAL CORPORATION
1997 ANNUAL REPORT
Corporate Profile
MCB Financial Corporation, headquartered in San Rafael, California, is the
holding company of Metro Commerce Bank, N.A. ("Metro"). Metro is a full service
commercial bank specializing in the delivery of financial services to the local
business communities it serves. Through its five branch offices located in San
Rafael, South San Francisco, Hayward, Upland and San Francisco, Metro offers a
broad range of deposit and loan products designed for small businesses. The
mission of Metro is to achieve superior financial performance for our
shareholders by ranking among the top 10% of all banks within California as
measured by return on equity and return on assets. This objective will be
accomplished by talented banking professionals working with a firm commitment to
community based lending, management of credit risk, and the delivery of a unique
service experience. Shares of MCB Financial Corporation are traded over-the-
counter under the ticker symbol of MCBF.
Table of Contents
Financial Highlights
Letter to Shareholders
Management's Discussion and Analysis
Market Price of MCB Financial Corporation
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Report of Independent Auditors
SELECTED FINANCIAL DATA FOR MCB FINANCIAL CORPORATION
(Dollar amounts in thousands, except per share amounts)
Years ended December 31,
1997 1996 1995 1994 1993
Interest income $11,500 $10,385 $8,716 $5,525 $4,041
Interest expense 4,253 4,018 3,841 1,806 1,526
Net interest income 7,247 6,367 4,875 3,719 2,515
Provision for possible credit losses 120 220 100 100 125
Other income 839 2,768 1,344 3,070 4,522
Other expense 5,673 5,565 8,552 5,837 5,440
Income (loss) before income taxes 2,293 3,350 (2,433) 852 1,472
Provision for income taxes 943 1,379 (935) 326 238
Net income (loss) $1,350 $1,971 ($1,498) $526 $1,234
Net income (loss) per share-diluted $1.28 $1.98 ($1.51) $0.54 $1.32
Period End
Total assets $139,877 $131,504 $122,316 $90,443 $64,247
Total loans 87,179 80,122 58,612 46,622 24,440
Total deposits 126,132 119,858 110,263 76,043 55,052
Other borrowings 750 447 213 4,521 763
Shareholders' equity 11,967 10,185 8,271 9,197 8,076
Book value per share $11.65 $10.29 $8.35 $9.17 $9.11
Financial Ratios
For period:
Return on assets 0.97% 1.56% (1.37%) 0.70% 1.96%
Return on equity 12.22% 20.97% (17.04%) 5.99% 16.31%
At period end:
Equity to assets 8.56% 7.75% 6.76% 10.17% 12.57%
LETTER TO SHAREHOLDERS
To Our Shareholders
1997 was another very good year for MCB Financial Corporation and our
shareholders, with record core earnings, record core revenues and a 56% gain in
our share price.
Financial Performance The Company reported net income of $1,350,000, up 23%
from 1996 net income before litigation expense recoveries. Net income for 1996
was $1,971,000, which included a pre-tax recovery of approximately $1.8 million
in litigation expenses. Earnings per share were $1.34 basic and $1.28 diluted
in 1997, compared to $1.99 basic and $1.98 diluted in 1996. Excluding the
litigation expense recovery, net income for 1996 would have been approximately
$1,099,000. Earnings per share would have been $1.11 basic and $1.10 diluted.
Excluding the litigation expense recovery in 1996, return on equity improved to
12.22% in 1997 compared to 11.69% in 1996. Return on assets also improved,
reaching 0.97% in 1997 compared to 0.87% in 1996.
The capital position continued to improve as the equity to assets ratio averaged
7.96% in 1997 compared to 7.44% in 1996. The Company continues to exceed all
minimum required ratios for well capitalized institutions.
The market for the Company's stock continued to develop as trading volume
increased throughout the year. The shares opened 1997 at $10.24 (adjusted for
stock dividends) and closed the year at $16.00, representing an increase of 56%
in market value. As a result of the continued growth of the Company and the
confidence of the board of directors in the Company's future , a 5% stock
dividend was paid in August 1997 and a 4-for-3 stock split was declared in
January 1998. It was the second stock dividend paid by the Company in as many
years and the Company's first stock split.
The Company continued to benefit from its strategy of de-emphasizing asset
growth in favor of improving existing profit margins. Although asset growth was
limited to 6.4%, the average loan to deposit ratio increased to 65.2% and the
average noninterest-bearing deposit to total deposit ratio increased to 21.5%
during1997. These ratios were 62.4% and 19.7%, respectively, during 1996. As
these ratios increase, the Company's capital position is utilized more
efficiently and the net interest margin is favorably impacted. Accordingly, the
Company's net interest margin increased to 5.68% for the year ended 1997
compared to 5.52% in 1996.
The Company also strives to utilize its capital more efficiently by keeping its
efficiency ratio (other expenses ses divided by net interest income plus other
income) as low as possible. This ratio decreased from 99.7% in 1995 and 76.1%
in 1996 (excluding litigation expense recoveries) to 70.2% in 1997.
Branch Expansion The Company remains focused in evaluating expansion
opportunities through branch openings and/or acquisitions. In January 1998, the
Company opened a San Francisco branch. The San Francisco office becomes the
fourth branch opened by the Company in the past four years. The branch provides
a presence in San Francisco while also solidifying the markets in areas adjacent
to San Francisco. We are hopeful that our continued efforts will produce other
expansion opportunities in the near future.
Leadership The Company's success relates to the board of director's and
management's motivation to think and act as shareholders. The board of
directors and management own a large percentage of the Company's common stock.
As a result, every management decision considers the impact on shareholders. We
are ever mindful of the need to offer products and services that are additive to
earnings and shareholder value.
Adopting Change In banking, nothing is consistent except change. Emerging
trends, advancing technologies, changes in regulatory law - all require a
resilience and willingness to adapt and evolve. In 1997, the Company converted
its information systems to a new state-of-the-art configuration. This
significant investment in technology will help us better serve our customers and
increase the return on our shareholders' investment in 1998 and beyond.
Continued Optimism Management continues to be optimistic for the near and
intermediate term regarding continued earnings improvement. We appreciate the
loyalty and support of the shareholders, directors and employees of MCB
Financial Corporation and look forward to your continued encouragement as we
work to build even greater value.
Sincerely,
John Cavallucci Charles O. Hall
Chairman, President & President & Chief Operating Officer
Chief Executive Officer Metro Commerce Bank, N.A.
MCB Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion presents information pertaining to the financial
condition and results of operations of MCB Financial Corporation that may not
otherwise be apparent from the financial statements and related notes. This
discussion should be read in conjunction with the financial statements and notes
found on pages 16 through 27 as well as other information presented throughout
this report. Within this discussion, MCB Financial Corporation shall be
referred to as "MCBF" and Metro Commerce Bank, N.A. shall be referred to as
"Metro." Average balances, including balances used in calculating certain
financial ratios, are generally comprised of average daily balances.
This document may contain forward-looking statements that are subject to risks
and uncertainties that could cause actual results to differ materially from
those indicated. For a discussion of factors that could cause actual results to
differ, please see the discussion contained herein and in the Company's publicly
available Securities and Exchange Commission filings and press releases.
OVERVIEW
Earnings Summary. MCBF reported net income of $1,350,000, or $1.34 per share
basic and $1.28 per share diluted, for 1997 compared to net income of
$1,971,000, or $1.99 per share basic and $1.98 per share diluted, in 1996 and a
net operating loss of $1,498,000, or $1.51 per share basic and diluted, in 1995.
The results for 1996 reflected a recovery of approximately $1.8 million (pre-
tax) in litigation expenses originally recorded in the prior year. The net
operating loss in 1995 was attributable to the creation of a $2.8 million
litigation contingency reserve during the second quarter of that year.
Return on average assets for 1997 was 0.97% compared to 1.56% in 1996 and
(1.37%) in 1995. Return on average equity for 1997 was 12.22% compared to 20.97%
in 1996 and (17.04%) in 1995.
FINANCIAL CONDITION
Summary. Assets increased by 6.4% during 1997 versus 7.5% and 35.2% in 1996 and
1995, respectively.
Asset growth slowed during 1997 as management continued to implement a strategy
of de-emphasizing growth in order to improve profit margins on existing market
share.
Loans. Loans held for investment increased by $7.1 million, or 8.8% in 1997, as
compared to an increase of $21.5 million, or 36.7%, during 1996. Commercial
real estate loans represented a majority of the 1996 increase as Metro
lengthened the duration of its loan portfolio and increased commercial real
estate loans through the offering of a competitively priced fixed rate,
intermediate-term loan product.
In the normal practice of extending credit, Metro accepts real estate
collateral on loans that have primary sources of repayment from commercial
operations. Loans secured by real estate totaled $71.3 million, or 81.8% of all
loans, at December 31, 1997 versus $66.2 million, or 82.7% of all loans, a year
earlier. Due to Metro's limited marketing area, its real estate collateral is
primarily concentrated in the San Francisco Bay Area and Southern California.
Management believes that its prudent underwriting standards for real estate
secured lending provide an adequate safeguard against changing real estate
prices.
Metro focuses its portfolio lending on commercial, commercial real estate,
and construction loans. These loans generally carry a higher level of risk than
conventional real estate loans, and accordingly, yields on these loans are
typically higher than those on other loans. The performance of commercial and
construction loans is generally dependent upon future cash flows from business
operations (including the sale of products, merchandise and services) and the
successful completion or operation of large real estate projects. Risks
attributable to such loans can be significantly increased, often to a greater
extent than on other loans, by regional economic factors, real estate prices,
the demand for commercial and retail office space, and the demand for products
and services of industries which are concentrated within Metro's loan portfolio.
As of December 31, 1997, the two largest industry concentrations within the loan
portfolio were real estate and related services at 26.5% and the
business/personal service industry at 20.1% of the portfolio. Because credit
concentrations increase portfolio risk, Metro places significant emphasis on the
purpose of each loan and the related sources of repayment.
Mortgage Banking. No mortgage loans sold pending settlement existed at December
31, 1997 versus $648,000 at December 31, 1996. Due to production changes in the
mortgage industry and the unfavorable prospects for future improvement, the
Company decided to wind down its wholesale Mortgage Banking operations at the
end of 1996. The mortgage industry continues to shift away from the use of
wholesalers in favor of direct lending. In addition, competitive pressures
continue to reduce the gross margins earned by wholesalers.
Nonperforming Assets. Metro carefully monitors the quality of its loan
portfolio and the factors that effect it including regional economic conditions,
employment stability, and real estate values. The accrual of interest on loans
is discontinued when the payment of principal or interest is considered to be in
doubt, or when a loan becomes contractually past due by 90 days or more with
respect to principal or interest, except for loans that are well secured and in
the process of collection. At December 31, 1997, nonperforming assets totaled
$109,000, or 0.08% of total assets, versus $79,000, or 0.06% at December 31,
1996.
Allowance for Possible Credit Losses. The Company maintains an allowance for
possible credit losses (the "APCL") which is reduced by credit losses and
increased by credit recoveries and provisions to the APCL charged against
operations. Provisions to the APCL and the total of the APCL are based, among
other factors, upon Metro's credit loss experience, the performance of loans
within the portfolio, evaluation of loan collateral value, and the prospects or
worth of respective borrowers and guarantors.
In determining the adequacy of its APCL, Metro segments its loan portfolio
into pools of homogeneous loans that share similar risk factors. Each pool is
given a risk assessment factor that largely reflects the expected future losses
from each category. These risk assessment factors change as economic conditions
shift and actual loan losses are recorded. The APCL totaled $1,007,000, or
1.14% of total loans, as of December 31, 1997 versus $944,000 or 1.16% of total
loans, a year earlier. In both periods, the APCL was determined to be an
adequate allowance against foreseeable future losses. Note 3 to the
consolidated financial statements provides a summary of the activity in the APCL
for the three years ended December 31, 1997. The increase in net credit losses
during 1995 resulted from the charge-off of substandard loans acquired by Metro
through its acquisition of the Bank of Hayward ("Hayward"). These loans were
reflected in the $400,000 APCL acquired from Hayward.
Investments. Total investment securities increased by $476,000 or 1.4% in 1997,
as compared to a decrease of $4.2 million, or 10.6% in 1996. Metro continues to
invest in callable government agency debentures. These securities offer above
market yields, but do not offer the same investment performance as non-callable
bonds. Market prices for callable bonds decrease when interest rates rise;
however, they remain relatively unchanged when interest rates fall due to the
increased probability of the call option being exercised. If these securities
are called Metro may not be able to reinvest the proceeds to obtain the same
investment yield.
Deposits. Total deposits increased by $6.3 million, or 5.2%, during 1997 as
compared to an increase of $9.6 million, or 8.7%, during 1996. During 1996,
management made a decision to slow Metro's rate of growth in order to
concentrate on improving profit margins. This policy included repositioning the
Company's deposit rates in the marketplace so as to limit non-relationship
deposit growth. This policy continued during 1997 resulting in lower interest
rates paid on deposits in 1997 compared to 1996. Average noninterest-bearing
demand deposits increased 19.5% during 1997 contributing to the decrease in the
cost of funds to 3.36% from 3.48% during 1996. The following table summarizes
the distribution of average deposits and the average rates paid for the periods
indicated (dollar amounts in thousands):
For the Years Ended December 31,
1997 1996 1995
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Noninterest-bearing
transaction deposits $27,019 $22,607 $16,691
Interest-bearing transaction deposits
(includes money market
deposit accounts) 78,521 4.10% 70,533 4.11% 55,927 4.46%
Savings deposits 1,928 1.93% 2,363 1.95% 2,430 2.22%
Time deposits,
$100,000 and over 10,214 5.42% 9,023 5.50% 8,541 5.78%
Other time deposits 8,080 5.13% 10,009 5.40% 13,357 5.50%
Total interest-
bearing 98,743 4.28% 91,928 4.34% 80,255 4.70%
Total deposits $125,762 3.36% $114,535 3.48% $96,946 3.89%
RESULTS OF OPERATIONS
Net Interest Income/Net Interest Margin. Net interest income increased by
$880,000, or 13.8%, during 1997 to reach $7.2 million. This compares to net
interest income of $6.4 million in 1996 and $4.9 million in 1995. As in prior
years, the increase in net interest income during 1997 was due to growth in
earning assets as well as improvement in the net interest margin.
The following table sets forth average assets, liabilities, and
shareholders' equity; the amount of interest income or interest expense; the
average yield or rate for each category of interest-bearing assets and interest-
bearing liabilities; and the net interest margin for the periods indicated
(dollar amounts in thousands):
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1996 1995
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold $6,613 356 5.38% $4,465 $233 5.22% $7,750 $450 5.81%
Interest-bearing
deposits with banks 348 21 6.03% 656 41 6.25% 934 61 6.53%
Investment securities 38,797 2,485 6.41% 38,736 2,375 6.18% 34,523 1,992 5.83%
Mortgage loans 66 5 7.58% 1,433 117 8.16% 2,353 180 7.65%
Loans 81,923 8,633 10.54% 70,082 7,619 10.87% 53,346 6,033 11.31%
Total earning assets 127,747 11,500 9.00% 115,372 10,385 9.02% 98,906 8,716 8.83%
Total non-earnings assets 10,928 11,014 10,087
Total Assets $138,675 $126,386 $108,993
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits $27,019 $22,607 $16,691
Interest-bearing
transaction accounts 78,521 3,219 4.10% 70,533 2,902 4.11% 55,927 2,492 4.46%
Time deposits,
$100,000 or more 10,214 554 5.42% 9,023 496 5.50% 8,541 493 5.77%
Savings and other time 10,009 452 4.52% 12,372 587 4.74% 15,787 789 5.00%
Total interest-
bearing deposits 98,744 4,225 4.28% 91,928 3,985 4.33% 80,255 3,774 4.70%
Other borrowings 591 28 4.74% 729 33 4.53% 1,163 67 5.76%
Total interest-
bearing liabilities 99,335 4,253 4.28% 92,657 4,018 4.34% 81,418 3,841 4.72%
Other liabilities 1,278 1,723 2,094
Shareholder's equity 11,043 9,399 8,790
Total Liabilities
and shareholders equity $138,675 $126,386 $108,993
Net interest income $7,247 $6,367 $4,875
Net interest margin 5.68% 5.52% 4.95%
</TABLE>
Metro's net interest margin (net interest income divided by average earning
assets) increased to 5.68% during 1997. This compared to 5.52% in 1996 and
4.95% in 1995. The improvements in 1997 and 1996 were due to higher investment
yields, increased loan volume and lower deposit costs.
The following table presents the dollar amount of changes in interest
earned and interest paid for each major category of interest-earning asset and
interest-bearing liability and the amount of change attributable to average
balances (volume) fluctuations and average rate fluctuations. The variance
attributable to both balance and rate fluctuations is allocated to a combined
rate/volume variance (dollar amounts in thousands):
1997 Compared to 1996 1996 Compared to 1995
Increase (decrease) due to Increase (decrease) due to
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
Interest Income:
Federal funds sold $112 $7 $4 $123 ($191) ($46) $20 ($217)
Interest-bearing
deposits with banks (20) (1) 1 (20) (18) (3) $1 (20)
Investment securities 4 106 0 110 246 121 $16 383
Mortgage loans held
for sale (112) (8) 8 (112) (70) 12 (5) (63)
Loans 1,284 (231) (39) 1,014 1,893 (235) (72) 1,586
Total Interest Income 1,268 (127) (26) 1,115 1,860 (151) (40) 1,669
Interest Expense:
Interest-bearing
transaction accounts 325 (7) (1) 317 651 (196) (45) 410
Time deposits,
$100,000 or more 66 (7) (1) 58 28 (23) (2) 3
Savings and other time (113) (27) 5 (135) (171) (41) 10 (202)
Other borrowings (6) 2 (1) (5) (25) (14) 5 (34)
Total Interest Expense 272 (39) 2 235 483 (274) (32) 177
Net Interest Income $996 ($88) ($28) $880 $1,377 $123 ($8)$1,492
Provision for Possible Credit Losses. MCBF provided $120,000 to the APCL during
1997 compared to $220,000 in 1996 and $100,000 in 1995. The provisions during
those periods were recorded primarily due to growth in the loan portfolio. Net
credit losses were $57,000 in 1997, $28,000 in 1996 and $254,000 in 1995. The
net credit losses in 1995 resulted from the write-off of substandard loans
acquired from the Bank of Hayward. These losses were reflected in the APCL
originally acquired from the Bank of Hayward.
Noninterest Income. The following table summarizes noninterest income for the
years 1997, 1996 and 1995 and expresses these amounts as a percentage of average
assets (dollar amounts in thousands):
Years Ended December 31, 1997 1996 1995
Components of Noninterest Income
Gain on sale of mortgage loans $13 $351 $465
Gain on sale of SBA loans 133 47 66
Service fees on deposit accounts 494 390 252
Loan servicing fees 34 21
Recovery of litigation expenses 1,825 452
Other income 165 135 109
Total $839 $2,769$ $1,344
As a Percentage of Average Assets
Gain on sale of mortgage loans 0.01% 0.28% 0.43%
Gain on sale of SBA loans 0.10% 0.04% 0.06%
Service fees on deposit accounts 0.36% 0.31% 0.23%
Loan servicing fees 0.02% 0.02%
Recovery of litigation expenses 1.44% 0.41%
Other income 0.12% 0.11% 0.10%
Total 0.61% 2.20% 1.23%
During the first quarter of 1996, MCBF recovered approximately $1.8 million in
litigation expenses in conjunction with the complete settlement and release of
its outstanding litigation. In addition, MCBF reached a settlement with its
insurance carriers during 1995 on an unrelated matter and received a recovery of
prior litigation expenses in the amount of $452,000. Gains from the sale of
mortgage loans decreased in 1997 due to MCBF's decision to wind down its
wholesale Mortgage Banking operations (see discussion of Mortgage Banking).
Noninterest Expenses. The following table summarizes noninterest expenses and
the associated ratios to average assets for the years 1997, 1996 and 1995
(dollar amounts in thousands):
Years Ended December 31,
Components of Noninterest Expense 1997 1996 1995
Salaries and employee benefits $3,011 $3,120 $3,010
Occupancy expense 774 724 723
Furniture and equipment expense 322 388 343
Professional services 365 202 463
Supplies 212 236 247
Promotional 202 233 277
Data processing 354 276 230
Regulatory assessments 61 46 131
Provision for legal settlement 2,800
Other 372 340 328
Total $5,673 $5,565 $8,552
Average full-time equivalent staff 49 50 49
As a Percentage of Average Assets
Salaries and employee benefits 2.17% 2.47% 2.76%
Occupancy expense 0.56% 0.57% 0.66%
Furniture and equipment expense 0.23% 0.31% 0.31%
Professional services 0.26% 0.16% 0.42%
Supplies 0.15% 0.19% 0.23%
Promotional 0.15% 0.18% 0.25%
Data processing 0.26% 0.22% 0.21%
Regulatory assessments 0.04% 0.04% 0.12%
Provision for legal settlement 2.57%
Other 0.27% 0.27% 0.30%
Total 4.09% 4.40% 7.85%
The increase in noninterest expense during 1995 was attributable to the creation
of a $2.8 million litigation settlement reserve during the second quarter. The
reserve was established after a Marin County Jury awarded, in favor of a
Southern California bank, a judgment of $795,000 against Metro and its Chief
Executive Officer. The reserve included estimates for the award of attorney's
fees against Metro. This litigation was completely settled during the first
quarter of 1996 and resulted in a recovery of approximately $1.8 million from
the reserve.
In 1997, data processing fees included charges incurred in connection with
making Metro's computer systems year 2000 compliant. The Year 2000 Issue is a
computer programming situation that may affect many electronic data processing
systems. In order to minimize the length of data fields, most computer programs
eliminated the first two digits in the year date field. This problem could
affect date sensitive calculations that would treat "00" as the year 1900,
rather than 2000. Secondly, years that end in "00" are not leap years, except
when it is a millenium year. This anomaly could result in miscalculations in
the processing of critical date-sensitive information after December 31, 1999.
The Company has prepared a project plan, identified all the major
Application systems that are not Year 2000 compliant, and sought external and
internal resources to replace, or develop and test the software. The Company
plans to complete the Year 2000 project well in advance of December 31, 1999.
The total remaining cost of the Year 2000 project is not expected to have a
material effect on the results of operations. As with all financial
institutions, there is a high degree of reliance being placed on the systems of
other financial institutions to properly settle transactions. Their inability
to process transactions properly could have a significant adverse impact on the
Company.
The cost of the project and the date on which the Company plans to complete
the Year 2000 modifications are based on management's best estimates, which were
derived utilizing a number of assumptions of future events including the
continued availability of internal and external resources, third party
modifications and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ.
Income Taxes. MCBF's effective tax rate was 41.1% in 1997 compared to 41.2% in
1996 and a tax benefit of 38.4% in 1995. Note 6 to the consolidated financial
statements provides a reconciliation of the statutory tax rates to the effective
tax rate for each period.
Liquidity and Asset/Liability Management. Liquidity is Metro's ability to
absorb fluctuations in deposits while simultaneously providing for the credit
needs of its borrowers. The objective in liquidity management is to balance the
sources and uses of funds. Primary sources of liquidity include payments of
principal and interest on loans and investments, proceeds from the sale or
maturity of loans and investments, growth in deposits, and increases in other
borrowings. Metro holds overnight federal funds as a cushion for temporary
liquidity needs. During 1997, federal funds sold averaged $6.6 million, or 4.8%
of total assets. In addition to its federal funds, Metro maintains various
lines of credit with correspondent banks, the Federal Reserve Bank, and the
Federal Home Loan Bank.
As of December 31, 1997, Metro had cash, time deposits with banks, federal
funds sold, and unpledged investment securities of approximately $43.4 million,
or 31.0% of total assets. This represented the total amount of liquid assets
available for sale and/or available to secure Metro's lines of credit.
Several methods are used to measure liquidity. One method is to measure
the balance between loans and deposits (gross loans divided by total deposits).
In general, the closer this ratio is to 100%, the more reliant an institution
becomes on its illiquid loan portfolio to absorb temporary fluctuations in
deposit levels. As of December 31, 1997, the loan-to-deposit ratio was 69.9%
compared to 67.6% a year earlier.
Another frequently used method is the relationship between short-term
liquid assets (federal funds sold and investments maturing within one year) and
short-term liabilities (total deposits and other borrowings) as measured by the
liquidity ratio. As of December 31, 1997, this ratio was 6.3% as compared 5.1%
a year earlier.
As of December 31, 1997, the Company had no material commitments that were
expected to adversely impact liquidity.
Capital Resources. The principal source of capital for MCBF is and will
continue to be the retention of operating profits. Total shareholders' equity
was $12.0 million as of December 31, 1997 compared to $10.2 million a year
earlier.
Regulatory authorities have established minimum capital adequacy
guidelines requiring that qualifying capital be 8% of risk-based assets, of
which at least 4% must be tier 1 capital (primarily shareholders' equity). As
of December 31, 1997, MCBF's qualifying capital was 12.4%, of which the tier 1
capital ratio was 11.5%. In addition, MCBF, under the guidelines established
for adequately capitalized institutions, must also maintain a minimum leverage
ratio (tier 1 capital divided by total assets) of 4%. As of December 31, 1997,
MCBF's leverage ratio was 8.1%.
Market Price of MCB Financial Corporation. MCBF is aware of two securities
dealers, Black & Co. in Portland, OR and Monroe Securities in Rochester, NY
which make a market in its common stock. Threre were approximately 436
shareholders as of December 31, 1997. The following high and low bid prices
reflect actual transactions which may not include retail markups, markdowns, or
commissions. Prices are adjusted to reflect stock dividends.
1995 1996 1997
High Low High Low High Low
First quarter $8.73 $7.93 $8.06 $6.81 $12.14 $10.24
Second quarter 8.16 8.16 8.06 7.26 12.14 11.19
Third quarter 8.16 8.16 8.17 7.71 14.50 11.79
Fourth quarter 8.16 6.80 10.90 7.71 16.88 14.38
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
Dollar amounts in thousands 1997 1996
Assets
Cash and due from banks 6,557 9,609
Federal funds sold 4,900 770
Total cash and cash equivalents 11,345 10,379
Interest-bearing deposits with banks 286 384
Investment securities available for sale at fair value 10,314 9,340
Investment securities held to maturity; fair values
of $25,197 in 1997 and $25,534 in 1996 25,242 25,740
Mortgage loans sold spending settlement 648
Loans held for investment
(net of allowance for possible credit losses of $1,007
in 1997 and $944 in 1996) (Notes 3 and 7) 87,179 80,121
Premises and equipment - Net (Note 4) 2,586 2,278
Accrued interest receivable 1,070 1,003
Deferred income taxes 568 621
Other assets 1,175 990
Total assets $139,765 $131,504
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 29,151 $ 26,266
Interest-bearing:
Transaction accounts 75,488 73,532
Time certificates, $100,000 and over 11,565 9,483
Savings and other time deposits 9,928 10,577
Total interest-bearing deposits 96,981 93,592
Total deposits 126,132 119,858
Other borrowings 750 447
Accrued interest payable and other liabilities (Note 9) 1,028 1,014
Total liabilities 127,910 121,319
Commitments and contingencies (Notes 9 and 10)
Shareholders' equity:
Preferred stock, no par value: authorized 20,000,000 shares;
none issued or outstanding
Common stock, no par value: authorized 20,000,000 shares;
issued 1,039,120 shares in 1997 and 954,422 shares in 1996,
outstanding 1,027,540 shares in 1997
and 942,842 shares in 1996 10,310 9,398
Net unrealized gain (loss) on investment securities
available for sale - net of taxes 1 (45)
Retained earnings 1,656 832
Total shareholders' equity 11,967 10,185
Total liabilities and shareholders' equity $139,877 $131,504
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1997, 1996 and 1995
In thousands, except per share amounts 1997 1996 1995
Interest income:
Loans, including fees $8,638 $7,736 $6,213
Federal funds sold 356 233 450
Investment securities 2,506 2,416 2,053
Total interest income 11,500 10,385 8,716
Interest expense:
Interest-bearing transaction, savings
and other time deposits 3,671 3,489 3,281
Time certificates, $100,000 and over 554 496 493
Other interest 28 33 67
Total interest expense 4,253 4,018 3,841
Net interest income 7,247 6,367 4,875
Provision for possible credit losses (Note 3) 120 220 100
Net interest income after provision
for possible credit losses 7,127 6,147 4,775
Other income:
Gain on sale of loans 146 398 531
Service fees on deposit accounts 494 390 252
Loan servicing fees 34 21
Loss on sale of investment securities (net) (1)
Recovery of litigation expenses (Note 9) 1,824 451
Other 165 135 111
Total other income 839 2,768 1,344
Other expenses:
Salaries and employee benefits 3,011 3,120 3,010
Occupancy expense 774 724 723
Furniture and equipment expense 322 388 343
Professional services 365 202 463
Supplies 212 236 247
Promotional expenses 202 233 277
Data processing fees 354 276 229
Regulatory assessments 61 46 131
Provision for legal settlement (Note 9) 2,800
Other 372 340 329
Total other expenses 5,673 5,565 8,552
Income (loss) before income taxes 2,293 3,350 (2,433)
Income tax provision (benefit) (Note 6) 943 1,379 (935)
Net income (loss) $1,350 $1,971 $(1,498)
Basic earnings per share (Note 14) $ 1.34 $ 1.99 $ (1.51)
Diluted earnings per share (Note 14) $ 1.28 $ 1.98 $ (1.51)
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
Dollar amounts in thousands
Net
Unrealized
Gain(Loss)on
Investment
Securities Retained
Available Earnings
Common Stock For Sale-Net (Accumulated
Shares Amount of Taxes Deficit) Total
Balance, December 31, 1994 909,904 $9,014 ($667) $850 $9,197
Net loss (1,498) (1,498)
Change in unrealized
loss - net 677 677
Purchases of common stock (11,580) (105) (105)
Balance, December 31, 1995 898,324 8,909 10 (648) 8,271
Net income 1,971 1,971
Net change in unrealized
gain - net of taxes (55) (55)
Dividends on common stock (5%)
Cash payment (2) (2)
Stock issued 44,518 489 (489)
Balance, December 31, 1996 942,842 9,398 (45) 832 10,185
Net income 1,350 1,350
Net change in unrealized
loss - net of taxes 46 46
Dividends on common stock (5%)
Cash payment (2) (2)
Stock issued 47,714 591 (591)
Common stock issued upon
exercise of stock
options 36,984 321 321
Tax benefit of stock
options exercised 67 67
Balance, December 31,1997 1,027,540 $10,310 $1 $1,656 $11,967
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
Dollar Amounts In thousands 1997 1996 1995
Cash Flows From Operating Activities:
Net income (loss) $1,350 $1,971 $(1,498)
Adjustments to reconcile net income
to net cash provided by operating activities:
Originations of loans for sale (29,865) (44,124)
Settlement of mortgage loans sold 648 32,733 45,676
Provision for possible credit losses 120 220 100
Depreciation and amortization 318 498 302
Loss on sale of other real estate owned 10
Provision for legal settlement 2,800
Loss on sale of investment securities (net) 2
Recovery of litigation expenses (1,800)
Change in deferred income taxes 20 902 (816)
(Increase) in accrued interest receivable (67) (20) (326)
(Increase) decrease in other assets (199) 2,334 (915)
Increase (decrease) in accrued interest
payable and other liabilities 98 (1,972) 107
Net cash provided by operating activities 2,288 5,001 1,318
Cash Flows From Investing Activities:
Held to maturity securities:
Maturities 3,000 11,100
Calls 7,500 8,000 1,000
Purchases (7,000) (19,239) (29,299)
Available for sale securities:
Maturities 5,127 13,171 1,586
Calls 4,000
Purchases (10,012) (1,000) (933)
Sales 3,798
Decrease (increase) in interest-bearing
deposits with banks 98 885 (683)
Proceeds from sale of other real estate owned 286
Net (increase) in loans held for investment (7,178) (21,730) (12,091)
Purchases of premises and equipment (641) (102) (386)
Net cash used by investing activities (8,106) (17,015) (25,622)
Cash Flows From Financing Activities:
Net increase in noninterest-bearing
demand deposits 2,885 4,507 5,940
Net increase in interest-bearing transaction,
savings and other time deposits 3,389 5,088 28,280
Net increase (decrease) in other borrowings 303 234 (4,308)
Cash dividends paid (2) (2)
Proceeds from the exercise of stock options 321
Purchases of common stock (105)
Net cash provided by financing activities 6,896 9,827 29,807
Net Increase (Decrease) in Cash
and Cash Equivalents 1,078 (2,187) 5,503
Cash and Cash Equivalents:
Beginning of year 10,379 12,566 7,063
End of year $11,457 $10,379 $12,566
Cash Paid During the Year for:
Interest on deposits and other borrowings $4,217 $4,134 $3,703
Income taxes $1,111 $250 $1
Noncash Investing and Financing Activities:
Stock dividends paid on common stock $591 $489
See notes to consolidated financial statements.
MCB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of MCB Financial Corporation (the
"Company") and its wholly owned subsidiary, Metro Commerce Bank, N.A. (the
"Bank"), conform to generally accepted accounting principles and general
practice in the banking industry. The Company was incorporated in California on
January 20, 1993 for the purpose of becoming a ank holding company registered
under the Bank Holding Company Act of 1956.
The following is a summary of the significant accounting policies and reporting
methods used by the Company:
Nature of Operations - The Bank operates four branches in the San Francisco Bay
Area and one branch in Upland, California. The Bank's primary source of revenue
is providing loans to small and middle-market businesses.
Use of Estimates in the Preparation of Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Basis of Consolidation - The accompanying consolidated financial statements
include the Company and its wholly owned subsidiary, the Bank. All intercompany
amounts are eliminated in consolidation.
Cash and due from banks include balances with the Federal Reserve Bank. The
Bank is required by federal regulations to maintain certain minimum average
balances with the Federal Reserve, based primarily on the Bank's average daily
deposit balances. At December 31, 1997, the Bank had required balances and
compensating balances with the Federal Reserve of $427,000 (1996 - $533,000).
Cash and cash equivalents include cash on hand, due from banks and federal funds
sold. Generally, federal funds are sold for one-day periods.
Investment Securities - The Company classifies its qualifying investments as
trading, available for sale or held to maturity. Management has reviewed the
securities portfolio and classified securities as either held to maturity or
available for sale. The Company's policy of classifying investments as held to
maturity is based upon its ability and management's intent to hold such
securities to maturity. Securities expected to be held to maturity are carried
at amortized historical cost. All other securities are classified as available
for sale and are carried at fair value. Fair value is determined based upon
quoted market prices . Unrealized gains and losses on securities available for
sale are included in shareholders' equity on an after-tax basis.
Gains and losses on dispositions of investment securities are included in
noninterest income and are determined using the specific identification method.
Loans which are held for investment are stated at the principal amount
outstanding, net of deferred loan origination fees and costs and the allowance
for possible credit losses. Interest income is recognized using methods which
approximate a level yield on principal amounts outstanding. The accrual of
interest on loans is discontinued when the payment of principal or interest is
considered to be in doubt, or when a loan becomes contractually past due by 90
days or more with respect to principal or interest, except for loans that are
well secured and in the process of collection. Loan origination fees, net of
certain related direct loan origination costs, are deferred and amortized as
yield adjustments over the contractual lives of the underlying loans.
Allowance for possible credit losses is maintained at a level deemed appropriate
by management to provide for known and inherent risks in the loan portfolio and
commitments to extend credit. The allowance is based upon management's
continuing assessment of various factors affecting the collectibility of loans
and commitments to extend credit, including current and projected economic
conditions, past credit experience, the value of the underlying collateral, and
such other factors as in management's judgment deserve current recognition in
estimating potential credit losses. Loans deemed uncollectible are charged-off
and deducted from the allowance, while subsequent recoveries are credited to the
allowance.
A loan is considered impaired when management determines that it is
probable that the Company will be unable to collect all amounts due according
to the original contractual terms of the loan agreement. Impaired loans are
carried at the estimated present value of total expected future cash flows,
discounted at the loan's effective rate, or the fair value of the collateral,
if the loan is collateral dependent, if less than the recorded investment in
the loan (including accrued interest, net deferred loan fees or costs and
unamortized premium or discount). An impairment is recognized by adjusting an
allocation of the existing allowance for credit losses.
Premises and equipment consist of leasehold improvements, furniture and
equipment, and automobiles which are stated at cost, less accumulated
depreciation and amortization. Depreciation is computed on a straight-line
basis over the estimated useful lives of the assets, primarily from three to
thirty years. Leasehold improvements are amortized over the terms of the lease
or their estimated useful lives, whichever is shorter.
Organization costs of the Company are included in other assets and amortized
over a 60 month period on a straight-line basis.
Stock-based compensation - The Company accounts for stock-based awards to
employees using the intrinsic value method as allowed under the provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation."
Income Taxes -The Company and its subsidiary file consolidated income tax
returns. The Company provides a deferred tax expense or benefit equal to the
net change in deferred tax assets and liabilities during the year. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
Stock Dividends - In August 1997, outstanding shares of common stock were
increased due to the payment of a 5% stock dividend. All per share amounts have
been restated to reflect the issuance of such shares.
Net Income Per Common Share - The Company adopted the disclosure provisions of
SFAS No. 128, "Earnings per Share" for the year ended December 31, 1997. SFAS
No. 128 replaces the presentation of primary EPS with a presentation of basic
EPS. In addition, all entities with complex capital structures are required to
provide a dual disclosure of basic and diluted EPS on the face of the income
statement and a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Under the new requirements, the computation of basic EPS does not differ from
the Company's computation of EPS in prior periods, and therefore there is no
restatement of EPS data presented herein.
Pending Accounting Pronouncements - In December 1996, the Financial Accounting
Standards Board (FASB) issued SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Stataement No. 125", which defers the implementation
of SFAS No. 125 for transactions related to repurchase agreements, dollar-roll
repurchase agreements, securities lending and similar transactions until January
1, 1998. Management believes that the effect of adoption of SFAS No. 125, for
those transactions covered under SFAS No. 127, on the Company's consolidated
financial statements will not be material.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which requires that an enterprise report, by major components and as a
single total, the change in its net assets during the period from non-owner
sources; and 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. Adoption of these Statements
will not impact the Company's consolidated financial position, results of
operations or cash flows, and any effect will be limited to the form and content
of its disclosures. Both statements are effective with the year-end 1998
financial statements. In addition, disclosure of comprehensive income is
required in the interim financial statements beginning with the first quarter of
1998.
Reclassifications - Certain 1996 and 1995 amounts were reclassified to conform
to the 1997 presentation.
2. INVESTMENT SECURITIES
The amortized cost and approximate market value of investment securities at
December 31 were as follows (dollar amounts in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
1997:
Held to maturity securities:
U.S. Government agencies $25,242 $44 $(89) $25,197 $25,242
Total held to maturity 25,242 44 (89) 25,197 25,242
Available for sale securities:
U.S. Treasury 5,004 29 5,033 5,033
U.S. Government agencies 1,000 (2) 998 998
Mortgage-backed securities 2,176 (30) 2,146 2,146
Corporate securities 1,992 5 (1) 1,996 1,996
Municipal bonds 140 1 141 141
Total available for sale 10,312 35 (33) 10,314 10,314
Total investment securities $35,554 $79 $(122) $35,511 $35,556
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
1996:
Held to maturity securities:
U.S. Government agencies $25,740 $9 $(215) $25,534 $25,740
Total held to maturity 25,740 9 (215) 25,534 25,740
Available for sale securities:
U.S. Treasury 4,977 22 (1) 4,998 4,998
Mortgage-backed securities 4,275 (99) 4,176 4,176
Municipal bonds 165 1 166 166
Total available for sale 9,417 23 (100) 9,340 9,340
Total investment securities $35,157 $32 $(315) $34,874 $35,080
The following table shows the amortized cost and approximate fair value of
investment securities by contractual maturity at December 31, 1997:
Held to Maturity Available for Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
Within one year 2,906 2,898
After one but within five years 19,745 19,744 6,406 6,418
Over five years 5,497 5,453 1,000 998
Total 25,242 25,197 10,312 10,314
The Bank carries its Federal Reserve Bank stock and Federal Home Loan Bank stock
as other assets. These securities are not covered by the provisions of SFAS No.
115 and are recorded at historical cost. The total carrying value at December
31, 1997 and 1996 was $678,000 and $653,000, respectively.
Mortgage-backed securities are classified, in the table above, based on
final maturity dates. These securities are issued by the Federal National
Mortgage Association, $1,284,000, ($1,526,000 in 1996), and the Federal Home
Loan Mortgage Corporation, $862,000 ($2,651,000 in 1996), and may be prepaid at
the option of the issuer.
The Bank has purchased U.S. government agency securities totaling
$26,240,000 that contain certain issuer call option features. These securities
have a weighted average yield of 6.45% and may be called if interest rates fall
below certain levels. If these securities are called the Bank may not be able
to reinvest the proceeds to obtain the same weighted average yield.
Securities with an amortized cost of approximately $3,866,000 as of
December 31, 1997, and $2,455,000 as of December 31, 1996, were pledged to
secure other borrowings.
3. LOANS AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES
Loans at December 31, consisted of the following:
1997 1996
Commercial $21,217 $16,851
Real estate:
Commercial 57,385 49,855
Construction 3,757 7,348
Land 1,307 1,807
Home equity 2,314 2,809
Loans to consumers and individuals 2,331 2,458
Total 88,311 81,128
Deferred loan fees (125) (63)
Allowance for possible credit losses (1,007) (944)
Total $87,179 $80,121
The Bank is principally engaged in commercial banking in the San Francisco Bay
Area of California and Upland, California. The Bank primarily grants commercial
loans, the majority of which are secured by commercial properties. Although the
Bank has a diversified portfolio, a substantial portion of its debtors' ability
to honor their contracts is dependent upon the economic sector of Northern
California, including the real estate markets of the San Francisco Bay Area.
Approximately 34% of the Bank's loans have interest rates that are variable and
tied to the prime rate, whereas the remaining are fixed rate loans.
Following is a schedule of the activity in the allowance for possible
credit losses on loans for the years ended December 31:
1997 1996 1995
Balances, January 1 $ 944 $ 752 $906
Provision for possible credit losses 120 220 100
Loans charged-off (108) (47) (263)
Recoveries 51 19 9
Total $1,007 $ 944 $752
At December 31, 1997 and 1996, the Company had nonperforming loans in the
amounts of $109,000 and $79,000, respectively. Had these loans performed under
their contractual terms, $6,000 and $10,000, respectively, in additional
interest income would have been recognized during the year.
At December 31, 1997 and 1996, the Company had loans identified as
impaired, in the aggregate amounts of $109,000 and $79,000, respectively. The
Company provided no specific allowance for possible credit losses at December
31, 1997 and 1996 for these impaired loans since they were adequately
collateralized.
4. PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, are as follows (dollar
amounts in thousands):
1997 1996
Leasehold improvements $2,071 $1,995
Furniture and equipment 2,025 1,508
Automobiles 180 201
Construction in progress 50
Total 4,326 3,704
Less accumulated depreciation and amortization (1,740) (1,426)
Premises and equipment, net $2,586 $2,278
The amount of depreciation and amortization was $333,000 in 1997, $375,000 in
1996 and $346,000 in 1995.
5. DEPOSITS
The aggregate amount of short-term jumbo CD's, each with a minimum denomination
of $100,000, was approximately $11,265,000 and $7,928,000 in 1997 and 1996,
respectively.
At December 31, 1997, the scheduled maturities of CDs are as follows:
1998 $18,431
1999 479
2000 479
2001 177
2002
Total $19,566
6. INCOME TAXES
The components of the provision (benefit) for income taxes for the years ended
December 31 are as follows (dollar amounts in thousands):
1997 1996 1995
Current payable (benefit):
Federal $672 $ 362 $ (98)
State 243 115 (21)
Total current payable (benefit) 915 477 (119)
Deferred:
Federal 17 634 (580)
State 11 268 (236)
Total deferred 28 902 (816)
Total $943 $1,379 $(935)
A reconciliation of the statutory federal income tax rates with the Company's
effective income tax rates is as follows:
1997 1996 1995
Statutory federal tax rate 34.0% 34.0% 34.0%
State income taxes, net of
federal income tax benefit 7.1 7.5 7.6
Municipal interest (0.1) (0.1) (0.5)
Other 0.1 (0.2) (2.7)
Effective tax rate 41.1% 41.2% 38.4%
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. Temporary differences and carryforwards which
give rise to deferred tax assets and liabilities are as follows (dollar amounts
in thousands):
December 31
1997 1996
Deferred tax assets:
Net operating loss carryforwards $329 $366
Reserves not currently deductible 384 417
Unrealized loss on
securities available for sale 1 32
State income taxes 45 5
Other 8
Total 759 828
Deferred tax liabilities:
Accrual to cash 45
Tax over book depreciation 158 120
Other 33 42
Total 191 207
Net deferred tax asset $568 $621
The Company has acquired net operating loss carryforwards ("NOL") in connection
with the acquisition of the Bank of Hayward in 1994. The utilization of NOLs
acquired through acquisition is limited by certain state and federal tax laws.
The Company has determined that the annual limitation on its ability to utilize
NOLs is $78,130 for the fifteen-year period. The following table presents the
NOLs (after limitation) at December 31, 1997, by expiration date:
Federal State
Expiration Date Amount Amount
December 31, 2004 $431
December 31, 2005 126
December 31, 2006 11 $43
December 31, 2007 180 63
December 31, 2008 78 5
December 31, 2009 329
The Company reduced its 1997 federal and state current tax liability by
approximately $27,000 and $9,000 by utilizing $78,130 in net operating loss
carryforwards.
7. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has made loans and advances under
lines of credit to directors and their related interests. All such loans and
advances were made under terms that are consistent with the Bank's normal
lending policies.
At December 31, 1997, loans outstanding to related parties were $960,000
and loan commitments to related parties amounted to $1,506,000.
8. STOCK OPTION PLAN
The Company has a Stock Option Plan (the "Plan") for certain of its directors,
organizers and key employees under which up to 237,754 shares of common stock
have been authorized to be granted. Up to 10% of the number of outstanding
shares of the Company's common stock is available for granting solely to the
directors and organizers of the Company, provided, however, that the sum of all
shares granted to directors, organizers and key employees of the Company does
not exceed the maximum number of options that may be granted by the Plan.
Under the Plan, options may not be granted at a price less than the fair
market value at the date of grant. Options for key employees are exercisable as
determined at the sole discretion of the Stock Option Plan Committee (the
"Committee"), but not exceeding 10 years from the date of grant. All options
granted to nonemployee directors of the Bank are nonstatutory options that have
a term of 10 years. Furthermore, 20% of the nonstatutory options granted to a
director are immediately vested and exercisable, and the remainder of the
options vest at 20% annually for each of the four years from the date of grant.
Each option granted to an organizer is exercisable as determined at the sole
discretion of the Committee, but not exceeding five years from the date of
grant.
The following is a summary of changes in options outstanding:
Weighted
Number Average
of Exercise
Shares Price
Outstanding at January 1, 1995
(106,767 exercisable at a weighted average price of $8.67) 154,955 $8.66
Granted (weighted average fair value of $3.60) 20,949 8.16
Canceled (7,165) 8.16
Outstanding at December 31, 1995
(121,814 exercisable at a weighted average price of $8.64) 168,739 8.62
Granted (weighted average fair value of $3.29) 11,576 7.45
Canceled (15,435) 8.16
Outstanding at December 31, 1996
(139,171 exercisable at a weighted average price of $8.65) 164,880 8.58
Granted (weighted average fair value of $6.21) 10,628 14.31
Exercised (37,553) 8.53
Canceled (2,203) 9.98
Outstanding at December 31, 1997 135,752 $9.02
Additional information regarding options outstanding as of December 31, 1997 is
as follows:
Options Outstanding Options Exercisable
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (Yrs) Exercise Price Exercisable Exercise Price
$ 6.80 - $8.62 84,343 5.4 $8.16 69,019 $8.24
9.07 - 11.43 38,448 2.5 9.23 36,348 9.10
11.79 - 15.25 12,961 8.4 13.93 6,451 12.65
$ 6.80 - $15.25 135,752 4.9 $9.02 111,818 $8.77
At December 31, 1997, 48,775 options were available for future grants under the
Plan.
Additional Stock Option Plan Information
The Company continues to account for its stock-based awards using the intrinsic
value method in accordance with Accounting Principles Board No. 25, Accounting
for Stock Issued to Employees and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements for
employee stock arrangements.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, (SFAS 123) requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 36 months following full
vesting; stock volatility, 25% in 1997, 26% in 1996 and 26% in 1995; risk free
interest rates, 6.5% in 1997, 1996 and 1995; and no dividends during the
expected term. The Company's calculations are based on a multiple option
valuation approach and forfeitures are recognized as they occur. If the
computed fair values of the 1995 - 1997 awards had been amortized to expense
over the vesting period of the awards, pro forma net income (loss) would have
been ($1,508,000) ($1.51 per share) in 1995, $1,958,000 ($1.97 per share) in
1996 and $1,329,000 ($1.26 per share) in 1997. However, the impact of
outstanding non-vested stock options granted prior to 1995 has been excluded
from the pro forma calculation; accordingly, the 1995 - 1997 pro forma
adjustments are not indicative of future period pro forma adjustments, when the
calculation will apply to all applicable stock options.
9. COMMITMENTS AND CONTINGENCIES
The Bank leases its premises under noncancelable operating leases expiring
through June 30, 2014 with options to extend the leases for two additional five-
year terms. Future minimum lease commitments are $582,000 in 1998, $598,000 in
1999, $567,000 in 2000, $367,000 in 2001, $361,000 in 2002 and $3,028,000,
thereafter.
Rental expense for premises under operating leases included in occupancy
expense was $506,000, $464,000 and $447,000 in 1997, 1996 and 1995,
respectively.
There are various legal actions pending against the Company arising from
the normal course of business. The Company is also named as defendant in
various lawsuits in which damages are sought. Management, upon the advice of
legal counsel handling such actions, believes that the ultimate resolution of
these actions will not have a material effect on the financial position or
results of operations of the Company.
In September 1992, Chino Valley Bank filed a lawsuit against Metro Commerce
alleging that Metro Commerce and its Chief Executive Officer, John Cavallucci,
had engaged in unfair competition with Chino Valley Bank. In June 1995, a jury
rendered a verdict in favor of Chino Valley Bank and against Metro Commerce and
Mr. Cavallucci in the amount of $795,000. Subsequently during 1995 Metro
Commerce established a legal contingency reserve of $2.8 million, based on the
amount of the jury verdict, the legal costs expected to be incurred by Metro
Commerce, and the possibility of an award of attorneys' fees to the plaintiff.
In addition, Metro Commerce agreed to indemnify Mr. Cavallucci for the amount of
his personal liability to Chino Valley Bank, and Metro Commerce and Mr.
Cavallucci reached an agreement with Metro Commerce's directors and officers
liability insurance carrier pursuant to which the carrier agreed to pay $1.2
million of the amounts awarded to Chino Valley Bank. In February 1996, the
trial court awarded Chino Valley Bank costs and attorneys' fees in the amount of
$1,327,438. Subsequently, in March 1996 Metro Commerce and Mr. Cavallucci
entered into a settlement agreement with Chino Valley Bank pursuant to which the
parties agreed to settle all claims upon the payment of $2,100,000 to Chino
Valley Bank. As a result of the settlement agreement with Chino Valley Bank and
the separate settlement with Metro Commerce's insurance carrier, Metro Commerce
recovered and reversed approximately $1.8 million from the legal contingency
reserve during the first quarter of 1996. This recovery reflects the final
settlement of this matter.
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to various financial instruments with on-balance sheet and
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. Financial instruments include commitments to extend
credit, standby letters-of-credit and financial guarantees. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amounts recognized in the balance sheet. The contract amounts of those
instruments reflect the extent of involvement the Bank has in particular classes
of financial instruments.
The Bank'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 and financial guarantees is represented by the
contractual amount of those instruments. The Bank uses the same credit policies
in making commitments and conditional obligations as it does for on-balance
sheet instruments. The Bank controls the credit risk of these transactions
through credit approvals, credit limits and monitoring procedures.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the counterparty. Collateral held varies, but may include
marketable securities, accounts receivable, inventory, property, plant and
equipment.
Standby letters-of-credit and financial guarantees are written conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and
private borrowing arrangements. Most guarantees extend for less than five years
and expire in decreasing amounts. The credit risk involved in issuing letters-
of-credit is essentially the same as that involved in extending loan facilities
to customers.
The following table summarizes these financial instruments and other
commitments and contingent liabilities at December 31 (dollar amounts in
thousands):
1997 1996
Financial instruments whose credit risk is represented
by contract amounts:
Commitments to extend credit - loans $21,417 $16,950
Standby letters-of-credit and financial guarantees 800 1,143
Total $22,217 $18,093
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments have been determined
using the available market information and appropriate valuation methodologies
consistent with the requirements of SFAS No. 107, Disclosures about Fair Value
of Financial Instruments. However, considerable judgment is necessarily
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the bank could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
December 31, 1997
Carrying Estimated
Amount Fair Value
Financial assets:
Cash and due from banks $6,557 $6,557
Federal funds sold 4,900 4,900
Interest-bearing deposits with banks 286 286
Available for sale securities 10,314 10,314
Held to maturity securities 25,242 25,197
Loans, net 87,179 86,862
Financial liabilities:
Noninterest-bearing deposits 29,151 29,151
Interest-bearing deposits 96,981 97,004
Other borrowings 750 750
December 31, 1996
Carrying Estimated
Amount Fair Value
Financial assets:
Cash and due from banks $9,609 $9,609
Federal funds sold 770 770
Interest-bearing deposits with banks 384 384
Available for sale securities 9,340 9,340
Held to maturity securities 25,740 25,534
Loans, net 80,121 80,258
Financial liabilities:
Noninterest-bearing deposits 26,266 26,266
Interest-bearing deposits 93,592 93,619
Other borrowings 447 447
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Short-Term Financial Assets - This category includes cash and due from banks,
federal funds sold and interest-bearing deposits with banks. Because of their
relatively short maturities, the fair value of these financial instruments is
considered to be equal to book value.
Available-For-Sale and Held-To-Maturity Securities - Fair value is quoted market
price, if available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar instruments.
Loans - The fair value of floating rate loans is deemed to approximate book
value. The fair value of all other performing loans is determined by
discounting expected future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities.
In addition to the above, the allowance for credit losses is considered a
reasonable adjustment for credit risk relating to the entire credit portfolio,
including obligations to extent credit and other off-balance-sheet transactions.
Deposits - The fair value of demand, savings and money market deposits is equal
to the amount payable on demand at the reporting date. For other types of
deposits with fixed maturities, fair value is estimated by discounting
contractual cash flows at interest rates currently being offered on deposits
with similar characteristics and maturities. A fair value for the deposits base
intangible has not been estimated.
Other Borrowings - The fair value of the other borrowings is determined by
discounting contractual cash flows at current market interest rates for similar
instruments.
Off-Balance-Sheet Financial Instruments - The Company has not estimated the fair
value of off-balance-sheet commitments to extend credit, standby letters of
credit and financial guarantees. Because of the uncertainty involved in
attempting to assess the likelihood and timing of a commitment being drawn upon,
coupled with the lack of an established market and the wide diversity of fee
structures, the Company does not believe it is practicable to provide a
meaningful estimate of fair value.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1997. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein. Management does not intend to dispose of a
significant portion of its financial instruments.
12. REGULATORY MATTERS
The Company and Bank are subject to various regulations issued by Federal
banking agencies, including minimum capital requirements. Failure to meet
minimum regulatory capital requirements could result in regulators requiring
prompt corrective action to be taken which could have a material effect on the
financial statements. As of December 31, 1997, the Company and Bank exceeded
the capital adequacy requirements for a well capitalized institution.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and Bank must meet specific capital guidelines
that involve quantitative measures of the Company's and Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company's and Bank's capital amounts and
classifications are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Company and Bank to maintain minimum amounts and ratios (set forth
in the table below) of total and tier 1 capital ( (as defined in the
regulations) to risk-weighted assets (as defined), and of tier 1 capital (as
defined) to average assets (as defined).
As of December 31, 1997, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total risk-based, tier 1 risk-
based, and tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institutions's category.
The Company and Bank's actual capital amounts and ratios are also presented
below (dollar amounts in thousands):
For Capital Required to be
1997 Actual Adequacy Purposes Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
Total Capital
(to risk weighted assets)
Company $12,691 12.4% $8,160 8.0% n/a
Bank 12,072 11.8% 8,160 8.0% $>=10,200 >=10.0%
Tier 1 Capital
(to risk weighted assets)
Company 11,684 11.5% 4,080 4.0% n/a
Bank 11,065 10.9% 4,080 4.0% >=6,120 >=6.0%
Tier 1 Capital
(to average assets)
Company 11,684 8.1% 5,795 4.0% n/a
Bank 11,065 7.6% 5,795 4.0% >=7,243 >=5.0%
For Capital Required to be
1996 Actual Adequacy Purposes Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
Total Capital
(to risk weighted assets)
Company $10,936 11.7% $7,481 8.0% n/a
Bank 10,815 11.6% 7,477 8.0% $>=9,346 >=10.0%
Tier 1 Capital
(to risk weighted assets)
Company 9,992 10.7% 3,741 4.0% n/a
Bank 9,871 10.6% 3,740 4.0% >=5,608 >=6.0%
Tier 1 Capital
(to average assets)
Company 9,992 7.6% 3,926 3.0% n/a
Bank 9,871 7.6% 3,925 3.0% >=6,541 >=5.0%
Management believes, as of December 31, 1997, that the Bank meets all capital
requirements to which it is subject.
The Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval. At December 31, 1997, the
Bank had available $1,714,029 for the payment of dividends. The Bank paid
$138,000 in dividends during 1997.
The Bank is subject to certain restrictions under the Federal Reserve Act,
including restrictions on the extension of credit to affiliates. In particular,
the Company is prohibited from borrowing from the Bank unless the loans are
secured by specified types of collateral. Such secured loans and other advances
from the Bank are limited to 10% of the Bank's shareholders' equity on a per
affiliate basis. There were no such extensions of credit by the Bank in 1997
and 1996.
13. EMPLOYEE BENEFIT PLAN
In 1991 the Company approved a defined contribution plan covering all eligible
salaried employees. Employees may, up to prescribed limits, contribute to the
plan. The Company may also elect to make discretionary contributions to the
plan based on the Company's earnings. No contributions were made by the Company
in 1997 or 1996.
In 1994 the Company established a Deferred Compensation Plan for
executives. Participation in the Plan is limited to a select group of
management and other employees as determined by the Board of Directors. Under
the terms of the Plan, participants may defer a portion of their cash
compensation and receive minimum 50% matching contributions from the Company,
which vest over the employee's remaining years of employment to retirement. The
Company has guaranteed participants a certain minimum return on their
contributions and on the Bank's matching contributions. Contributions made by
the Company for the years ended December 31, 1997, 1996 and 1995 were $12,000,
$15,000 and $13,000, respectively.
14 EARNINGS PER SHARE
The following table reconciles the numerators and the denominators of the basic
and diluted per share computations in accordance with SFAS No. 128 (in
thousands, except per share amounts):
Years Ended December 31,
Income Shares Per Share
1997 (Numerator) (Denominator) Amount
BASIC EPS
Income available to common shareholders $1,350 1,006 $1.34
EFFECT of DILUTIVE SECURITIES
Stock options 46
DILUTED EPS
Income available to common shareholders
plus assumed conversions $1,350 1,052 $1.28
1996
BASIC EPS
Income available to common shareholders $1,971 990 $1.99
EFFECT of DILUTIVE SECURITIES
Stock options 5
DILUTED EPS
Income available to common shareholders
plus assumed conversions $1,971 995 $1.98
1995
BASIC EPS
Income available to common shareholders ($1,498) 993 ($1.51)
EFFECT of DILUTIVE SECURITIES
Stock options
DILUTED EPS
Income available to common shareholders
plus assumed conversions ($1,498) 993 ($1.51)
15. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
The condensed financial information for MCB Financial Corporation (parent
company only) at December 31, 1997 and 1996, and the results of its operations
and cash flows for the years then ended, is summarized as follows (dollar
amounts in thousands):
FINANCIAL CONDITION: 1997 1996
Assets:
Cash and due from banks $ 603 $ 71
Investment in the Bank 11,348 10,065
Other 17 50
Total $11,968 $10,186
Liabilities and shareholders' equity:
Other liabilities $ 1 $ 1
Shareholders' equity:
Common stock 10,310 9,398
Unrealized gain (loss)
on investment securities available
for sale - net 1 (45)
Retained earnings 1,656 832
Total shareholders' equity 11,967 10,185
Total $11,968 $10,186
RESULTS OF OPERATIONS: 1997 1996
Dividend income from Bank $ 138 $ 50
Income - interest from investments 14 1
Expenses - general and administrative 62 52
Income (loss) before equity in net
income of the Bank 90 (1)
Equity in undistributed net income
of the Bank 1,236 1,947
Income before income tax provision 1,326 1,946
Income tax benefit 24 25
Net income $1,350 $1,971
CASH FLOWS: 1997 1996
Cash flows from operating activities:
Net income $1,350 $1,971
Reconciliation to cash used in operating activities:
(Increase) in equity in undistributed net income
of Bank (1,375) (1,997)
Amortization 14 14
Increase in other assets 86 (4)
Cash provided (used in) operating activities 75 (16)
Cash flows from investing activities:
Dividend received from Bank 138 50
Cash provided by investing activities 138 50
Cash flows from financing activities:
Proceeds from the exercise of stock options 321
Cash dividends paid (2) (2)
Cash provided (used in) financing activities 319 (2)
Net increase in cash and equivalents 532 32
Cash and equivalents:
Beginning of period 71 39
End of period $ 603 $ 71
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of MCB Financial Corporation:
We have audited the accompanying consolidated balance sheets of MCB Financial
Corporation and subsidiary (the "Company") as of December 31, 1997 and 1996, and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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 MCB Financial Corporation and its
subsidiary as of December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
January 31, 1998
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,557
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<INVESTMENTS-HELD-FOR-SALE> 10,314
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<SHORT-TERM> 750
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<COMMON> 10,310
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