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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Year ended DECEMBER 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 0-25020
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HERITAGE OAKS BANCORP
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(Exact name of registrant as specified in its charter)
STATE OF CALIFORNIA 77-0388249
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(State or other jurisdiction of (I.R.S. Identification No.)
employee incorporation or organization)
545 12TH STREET, PASO ROBLES, CALIFORNIA 93446
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (805) 239-5200
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
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Common Stock, no par value None
Indicate by check mark whether the registrant (1) has riled all reports
required to be riled by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to
the best of the 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 [ ].
Registrant's revenues for 1997 were $11,651,435
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 1st, 1998 was $9,318,132
As of March 1st, 1998, the Registrant had 1,039,435 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this Form 10-KSB:
Part III, Items 9 through 12 of Registrant's definitive proxy statement for
the 1998 annual meeting of shareholders [and verify whether portion of Annual
Report to shareholders is incorporated]
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
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INDEX TO FORM 10-KSB
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PART I
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Page
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Item 1. Description of Business 1
Item 2. Description of Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
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PART II
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Item 5. Market for Common Equity and Related Stockholders Matters 18
Item 6. Management's Discussion and Analysis or Plan of Operations 21
Item 7. Financial Statements 39
Item 8. Changes and Disagreements with Accountants on Accounting
and Financial Disclosure 40
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PART III
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Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 40
Item 10. Executive Compensation 40
Item 11. Security Ownership of Certain Beneficial Owners and Management 40
Item 12. Certain Relationships and Related Transactions 40
Item 13. Exhibits and Reports on Form 8-K 41
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Heritage Oaks Bancorp (the "Company") is a California corporation
organized in 1994 to act as the bank holding company of Heritage Oaks Bank
(the "Bank"). In 1994, the Company acquired all of the outstanding common
stock of the Bank in a holding company formation transaction. Other than
holding the shares of the Bank, the Company conducts no significant
activities, although it is authorized, with the prior approval of the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board"), the
Company's principal regulator, to engage in a variety of activities which are
deemed closely related to the business of banking.
BANKING SERVICES
The Bank was licensed by the California Department of Financial
Institutions ("DFI") and commenced operation in January, 1983. As a
California state bank, the Bank is subject to primary supervision,
examination and regulation by the DFI and the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is also subject to certain other federal laws
and regulations. The deposits of the Bank are insured by the FDIC up to the
applicable limits thereof. The Bank is not a member of the Federal Reserve
System. At December 31, 1997, the Company had approximately $93.3million in
assets, $54.7 million in net loans, $83.5million in deposits, and $8.1
million in stockholders' equity.
The Bank is headquartered in Paso Robles with a branch office in Paso
Robles, two branches in San Luis Obispo and a branch office in Cambria. The
Bank conducts a commercial banking business in San Luis Obispo County
including accepting demand, savings and time deposits, and making commercial,
real estate, SBA, agricultural, credit card, and consumer loans. It also
offers installment note collection, provides POS terminals and processing,
issues cashiers checks and money orders, sells travelers checks, and provides
bank-by-mail, night depository, safe deposit boxes, and other customary
banking services. The Bank does not offer trust services or international
banking services and does not plan to do so in the near future.
The Bank's operating policy since its inception has emphasized retail
banking. Most of the Bank's customers are retail customers, farmers and
small to medium-sized businesses. The Bank takes real estate, listed and
unlisted securities, savings and time deposits, automobiles, machinery and
equipment as collateral for loans. The areas in which the Bank has directed
virtually all of its lending activities are (i) commercial and agricultural
loans, (ii) installment loans, (iii) construction loans, and (iv) other real
estate loans or commercial loans secured by real estate. As of December 31,
1997, these four categories accounted for approximately 45%, 8%, 13% and
34% respectively, of the Bank's loan portfolio. As of December 31, 1997,
$26,097,267 or 48% of the Bank's
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$54,697,484 in net loans consisted of interim construction and real estate
loans, primarily for single family residences or for commercial development.
Additionally, commercial and agricultural loans grew $4.6 million
(approximately 22.2%) between year end 1996 and year end 1997. See "Item 6
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Most of the Bank's deposits are attracted by local promotional
activities and advertising in the local media. A material portion of the
Bank's deposits have not been obtained from a single person or a few persons,
the loss of any one or more of which would have a materially adverse effect
on the business of the Bank. As of December 31, 1997, the Bank had
approximately 15,298 deposit accounts, representing approximately 5,542
non-interest bearing (demand) accounts with balances totaling approximately
$18,407,169 for an average balance per account of approximately 3,321;
8,281 savings, interest-bearing demand and money market accounts with
balances totaling approximately $46,633,837 for an average balance per
account of approximately $5,631; and 1,475 time certificate of deposit
accounts with balances totaling approximately $18,508,651, for an average
balance per account of approximately $12,548.
The principal sources of the Bank's revenues are (i) interest and fees
on loans, (ii) interest on investments, (iii) service charges on deposit
accounts and other charges and fees, and (iv) ATM transaction fees,
sponsorship fees and interchange income, (v) bankcard merchant fees and (vi)
miscellaneous income. For the year ended December 31, 1997, these sources
comprised 47.3%, 10.1%, 4.8%, 29.0%, 6.0% and 2.8%, respectively, of the
Bank's total operating income.
The Bank has installed 61 cash dispensing machines for the
purpose of dispensing cash at 10 sites on Native American lands where bingo
games and other gaming operations are conducted at other commercial
locations, and at the Bank's 5 offices. The Bank receives a transaction fee
for each completed transaction on the cash dispensing machines at the gaming
sites. In previous years, the Bank shared a portion of the fees with two
individuals who had helped to make these arrangements and with the tribes on
whose lands the cash dispensing machines are installed. During September
1996, the Bank bought out the interest of one of the individuals. During
April 1997, the Bank bought out the interest of the other individual. In
prior years, the Bank only received the net earnings from the surcharge
revenue received from the gaming network. After the Bank had purchased the
interest of the two individuals, it then assumed all direct costs and
received all of the revenue net of the amounts that are still paid to the
tribes on whose land the casinos are located. The contract buy outs are
being amortized over a period of 18 to 36 months. the total amortization
expense for 1997 was $276,667 with the remaining unamortized cost on the
books at December 31, 1997 was $337,917.
On March 11, 1998, the Bank signed a non-binding letter of intent with
another company to sell all of the Bank's ATM contracts. The proposed
transaction is subject to negotiation and execution of a legally binding,
definitive acquisition agreement within 60 days as well as to a variety of
other conditions, including due diligence. If the transaction is
consummated, the Bank will no longer receive the revenue and expense
attributable to this business but will receive a lump sum cash buy out. The
pretax net earnings from this source before deducting for overhead expenses
and salaries were
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$1,493,778, $1,419,244, and $1,498,664 for the years ended December 31, 1997,
1996, and 1995, respectively. No assurance can be given that the proposed
transaction will be consummated nor can the transaction's precise financial
impact upon the Bank and its results of operations currently be predicted
accurately.
On February 21, 1997, the Bank established, through the acquisition of
certain assets and liabilities from Wells Fargo Bank, a branch in Cambria,
California. The branch acquisition and its effects have been included within
the Company consolidated financial statements for the year ended December 31,
1997.
The Company has also caused to be incorporated a proposed subsidiary,
CCMS Systems, Inc. which is currently inactive and has not been capitalized.
The Company has no present plans to activate the proposed subsidiary.
The Bank has not engaged in any material research activities relating
to the development of new services or the improvement of existing bank
services. There has been no significant change in the types of services
offered by the Bank since its inception. The Bank has no present plans
regarding "a new line of business" requiring the investment of a material
amount of total assets. Most of the Bank's business originates from Paso
Robles and San Luis Obispo and there is no emphasis on foreign sources and
application of funds. The Bank's business, based upon performance to date,
does not appear to be seasonal. Management of the Bank is unaware of any
material effect upon the Bank's capital expenditures, earnings or competitive
position as a result of federal, state or local environmental regulations.
The Bank holds no patents, licenses (other than licenses obtained from
bank regulatory authorities), franchises or concessions.
EMPLOYEES
As of February 1, 1998, the Bank had a total of 62 full-time equivalent
employees. The management of the Bank believes that its employee relations
are satisfactory. The Company has only one salaried employee (the internal
auditor). The Company's officers all hold similar positions at the Bank and
receive compensation from the Bank.
COMPETITION
The banking and financial services business in California generally, and
in the Bank's market area specifically, is highly competitive. The
increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems, and the
accelerating pace of consolidation among financial services providers.
The Bank's business is concentrated in its service area, which
encompasses northern and central San Luis Obispo County. The economy of San
Luis Obispo County is moderately dependent
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upon the agricultural industry. Consequently, the Bank competes with other
financial institutions in northern and central San Luis Obispo County for
deposits from and loans to individuals and companies who are also dependent
upon the agricultural industry.
In order to compete with other financial institutions in its service
area, the Bank relies principally upon local advertising programs; direct
personal contact by officers, directors, employees, and shareholders; and
specialized services such as courier pick-up and delivery of non-cash banking
items. The Bank emphasizes to its customers the advantages of dealing with a
locally owned and community oriented institution. The Bank also seeks to
provide special services and programs for individuals in its primary service
area who are employed in the agricultural, professional and business fields,
such as loans for equipment, furniture, tools of the trade or expansion of
practices or businesses. Larger banks may have a competitive advantage
because of higher lending limits and major advertising and marketing
campaigns. They also perform services, such as trust services, international
banking, discount brokerage and insurance services which the Bank is not
authorized or prepared to offer currently. The Bank has made arrangements
with its correspondent banks and with others to provide such services for its
customers. For borrowers requiring loans in excess of the Bank's legal
lending limits, the Bank has offered, and intends to offer in the future,
such loans on a participating basis with its correspondent banks and with
other independent banks, retaining the portion of such loans which is within
its lending limits. As of December 31, 1997, the Bank's legal lending limits
to a single borrower and such borrower's related parties were $1,285,181 on
an unsecured basis and $2,141,969 on a fully secured basis based on
regulatory capital of $8,567,876.
Commercial banks compete with savings and loan associations, credit
unions, other financial institutions and other entities for funds. For
instance, yields on corporate and government debt securities and other
commercial paper affect the ability of commercial banks to attract and hold
deposits. Commercial banks also compete for loans with savings and loan
associations, credit unions, consumer finance companies, mortgage companies
and other lending institutions.
In recent years competition for cash dispensing machines on Native
American lands in connection with gaming operations has increased and no
assurance can be given that the Bank will be able to continue to provide
these services at as many locations and with the same degree of profitability
as in the past.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business that depends on rate differentials. In general,
the difference between the interest rate paid by the Bank on its deposits and
its other borrowings and the interest rate received by the Bank on loans
extended to its customers and securities held in the Bank's portfolio
comprise the major portion of the Bank's earnings. These rates are highly
sensitive to many factors that are beyond the control of the Bank.
Accordingly, the earnings and growth of the Bank are
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subject to the influence of domestic and foreign economic conditions,
including inflation, recession and unemployment.
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
Board of Governors of the Federal Reserve System (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 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. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and
other financial institutions are frequently made in Congress, in the
California legislature and before various bank regulatory and other
professional agencies. For example, legislation has been introduced in
Congress that would repeal the current statutory restrictions on affiliations
between commercial banks and securities firms. See "Financial Modernization
Legislation."
SUPERVISION AND REGULATION
The Bank is extensively regulated under both federal and state law. Set
forth below is a summary description of certain laws which relate to the
regulation of the Bank. The description does not purport to be complete and
is qualified in its entirety by reference to the applicable laws and
regulations.
THE COMPANY
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and
is registered as such with, and subject to the supervision of, the Federal
Reserve Board. The Company is required to file with the Federal Reserve
Board quarterly and annual reports and such additional information as the
Federal Reserve Board may require pursuant to the Bank Holding Company Act.
The Federal Reserve Board may conduct examinations of bank holding companies
and their subsidiaries.
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The Company is required to obtain the approval of the Federal Reserve
Board before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if, after
giving effect to such acquisition of shares, the Company would own or control
more than 5% of the voting shares of such bank. Prior approval of the
Federal Reserve Board is also required for the merger or consolidation of the
Company and another bank holding company.
The Company is prohibited by the Bank Holding Company Act, except in
certain statutorily prescribed instances, from acquiring direct or indirect
ownership or control of more than 5% of the outstanding voting shares of any
company that is not a bank or bank holding company and from engaging ,
directly or indirectly, in activities other than those of banking, managing
or controlling banks or furnishing services to its subsidiaries. However,
the Company 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.
The Company, and any subsidiaries which it may acquire or organize, are
deemed to be "affiliates" of the Bank within the meaning of that term as
defined in the Federal Reserve Act. This means, for example, that there are
limitations (a) on loans by the Bank to affiliates, and (b) on investments by
the Bank in affiliates' stock as collateral for loans to any borrower. The
Company and the Bank are also subject to certain restrictions with respect to
engaging in the underwriting, public sale and distribution of securities.
The Company and the Bank are prohibited from engaging in certain tie-in
arrangements in connection with an extension of credit, sale or lease of
property or furnishing of services. Section 106(b) of the Bank Holding
Company Act Amendments of 1970 generally prohibits a bank from tying a
product or service to another product or service offered by the bank, or by
any of its affiliates. Further, the Company and the Bank are required to
maintain certain levels of capital. See, "Supervision and Regulation -
Capital Standards."
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest subsidiaries or
affiliates when the Federal Reserve Board determines that the activity or the
control or the subsidiary or affiliates constitutes a significant risk to the
financial safety, soundness or stability of any of its banking subsidiaries.
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,
the Company must file written notice and obtain approval from the Federal
Reserve Board prior to purchasing or redeeming its equity securities.
Under the Federal Reserve Board's 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 and 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
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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.
The Company is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, and filed reports and proxy
statements pursuant to such Act with the Securities and Exchange Commission
("SEC")
THE BANK
The Bank is chartered under the laws of the State of California and its
deposits are insured by the FDIC to the extent provided by law. The Bank is
subject to the supervision of, and is regularly examined by, the DFI and the
FDIC. Such supervision and regulation include comprehensive reviews of all
major aspects of the Bank's business and condition.
Various requirements and restrictions under the laws of the United
States and the State of California affect the operations of the Bank.
Federal and California statutes relate to many aspects of the Bank's
operations, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings, dividends
and locations of branch offices. Further, the Bank is required to maintain
certain levels of capital.
California law and regulations of the DFI authorize California licensed
banks, subject to applicable limitations and approvals of the DFI to (1)
provide real estate appraisal services, management consulting and advice
services, and electronic data processing services; (2) engage directly in
real property investment or acquire and hold voting stock of one or more
corporations, the primary activities of which are engaging in real property
investment; (3) organize, sponsor, operate or render investment advice to an
investment company or to underwrite, distribute or sell securities in
California; and (4) invest in the capital stock, obligations or other
securities of corporations not acting as insurance companies, insurance
agents or insurance brokers. In November 1988, Proposition 103 was adopted
by California voters. The DFI has established certain procedures to be
followed by banks desiring to engage in insurance activities which include
filing a report describing (1) a proposed business plan and information
regarding the types of insurance products intended to be offered; (2)
insurance companies with which the banks intend to conduct business; (3)
organization plans; (4) locations at which activities will be conducted; and
(5) proposed operational and compliance procedures and policies.
CAPITAL STANDARDS
The Federal Reserve Board and the FDIC have adopted risk-based minimum
capital
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guidelines intended to provide a measure of capital that reflects the degree
of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such
as letters of credit and recourse arrangements, which are recorded as off
balance sheet items. Under these guidelines, nominal dollar amounts of
assets and credit equivalent amounts of off balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with relatively high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which includes off balance sheet
items, against both total qualifying capital (the sum of Tier 1 capital and
limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital
consists primarily of common stock, retained earnings, noncumulative
perpetual preferred stock (cumulative perpetual preferred stock for bank
holding companies) and minority interests in certain subsidiaries, less most
intangible assets. Tier 2 capital may consist of a limited amount of the
allowance for possible loan and lease losses, cumulative preferred stock,
long term preferred stock, eligible term subordinated debt and certain other
instruments with some characteristics of equity. The inclusion of elements
of Tier 2 capital is subject to certain other requirements and limitations of
the federal banking agencies. The federal banking agencies require a minimum
ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum
ratio of Tier 1 capital to risk-adjusted assets of 4%.
In addition to the risked-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital
to total assets, referred to as the leverage ratio. For a banking
organization rated in the highest of the five categories used by regulators
to rate banking organizations, the minimum leverage ratio of Tier 1 capital
to total assets is 3%. For all banking organizations not rated in the
highest category, the minimum leverage ratio must be at least 100 to 200
basis points above the 3% minimum, or 4% to 5%. In addition to these
uniform risk-based capital guidelines and leverage ratios that apply across
the industry, the regulators have the discretion to set individual minimum
capital requirements for specific institutions at rates significantly above
the minimum guidelines and ratios.
In June 1996, the federal banking agencies adopted a joint agency policy
statement to provide guidance on managing interest rate risk. These agencies
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. A bank
with material weaknesses in its risk management process or high levels of
exposure relative to its capital will be directed by the agencies to take
corrective action. Such actions will include recommendations or directions
to raise additional capital, strengthen management expertise, improve
management information and measurement systems, reduce levels of exposure, or
some combination thereof depending upon the individual institution's
circumstances.
The federal banking agencies issued an interagency policy statement on the
allowance for loan and lease losses which, among other things, establishes
certain benchmark ratios of loan loss reserves
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to classified assets. The benchmark set forth by such policy statement is
the sum of (a) assets classified loss; (b) 50 percent of assets classified
doubtful; (c) 15 percent of assets classified substandard; and (d) estimated
credit losses on other assets over the upcoming 12 months.
Federally supervised banks and savings associations are currently
required to report deferred tax assets in accordance with SFAS No. 109. The
federal banking agencies recently issued final rules governing banks and bank
holding companies, which became effective April 1, 1995, which limit the
amount of deferred tax assets that are allowable in computing an institutions
regulatory capital. The standard has been in effect on an interim basis since
March 1993. Deferred tax assets that can be realized for taxes paid in prior
carryback years and from future reversals of existing taxable temporary
differences are generally not limited. 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
any deferred tax in excess of this limit would be excluded from Tier 1
Capital and total assets and regulatory capital calculations.
Future changes in regulations or practices could further reduce the amount
of capital recognized for purposes of capital adequacy. Such a change could
affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends
The following table presents the amounts of regulatory capital and the
capital ratios for the Bank, compared to its minimum regulatory capital
requirements as of December 31, 1997.
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DECEMBER 31, 1997
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Minimum
Capital
Actual Requirement
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Leverage ratio . . . . . . . . . . . . . . 8.6% 4.0%
Tier 1 risk-based ratio. . . . . . . . . . 12.2% 4.0
Total risk-based ratio . . . . . . . . . . 13.5% 8.0
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Under applicable regulatory guidelines, the Bank was considered "Well
Capitalized" at December 31, 1997. Under existing regulations of the Federal
Reserve Board. The capital ratios of the bank holding company with total
assets of less than $150 million, such as the Company, are deemed to be the
same as those of the Bank.
On January 1, 1998 new legislation became effective which, among other
things, gave the power to the DFI to take possession of the business and
properties of a bank in the event that the tangible shareholders' equity of
the bank is less than the greater of (i) 3% of the bank's total assets or
(ii) $1,000,000.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
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Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including
but not limited to those that fall below one or more prescribed minimum
capital ratios. The law required each federal banking agency to promulgate
regulations defining the following five categories in which an insured
depository institution will be placed, based on the level of its capital
ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
An insured depository institution generally will be classified in the
following categories based on capital measures indicated below:
"WELL CAPITALIZED" "ADEQUATELY CAPITALIZED"
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Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"UNDERCAPITALIZED" "SIGNIFICANTLY UNDERCAPITALIZED"
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Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital Tier 1 risk-based capital
less than 4%; or less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"CRITICALLY UNDERCAPITALIZED"
------------------------------------
Tangible equity to total assets less
than 2%.
An institution that, based upon its capital levels, is classified as
"well capitalized," "adequately capitalized" or undercapitalized" may be
treated as though it were in the next lower capital category if the
appropriate federal banking agency, after notice and opportunity for hearing,
determines that an unsafe or unsound condition or an unsafe or unsound
practice warrants such treatment. At each successive lower capital category,
an insured depository institution is subject to more restrictions. The
federal banking agencies, however, may not treat an institution as
"critically undercapitalized" unless its capital ratio actually warrants such
treatment.
The law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions 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. In addition, each
company controlling an undercapitalized depository institution must guarantee
that the institution will comply with the capital plan until the
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depository institution has been adequately capitalized on an average
basis during each of four consecutive calendar quarters and must otherwise
provide adequate assurances of performance. The aggregate liability of such
guarantee is limited to the lesser of (a) an amount equal to 5% of the
depository institution's total assets at the time the institution became
undercapitalized or (b) the amount which is necessary to bring the
institution into compliance with all capital standards applicable to such
institution as of the time the institution fails to comply with its capital
restoration plan. 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 correction action provisions.
An insured depository institution that is significantly
undercapitalized, or is undercapitalized and fails to submit, or in a
material respect to implement, an acceptable capital restoration plan, is
subject to additional restrictions and sanctions.These include, among other
things: (i) a forced sale of voting shares to raise capital or, if grounds
exist for appointment of a receiver or conservator, a forced merger; (ii)
restrictions on transactions with affiliates;(iii) further limitations on
interest rates paid on deposits; (iv) further restrictions on growth or
required shrinkage; (v) modification or termination of specified activities;
(vi) replacement of directors or senior executiveofficers; (vii) prohibitions
on the receipt of deposits from correspondentinstitutions; (viii)
restrictions on capital distributions by the holding companies of such
institutions; (ix) required divestiture of subsidiaries by the institution;
or (x) other restrictions as determined by the appropriate federal banking
agency. Although the appropriate federal banking agency has discretion to
determine which of the foregoing restrictions or sanctions it will seek to
impose, 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
significantlyundercapitalized institution may not pay any bonus to its senior
executive officers or provide compensation to any of them at a rate that
exceeds suchofficer's average rate of base compensation during the 12
calendar months preceding the month in which the institution became
undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated
debt beginning 60 days after becoming critically undercapitalized. 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 would 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.
In addition to measures taken under the prompt corrective action
provisions, commercial
11
<PAGE>
banking organizations may be subject to potential enforcement actions by the
federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver,
the issuance of a cease and desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal
agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the enforcement of such actions through
injunctions or restraining orders based upon a judicial determination that
the agency would be harmed if such equitable relief was not granted.
SAFETY AND SOUNDNESS STANDARDS
Effective in 1995 the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). These
standards are designed to identify potential safety and soundness concerns
and ensure that action is taken to address those concerns before they pose a
risk to the deposit insurance fund. The standards relate to (i) internal
controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) asset growth; (v) earnings;
and (vi) compensation, fees and benefits. If a federal banking agency
determines that an institution fails to meet any of these standards, the
agency may require the institution to submit to the agency an acceptable plan
to achieve compliance with the standard. In the event the institution fails
to submit an acceptable plan within the time allowed by the agency or fails
in any material respect to implement an accepted plan, the agency must, by
order, require the institution to correct the deficiency. Effective October
1, 1996, the federal banking agencies promulgated safety and soundness
regulations and accompanying interagency compliance guidelines on asset
quality and earnings standards. These new guidelines provide six standards
for establishing and maintaining a system to identify problem assets and
prevent those assets from deteriorating. The institution should (i) conduct
periodic asset quality reviews to identify problem assets; (ii) estimate the
inherent losses in those assets and establish reserves that are sufficient to
absorb estimated losses; (iii) compare problem asset totals to capital; (iv)
take appropriate corrective action to resolve problems assets; (v) consider
the size and potential risks of material asset concentrations; and (vi)
provide periodic asset reports with adequate information for management and
the board of directors to assess the level of risk. These new guidelines also
set forth standards for evaluating and monitoring earnings and for ensuring
that earnings are sufficient for the maintenance of adequate capital and
reserves. If an institution fails to comply with a safety and soundness
standard, the appropriate federal banking agency may require the institution
to submit a compliance plan. Failure to submit a compliance plan or to
implement an accepted plan may result in enforcement action.
PREMIUMS FOR DEPOSIT INSURANCE
Federal law has established several mechanisms to increase funds to
protect deposits insured by the Bank Insurance Fund ("BIF") administered by
the FDIC. The FDIC is authorized
12
<PAGE>
to borrow up to $30 billion from the United States Treasury; up to 90% of the
fair market value of assets of institutions acquired by the FDIC as receiver
from the Federal Financing Bank; and from depository institutions that are
members of the BIF. Any borrowings not repaid by asset sales are to be repaid
through insurance premiums assessed to member institutions. Such premiums
must be sufficient to repay any borrowed funds within 15 years and provide
insurance fund reserves of $1.25 for each $100 of insured deposits. The FDIC
also has authority to impose special assessments against insured deposits.
The FDIC has adopted final regulations implementing a risk-based premium
system required by federal law. Under the regulations, which cover the
assessment periods commencing on and after January 1, 1994, insured
depository institutions are required to pay insurance premiums within a range
of 23 cents per $100 of deposits to 31 cents per $100 of deposits depending
on their risk classification. The FDIC, effective September 15, 1995, lowered
assessments from their rates of $.23 to $.31 per $100 of insured deposits to
rates of $.04 to $.31, depending on the health of the bank, as a result of
the recapitalization of the BIF. On November 15, 1995, the FDIC voted to drop
its premiums for well capitalized banks to zero effective January 1, 1996.
Other banks will be charged risk-based premiums up to $.27 per $100 of
deposits. The Bank pays the minimum required premiums as a result of its
"well-capitalized" status.
In 1994 the Bank acquired a branch of a savings and loan association and
the Bank pays an additional premium related to these deposits to the FDIC's
Savings Association Insurance Fund ("SAIF"). The premium related to theses
deposits is $.06 per $100. At the current rate the Bank's premiums will be
approximately $5,050 per quarter for 1998.
Congress passed in 1996 and the President signed into law, provisions
to strengthen the Savings and Loan Insurance Fund ("SAIF") and to repay
outstanding bonds that were issued to recapitalize the SAIF as a result of
payments made due to the insolvency of savings and loan associations and
other federally insured savings institutions in the late 1980s and early
1990s. The new law requires saving and loan associations to be bear the cost
of recapitalizing the SAIF and, after January 1, 1997, banks will contribute
towards paying off the financing bonds, including interest. Effective January
1, 1997, SAIF-insured institutions pay 3.2 cents per $100 in domestic
deposits, and BIF-insured institutions, like the Bank, pay 0.64 cents per
$100 in domestics deposits. In 2000, the banking industry will share on a
more equal basis in the bulk of the payments.
FINANCIAL MODERNIZATION LEGISLATION
Various proposals to adopt comprehensive financial modernization
legislation have been introduced in Congress which include, among other
things, elimination of the federal thrift charter, creation of a uniform
financial institutions charter, expansion of bank powers, and integration of
banking, commerce, securities activities and insurance. Under the proposed
legislation, bank holding companies would be allowed to control both a
commercial bank and a securities affiliate, which could engage in the full
range of investment banking activities, including
13
<PAGE>
corporate underwriting. By the end of 1997 competing versions of financial
modernization legislation had been passed by the House Banking and the House
Commerce Committees. Despite attempts to reach a compromise on these bills,
differences between the bills passed by the two Committees remain, including
the amount of nonfinancial business that bank holding companies would be
permitted to own and limitations on bank operating subsidiaries. Certain
leaders in the Senate have indicated that the Senate will not take up the
matter until a bill is passed by the entire House. It is currently impossible
to predict whether and in what form financial reform legislation will be
passed in 1998 or in the future or what the impact of such legislation might
be on the Company, its financial condition and business as well as its
results of operations.
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Riegel-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Act"). Under the Interstate Act, beginning one year after the date of
enactment, a bank holding company that is adequately capitalized and managed
may obtain approval under the Bank Holding Company Act to acquire an existing
bank located in another state without regard to state law. A bank holding
company would not be 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 application of such limitation does
not discriminate against out-of-state banks. An out-of-state bank holding
company may not acquire a state bank in existence for less than a minimum
length of time that may be prescribed by state law except that a state may
not impose more than a five year existence requirement.
The Interstate Act also permits, 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. Each state may permit
such combinations earlier than June 1, 1997, and may adopt legislation to
prohibit interstate mergers after that date in that state 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.
In 1995, California adopted "opt in" legislation under the Interstate
Act that permits out-of-state banks to acquire California banks that satisfy
a five-year minimum age requirement (subject to exceptions for supervisory
transactions) by means of merger or purchases of assets, although entry
through acquisition of individual branches of California institutions and de
novo branching into California are not permitted. The Interstate Act and the
California branching statute will likely increase competition from
out-of-state banks in the markets in which the
14
<PAGE>
Company operates, although it is difficult to assess the impact that such
increased competition may have on the Company's operations.
The Interstate Act may increase competition in the Company's market
areas especially from larger financial institutions and their holding
companies. It is difficult to assess the impact such likely increased
competition may have on the Company's operations.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate
income neighborhoods. In addition to substantial penalties and corrective
measures that may be required for a violation of certain fair lending laws,
the federal banking agencies may take compliance with such laws and CRA into
account when regulating and supervising other activities.
In 1995 the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with CRA
obligations. The final regulations adopt a performance-based evaluation
system which bases CRA ratings on an institutions's actual lending, service
and investment performance, rather than the extent to which the institution
conducts needs assessments, documents community outreach activities or
complies with other procedural requirements.
In 1994 the federal Interagency Task Force on Fair Lending issued a
policy statement on discrimination in lending. The policy statement describes
the three methods that federal agencies will use to prove discrimination:
overt evidence of discrimination, evidence of disparate treatment and
evidence of disparate impact.
In connection with its assessment of CRA performance, the appropriate
bank regulatory agency assigns a rating of "outstanding." "Satisfactory,"
"needs to improve" or "substantial noncompliance." At its last examination
by the FDIC, the Bank received a CRA rating of "Satisfactory."
ACCOUNTING CHANGES
From time to time the Financial Accounting Standards Board ("FASB")
issues pronouncements which govern the accounting treatment for the Company's
financial statements. For a description of the recent pronouncements
applicable to the Company (see the Notes to the Financial Statements included
in Item 7 of this Report).
POTENTIAL ENFORCEMENT ACTIONS
15
<PAGE>
Commercial banking organizations, such as the Company and the Bank, may
be subject to potential enforcement actions by the Federal Reserve Board, the
DFI and the FDIC for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver,
the issuance of a cease and desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal
agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the enforcement of such actions through
injunctions or restraining orders based upon a judicial determination that
the agency would be harmed if such equitable relief was not granted.
ITEM 2. DESCRIPTION OF PROPERTIES
The Bank and the Company occupy a permanent headquarters facility which
is located at 545 Twelfth Street, Paso Robles, California. The purchase
price for the headquarters, was approximately $1,000,000 for the building
and land. This building has approximately 9,000 square feet of space and
off-street parking. The Bank has remodeled this building at an approximate
cost of $300,000.
The Bank has a non-banking office, located at 600 Twelfth Street, Paso
Robles (directly across from its present headquarters) which was purchased by
the Bank on December 23, 1986, for approximately $400,000 from an
unaffiliated party.
In June of 1994, the Bank opened a branch at 171 Niblick Rd. Paso
Robles, California. The Bank leases this 1,400 square foot branch for $1,832
per month. On March 6, 1997, the Bank renewed this lease for three years.
On June 26, 1997 the Bank executed a lease for its branch office at 297
Madonna Road, San Luis Obispo. The branch was previously located in premises
which were acquired from La Cumbre Savings which lease expired in 1997. The
new branch lease is for 6,200 square feet of which the Bank subleases
approximately 58% to another firm and uses 42%. The other firm pays 58% of
the rent and expenses and the Bank pays 42%. The rent under the lease for the
entire space starts at $6,200/month for the first year; $6,280/month for the
next two years; $7,750/month for the next two years; the rent is then
repriced in year six of the lease to 95% of the prevailing fair market value
and then increases each year thereafter at the greater of the consumer price
index or 2.5% until the lease expires on June 30, 2009.
16
<PAGE>
The Bank opened a branch office at 1135 Santa Rosa Street in downtown
San Luis Obispo, California in April 1996. The Bank is leasing a building
containing approximately 5,618 square feet for $5,555 per month for the next
four years. The lease payment will increase by approximately $500 per month
during the next 4 years. The lease will expire on February 28, 2001 at which
time the Bank has an option to renew the lease for an additional 5 years.
On February 21, 1997, the Bank acquired the Cambria branch of Wells
Fargo Bank located at 1276 Tamson Drive, Cambria. The Bank leases this 2,916
square foot branch for rent of $2,208 per month, subject to adjustments for
cost of living increases and certain pass-throughs. The lease will expire in
2004 at which time the Bank has an option to renew the lease for two
additional five year terms.
On March 6, 1998, the Bank opened an escrow to purchase a piece of
property in Atascadero, California for $275,000. It is the Bank's intention
to open a new branch at this location during the third quarter of 1998.
Atascadero is located in the Bank's primary service area about halfway
between Paso Robles and San Luis Obispo.
ITEM 3. LEGAL PROCEEDINGS
The Bank is, from time to time, subject to various pending and
threatened legal actions which arise out of the normal course of its
business. Except as described below, neither the Company nor the Bank is a
party to any pending legal or administrative proceedings (other than ordinary
routine litigation incidental to the Company's or the Bank's business) and no
such proceedings are known to be contemplated,
There are no material proceedings adverse to the Company or the Bank to
which any director, officer, affiliate of the Company or 5 % shareholder of
the Company or the Bank, or any associate of any such director, officer,
affiliate or 5% shareholder of the Company or Bank is a party, and none of
the above persons has a material interest adverse to the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
17
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
There is a limited over-the-counter market for the Company's Common
Stock. The Company's Common Stock is not listed on any exchange or market.
However, Maguire Investments, Inc., Hoefer & Arnett, Inc. and Sutro & Co.
make a market in the Company's Common Stock. Certain information concerning
the Common Stock is reported on the NASDAQ electronic bulletin board under
the symbol "HEOP".
The information in the following table indicates the high and low bid
prices of the Company's Common Stock for each quarterly period during the last
two years based upon information provided by Maguire Investments, Inc., Hoefer &
Arnett and Sutro & Co.. These prices do not include retail mark-ups, mark-downs
or commission.
<TABLE>
<CAPTION>
QUARTER ENDED BID PRICES (1)
- ------------- --------------
<S> <C> <C>
1997 LOW HIGH
- ---- --- ----
March 31 8.00 10.00
June 30 10.00 11.33
September 30 10.33 11.33
December 31 11.50 12.67
1996 LOW HIGH
- ---- --- ----
March 31 $6.17 $6.50
18
<PAGE>
June 30 6.50 7.08
September 30 6.67 7.17
December 31 7.00 8.50
</TABLE>
(1) All per share information has been retroactively adjusted for the
three-for-two stock split which occurred on November 5, 1997.
HOLDERS
As of February 1, 1998, there were approximately 550 holders of the
Company's Common Stock. There are no other classes of common equity
outstanding.
DIVIDENDS
The Company is a legal entity separate and distinct from the Bank. The
Company's shareholders are entitled to receive dividends when and as declared by
its Board of Directors, out of funds legally available therefor, subject to the
restrictions set forth in the California General Corporation Law (the
"Corporation Law"). The Corporation Law provides that a corporation may make a
distribution to its shareholders if the corporation's retained earnings equal at
least the amount of the proposed distribution. The Corporation Law also
provides that, in the event that sufficient retained earnings are not available
for the proposed distribution, a corporation may nevertheless make a
distribution to its shareholders if it meets two conditions, which generally
stated are as follows: (i) the corporation's assets equal at least 1-1/4 times
its liabilities, and (ii) the corporation's current assets equal at least its
current liabilities or, if the average of the corporation's earnings before
taxes on income and before interest expenses for the two preceding fiscal years
was less than the average of the corporation's interest expenses for such fiscal
years, then the corporation's current assets must equal at least 1-1/4 times
its current liabilities.
The ability of the Company to pay a cash dividend depends largely on the
Bank's ability to pay a cash dividend to the Company. The payment of cash
dividends by the Bank is subject to restrictions set forth in the California
Financial Code (the "Financial Code"). The Financial Code provides that a bank
may not make a cash distribution to its shareholders in excess of the lesser of
(a) the bank's retained earnings; or (b) the bank's net income for its last
three fiscal years, less the amount of any distributions made by the bank or by
any majority-owned subsidiary of the bank to the shareholders of the bank during
such period. However, a bank may, with the approval of the Superintendent, make
a distribution to its shareholders in an amount not exceeding the greater of (x)
its retained earnings; (y) its net income for its last fiscal year; or (z) its
net income for its current fiscal year. In the event that the Superintendent
determines that the shareholders' equity of a bank is inadequate or that the
making of a distribution by the bank would be unsafe or unsound, the
Superintendent may order the bank to refrain from making a proposed
distribution. The FDIC may
19
<PAGE>
also restrict the payment of dividends if such payment would be deemed unsafe
or unsound or if after the payment of such dividends, the Bank would be
included in one of the "undercapitalized" categories for capital adequacy
purposes pursuant to federal law. (See, "Item 1 - Description of Business -
Prompt Corrective Action and Other Enforcement Mechanisms.") Additionally,
while the Federal Reserve Board has no general restriction with respect to
the payment of cash dividends by an adequately capitalized bank to its parent
holding company, the Federal Reserve Board might, under certain
circumstances, place restrictions on the ability of a particular bank to pay
dividends based upon peer group averages and the performance and maturity of
the particular bank, or object to management fees to be paid by a subsidiary
bank to its holding company on the basis that such fees cannot be supported
by the value of the services rendered or are not the result of an arm's
length transaction.
Under these provisions and considering minimum regulatory capital
requirements, the amount available for distribution from the Bank to the
Company was approximately $2,611,314 at December 31, 1997.
The following table sets forth the per share amount and month of payment
for all cash dividends paid since January 1, 1996:
<TABLE>
<S> <C>
MONTH PAID AMOUNT PER SHARE (2)
---------- --------------------
February , 1996 $.21
February, 1997 .33
February, 1998 .50
</TABLE>
(2) Per share information has been retroactively adjusted for the three-for-two
stock split paid on November 5, 1997.
The Company intends to pay cash dividends in the future subject to various
factors including regulatory restrictions described above. Whether or not stock
dividends or any cash dividends will be paid in the future will be determined by
the Board of Directors after consideration of various factors. The Company's
profitability and regulatory capital ratios in addition to other financial
conditions will be key factors considered by the Board of Directors in making
such determinations regarding the payment of dividends by the Company.
20
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is an analysis of the financial condition and results of
operations of the Company for the two years ended December 31, 1997. The
analysis should be read in connection with the consolidated financial
statements and notes thereto included in Item 7 of the Report.
On November 15, 1994, the Company acquired all of the assets and assumed
all of the liabilities of the Bank. Each shareholder of the Bank received one
share of stock in the Company in exchange for one share of Bank stock. The Bank
became a wholly owned subsidiary of the Company. The Bank is the only active
subsidiary owned by the Company.
EARNINGS OVERVIEW
The Company reported net income for 1997 of $1,261,064. This was a 38.0%
increase from the $913,831reported in 1996. Net income reported for 1996
represented a decrease of $74,737 or 7.6% less than 1995 net income of
$988,568. Per share earnings, on a basic and diluted basis were $1.23 and
$1.15 in 1997 compared to $.91 and $.87 in 1996 and $.99 and $.96 per share
in 1995. The earnings per share for 1996 and 1995 were retroactively
adjusted for a three-for-two stock split which occurred on November 5, 1997.
<TABLE>
<CAPTION>
RETURN ON EQUITY AND ASSETS
DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Return on Average Assets 1.41% 1.21%
Return on Average Equity 16.61% 13.76%
Dividend Payout Ratio 43.98% 38.38%
Average Equity to
Average Assets Ratio 8.48% 8.76%
Return on Average Interest
Bearing Assets 6.02% 5.80%
Average Loans to Average Deposits 65.79% 64.27%
</TABLE>
NET INTEREST INCOME AND INTEREST MARGIN
Net interest income, the primary component of the net earnings of a
financial institution, refers to the difference between the interest paid on
deposits and borrowings, and the interest earned on loans and investments. The
net interest margin is the amount of net interest income expressed as a
percentage of
21
<PAGE>
average earning assets. Factors considered in the analysis of net interest
income are the composition and volume of earning assets and interest-bearing
liabilities, the amount of non-interest bearing liabilities and nonaccrual
loans, and changes in market interest rates.
Net interest income before provision for possible loan losses for 1997 was
$4,473,003 an increase of $863,417 or 23.9% more than the $3,609,586 in 1996.
Net interest income for 1995 was $3,231,303. The increase in net interest income
for 1997 compared to 1996 was attributable to a $12,105,000 increase in average
earning assets at an average interest rate of 9.0%. The average interest-bearing
liabilities for 1997 increased by $5,873,000. The increase in net interest
income resulted primarily from the large increase in interest earning assets
over the increase in interest bearing liabilities. The average rate paid on
interest bearing liabilities in 1997 was 3.42% compared to 3.37% in 1996. The
average non-interest bearing demand deposits increased by $6,745,000 over 1996.
Other low cost deposits such as savings, now and money market accounts grew an
average $8,124,000 with a weighted average interest rate of 2.53%. The higher
cost time deposits decreased an average of $2,698,000. These changes reflect a
major effort by the Bank to adjust its liability mix to increase its level of
demand deposits and savings accounts. Total income on the loan portfolio
increased from $4,578,552 in 1996 to $5,505,740 in 1997. This was due to an
average increase in the loan portfolio of $9,673,000. During 1996, interest
income for loans had increased $346,264 as a result of an increase in loans and
higher interest rates.
The average yield on earning assets was 9.0% and 8.99% for 1997 and 1996,
respectively. The average yield on interest bearing liabilities was 3.42% for
1997, compared to 3.37% for 1996. The net interest margin was 6.02% in 1997
compared to 5.80% in 1996.
The following tables set forth average balance sheet information, interest
income and expense, average yields and rates and net interest income and margin
for the years ended December 31, 1997 and 1996. The average balance of
nonaccruing loans has been included in loan totals.
22
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET INFORMATION
(dollars in thousands)
1997 1996
Avg. Yield Interest Average Avg. Yield Average Avg. Yield
Interest Earning Assets: Balance Rate paid Amount Balance Rate Paid Amount
------- ---------- ------ ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Time deposits with other Banks $ 190 5.79% $ 11 $ 100 5.00% $ 5
Investment securities taxable 15,732 5.71% 899 13,820 5.10% 761
Investment securities non-taxable 2,716 4.68% 127 2,785 4.96% 138
Federal funds sold 2,593 5.48% 142 2,094 5.16% 108
Loans (1)(2) 53,073 10.37% 5,506 43,400 10.55% 4,580
--------- ------ -------- -------- ------ --------
Total interest earning assets $74,304 9.00% $6,685 $62,199 8.99% $5,592
Allowance for possible loan losses (849) (773)
Non-earning assets:
Cash and due from banks 10,638 9,822
Property, premises, & equipment 1,981 1,720
Other assets 3,387 2,791
--------- --------
TOTAL ASSETS $89,461 $75,759
--------- --------
--------- --------
Interest-bearing liabilities:
Savings, now, & money market $41,531 2.53% $1,050 $33,407 2.11% $ 704
Time deposits 22,184 4.99% 1,106 24,882 5.02% 1,248
Other borrowings 973 5.76% 56 526 5.70% 30
--------- ------ -------- -------- ------ --------
Total interest-bearing
liabilities $ 64,688 3.42% $2,212 $58,815 3.37% $1,982
Non-interest-bearing liabilities:
Demand deposits 15,982 9,237
Other liabilities 1,201 1,451
--------- --------
Total liabilities $81,871 $69,503
Stockholders' equity:
Common stock $ 4,135 $ 4,060
Retained earnings 3,867 2,678
Valuation allowance investments (412) (482)
--------- --------
Total stockholders' equity $ 7,590 $ 6,256
--------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $89,461 $75,759
--------- --------
--------- --------
Net interest income $4,473 $3,610
------ ------
------ ------
Net interest margin(3) 6.02% 5.80%
</TABLE>
(1) Nonaccruing loans have been included in total loans.
23
<PAGE>
(2) Loan fees of $265 and $252 for 1997 and 1996, respectively have been
included in the interest income computation.
(3) Net interest margin has been calculated by dividing the net interest
income by total earning assets.
Note: All average balances have been computing using daily balances.
RATE/VOLUME ANALYSIS
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996
Average Average Average Average
Increase (decrease) in: Bal/Vol Rate Total Bal/Vol Rate Total
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans (1) $1,082 $(156) $ 926 $499 $ (152) $ 347
Investment securities taxable 109 29 138 (255) (62) (317)
Investment Sec. (Non-taxable)(2) (5) (12) (17) 66 (15) 51
Taxable equivalent adjustment (2) 2 4 6 (23) 6 (17)
Interest-bearing deposits 8 (2) 6 0 (3) (3)
Federal funds sold 40 (6) 34 33 (7) 26
------- ------ ----- ----- ------ -----
Total 1,236 (143) 1,093 320 (233) 87
Interest expense:
Savings, now, money market 357 11) 346 97 (76) 21
Time deposits (97) (45) (142) (199) (73) (272)
Other borrowings (30) (4) 26 (33) (8) (41)
------- ------ ----- ----- ------ -----
Total 290 (60) 230 (135) (157) (292)
------- ------ ----- ----- ------ -----
Increase (decrease) in net
Interest income $ 946 $ (83) $863 $455 $ (76) $ 379
------- ------ ----- ----- ------ -----
------- ------ ----- ----- ------ -----
</TABLE>
(1) Loan fees of $265 and $252 for 1997 and 1996, respectively have been
included in the interest income computation.
(2) Adjusted to a fully taxable equivalent basis using a tax rate of 34%.
Note A: Average balances of all categories in each period were included in
the volume computations.
Note B: Average yield rates in each period were used in rate computations.
Any change attributable to changes in both volume and rate which
cannot be segregated has been allocated.
24
<PAGE>
NON-INTEREST INCOME
Non-interest income consists of bankcard merchant fees, automatic teller
machines ("ATM") transactions, and other fees, service charges, and gains on
other real estate owned. Non-interest income for 1997 was $4,966,182 compared
to $2,888,823 for 1996.
The primary increase in non-interest income is attributable to ATM
transaction fees, ATM interchange income, and ATM sponsorship fees. These
fees increased by $1,459,396 from 1996. ATM transaction fees, interchange
income, and sponsorship fees were $3,381,580 for 1997 compared to $1,922,184
for 1996. In previous years the Bank shared a portion of the fees with two
individuals who had helped to make these arrangements and with the tribes on
whose lands the cash dispensing machines are installed. During September
1996, the Bank bought out the interest of one of the individuals. During
April 1997, the Bank bought out the interest of the other individual. In
prior years, the Bank only received the net earnings from the surcharge
revenue received from the gaming network. After the bank had purchased the
interest of the two individuals, it then assumed all direct costs and
received all of the revenue net of the amounts that are still paid to the
tribes on whose land the casinos are located. The contract buy outs are
being amortized over a period of 18 to 36 months. The total amortization
expense for 1997 was $276,667. The remaining unamortized cost on the books
at December 31, 1997 was $337,917. The Bank receives income for each
transaction and as the volume increases so does the related income.
Approximately half of the ATMs are located at gaming sites on Native American
lands. The competition related to the installation of ATM machines has been
increasing and the increased competition could reduce future income from
existing machines. On March 11, 1998, the Bank signed a non-binding letter of
intent with another company to purchase all of the Bank's ATM contracts. The
proposed transaction is subject to negotiation and execution of a legally
binding, definitive acquisition agreement within 60 days as well as to a
variety of other conditions, including due diligence. If the transaction is
consummated, the Bank will no longer receive the revenue and expense
attributable to this business but will receive a lump sum cash buy out. The
pretax net earnings from this source before deducting for overhead expenses
and salaries were $1,493,778, $1,419,244, and $1,239,315, for the years
ended December 31, 1997, 1996, and 1995, respectively. No assurance can be
given that the proposed transaction will be consummated nor can the
transaction's precise financial impact upon the Bank and its results of
operations currently be predicted accurately.
Bankcard merchant fees were $697,159 in 1997 compared to $363,247 in 1996.
The increase in merchant fees was due to an expansion in the number of
merchants added by the Bank during the year.
NON-INTEREST EXPENSES
Non-interest expenses have increased as a result of the Bank's growth
in its branches and ATM network. The Bank opened a new branch located in
Cambria on February 21, 1997. This brought the total number of branches to
five at the end of the year. The branch purchase increased deposits by
$5,255,161 and provided the Bank the opportunity to move into a new market
area in the county that it did not previously serve. On March 6, 1998, the
Bank opened escrow to purchase a piece of property in Atascadero, California
for $275,000. It is the Bank's intention to open a new branch at this
location during the third quarter of 1998. Atascadero is located in the
Bank's primary service area about halfway between Paso Robles and San Luis
Obispo.
25
<PAGE>
Salaries and employee benefit expenses were $2,402,600 and $1,873,389
for 1997 and 1996 respectively. Full time equivalent employees were 62 for
1997 and 56 for 1996. The increase in salary and benefit expense is
attributable to increased staffing for the new branch that was added in
February of 1997 and bonus expense and related payroll tax expense increased
$186,224 over the previos year. The ratio of "assets per employee," one of
the measures of operational efficiency, was $1,505,152 and $1,520,041 for
1997, and 1996 respectively. Occupancy, furniture and equipment expenses
were $782,217 during 1997, compared to $770,283 incurred in 1996.
Other expenses increased to $4,047,572 in 1997 as compared to $2,297,563
in 1996. The increase in other expenses reflects costs associated with growth
of the Bank and a $1,261,343 increase in cost associated with the growth of
the ATM network. The ATM cost increased as a result of the purchase of the
interest of two particpants in the ATM network. Previously, the Bank only
received the net income from these ATM networks and now is directly
responsible for paying all of the expenses associated with the operation of
the ATM networks.
Bankcard merchant expenses were $604,011 for 1997, compared to $290,236
for 1996 the increase resulted from the expansion in the number of merchants
processed by the Bank.
PROVISION FOR INCOME TAXES
The provision for income taxes was $781,732 for 1997 compared to
$553,343 in 1996. The increase in the provision is the result of the
increase in the Company's earnings before the provision for taxes. The
Bank's effective tax rate was 38.3% and 37.7% in 1997 and 1996, respectively.
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is based upon management's evaluation of
the adequacy of the existing allowance for outstanding loans. This allowance
is increased by provisions charged to expense and reduced by loan charge-offs
net of recoveries. Management determines an appropriate provision based upon
loan growth during the period, a comprehensive grading and review formula for
loans outstanding and historical loss experience. In addition, management
periodically reviews the condition of the loan portfolio including the value
of security interest related to portfolio loans and the economic
circumstances which may affect the value of portfolio loans to determine the
adequacy of the allowance. The evaluation of the allowance is reviewed by
management and reported on an ongoing basis to the Company's Loan Committee,
Audit Committee and Board of Directors. A provision for credit losses of
$164,000 was expended in 1997 as compared to $90,000 in 1996. Net loan
charge-offs (loans charged off net of loans recovered) were $5,641 in 1997.
Net charge-offs were $84,337 during 1996. The allowance for credit losses as
a percent of total gross loans at year-end 1997 and 1996 was 1.67% and 1.53%,
respectively. Monitoring of all credits enables management to analyze any
inherent risks in the portfolio which may result from changes in economic
conditions.
26
<PAGE>
The following table summarizes the analysis of the allowance for loan
losses as of December 31, 1997 and 1996.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Balance at Beginning of Period $771,925 $766,262
Charge-offs:
Commercial, Financial and Agricultural 0 38,475
Real Estate - Construction 0 10,032
Installment Loans to Individuals:
Money Plus 1,381 3,910
Credit Cards 37,658 40,375
Other Installment 9,810 14,338
--------- --------
Total charge-offs 48,849 107,130
--------- --------
Recoveries:
Commercial, Financial and Agricultural 20,021 4,822
Real Estate - Construction 590 0
Installment Loans to Individuals:
Money Plus 466 0
Credit Cards 2,329 4,780
Other Installment 19,802 13,191
--------- --------
Total Recoveries 43,208 22,793
--------- --------
Net Charge-offs 5,641 84,337
Additions Charged to Operations 164,000 90,000
--------- --------
Balance at End of Period $ 930,284 $771,925
--------- --------
--------- --------
Gross Loans at End of Period $55,871,661 $50,570,564
Ratio of Net Charge-offs During the
Year to Average Loans outstanding 0.01% 0.19%
Ratio of Reserves to Gross Loans 1.67% 1.53%
Ratio of Non-performing Loans to
the Allowance for Credit Losses 109.13% 125.01%
</TABLE>
In accordance with SFAS No. 114 (as amended by SFAS No. 118), "Accounting
by Creditors for Impairment of a Loan"
27
<PAGE>
are measured on the present value of expected future cash flows discounted at
the loan's effective interest rate, except that as a practical expedient, a
creditor may measure impairment based on a loan's observable market price, or
the fair value of the collateral if the loan is collateral dependent. A loan
is impaired when it is probable that the creditor will not be able to collect
all contractual principal and interest payments due in accordance with the
terms of the loan agreement. Included in non-performing loans for the last
three years is a loan for $758,115. This loan is secured by real estate with
an appraised value of approximately $1,500,000. Even though this loan is on
a nonaccrual status, management doesn't believe that there will be any loss
of the principal due.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1997 1996
% OF LOANS % OF LOANS
IN EACH CATEGORY IN EACH CATEGORY
TO TOTAL LOANS TO TOTAL LOANS
------------------ -------------------
AMOUNT LOANS AMOUNT LOANS
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Commercial, Financial
and Agricultural $428,341 45.33% $310,665 40.99%
Real Estate -
Construction 190,804 12.45% 210,382 14.22%
Real Estate -
Mortgage 249,875 34.26% 155,648 33.90%
Installment Loans
to individuals $59,295 7.69% $94,466 10.71%
All Other Loans
(Including overdrafts) 1,969 .27% 764 .18%
--------- ------- -------- -------
$930,284 100.00% $771,925 100.00%
--------- ------- -------- -------
--------- ------- -------- -------
</TABLE>
In evaluating the allowance for the credit losses, management takes into
consideration the composition of its loan portfolio, loan growth during the
period, risk and collectibility of loans, and economic conditions. The
allowance is maintained at a sufficient level to cover all potential loan
charge-offs in addition to a cumulative, annual amount based upon the factors
outlined above. Management utilizes an internal loan classification system
to grade portfolio loans as a part of its analysis of the adequacy of the
allowance. In addition, management periodically reviews the
28
<PAGE>
condition of the loan portfolio including the value of security interests
related to the portfolio loan to determine the adequacy of the allowance.
The evaluation of the adequacy of the allowance is reviewed by management and
reported on an ongoing basis to the Bank's Loan Committee, Audit Committee
and Board of Directors.
LOCAL ECONOMY
The California economy is expected to continue to grow at a modest rate
during 1998, with the local economy in the Bank's primary service area
anticipated to show higher rates of growth than the state as a whole.
During 1998, a few large retail stores are under construction and are
expected to open during the later part of 1998. The Bank has a branch in Paso
Robles which is located across the street from this shopping center. Several
mergers in our market area have opened a unique window of opportunity for the
Bank to increase its market share.
These statements constitute forward-looking information within the meaning of
the private Securities Litigation Reform Act of 1995. Actual results may
differ materially from the statements discussed in this Report since such
projections involve. signigicant risks and uncertainties. Factors that might
cause such differences include, but are not limited to, a decline in the
economy, the inability of these large retail stores to get open in 1998, the
competitive pressures among financial institutions increase signigicantly,
the inability of the Company and the Bank to take advantage of this projected
growth, economic conditions, wither nationally or locally are less favorable
than expected, or legilation or regulatory changes adversly affect the
business in which the Company would be engaged.
FINANCIAL CONDITION ANALYSIS
Total assets of the Company were $93,319,422 at December 31, 1997
compared to $85,122,317 in 1996.
A major portion of the Bank's loans are adjustable. Approximately 63.8%
of the loans are adjustable. The majority of those loans that reprice are
tied to changes in the prime rate. If interest rates change, the yield on
these loans will also change. A 1.00% increase in the prime rate would
increase net interest income approximately $231,000 a year and a 1.00%
decrease in the prime rate would decrease net interest income by $170,000 a
year.
The following table summarizes the composition of the loan portfolio as
of December 31, 1997 and 1996.
29
<PAGE>
COMPOSITION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
LOAN CATEGORY AMOUNT PERCENT AMOUNT PERCENT
- ------------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Commercial, Financial
and Agricultural $25,325,584 45.33% $20,729,098 40.99%
Real Estate-Construction 6,953,512 12.45% 7,190,680 14.22%
Real Estate-Mortgage 19,143,755 34.26% 17,142,334 33.90%
Installment Loans to Individuals 4,296,204 7.69% 5,416,061 10.71%
All other (including overdrafts) 152,606 0.27% 92,39 10.18%
----------- ------- ----------- -------
Total Loans, Gross 55,871,661 100.00% 50,570,564 100.00%
Deferred Loan Fees (243,893) (218,786)
Reserve For Possible (930,284) (771,925)
----------- -----------
Loan Losses
Total Loans, Net $54,697,484 $49,579,853
----------- -----------
----------- -----------
</TABLE>
Net loans totaled $54,697,484 at December 31, 1997, compared to
$49,579,853 at December 31, 1996. Loans increased during the year as the
result of our downtown San Luis Obispo branch and moderate growth at the head
office. The primary growth was approximately $4,596,486 in commercial and
agricultural loans.
30
<PAGE>
The following are the approximate maturities and sensitivity to change
in interest rates for the loans at December 31, 1997.
<TABLE>
<CAPTION>
AFTER ONE
LOAN CATEGORY DUE WITHIN YEAR BUT AFTER
(DOLLARS IN THOUSANDS) ONE YEAR WITHIN FIVE FIVE YEARS TOTALS
- ---------------------- ---------- ----------- ---------- ------
<S> <C> <C> <C> <C>
Commercial, Financial
and Agricultural $ 14,393 $ 8,923 $ 2,010 $ 25,326
Real Estate -
Construction 1,645 3,820 1,489 6,954
Real Estate -
Mortgage 2,054 9,335 7,755 19,144
Installment Loans
to individuals 921 3,316 59 4,296
All Other loans
(including overdrafts) 152 -- -- 152
-------- ------- ------- -------
TOTALS $19,165 $25,394 $11,313 $55,872
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
AFTER ONE
DUE WITHIN YEAR BUT AFTER
INTEREST RATE PROVISION ONE YEAR WITHIN FIVE FIVE YEARS TOTALS
- ----------------------- ---------- ----------- ---------- ------
<S> <C> <C> <C> <C>
Predetermined rates $ 3,392 $ 7,708 $10,078 $21,178
Floating or adjustable
rates 15,773 17,686 1,235 34,694
-------- ------- ------- -------
TOTALS $19,165 $25,394 $11,313 $55,872
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
RISK ELEMENTS
Risk elements on loans are presented in the following table for December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Nonaccrual Loans (impaired loans) $864,888 $803,280
Accruing Loans Past Due 90 days $ 95,536 $160,729
Restructured Loans $407,929 $514,999
Interest Excluded on Nonaccrual Loans $ 94,762 $ 97,382
Interest Recognized on Nonaccrual and
Troubled Debt Restructured Loans $ 40,753 $ 42,432
</TABLE>
31
<PAGE>
At December 31, 1997, the Bank had no foreign loans outstanding. The
Bank did not have any concentrations of loans except as disclosed above.
The Bank's management is responsible for monitoring loan performance
which is done through various methods, including a review of loan
delinquencies and personal knowledge of customers. Additionally, the Bank,
maintains both a "watch" list of loans which, for a variety of reasons,
management believes requires regular review as well as an internal loan
classification process. Yearly, the loan portfolio is also reviewed by an
experienced, outside loan reviewer not affiliated with the Bank. A list of
delinquencies, the watch list, loan grades and the outside loan review are
reviewed regularly by the Board of Directors. Except as set forth in the
preceding table, there are no loans which management has serious doubts as to
the borrower's ability to comply with present loan repayment terms.
The Bank has a nonaccrual policy which requires a loan greater than 90
days past due to be placed on nonaccrual status unless such loan is
well-collateralized and in the process of collection. When loans are placed
on nonaccrual status, all uncollected interest accrued is reversed from
earnings. Once on nonaccrual status, interest on a loan is only recognized on
a cash basis. Loans may be returned to accrual status if management believes
that all remaining principal and interest is fully collectible and there has
been at least six months of sustained repayment performance since the loan
was placed on nonaccrual.
If a loan's credit quality deteriorates to the point that collection of
principal is believed by management to be doubtful and the value of
collateral securing the obligation is sufficient the Bank generally takes
steps to protect and liquidate the collateral. Any loss resulting from the
difference between the loan balance and the fair market value of the property
is recognized by a charge to the reserve for loan losses. When the property
is held for sale after foreclosure, it is subject to a periodic appraisal.
If the appraisal indicates that the property will sell for less than its
recorded value, the Bank recognizes the loss by a charge to non-interest
expense.
TOTAL CASH AND DUE FROM BANKS
Total cash and due from banks decreased from $13,575,653 at December 31,
1996 to $12,491,388 at December 31, 1997. The large amount of cash and due
from banks is to fund the operations of the Bank's two ATM networks. If the
Bank were to sell these two networks, the amount of cash would then be
invested in securities and loans.
Other earning assets are comprised of Federal Funds sold (funds lent on
a short term basis to other banks), investment securities and short term
certificates of deposit at other financial institutions. These assets are
maintained for short term liquidity needs of the Bank, collateralization of
public
32
<PAGE>
deposits, and diversification of the earning asset mix.
Other earning assets increased to $21,003,929 at December 31, 1997
compared to $17,597,726 at December 31, 1996. The increase in 1997 represents
an increase in the overall size of the Bank and the investment of excess
funds. Other earning assets represented 27.3% of the earning asset portfolio
at December 31, 1997, compared to 26.2% in 1996.
The following table summarizes the composition of other earning assets
at December 31:
COMPOSITION OF OTHER EARNING ASSETS
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Held to Maturity investments $11,590,592 55.19% $11,080,726 62.97%
Available for Sale investments 8,303,218 39.53% 5,317,000 30.21%
Federal Funds Sold 500,000 2.38% 1,100,000 6.25%
Certificate of Deposits 610,119 2.90% 100,000 0.57%
----------- ------- ----------- -------
Total other earning assets $27,003,929 100.00% $17,597,726 100.00%
----------- ------- ----------- -------
----------- ------- ----------- -------
</TABLE>
33
<PAGE>
The amortized cost, fair value, and maturities at December 31, 1997
are as follows:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE SECURITIES HELD
FOR SALE TO MATURITY
---------------------- -----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $2,000,269 $1,982,177 $3,001,969 $3,017,642
Due after one year
through five years 500,000 500,625 1,438,392 1,440,962
Due after five years
through ten years 1,000,000 1,003,263 805,596 811,033
Due after ten years 2,000 2,000 1,364,510 1,361,095
Mortgage-backed
securities 5,167,677 4,815,153 4,980,125 5,208,429
----------- --------- ---------- ----------
Total $8,669,946 $8,303,218 $11,590,592 $11,839,161
----------- --------- ---------- ----------
----------- --------- ---------- ----------
</TABLE>
DEPOSITS
Total deposits increased to $83,549,657 at December 31, 1997. Total
deposits at December 31, 1996 were $71,991,298.
The following table sets forth information for the last two fiscal years
regarding the composition of deposits at December 31, and the average rates
paid on each of these categories.
COMPOSITION OF DEPOSITS
<TABLE>
<CAPTION>
1997 1996
------------------------ ----------------------
AVERAGE AVERAGE
DEPOSIT TYPE BALANCE RATE PAID BALANCE RATE PAID
- ------------ ----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Non-Interest Bearing Demand $18,407,169 0.00% $13,230,117 0.00%
Interest Bearing Demand 30,047,646 2.27% 20,750,267 1.75%
Savings 10,766,665 2.51% 8,923,709 2.53%
Money Market 5,819,526 3.84% 6,526,343 2.73%
Time Deposits 18,508,651 4.99% 22,560,862 5.02%
----------- -----------
Total Deposits $83,549,657 2.70% $71,991,28 2.89%
----------- -----------
----------- -----------
</TABLE>
34
<PAGE>
Set forth below is a maturity schedule of domestic time certificates of
deposits of $100,000 and over at December 31, 1997.
TIME DEPOSITS $100,000 AND OVER:
(Dollars in thousands)
Less than 3 months $ 554
3-6 months 207
6-12 months 209
------
TOTAL $ 970
------
------
CAPITAL
The Company's total stockholders equity was $8,127,078 as of December
31, 1997 compared to $7,053,148 as of December 31, 1996. The increase in
capital during 1997 was due to net income of $1,261,064 and an increase in
the valuation allowance for investments of $60,763. The valuation allowance
was a result of the company's adoption of SFAS No. 115 "Accounting for
Certain Investment in Debt and Equity Securities."
Capital ratios for commercial banks in the United States are generally
calculated using 3 different formulas. These calculations are referred to as
the "Leverage Ratio" and two "risk based" calculations known as: "Tier One
Risk Based Capital Ratio" and the "Total Risk Based Capital Ratio." These
standards were developed through joint efforts of banking authorities from 12
different countries around the world. The standards essentially take into
account the fact that different types of assets have different levels of risk
associated with them. Furthermore, they take into account the off-balance
sheet exposures of banks when assessing capital adequacy.
The Leverage Ratio calculation simply divides common stockholders'
equity (reduced by any Goodwill a bank may have) by the total assets of the
bank. In the Tier One Risk Based Capital Ratio, the numerator is the same as
the leverage ratio, but the denominator is the total "risk-weighted assets"
of the bank. Risk weighted assets are determined by segregating all the
assets and off balance sheet exposures into different risk categories and
weighting them by a percentage ranging from 0% (lowest risk) to 100% (highest
risk). The Total Risk Based Capital Ratio again uses "risk-weighted assets"
in the denominator, but expands the numerator to include other capital items
besides equity such as a limited amount of the loan loss reserve, long-term
capital debt, preferred stock and other instruments. Summarized below are
the Bank's capital ratios at December 31, 1997. Additionally, the standards
for a well-capitalized institution are displayed below.
35
<PAGE>
<TABLE>
<CAPTION>
WELL-CAPITALIZED HERITAGE
(REGULATORY OAKS
STANDARD) BANK
---------------- --------
<S> <C> <C>
Leverage Ratio 5.00% 8.59%
Tier One Risk Based Capital Ratio 6.00% 12.18%
----- -----
Total Risk Based Capital Ratio 10.00% 13.45%
----- -----
----- -----
</TABLE>
It is the intent of management to continue to maintain strong capital
ratios.
LIQUIDITY
The objective of liquidity management is to ensure the continuous
availability of funds to meet the demands of depositors, investors and
borrowers. Asset liquidity is primarily derived from loan payments and the
maturity of other earning assets. Liquidity from liabilities is obtained
primarily from the receipt of new deposits. The Bank's Asset Liability
Committee (ALCO) is responsible for managing the on-and off-balance sheet
commitments to meet the needs of customers while achieving the Bank's
financial objectives. ALCO meets regularly to assess the projected funding
requirements by reviewing historical funding patterns, current and forecasted
economic conditions and individual customer funding needs. Deposits
generated from Bank customers serve as the primary source of liquidity. The
Bank has credit arrangements with correspondent banks which serve as a
secondary liquidity source in the amount of $2,500,000. The Bank has also
established two borrowing lines with brokers whereby the Bank can pledge
investment securities as collateral for short term borrowings.
The Bank manages its liquidity by maintaining a majority of its
investment portfolio in federal funds sold and other liquid investments. At
December 31, 1997, the ratio of liquid assets not pledged for collateral and
other purposes to deposits and other liabilities were 28.7% compared to 18.5%
in 1996. The liquidity ratio for 1997 increased. At December 31, 1996,
there were $4,730,000 of securities pledged as collateral on borrowings. At
December 31, 1997, there were no assets pledged as collateral on borrowings.
The ratio of gross loans to deposits, another key liquidity ratio, was 66.6%
at year end 1997 compared to 70.3% at December 31, 1996.
INFLATION
The assets and liabilities of a financial institution are primarily
monetary in nature. As such they represent obligations to pay or receive
fixed and determinable amounts of money which are not affected by future
changes in prices. Generally, the impact of inflation on a financial
institution is reflected by fluctuations in interest rates, the ability of
customers to repay debt and upward pressure on operating expenses. The
effect on inflation during the three-year period ended December 31, 1997 has
not been significant to the Bank's financial position or results of
operations.
YEAR 2000
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of data-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000, which could result in miscalculations or system failures. Based on
preliminary information, the costs of addressing potential problems currently
are not expected to have a material adverse impact on the Company's finanical
position, results of operations or liquidity in future periods. However, if
the Company is unable to resolve such processing issues in a timely manner,
it could result in a material financial risk. Accordingly, the Company plans
to devote the necessary resources to resolve all significant year 2000 issues
in a timely manner. However, even if the Company is able to resolve any such
issues with respect to its computerized information systems, there is no
assurance that customers who utilize computer information systems to
effectuate banking transactions, or the Company's vendors or financial
institutions with which the Company does business, will not encounter
problems that could adversely affect the Company's business.
36
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Contained herein starting at page F-1.
37
<PAGE>
ITEM 8. CHANGES 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 by Item 9 of Form 10-KSB is incorporated by
reference from the information contained in the Company's Proxy Statement for
the 1998 Annual Meeting of Shareholders which will be filed pursuant to
Regulation 14A.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 of Form 10-KSB is incorporated by
reference from the information contained in the Company's Proxy Statement for
the 1998 Annual Meeting of Shareholders which will be filed pursuant to
Regulation 14A.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 11 of Form 10-KSB is incorporated by
reference from the information contained in the Company's Proxy Statement for
the 1998 Annual Meeting of Shareholders which will be filed pursuant to
Regulation 14A.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 of Form 10-K is incorporated by
reference from the information contained in the Company's Proxy Statement for
the 1998 Annual Meeting of Shareholders which will be filed pursuant to
Regulation 14A.
38
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
(2.1) Plan of Reorganization and Merger Agreement dated as of March 22,
1994, incorporated by reference from Exhibit 2 to Registration
Statement on Form S-4 No. 33-77504, filed with the Commission on
April 8, 1994.
(3.1a) Articles of Incorporation incorporated by reference from Exhibit 3.1a
to Registration Statement on Form S-4 No. 33-77504, filed with the
Commission on April, 1994.
(3.1b) Amendment to the Articles of Incorporporation by reference from
Exhibit 3.1b to Certificate of Amendment No. A498586 filed with the
Secretary of State on October 16, 1997.
(3.2) Bylaws incorporated by reference from Exhibit 3.2 to Registration
Statement on Form S-4 No. 33-77504, filed with the Commission on April
8, 1994.
(4.1) Specimen form of Heritage Oaks Bancorp stock certificate incorporated
by reference from Exhibit 4.1 to Registration Statement on Form S-4
No. 33-77504, filed with the Commission on April 8, 1994.
(10.1) Agreement to Purchase Assets and Assume Liabilities between Heritage
Oaks Bank and La Cumbre Savings Bank, dated March 28, 1994,
incorporated by reference from Exhibit 10.1 to Registration Statement
on Form S-4 No. 33-77504, filed with the Commission on April 8, 1994.
*(10.2) 1990 Stock Option Plan incorporated by reference from Exhibit 10.2 to
Registration Statement on Form S-4 No. 33-77504, filed with the
Commission on April 8, 1994.
*(10.3) Form of Stock Option Agreement incorporated by reference from Exhibit
4.2 to Registration Statement on Form S-4 No. 33-77504, filed with the
Commission on April 8, 1994.
*(10.4) Lawrence P. Ward Employment Letter Agreement, dated November 17, 1992,
incorporated by reference from Exhibit 10.3 to Registration Statement
on Form S-4 No. 33-77504, filed with the Commission on April 8, 1994.
(10.5) Service Agreement, dated November 10, 1992, between Heritage Oaks Bank
and Mescom Enterprises, Inc. dba Native American Network System,
incorporated by reference from Exhibit 10.4 to Registration Statement
on Form S-4 No. 33-77504, filed with the Commission on April 8, 1994.
39
<PAGE>
(10.6) Letter Agreement, dated October 23, 1992, between Heritage Oaks Bank
and Peter Gheorghiu, incorporated by reference from Exhibit 10.5 to
Registration Statement on Form S-4 No. 33-77504, filed with the
Commission on April 8, 1994.
(10.7) Item Processing and Back Offices Servicing Agreement, dated August 11,
1993, between Heritage Oaks Bank and Systematics Financial Services,
Inc., incorporated by reference from Exhibit 10.6 to Registration
Statement on Form S-4 No. 33-77504, filed with the Commission on April
8, 1995.
(10.8) Data Processing Agreement, dated October 1, 1992, between Heritage
Oaks Bank and City National Information Systems, incorporated by
reference from Exhibit 10.7 to Registration Statement on Form S-4
No. 33-77504, filed with the Commission on April 8, 1994.
*(10.9) 401(k) Pension and Profit Sharing Plan, filed with the Commission in
the Company's 10K Report for the year ended December 31, 1994.
*(10. 10) Heritage Oaks Bancorp 1995 Bonus Plan, filed with the Commission in
the Company's 10K Report for the year ended December 31, 1994.
*(10.11) Salary Continuation Plan of Heritage Oaks Bank, filed with the
Commission in the Company's 10K Report for the year ended December 31,
1994 .
*(10. 12) Salary Continuation Agreement with Lawrence P. Ward, filed with the
Commission in the Company's 10K Report for the year ended December 31,
1994 .
*(10. 13) Salary Continuation Agreement with Gwen R. Pelfrey, filed with the
Commission in the Company's 10K Report for the year ended December 31,
1994 .
*(10. 14) Salary Continuation Agreement with Robert E. Bloch, filed with
the Commission in the Company's 10K Report for the year ended
December 31, 1994.
(10.15) Woodland Shopping Center Lease, filed with the Commission in the
Company's 10K Report for the year ended December 31, 1994.
(10.16) Laguna Village Sublease, filed with the Commission in the Company's
10K Report for the year ended December 31, 1994 .
*(10.17) Lawrence P. Ward Employment Letter Agreement, dated February 27, 1996,
filed with the Commission in the Company's 10KSB Report for the year
ended December 31, 1995.
(10.18) 1135 Santa Rosa Street Lease, filed with the Commission in the
Company's 10KSB Report for the year ended December 31, 1995.
40
<PAGE>
(10.19) Purchase and Assumption between Wells Fargo Bank, N.A. and Heritage
Oaks Bank, dated as of October 15, 1996, filed with the Commission in
the Company's 8-K Report, dated December 2, 1996.
(10.20) Lease Agreement for Cambria Branch Office dated February 21, 1997
filed with the Commission in the Company's 10KSB reported for the
year ended December 31, 1996.
*(10.21) 1997 Stock Option Plan in corporated by reference from Exhibit 4a
to Registration Statement on Form S-8 No.333-31105, filed with the
Commission on July 11, 1997.
*(10.22) Form of Stock Option Agreement incorporated by reference from
Exhibit 4b to Registration Statement on Form S-8 No. 333-31105,
filed with the Commission on July 11, 1997.
(10.23) Madonna Road Lease filed with this Report.
(21) Subsidiaries of Heritage Oaks Bancorp.
(23) Consent of Independent Accountants
(27) Financial Schedule
*Denotes management contracts, compensatory plans or arrangements.
REPORTS ON FORM 8-K:
During the fourth quarter of 1997, the Company filed a report on Form 8-K,
dated October 9, 1997, concerning the three-for-two stock split of its Common
Stock.
An Annual Report for the fiscal year ended December 31, 1997, and Notice
of Annual Meeting and Proxy Statement for the Company's 1998 Annual Meeting
will be mailed to security holders subsequent to the date of filing of this
Report. Copies of said materials will be furnished to the Commission in
accordance with the Commission's Rules and Regulations.
41
<PAGE>
EXHIBIT INDEX
EXHIBIT
SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ---------- ---------------------------------------------- --------------
3.1b Certificate of Amendment to the Articles
of Incorporation filed with the Secretary of
State on October 16, 1997.
10.23 Madonna Road Branch Lease
23.1 Consent of Independent Accountants
27 Financial Data Schedule
42
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Heritage Oaks Bancorp
Paso Robles, California
We have audited the accompanying consolidated balance sheets of Heritage Oaks
Bancorp as of December 31, 1997 and 1996, and the related consolidated
statements of income and changes in stockholders' equity and statements of
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 audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Heritage
Oaks Bancorp as of December 31, 1997 and 1996, the results of their
operations and changes in their stockholders' equity and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ VAVRINEK, TRINE, DAY & CO., LLP
VAVRINEK, TRINE, DAY & CO., LLP
Rancho Cucamonga, California
February 13, 1998
[LETTERHEAD ADDRESSES]
F-1
<PAGE>
Heritage Oaks Bancorp
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
-------------------------------
ASSETS 1997 1996
-------------------------------
<S> <C> <C>
Cash and due from banks (Minimum Federal Reserve required
at December 31, 1997 was $1,368,000) $12,491,388 $13,575,653
Federal funds sold 500,000 1,100,000
-------------------------------
Total Cash and Cash Equivalents 12,991,388 14,675,653
Interest bearing deposits other banks 610,119 100,000
Investment securities:
Available-for-sale 8,303,218 5,317,000
Held-to-maturity, fair value of $11,839,161 and $11,006,428 at
December 31, 1997 and 1996, respectively 11,590,592 11,080,726
Loans (net of reserves for possible loan losses of $930,284 and
$771,925 at December 31, 1997 and 1996, respectively) 54,697,484 49,579,853
Property, premises and equipment, net 2,072,711 1,756,099
Other real estate owned 62,000 0
Net deferred tax asset 566,612 573,154
Cash surrender value life insurance 970,318 729,920
Other assets 1,454,980 1,309,912
-------------------------------
TOTAL ASSETS $93,319,422 $85,122,317
-------------------------------
-------------------------------
LIABILITIES and STOCKHOLDERS' EQUITY
Deposits:
Demand, non-interest bearing $18,407,169 $13,230,117
Savings, NOW, and money market deposits 46,633,837 36,200,319
Time deposits of $100,000 or more 970,300 3,449,545
Time deposits under $100,000 17,538,351 19,111,317
-------------------------------
Total Deposits 83,549,657 71,991,298
Other borrowed money 0 4,730,000
Other liabilities 1,642,687 1,347,871
-------------------------------
Total Liabilities 85,192,344 78,069,169
Stockholders' Equity:
Common Stock, no par value; 20,000,000 authorized;
1,036,626 and 1,012,944 shares issued and
outstanding for 1997 and 1996, respectively 4,180,486 4,089,245
Retained earnings 4,327,921 3,405,995
Valuation allowance for investments (381,329) (442,092)
-------------------------------
Total Stockholders' Equity 8,127,078 7,053,148
-------------------------------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $93,319,422 $85,122,317
-------------------------------
-------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
Heritage Oaks Bancorp
Consolidated Statements of Income
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $5,505,740 $4,578,552 $4,232,288
Interest on investment securities:
U.S. Treasury securities 51,472 51,666 75,792
Obligations of U.S. Government Agencies 777,718 684,716 981,589
Corporate Bonds, mutual funds, and commercial paper 69,907 24,838 21,101
Obligations of State and Political Subdivisions 126,916 138,345 104,141
Interest on time deposits with other banks 11,016 5,334 7,631
Interest on federal funds sold 142,484 108,013 82,132
--------------------------------------------------
Total interest income 6,685,253 5,591,464 5,504,674
Interest expense:
Savings, NOW and money market deposits 1,049,847 703,580 682,640
Time deposits of $100,000 or more 112,009 110,221 155,539
Time deposits under $100,000 993,941 1,138,282 1,364,584
Other 56,453 29,795 70,608
--------------------------------------------------
Total interest expense 2,212,250 1,981,878 2,273,371
Net interest income before provision for
possible loan losses 4,473,003 3,609,586 3,231,303
Provision for possible loan losses 164,000 90,000 60,000
--------------------------------------------------
4,309,003 3,519,586 3,171,303
--------------------------------------------------
Non-interest Income:
Service charges on deposit accounts 559,874 373,022 337,757
Insurance and brokerage commission fees 11,780 14,693 7,078
Investment securities gain (loss), net (16,719) 0 337
Other 4,411,247 2,501,108 2,449,570
--------------------------------------------------
Total Non-interest Income 4,966,182 2,888,823 2,794,742
--------------------------------------------------
Non-interest Expenses:
Salaries and employee benefits 2,402,600 1,873,389 1,751,751
Equipment expenses 275,745 252,013 162,986
Occupancy expenses 506,472 518,270 279,451
Other 4,047,572 2,297,563 2,149,591
--------------------------------------------------
Total Non-interest Expenses 7,232,389 4,941,235 4,343,779
--------------------------------------------------
Income before provision for income taxes 2,042,796 1,467,174 1,622,266
Provision for income taxes 781,732 553,343 633,698
--------------------------------------------------
Net Income $1,261,064 $913,831 $988,568
--------------------------------------------------
--------------------------------------------------
Earnings per share:
Basic $1.23 $0.91 $0.99
--------------------------------------------------
--------------------------------------------------
Diluted $1.15 $0.87 $0.96
--------------------------------------------------
--------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
Heritage Oaks Bancorp
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Valuation Total
Shares Common Retained Allowance Stockholders'
Outstanding Stock Earnings for Investments Equity
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1995 665,355 $4,032,084 $1,716,607 $(782,579) $4,966,112
Exercise of Stock Options 300 1,725 0 0 1,725
Net Income 0 0 988,568 0 988,568
Change in unrealized loss on investment securities 0 0 0 269,058 269,058
------------------------------------------------------------------------
Balances, December 31, 1995 665,655 4,033,809 2,705,175 (513,521) 6,225,463
Exercise of Stock Options 9,641 55,436 0 0 55,436
Cash dividends paid - $.32 per share 0 0 (213,011) 0 (213,011)
Net Income 0 0 913,831 0 913,831
Change in unrealized loss on investment securities 0 0 0 71,429 71,429
------------------------------------------------------------------------
Balances, December 31, 1996 675,296 4,089,245 3,405,995 (442,092) 7,053,148
Exercise of stock options 15,868 91,241 0 0 91,241
Cash dividends paid - $.50 per share (337,787) 0 (337,787)
Three-for -two stock split 345,462 0 0 0 0
Cash paid to stockholders' in lieu of fractional shares
on three-for-two stock split 0 0 (1,351) 0 (1,351)
Net Income 0 0 1,261,064 0 1,261,064
Change in unrealized loss on investment securities 0 0 0 60,763 60,763
------------------------------------------------------------------------
Balances, December 31, 1997 1,036,626 $4,180,486 $4,327,921 $(381,329) $8,127,078
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
Heritage Oaks Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,261,064 $913,831 $988,568
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 351,303 262,424 189,057
Provision for possible loan losses 164,000 90,000 60,000
(Decrease) increase in deferred loan fees 116,343 91,236 (15,951)
Net (gain) loss on sales of investment securities 16,719 0 (337)
Amortization of premiums/discounts on investment securities, net (74,194) (63,468) (128,331)
Gain on sale of other real estate owned 0 0 (13,314)
Net (gain) loss on sale of POS equipment (9,709) (2,269) 157
Decrease in net deferred tax assets 6,542 50,998 189,073
Increase in other assets (135,359) (356,287) (262,949)
Increase (decrease) in other liabilities 251,402 (57,494) 467,245
---------------------------------------------------
Net cash provided by operating activities 1,948,111 928,971 1,473,218
---------------------------------------------------
Cash flows from investing activities:
Purchase of securities held-to-maturity (3,976,013) (2,856,218) (3,492,874)
Purchase of Mortgage-Backed Securities held-to-maturity (2,080,158) 0 0
Purchase of securities available-for-sale (1,500,000) (500,000) 0
Purchase of Mortgage-Backed Securities available-for-sale (3,355,847) 0 0
Proceeds from sales of Securities held-to-maturity 1,250,000 0 4,978,707
Proceeds from principal reductions and maturities of
securities held-to-maturity 2,125,000 3,890,000 5,299,999
Proceeds from principal reductions and maturities of
Mortgage-Backed Securities held-to-maturity 534,864 297,079 96,192
Proceeds from sales of Securities available-for-sale 3,483,281 0 1,115,754
Proceeds from principal reductions and maturities of
securities available-for-sale 0 500,000 0
Proceeds from principal reductions and maturities of
Mortgage-Backed Securities available-for-sale 184,441 0 0
Purchase of deposits with other banks (510,119) 0 0
Purchase of life insurance policies (240,398) (37,496) (33,756)
Proceeds from sale of other real estate owned 0 0 258,978
Increase loans, net (5,459,974) (9,841,443) (4,164,382)
Purchase of property, premises & equipment, net (667,915) (352,280) (367,842)
---------------------------------------------------
Net cash provided by (used in) investing
activities (10,212,838) (8,900,358) 3,690,776
---------------------------------------------------
Cash flows from financing activities:
Increase in deposits, net 11,558,359 7,277,201 2,108,969
Net increase (decrease) in other borrowings (4,730,000) 4,730,000 (4,727,500)
Proceeds from exercise of stock options 91,241 55,436 1,725
Cash dividends paid or declared (339,138) (213,011) 0
Net cash provided by (used in) financing activities 6,580,462 11,849,626 (2,616,806)
---------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,684,265) 3,878,239 2,547,188
Cash and cash equivalents at beginning of year 14,675,653 10,797,414 8,250,226
---------------------------------------------------
Cash and cash equivalents at end of year $12,991,388 $14,675,653 $10,797,414
---------------------------------------------------
---------------------------------------------------
Supplemental disclosures of cash flow information:
Interest paid $2,445,815 $2,120,014 $1,927,954
Income taxes paid $847,000 $537,000 $611,114
Supplemental disclosures of noncash flow information:
Change in unrealized loss on investment securities $60,763 $71,429 $269,058
Transfer of loan to other real estate owned through foreclosure $62,000 $0 $0
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies:
The accounting and reporting policies of Heritage Oaks Bancorp (the Company)
and Subsidiary conform to generally accepted accounting principles and to
general practices within the banking industry. A summary of the Company's
significant accounting and reporting policies consistently applied in the
preparation of the accompanying financial statements follows:
Principles of Consolidation:
The consolidated financial statements include the Company and its wholly
owned subsidiaries, Heritage Oaks Bank and CCMS Systems, Inc.. Intercompany
balances and transactions have been eliminated.
Use of Estimates:
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.
Estimates that are particularly susceptible to significant change relate to
the determination of the allowance for loan losses on loans and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for losses on
loans and foreclosed real estate, management obtains independent appraisals
for significant properties.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's allowances for losses on loans and foreclosed real estate.
Such agencies may require the Bank to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination. Because of these factors, it is reasonably possible that
the allowances for losses on loans and foreclosed real estate may change.
Investment Securities and Mortgage-backed securities:
In accordance with SFAS No. 115 "Accounting for Certain Investments in Debt
and Equity Securities" which addresses the accounting for investments in
equity securities that have readily determinable fair values and for
investments in all debt securities. Securities and mortgage-backed
securities are classified in three categories and accounted for as follows:
debt, equity, and mortgage-backed securities that the company has the
positive intent and ability to hold to maturity are classified as
held-to-maturity and are measured at amortized cost; debt and equity
securities bought and held principally for the purpose of selling in the
near term are classified as trading securities and are measured at fair
value, with unrealized gains and losses included in earnings;, debt and
equity securities not classified as either held-to-maturity or trading
securities are deemed as available-for-sale and are measured at fair value,
with unrealized gains and losses, net of applicable taxes, reported in a
separate component of stockholders' equity. Gains or losses on sales of
investment securities and mortgage-backed securities are determined on the
specific identification method. Premiums and discounts are amortized or
accreted using the interest method over the expected lives of the related
securities.
F-6
<PAGE>
Note 1: Summary of Significant Accounting Policies: (continued)
Loans:
Loans are stated at unpaid principal balances less the allowance for loan
losses and net deferred loan fees and unearned discounts. The Bank
recognizes loan origination fees to the extent they represent reimbursement
for initial direct costs, as income at the time of loan boarding. The excess
of fees over costs, if any, is deferred and credited to income over the term
of the loan.
In accordance with SFAS No. 114 (as amended by SFAS No. 118), "Accounting by
Creditors for Impairment of a Loan" those loans identified as impaired are
measured on the present value of expected future cash flows discounted at the
loan's effective interest rate or the fair value of the collateral if the
loan is collateral dependent. A loan is impaired when it is probable the
creditor will not be able to collect all contractual principal and interest
payments due in accordance with the terms of the loan agreement.
Loans are placed on a nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more.
Any unpaid interest previously accrued on those loans is reversed from
income. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan principal
balance.
All loans on non accrual are measured for impairment. The Bank applies the
measurement provision of SFAS No. 114 to all loans in its portfolio. All
loans are generally charged off at such time the loan is classified a loss.
Allowance for Loan Losses:
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectability of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific
impaired loans, and economic conditions. Allowances for impaired loans are
generally determined based on collateral values or the present value of
estimated cash flows. The allowance is increased by a provision for loan
losses, which is charged to expense and reduced by charge-offs, net of
recoveries. Changes in the allowance relating to impaired loans are charged
or credited to the provision for loan losses. Because of uncertainties
inherent in the estimation process, management's estimate of credit losses
inherent in the loan portfolio and the related allowance may change.
Property, Premises and Equipment:
Property, premises and equipment are stated at cost, less accumulated
depreciation and amortization. Equipment under capital leases is carried at
the present value of future minimum lease payments less accumulated
amortization over the term of the lease. Depreciation is computed on a
straight-line basis over the estimated useful lives of each asset type.
Other Real Estate Owned:
Other real estate owned, which represents real estate acquired through
foreclosure is stated at the lower of the carrying value of the loan or the
estimated fair market value less estimated selling costs of the related real
estate. Loan balances in excess of the fair market value of the real estate
acquired at the date of acquisition are charged against the allowance for
loan losses. Any subsequent declines in estimated fair value, operation
income, and gains or losses on disposition of such properties are expensed or
charged to current operations.
F-7
<PAGE>
Note 1: Summary of Significant Accounting Policies: (continued)
Income Taxes:
Provisions for income taxes are based on amounts reported in the statements
of income (after exclusion of non-taxable income such as interest on state
and municipal securities) and include deferred taxes on temporary differences
in the recognition of income and expense for tax and financial statement
purposes. Deferred taxes are computed on the liability method as prescribed
in SFAS No. 109, "Accounting for Income Taxes".
Consolidated Statements of Cash Flows:
The Company presents its cash flows using the indirect method and reports
certain cash receipts and payments arising from customer loans, deposits and
deposits placed with other financial institutions on a net basis. For the
purpose of the Statements of Cash Flows, cash and cash equivalents include
cash and due from banks, cash items in transit, and Federal funds sold
balances as of the year end.
Reclassifications:
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform to the 1997 presentation.
Earnings Per Share (EPS):
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of
the entity.
New Accounting Pronouncements:
In June 1997, the Financial accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income". This statement which is effective for
the year ending December 31, 1998, establishes standards of disclosure are
financial statement display for reporting comprehensive income and its
components.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information."
This statement changes current practice under SFAS 14 by establishing a new
framework on which to base segment reporting (referred to as the management
approach) and also requires certain related disclosures about products and
services, geographic areas and major customers. The disclosures are required
for the year ending December 31, 1998.
F-8
<PAGE>
Note 2: Fair Values of Financial Instruments
Statement of Financial Accounting Standard No. 107; "Disclosure about Fair
Value of Financial Instruments," requires disclosure of fair value information
about all financial instruments, whether or not recognized in the balance
sheet. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets, and, in many cases, could not be realized
in immediate settlement of the instruments. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Bank.
The following table presents the estimates of fair values of financial
instruments at December 31, 1997:
<TABLE>
<CAPTION>
Carrying
Amount Fair Value
--------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $12,991,388 $12,991,388
Interest bearing deposits 610,119 610,119
Investment and mortgage-backed securities 19,893,810 20,142,379
Loans receivable 54,697,484 54,776,969
Accrued interest receivable 623,918 623,918
Liabilities:
Non-interest bearing deposits 18,407,169 18,407,169
Interest bearing deposits 65,142,488 65,149,191
Accrued interest payable 408,295 408,295
<CAPTION>
Notional Cost to Cede
Amount Or Assume
--------------------------
<S> <C> <C>
Off-balance sheet instruments:
Commitments to extend credit and standby letters of credit $20,112,680 $201,127
</TABLE>
The following methods and assumptions were used by the Bank in estimating
fair value disclosures:
Cash and cash equivalents:
The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate those assets' fair values due to the short-term
nature of the assets.
Interest Bearing Deposits:
Fair values for time deposits are estimated using a discounted cash flow
analysis that applies interest rates currently being offered on certificates
to a schedule of aggregated contractual maturities on such time deposits.
Investment and mortgage-backed securities:
Fair values are based upon quoted market prices, where available.
F-9
<PAGE>
Note 2: Fair Values of Financial Instruments (continued)
Loans:
For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying amounts. The fair
values for other (for example, fixed rate commercial real estate and rental
property mortgage loans and commercial and industrial loans) are estimated
using discounted cash flow analysis, based on interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
Loan fair value estimates include judgments regarding future expected loss
experience and risk characteristics. The carrying amount of accrued interest
receivable approximates its fair value.
Deposits:
The fair values disclosed for demand deposits (for example, the
interest-bearing checking accounts and passbook accounts) are, by definition,
equal to the amount payable on demand at the reporting date (that is, their
carrying amounts). The fair values for certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated
contractual maturities on such time deposits. The carrying amount of accrued
interest payable approximates fair value.
Off-balance sheet instruments :
Fair values of loan commitments and Financial guarantees are based upon fees
currently charged to enter similar agreements, taking into account the
remaining terms of the agreement and the counterparties' credit standing.
Note 3: Investment and Mortgage-backed Securities
At December 31, 1997, the investment securities portfolio was comprised of
securities classified as available-for-sale and held-to-maturity, in
conjunction with the adoption of SFAS No. 115, resulting in investment
securities available-for-sale being carried at fair value and investment
securities held-to-maturity being carried at cost, adjusted for amortization
of premiums and accretion of discounts, and fair market value adjustments for
securities transferred from available-for-sale.
The amortized cost and fair value and investment securities
available-for-sale at December 31, 1997 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $1,000,269 $0 ($6,519) $993,750
Obligations of U.S. government agencies and corporations 2,500,000 3,888 (11,573) 2,492,315
Mortgage-Backed Securities 5,167,677 3,442 (355,966) 4,815,153
Other securities 2,000 0 0 2,000
-------------------------------------------------------
TOTAL AVAILABLE-FOR-SALE $8,669,946 $7,330 ($374,058) $8,303,218
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
Available-for-sale Securities in the amount of $2,089,375 were transferred to
held-to-maturity during 1994. The unrealized loss of $330,165 net of tax of
$137,098 was reflected in a separate component of stockholders' equity and is
being amortized over the remaining life of the securities as a yield
adjustment. At December 31, 1997 the remaining unrealized loss of $293,007
net of tax of $121,668 is included in the valuation allowance.
F-10
<PAGE>
Note 3: Investment and Mortgage-backed Securities (continued)
The amortized cost and fair values of investment securities held-to-maturity at
December 31, 1997 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $99,209 $0 ($209) $99,000
Obligations of U.S. government agencies and corporations 3,051,500 236,577 (8,273) 3,279,804
Mortgage-Backed Securities 4,980,125 16,086 (3,182) 4,993,029
Obligations of state and political subdivisions 3,459,758 10,898 (3,328) 3,467,328
--------------------------------------------------------
TOTAL HELD-TO-MATURITY $11,590,592 $263,561 ($14,992) $11,839,161
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
The amortized cost and fair value and investment securities available-for-sale
at December 31, 1996 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $1,000,842 $0 ($18,342) $982,500
Obligations of U.S. government agencies and corporations 4,500,000 0 (167,500) 4,332,500
Other securities 2,000 0 0 2,000
--------------------------------------------------------
TOTAL AVAILABLE-FOR-SALE $5,502,842 $0 ($185,842) $5,317,000
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
The amortized cost and fair values of investment securities held-to-maturity at
December 31, 1996 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $98,489 $0 ($932) $97,557
Obligations of U.S. government agencies and corporations 3,202,355 29,702 (375) 3,231,682
Mortgage-Backed Securities 5,075,990 110,810 (221,569) 4,965,231
Obligations of state and political subdivisions 2,703,892 20,279 (12,213) 2,711,958
--------------------------------------------------------
TOTAL HELD-TO-MATURITY $11,080,726 $160,791 ($235,089) $11,006,428
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
The amortized cost and fair values of investment securities
available-for-sale and held-to-maturity at December 31, 1997, by contractual
maturity are shown below. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities-Available-For-Sale Securities-Held-To-Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Due in one year or less $2,000,269 $1,982,177 $3,001,969 $3,017,642
Due after one year through five years 500,000 500,625 1,438,392 1,440,963
Due after five years through ten years 1,000,000 1,003,263 805,596 811,033
Due after ten years 2,000 2,000 1,364,510 1,361,095
Mortgage-backed securities 5,167,677 4,815,153 4,980,125 5,208,429
--------------------------- ---------------------------
Total $8,669,946 $8,303,218 $11,590,592 $11,839,162
--------------------------- ---------------------------
--------------------------- ---------------------------
</TABLE>
F-11
<PAGE>
Note 3: Investment and Mortgage-backed Securities (continued)
Proceeds from sales and maturities of investment securities
Available-for-sale during 1997, 1996, and 1995 were $3,483,281, $500,000,
$1,115,754, respectively. In 1997, gross losses on these sales were $16,719
there were no gross gains. There were no gross gains or losses in 1996 and
only gross gains of $221 in 1995. Proceeds from maturities and sales of
investment securities Held-to-maturity during 1997, 1996, and 1995 were
$3,375,000, $3,890,000, and $10,278,706, respectively. There were no gains or
losses on those sales and maturities in 1997 and 1996. During 1995 there were
gross gains of $1,250 and gross losses of $1,134. Proceeds from sales and
maturities of mortgage-backed securities 1997, 1996, and 1995 were $719,305,
297,079, and $96,192, respectively. There were no gross gains or losses on
these sales during 1997 and 1996. During 1995 there were gross gains of
$2,197. Unrealized net losses on investment securities and mortgage-backed
securities included in shareholders' equity net of tax at December 31, 1997,
1996, and 1995 were $381,329, $442,092, and $513,521, respectively.
Securities having a carrying value of $5,013,210 and $8,982,122 and a fair
value of $4,890,142 and $8,257,217 at December 31, 1997 and 1996,
respectively were pledged to secure public deposits and for other purposes as
required by law.
Note 4: Derivative Financial Instruments
As of December 31, 1997 the Bank held derivatives for purposes other than
trading for the purpose of asset-liability management. The principal
objective of the Bank's asset-liability management activities is to assure
maximum levels of net interest income while maintaining acceptable levels of
interest-rate and liquidity risk and facilitating the funding needs of the
Bank. The Bank's derivatives are comprised of two securities classified on
the balance sheet under investments and included in the "held-to-maturity"
category. These securities are considered derivatives since each included a
"step-up" feature which provides the issuer of the security the option of
either increasing the interest rate or having the security called, effective
on the call date. This option is always the issuers and is generally based
on current or future interest rates of similar securities. At December 31,
1997, both of these bonds have increased to the maximum rate and there are no
additional increases in rate between now and maturity. The issuer can still
call the bonds prior to maturity. Additional information regarding each of
the securities is outlined below:
<TABLE>
<CAPTION>
Carrying Maturity Callable Current Next Step-up
Value Date Date Rates Rates
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Government Sponsored Securities:
1997:
Federal National Mortgage Association $990,596 11/03/98 11/03/95 5.47% 5.47%
Federal National Mortgage Association $990,026 11/02/98 11/02/95 5.42% 5.42%
1996:
Federal National Mortgage Association $976,779 11/03/98 11/03/95 5.47% 5.47%
Federal National Mortgage Association $975,576 11/02/98 11/02/95 5.42% 5.42%
Federal Home Loan Bank $250,000 10/29/2001 10/29/97 6.25% 6.63%
</TABLE>
F-12
<PAGE>
Note 5: Loans and Reserve for Possible Loan Losses
Major classifications of loans were:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
--------------------------
<S> <C> <C>
Commercial, financial, and agricultural $25,325,584 $20,729,098
Real estate-construction 6,953,512 7,190,680
Real estate-mortgage 19,143,755 17,142,334
Installment loans to individuals 4,296,204 5,416,061
All other loans (including overdrafts) 152,606 92,391
--------------------------
55,871,661 50,570,564
--------------------------
Less - deferred loan fees (243,893) (218,786)
Less - reserve for possible loan losses (930,284) (771,925)
--------------------------
$54,697,484 $49,579,853
--------------------------
--------------------------
</TABLE>
Concentration of Credit Risk
At December 31, 1997, approximately $26,097,267 of the Bank's loan portfolio
was collateralized by various forms of real estate. Such loans are generally
made to borrowers located in San Luis Obispo County. The Bank attempts to
reduce its concentration of credit risk by making loans which are diversified
by project type. While management believes that the collateral presently
securing this portfolio is adequate, there can be no assurances that
significant deterioration in the California real estate market would not
expose the Bank to significantly greater credit risk.
An analysis of the changes in the reserve for possible loan losses is as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $771,925 $766,262 $875,712
Additions charged to operating expense 164,000 90,000 60,000
Loans charged off (48,849) (107,130) (181,110)
Recoveries of loans previously charged off 43,208 22,793 11,660
--------------------------------------
Balance at end of year $930,284 $771,925 $766,262
--------------------------------------
--------------------------------------
</TABLE>
F-13
<PAGE>
Note 5: Loans and Reserve for Possible Loan Losses (continued)
The following is a summary of the investment in impaired loans, the related
allowance for loan losses, and income recognized thereon as of December 31:
<TABLE>
<CAPTION>
----------------------------------------
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Recorded investment in impaired loans $1,015,207 $964,009 $758,115
Related allowance for loan losses 133,930 193,109 150,000
Average recorded investment in impaired loans 955,187 812,252 758,115
Interest income recognized for cash payments 0 0 0
Cash receipts applied to reduce principal balance 0 0 0
</TABLE>
The provisions of SFAS No. 114 and SFAS No. 118 permit the valuation
allowance reported above to be determined on a loan-by-loan basis or by
aggregating loans with similar risk characteristics. Because, the loans
currently identified as impaired have unique risk characteristics, the
valuation allowance was determined on a loan-by-loan basis.
Nonaccruing loans totaled $864,488 and $803,280 at December 31, 1997 and
1996, respectively. As of December 31, 1997 and 1996, all loans on
nonaccrual were classified as impaired. if interest had been recognized at
the original interest rates, interest income would have increased $94,762,
$97,382, $92,412 in 1997,1996, and 1995, respectively.
At December 31, 1997 and 1996, the Bank had $95,536 and $160,729,
respectively in loans past due 90 days or more in interest or principal and
still accruing interest. These are well secured and in the process of
collection, or are secured by 1-4 single family residences.
At December 31, 1997, loans totaling $407,929 were classified as trouble debt
restructurings.
Note 6: Property, Premises and Equipment
Property, premises and equipment consisted of
the following:
<TABLE>
<CAPTION>
December 31
--------------------------
1997 1996
--------------------------
<S> <C> <C>
Land $400,000 $400,000
Building and improvements 2,222,997 1,903,593
Furniture and equipment 2,431,063 2,083,349
--------------------------
5,054,060 4,386,942
Less - accumulated depreciation 2,981,349 2,630,843
--------------------------
Total property, premises and equipment $2,072,711 $1,756,099
--------------------------
--------------------------
</TABLE>
Depreciation included in other expenses was $351,303, $262,424, and, $189,057
in 1997, 1996, and 1995, respectively, and are based on estimated lives of 20
years for buildings and 3 to 7 years for furniture, fixtures, and equipment.
F-14
<PAGE>
Note 7: Time Deposits Liabilities
At December 31, 1997 the Bank had time certificate of deposits with maturity
distributions as follows:
<TABLE>
<S> <C>
1998 $16,762,417
1999 1,185,924
2000 381,063
2001 21,983
2002 57,254
2003 100,010
-----------
$18,508,651
-----------
-----------
</TABLE>
Note 8: 401(k) Pension Plan
During 1994, the Bank established a savings plan for employees which allows
participants to make contributions by salary deduction equal to 15% or less
of their salary pursuant to section 401(k) of the Internal Revenue Code.
Employee contributions are matched up to 25% of the employee's contribution.
Employees vest immediately in their own contributions and they vest in the
Bank's Contribution based on years of service. Expenses of the savings plan
were $24,048, $16,651, and $12,904 for the years ended December 31, 1997,
1996, and 1995, respectively.
Note 9: Salary Continuation Plan
During 1994, the Bank established a salary continuation plan agreement with
the President, Chief Financial Officer, and Chief Administrative Officer, as
authorized by the Board of Directors. This agreement provides for annual
cash payments for a period not to exceed 15 years, beginning at retirement
age 60. In the event of death prior to retirement age, annual cash payments
would be made to the beneficiaries for a determined number of years. The
present values of the Company's liability under this Agreement were $134,673
and $92,947 at December 31, 1997 and 1996, respectively and are included in
other liabilities in the Company's Consolidated Financial Statements. The
Company maintains life insurance policies, which are intended to fund all
costs of the plan. The cash surrender values of these life insurance policies
totaled $970,318 and $729,920 at December 31, 1997 and December 31, 1996,
respectively.
Note 10: Acquisitions of Assets and Liabilities
On February 21, 1997, the Bank acquired certain assets and liabilities of the
Wells Fargo Bank branch located in Cambria, California. The total assets
acquired were $5,255,161, which consisted of $316,610 of leasehold
improvements and fixed assets, $4,863,150 of cash and $15,267 of loans. In
addition the Bank also assumed $5,255,161 of deposits. The Bank paid a
premium of $60,134 for the deposits. On September 2, 1994, the Bank had paid
a premium of $173,102 for a branch acquisition. Both of these premiums are
being amortized over a five year period. Amortization of the premiums for
1997, 1996, and 1995 were $43,641, $34,620, $34,620, respectively. The
remaining unamortized premiums at December 31, 1997 and 1996 were $108,815
and $92,321, respectively.
F-15
<PAGE>
Note 11: Taxes on Income
The current and deferred amounts of the provision, (benefit) for income taxes
were:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Federal
Current $551,554 $396,443 $448,359
Deferred (3,143) (9,105) (2,669)
---------------------------------------
Total Federal Taxes 548,411 387,338 445,690
---------------------------------------
State
Current $236,760 $166,433 180,700
Deferred (3,439) (428) 7,308
---------------------------------------
Total State Taxes 233,321 166,005 188,008
---------------------------------------
Total Federal and State Taxes $781,732 $553,343 $633,698
---------------------------------------
---------------------------------------
The principal items giving rise to deferred taxes were:
Use of different depreciation for tax purposes $15,100 $2,300 ($1,240)
Difference in loan loss provision for tax purposes 32,781 37,400 38,911
Differences arising from changes in accruals (35,621) (62,400) (68,486)
Other, net (18,802) 13,167 35,454
---------------------------------------
Total Deferred Taxes ($6,542) ($9,533) $4,639
---------------------------------------
---------------------------------------
</TABLE>
The provision for taxes on income differed from the amounts computed using
the federal statutory tax rate of 34 percent are as follows:
<TABLE>
<CAPTION>
1997 1996 1996
--------------------------------------
<S> <C> <C> <C>
Tax provision at federal statutory tax rate $694,551 $498,839 $551,570
State income taxes, net of federal income tax benefit 146,060 109,563 124,085
Other, net (58,879) (55,059) (41,957)
--------------------------------------
Total Tax Provision $781,732 $553,343 $633,698
--------------------------------------
--------------------------------------
<CAPTION>
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
The net deferred tax asset is determined as follows:
Deferred tax assets arising from cumulative timing differences $669,612 $676,154 $727,152
Valuation Allowance * (103,000) (103,000) (103,000)
--------------------------------------
Net deferred tax asset $566,612 $573,154 $624,152
--------------------------------------
--------------------------------------
</TABLE>
* The valuation allowance is estimated based upon amounts less than likely of
future realization.
There was no change in the valuation allowance during the year.
F-16
<PAGE>
Note 12: Other Borrowed Money
Other borrowed money consisted of the following:
<TABLE>
<CAPTION>
1997 1997 1996 1996
Current Average Current Average
Balance Balance(1) Balance Balance(1)
<S> <C> <C> <C> <C>
Securities sold under agreements to repurchase $0 $40,438 $4,730,000 $486,704
Federal funds purchased 0 932,565 0 39,675
-------------------------------------------------------
$0 $973,003 $4,730,000 $526,379
-------------------------------------------------------
-------------------------------------------------------
The maximum outstanding balance at any month end
during the year. $3,760,000 $4,730,000
</TABLE>
(1) Average balances are computed using the daily balances outstanding during
the year.
At December 31, 1996, the book value including accrued interest receivable on
securities sold under agreements to repurchase were $4,899,438. The
securities dealer that has lent the Bank the money has possession of the
securities during the term of the loan.
Interest expense on federal funds purchased was $2,572, $2,360, and $5,332
and interest expense on securities sold under agreements to repurchase was
$53,880, $27,434 and $65,276 for the years ended December 31, 1997, 1996, and
1995, respectively.
The Bank has a fed funds borrowing line with a correspondent bank. The credit
limit available on that line is $2,500,000.
Note 13. Stock Options Plans
At December 31, 1997, the Bank had two stock option plans, which are
described below. The Bank applies APB Opinion 25 and related interpretations
in accounting for its plan. Accordingly, no compensation costs has been
recognized for its stock option plans. Had compensation costs for these
plans been determined on the fair value at the grant dates consistent with
the method of SFAS No. 123, the impact would not have materially affected net
income.
The Company adopted the Bank's 1990 stock option plan, which is a tandem
stock option plan permitting options to be granted either as "Incentive Stock
Options" or as non-qualified stock options under the Internal Revenue Code.
All outstanding options were granted at prices which equal the fair market
value on the day of grant. Options granted vest at a rate of 25 percent per
year for four years, and expire no later than ten years from the date of
grant. The plan provides for issuance of up to 138,465 shares (after giving
retroactive effect for a three-for-two stock split) of the Company's unissued
common stock and is subject to the specific approval of the Board of
Directors.
The fair value of each option granted was estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions
for 1997: risk-free rates of 5.78% and dividend yields of 3.22%, expected
life of five years; and volatility of 34%. No options were granted during
1996 or 1995.
F-17
<PAGE>
Note 13. Stock Options Plans (continued)
1990 Stock Option Plan
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
----------------------------------------------------------------------------------------
<S> <C>
Options outstanding, beginning of year 119,447 $3.92 133,908 $3.91 138,462 $3.91
Granted 4,104 $10.67 0 0
Canceled 0 0 (4,104) $3.83
Exercised (23,802) $3.83 (14,461) $3.83 (450) $3.83
------- ------- -------
Options outstanding, end of year 99,749 $4.21 119,447 $3.92 133,908 $3.91
------- ------- -------
------- ------- -------
Options available for grant, end of year 3 4,104 4,104
</TABLE>
Weighted average fair value of options granted during the year were $.57 per
share.
The following table summarizes information about 1990 stock option plan
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------
Weighted-Average
Number Remaining Weighted-Average Number Weighted-Average
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3.83 64,895 5.09 $3.83 64,895 $3.83
4.00 - 4.33 30,750 2.90 $4.14 30,750 $4.14
10.67 4,104 9.52 $10.67 0
------ ------
99,749 4.60 $4.21 95,645 $3.93
------ ------
------ ------
</TABLE>
The Company adopted the Bank's 1997 stock option plan, which is a tandem
stock option plan permitting options to be granted either as "Incentive Stock
Options" or as non-qualified stock options under the Internal Revenue Code.
All outstanding options were granted at prices which equal the fair market
value on the day of grant. Options granted vest at a rate of 20 percent per
year for five years, and expire no later than ten years from the date of
grant. The plan provides for issuance of up to 161,049 shares (after giving
retroactive effect for a three-for-two stock split) of the Company's unissued
common stock and is subject to the specific approval of the Board of
Directors.
The fair value of each option granted was estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions
for 1997: risk-free rates of 5.78%, dividend yield of 3.22%, expected life of
seven years, and volatility of 34%. No options were issued for this plan
prior to 1997.
F-18
<PAGE>
Note 13. Stock Options Plans (continued)
1997 Stock Option Plan
<TABLE>
<CAPTION>
1997
-------------------------
Weighted Average
Shares Exercise Price
-------------------------
<S> <C> <C>
Options outstanding, beginning of year 0
Granted 139,146
Canceled 0
Exercised 0
-------
Options outstanding, end of year 139,146 $10.67
-------
-------
Options available for grant, end of year 21,903
</TABLE>
Weighted average fair value of options granted during the year were $1.43 per
share.
Options Outstanding and Exercisable
<TABLE>
<CAPTION>
Number Weighted-Average
Range of Outstanding Remaining Weighted-Average Number
Exercise Prices at 12/31/97 Contractual Life Exercise Price Exercisable
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$10.67-$10.67 139,146 9.53 years $10.67 0
</TABLE>
Note 14 Earnings Per Share (EPS)
The following is a reconciliation of net income and shares outstanding to the
income and number of shares used to compute EPS:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------------------------------
Net Income Shares Net Income Shares Net Income Shares
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income as Reported $1,261,064 $913,831 $988,568
Shares Outstanding at Year End 1,036,626 1,012,824 998,804
Impact of Weighting Shares
Purchased During the Year (8,746) (7,048) (412)
--------------------------------------------------------------------------------------
Used in Basic EPS 1,261,064 1,027,880 913,831 1,005,776 988,568 998,392
Dilutive Effect of Outstanding
Stock Options 64,130 39,605 35,522
--------------------------------------------------------------------------------------
Used in Dilutive EPS $1,261,064 1,092,010 $913,831 1,045,381 $988,568 1,033,914
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE>
Note 15. Restriction on Transfers of Funds to Parent
There are legal limitations on the ability of the Bank to provide funds to
the Company. Dividends declared by the Bank may not exceed, in any calendar
year, without approval of the State Banking Department, net income for the
year and the retained net income for the preceding two years. Section 23A of
the Federal Reserve Act restricts the Bank from extending credit to the
Company and other affiliates amounting to more than 20% of its contributed
capital and retained earnings. During 1997, the Bank paid the parent
$345,985 in dividends.
Note 16. Commitments and Contingencies
The Company leases land, buildings, and equipment under noncancelable
operating leases expiring at various dates through 2009. The following is a
schedule of future minimum lease payments based upon obligations at year end.
lease payments based upon obligations at year end.
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1998 $310,756
1999 200,142
2000 164,782
2001 154,056
2002 72,675
more than 5 years 248,018
--------
Total $902,411
--------
--------
</TABLE>
Total expenditures charged for leases for the reporting period ended December
31, 1997, 1996, and 1995 were $309,034, $250,736, $62,989, respectively.
The Company is involved in various litigation. In the opinion of management
and the Company's legal counsel, the disposition of all such litigation
pending will not have a material effect on the Company's financial statements.
At December 31, 1997 and 1996, the Bank was contingently liable for letters
of credit accommodation's made to its customers totaling $298,019 and
$235,955, respectively. At December 31, 1997 and 1996 the Bank had
undisbursed loan commitments in the amount of $20,112,680 and $12,238,199,
respectively. The Bank makes commitments to extend credit in the normal
course of business to meet the financing needs of its customers. 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 outstanding commitment amount does not
necessarily represent future cash requirements. Standby letters of credit
written are confidential commitments issued by the Bank to guarantee the
performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loans to customers. The Bank anticipates no losses as a result of
such transactions.
F-20
<PAGE>
Note 17. Related Party Transactions
The Bank has entered into loan and deposit transactions with certain
directors and executive officers of the Company. These loans were made and
deposits were taken in the ordinary course of the Bank's business and, in
management's opinion, were made at prevailing rates and terms.
An analysis of loans to directors and executive officers is as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------
<S> <C> <C>
Balance at beginning of year $285,011 $510,990
Additional loans made 115,344 158,000
Payments received (78,225) (383,979)
---------------------
Balance at end of year $322,130 $285,011
---------------------
---------------------
</TABLE>
Note 18. Regulatory Matters
The Bank is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the 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 Tier 1 capital (as defined) to
average assets (as defined). Management believes, as December 31, 1997, that
the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well-capitalized under
the regulatory framework for prompt corrective action (there are no
conditions or events since that notification that Management believes have
changed the Bank's category). To be categorized as well-capitalized, the
Bank must maintain minimum capital ratios set forth in the table below. The
following table also sets forth the Bank's actual regulatory capital and
ratios (dollars in thousands):
<TABLE>
<CAPTION>
For Capital To be Well-Capitalized under
Actual regulatory Adequacy Purposes Prompt Corrective action provisions
-------------------------- ------------------------- -----------------------------------
Capital amount Ratio Capital amount Ratio Capital amount Ratio
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital to Risk-Weighted Assets $8,841 13.45% $5,259 8.00% $6,573 10.00%
Tier 1 Capital to Risk-Weighted Assets $8,018 12.18% $2,633 4.00% $3,950 6.00%
Tier 1 Capital to Average Assets $8,018 8.59% $3,732 4.00% $4,665 5.00%
As of December 31, 1996
Total Capital to Risk-Weighted Assets $7,761 13.94% $4,454 8.00% $5,568 10.00%
Tier 1 Capital to Risk-Weighted Assets $7,064 12.67% $2,230 4.00% $3,345 6.00%
Tier 1 Capital to Average Assets $7,064 8.30% $3,404 4.00% $4,255 5.00%
</TABLE>
F-21
<PAGE>
Note 19: Other Non-interest Income
The major items included in non-interest income were:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
ATM transaction fees $2,433,051 $1,024,017 $978,335
ATM interchange income 808,901 882,058 779,678
ATM sponsorship fees 139,628 16,109 4,155
Bankcard merchant fees 697,159 363,247 591,658
Mortgage broker fees 127,411 57,399 0
Gain on sale of other real estate owned 0 0 13,314
Other 205,097 158,278 82,430
----------------------------------------
$4,411,247 $2,501,108 $2,449,570
----------------------------------------
----------------------------------------
</TABLE>
Note 20: Other Non-interest Expenses
The major items included in non-interest expenses were:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Data processing $615,809 $481,844 $477,384
Advertising and promotional 110,418 123,240 79,412
Regulatory fees 28,779 159,324 118,087
Other professional fees and outside services 66,850 54,376 82,358
Legal fees and other litigation expense 152,351 118,071 121,143
Stationery and supplies 111,942 98,386 78,254
Bankcard merchant expense 604,011 290,236 530,182
Director fees 96,275 88,675 94,455
Gaming expense 1,053,056 0 0
ATM costs at retail sites 695,118 486,831 259,349
Other 512,963 396,580 308,967
----------------------------------------
$4,047,572 $2,297,563 $2,149,591
----------------------------------------
----------------------------------------
</TABLE>
NOTE 21: Other Real Estate Owned
As discussed in Note 1, Other Real Estate Owned is carried at the estimated
fair value of the real estate. An anlysis of the transactions for the year
ended December 31, 1997 were as follows:
<TABLE>
<S> <C>
Balance, beginning of year $ 0
Additions 62,000
-------
Balance, end of year $62,000
-------
-------
</TABLE>
There were no Other Real Estate owned transactions during 1996.
F-22
<PAGE>
NOTE 22: Condensed Financial Information of Heritage Oaks Bancorp (Parent
Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
--------------------------
<S> <C> <C>
Cash $300,296 $314,388
Prepaid expenses 89,024 57,807
Investment in Subsidiary 7,746,408 6,714,428
--------------------------
TOTAL ASSETS $8,135,728 $7,086,623
--------------------------
--------------------------
LIABILITIES and STOCKHOLDERS' EQUITY
Other Liabilities 8,650 33,475
Stockholders' Equity:
Common Stock 4,180,486 4,089,245
Retained earnings 3,946,592 2,963,903
--------------------------
Total Stockholders' Equity 8,127,078 7,053,148
--------------------------
$8,135,728 $7,086,623
--------------------------
--------------------------
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Income
Equity in undisbursed income of subsidiary $1,317,202 $950,057 $1,008,268
Management Fee from Bank 0 0 100,321
----------------------------------------
Total income 1,317,202 950,057 1,108,589
----------------------------------------
Expense
Salary expense 32,283 31,987 22,158
Equipment Expense 0 182 424
Other Professional Fees and Outside Services 22,785 13,781 95,843
Other 37,887 16,141 11,745
----------------------------------------
Total expense 92,955 62,091 130,170
----------------------------------------
Total Operating Income 1,224,247 887,966 978,419
Tax expense of parent (36,817) (25,865) (10,149)
----------------------------------------
$1,261,064 $913,831 $988,568
----------------------------------------
----------------------------------------
</TABLE>
F-23
<PAGE>
NOTE 22: Condensed Financial Information of Heritage Oaks Bancorp (Parent
Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,261,064 $913,831 $988,568
Adjustments to reconcile net income
to net cash provided by operating activities:
(Increase) decrease in other assets (31,217) (28,434) 7,581
Increase (decrease) in other liabilities (24,825) (11,062) 43,737
Decrease in dividends payable 0 0 (179,645)
Undistributed income of subsidiary (1,317,202) (950,057) (1,008,268)
-----------------------------------------
Net cash used in operating activities (112,180) (75,722) (148,027)
Cash flows from financing activities:
Cash dividends declared (339,138) (213,011) 0
Cash dividends received 345,985 499,016 0
Proceeds from the exercise of options 91,241 55,436 1,725
-----------------------------------------
Net cash provided by financing activities 98,088 341,441 1,725
-----------------------------------------
Net increase in cash (14,092) 265,719 (146,302)
Cash at beginning of year 314,388 48,669 194,971
-----------------------------------------
Cash at end of year $300,296 $314,388 $48,669
-----------------------------------------
-----------------------------------------
</TABLE>
NOTE 23: Stock Split
On September 4 , 1997 the Board of Directors approved a three-for-two stock
split of its common stock. The outstanding shares and related calculations
included in these financial statements reflect retroactive adjustments for
this stock split.
Note 24. Subsequent Events
On January 29, 1998, the Board of Directors declared a dividend of $.50 per
share to stockholders'' of record on February 9, 1997. The dividend paid was
$519,718.
On March 11, 1998, the Bank signed a non-binding letter of intent with
another company to sell all of the Bank's ATM contracts. The proposed
transaction is subject to negotiation and execution of a legally binding,
definitive acquisition agreement within 60 days as well as to a variety of
other conditions, including due diligences. If the transaction is
consummated, the Bank will no longer receive the revenue or incur the expense
attributable to this business but will receive a lump sum cash buy out. The
pretax net earnings from this source before deduction for overhead expenses
and salaries were $1,493,778, $1,419,244, and $1,498,664 for the years ended
December 31, 1997, 1996, and 1995, respectively. No assurance can be given
that the proposed transaction will be consummated nor can the transaction's
precise financial impact upon the Bank and its results of operations
currently be predicated accurately.
Note: This statement has not been reviewed or confirmed for accuracy or
relevance by the Federal Deposit Insurance Corporation.
F-24
<PAGE>
Selected Quarterly Financial Data
The selected quarterly data for 1997 and 1996 is based on the unaudited
financial statements of the Company as presented by Management.
<TABLE>
<CAPTION>
Quarter ended
----------------------------------------------------------
(Dollars in thousands, except per share data) March 31 June 30 September 30 December 31
----------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Net interest income $1,027 $1,097 $1,114 1,235
Provision for possible loan losses 60 26 43 35
Non-interest income 836 911 1,619 1,600
Non-interest expenses 1,393 1,506 2,117 2,216
----- ----- ----- -----
Income before provision for income taxes 410 476 573 584
Provision for income taxes 156 180 222 224
----- ----- ----- -----
Net income $254 $296 $351 $360
----- ----- ----- -----
----- ----- ----- -----
Earnings per share:
Basic (1) $0.25 $0.29 $0.34 $0.35
Diluted (1) 0.23 0.27 0.32 0.33
Dividends declared per share (1) 0.33 0.00 0.00 0.00
Total assets 84,897 87,787 93,825 93,319
Total Deposits 76,439 79,079 84,184 83,550
Loans, net 51,193 52,802 55,088 54,697
Stockholders' equity 6,980 7,408 7,717 8,127
1996
Net interest income $822 $848 $915 $1,025
Provision for possible loan losses 23 22 23 22
Non-interest income 725 733 703 728
Non-interest expenses 1,135 1,176 1,265 1,366
Income before provision for income taxes and cumulative
effect of accounting change 389 383 330 365
Provision for income taxes 150 146 123 134
----- ----- ----- -----
Net income $239 $237 $207 $231
----- ----- ----- -----
----- ----- ----- -----
Earnings per share:
Primary (1) $0.24 $0.23 $0.21 $0.23
Fully diluted (1) 0.23 0.22 0.20 0.22
Dividends declared per share (1) 0.21 0.00 0.00 0.00
Total assets 71,203 76,508 77,353 85,122
Total Deposits 63,327 66,658 69,250 71,991
Loans, net 40,453 43,903 43,594 49,580
Stockholders' equity 6,283 6,529 6,827 7,053
</TABLE>
(1) Adjusted retroactively for the three-for-two stock split paid on
November 5, 1997
F-25
<PAGE>
SELECTED FINANCIAL DATA (unaudited)
(Dollars in thousands, except per share and ratio data)
All per share data have been adjusted for the three-for-two split
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Results of Operations:
Total interest income $6,685 $5,591 $5,505 $4,543 $4,367
Total interest expense 2,212 1,982 2,273 1,513 1,519
------ ------ ------ ------ ------
Net Interest Income 4,473 3,609 3,232 3,030 2,848
Provision for possible loan losses 164 90 60 45 30
------ ------ ------ ------ ------
Net interest income after provision
for possible loan losses 4,309 3,519 3,172 2,985 2,818
Total non-interest income 4,966 2,889 2,795 2,109 1,625
Total non-interest expenses 7,232 4,941 4,344 3,579 3,288
------ ------ ------ ------ ------
Income before provision for income taxes and
cumulative effect of accounting change 2,043 1,467 1,623 1,515 1,155
Provision for income taxes 782 553 634 607 467
Cumulative effect of change in accounting for
income taxes -- -- -- -- 99
------ ------ ------ ------ ------
NET INCOME $1,261 $914 $989 $908 $787
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Selected Financial Ratios:
Return on average assets 1.41% 1.21% 1.36% 1.48% 1.41%
Return on average equity 16.61% 13.76% 17.93% 22.40% 19.84%
Average equity to average assets 8.48% 8.76% 7.59% 6.60% 7.10%
Dividend payout ratio (1) 43.48% 38.38% 21.72% 23.42% 6.90%
Earnings per share -
Basic:
Income before effect of accounting change (1) $1.23 $0.91 $0.99 $1.06 $0.85
Effect of change in accounting for taxes (2) -- -- -- -- $0.12
------ ------ ------ ------ ------
NET INCOME $1.23 $0.91 $0.99 $1.06 $0.97
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Diluted:
Income before effect of accounting change (2) $1.15 $0.87 $0.96 $1.05 $0.71
Effect of change in accounting for taxes (2) -- -- -- -- $0.10
------ ------ ------ ------ ------
NET INCOME $1.15 $0.87 $0.96 $1.05 $0.81
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Dividends declared per share $0.50 $0.50 $0.32 $0.37 $0.10
Weighted average common and common
equivalent shares outstanding:
Basic 1,027,880 1,005,776 998,519 859,479 812,787
Diluted 1,092,010 1,045,381 1,033,914 860,511 1,014,871
Total Assets $93,319 $72,345 $72,345 $73,237 $55,247
</TABLE>
(1) The 1997 dividend of $.50 was declared on January 29, 1998. The 1996
dividend of $.33 was declared on February 23, 1997.
(2) Adjusted retroactively for the three-for-two stock split paid on November
5, 1997
F-26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HERITAGE OAKS BANCORP
By: /s/ Lawrence P. Ward
-----------------------------------------------------
LAWRENCE P. WARD
President and Chief Executive officer
Dated: March 25, 1998
By: /s/ Robert E. Bloch
-----------------------------------------------------
ROBERT E. BLOCH
Executive Vice President and Chief Financial Officer
Dated: March 25, 1998
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Dated:
<S> <C> <C>
/s/ B. R. Bryant Chairman of the March 25, 1998
- -------------------------------- Board of
B. R. BRYANT Directors
/s/ Donald H. Campbell Vice Chairman March 25, 1998
- -------------------------------- of the Board
DONALD H. CAMPBELL of Directors
/s/ Elizabeth A. Cousins Director March 25, 1998
- --------------------------------
ELIZABETH A. COUSINS
Director March , 1998
- --------------------------------
DOLORES T. LACEY
/s/ Merle F. Miller Director March 25, 1998
- --------------------------------
MERLE F. MILLER
/s/ John Palla Director March 25, 1998
- --------------------------------
JOHN PALLA
/s/ J. Russell Roy Director March 25, 1998
- --------------------------------
J. RUSSELL ROY
/s/ Ole K. Viborg Director March 25, 1998
- --------------------------------
OLE K. VIBORG
/s/ Lawrence P. Ward Director March 25, 1998
- --------------------------------
LAWRENCE P. WARD
</TABLE>
<PAGE>
EXHIBIT 3.1b
STATE OF CALIFORNIA
[STATE SEAL]
SECRETARY OF STATE
[seal of the
Secretary of State]
I, BILL JONES, Secretary of State of the State of California, hereby
certify:
That the attached transcript has been compared with the record on file
in this office, of which it purports to be a copy, and that it is full, true
and correct.
IN WITNESS WHEREOF, I execute this
certificate and affix the Great
Seal of the State of California this
Oct 16 1997
-----------
[seal of the /s/ BILL JONES
State of California] ------------------
Secretary of State
<PAGE>
ENDORSED
FILED
In the office of the
Secretary of State
of the State of California
October 15, 1997
/s/ BILL JONES
------------------
BILL JONES,
Secretary of State
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
HERITAGE OAKS BANCORP
Lawrence P. Ward and Gwen R. Pelfrey certify that:
1. They are the President and the Secretary, respectively, of Heritage
Oaks Bancorp, a California corporation.
2. Article IV of the Corporation's Articles of Incorporation is amended
to read as follows:
"IV
The corporation is authorized to issue only one class of
shares of stock; and the total number of shares which this
corporation is authorized to issue is Twenty Million (20,000,000).
Upon the amendment of this Article to read as herein set forth,
each two outstanding shares of stock are split up and converted
into three shares."
3. The foregoing amendment of the Corporation's Articles of Incorporation
has been duly approved by the Board of Directors.
4. The foregoing amendment of the Corporation's Articles of
Incorporation was one which the Board of Directors alone may adopt without
approval of the outstanding shares pursuant to Section 902(c) of the
California Corporations Code, since only one class of shares are outstanding.
/s/ LAWRENCE P. WARD
--------------------
Lawrence P. Ward
President
/s/ GWEN R. PELFREY
--------------------
Gwen R. Pelfrey
Secretary
Each of the undersigned declares under penalty of perjury that the
matters set forth in the foregoing Certificate are true and correct of his or
her own knowledge and that this declaration
<PAGE>
was executed on October 6, 1997 at Paso Robles, California.
/s/ LAWRENCE P. WARD
--------------------
Lawrence P. Ward
/s/ GWEN R. PELFREY
--------------------
Gwen R. Pelfrey
[seal of the
Secretary of State]
<PAGE>
Consent to Construction
The undersigned are the Landlords under the Master Lease and the Master
Ground Lease as such Landlord's are further defined in the Lease by and
between Heritage Oaks Bank as Tenant and Great Western Bank as Landlord dated
as of June 26, 1997.
The Tenant is desirous of improving the premises pursuant to the plans
attached hereto and made as part hereof and is seeking the Landlord's
approval.
The plans are further described as:
Sheet SP dated as of 5/ /97; Job No. 97-116
Sheet A1 dated as of 5/ /97; Job No. 97-116
Sheet A2 dated as of 5/ /97; Job No. 97-116
A fourth untitled sheet referencing certain specifications
The Landlords hereby grant their respective consents to the construction
with the following conditions:
1. All work shall be performed in accordance with the Lease, including, without
limitation, compliance with all governmental and quasi-governmental
requirements.
2. All work shall be performed utilizing professional tradesmen.
3. The contractor performing such work shall be duly licensed and shall
maintain insurance in the amounts specified in the Lease and Master Ground
Lease. Contractor shall require that its insurance name Landlord and Master
Ground Lessor as additional insured.
4. Landlord and Master Ground Lessor shall, at their discretion, post Notices
of Non-Responsibility upon the premises.
APPROVED
LANDLORD MASTER GROUND LESSOR
/s/ Sharon H. Driben By /s/ Mary L. Schlachter
------------------------ -----------------------
Sharon Driben Its Sr. Vice President
Regional Vice President -----------------------
<PAGE>
SUBLEASE
This Sublease is executed as of June 26, 1997, by and between Heritage
Oaks Bank, a California corporation (the "Sublessor"), whose address is 545
12th Street, Paso Robles, California 93446 and Blakeslee & Blakeslee, a
California corporation (the "Sublessee"), whose address is 1110 California
Boulevard, San Luis Obispo, California 93401.
RECITALS
Great Western Bank, a federal savings bank, as Landlord, and Heritage
Oaks Bank, as Tenant, executed a lease dated as of June 26, 1997 (the "Master
Lease"), which is attached to this Sublease as Exhibit A and incorporated
into this Sublease by this reference;
By the terms of the Master Lease, the real property described in
Paragraph 2 of the Master Lease was leased to Heritage Oaks Bank for a term
of approximately 12 years ending on June 30, 2009, subject to earlier
termination as provided in the Master Lease;
Sublessor desires to sublease to Sublessee a portion of the property
occupied by Sublessor under the terms of the Master Lease, and Sublessee
desires to lease that property from Sublessor; and
The Landlord under the Master Lease and the Master Ground Lessor shall
consent to the terms of this Sublease by executing the "Consent of Lessors"
provision at the end of this Sublease;
THEREFORE, Sublessor and Sublessee agree as follows:
LEASING AND DESCRIPTION OF PROPERTY
1. Subject to the terms, conditions, and covenants set forth in this
Sublease, Sublessor hereby leases to Sublessee, and Sublessee hereby leases
from Sublessor, a portion of the property located at 297 Madonna Road, San
Luis Obispo, California, described on Exhibit B hereto (the "Subleased
Premises').
TERM
2. Sublessee shall pay to Sublessor as rent for the Subleased Premises a
rental of an amount equal to a proportionate amount of all monetary
obligations of Sublessor under the Master Lease (whether designated as rent
or otherwise) which is equivalent to the proportionate amount of space
subleased to Sublessee in the Premises which is the subject of the Master
Lease, payable in advance on the first day of each calendar month during the
term, according to the terms of the Master Lease. Rent shall be paid to
Sublessor at 545 12th Street, Paso Robles, California 93446, or at any
1
<PAGE>
other place designated in writing by Sublessor. The installment rent payable
for any portion of a calendar month shall be a pro rata portion of the
installment payable for a full calendar month.
USE OF PREMISES
4. Sublessee shall use the Subleased Premises for business office
purposes and for financial and insurance services and product sales and for
no other purpose.
QUIET ENJOYMENT
5. Sublessor covenants that Sublessee shall be entitled to quiet
enjoyment of the premises, provided that Sublessee complies with the terms of
this Sublease.
CONDITION OF PREMISES
6. Sublessee agrees that Sublessee's act of taking possession will be an
acknowledgment that the Subleased Premises are in a tenantable and good
condition. Sublessee will, at Sublessee's own expense, maintain the Subleased
Premises in a thorough state of repair and in good and safe condition.
APPLICABILITY OF MASTER LEASE
7. This Sublease is subject and subordinate to all of the terms and
conditions of the Master Lease, and Master Ground Lease, which are
incorporated herein by reference.
ASSUMPTION
8. Sublessee expressly assumes and agrees to perform and comply with all
the obligations required to be kept or performed by the Tenant under the
provisions of the Master Lease and the Master Ground Lease identified in
Paragraph 7 of this Sublease, to the extent that they are applicable to the
Subleased Premises, with the following exceptions: (1) the obligation and
covenant to pay rent to the Landlord required by Paragraph 5 of the Master
Lease shall be considered performed by Sublessee to the extent and in the
amount rent is paid to Sublessor in accordance with Paragraph 3 of this
Sublease.
OBLIGATIONS OF SUBLESSOR
9. Sublessor does not assume the obligations required to be kept or
performed by the Landlord under the Master Lease.
2
<PAGE>
ISSUANCE OF NONDISTURBANCE AGREEMENT AND ATTORNMENT
10. If the Master Lease is terminated for any reason before the natural
expiration of its term, the termination shall not terminate or affect the
continuing validity of this Sublease, if the Landlord under the Master Lease
has entered into a nondisturbance agreement with Sublessee. If Sublessee
desires to enter into such an agreement, and agrees to assume the Master
Lease for the entire space covered by the Master Lease (i.e., the space
leased to Sublessor and the subleased space), Sublessee shall submit to
Landlord a written request for a nondisturbance agreement, stating the reason
or reasons it is desired and including a copy of this Sublease. The request
must be submitted to Landlord at the following address: Attn. Lease
Administration, 9200 Oakdale Avenue, Mail Stop N-11-45, Chatsworth,
California 91311. Within 30 days after Landlord receives the request,
Landlord shall arrange to enter into a nondisturbance agreement with
Sublessee for the entire space covered by the Master Lease, as long as
Sublessee's financial stability and condition has not suffered a material
negative change from Sublessee's current financial condition. Among other
things, that agreement shall provide that the following shall apply on
termination of the Master Lease:
(1) All Sublessor's interests under this Sublease shall be deemed
automatically assigned, transferred, and conveyed to Landlord;
(2) Landlord shall be bound on this Sublease to the same extent
Sublessor was bound on it; provided, however, that any amendments to
this Sublease made after Landlord and Sublessee enter into the
nondisturbance agreement shall not be binding on Sublessor; and
(3) Sublessee shall attorn to Landlord, provided that Sublessee shall
be under no obligation to pay rent to Landlord until Sublessee
receives written notice from Landlord that Landlord has succeeded
to the interests of Sublessor under this Sublease.
If Landlord does not enter into a nondisturbance agreement with
Sublessee and the Master Lease is terminated for any reason before the
natural expiration of its term, the following shall occur: this Sublease
shall immediately terminate; after termination, Sublessor and Sublessee shall
be released from all obligations under this Sublease; and, Sublessor shall
refund to Sublessee any unearned rent paid in advance.
ASSIGNMENT OR SUBLEASE OF MASTER LEASE
11. Notwithstanding anything to the contrary in the Master Lease, (a)
Sublessor may assign or sublease all or the remaining portion of the Premises
described in Paragraph 2 of the Master Lease to (i) Sublessee or (ii) an
entity which purchases or acquires Sublessor so long as it operates financial
institutions and is at least equal to Sublessor's financial strength and
condition; without obtaining the further consent to said assignment or
sublease by Landlord or the Master Ground Lessor, and (b) Sublessee may
assign the Sublease or sublease the Subleased Premises to
3
<PAGE>
(i) a person or entity which purchases or acquires 50% or more of Sublessee
so long as it intends to engage in a similar business as Sublessee and is at
least equal to Sublessee's financial strength and condition or (ii) a person
or entity who subleases 15% or less of the Subleased Premises (such as an
office) so long as no other portion of the subleased Premises are subleased
at the same time and so long as said person or entity does not compete with
the products or services of Sublessor. Paragraph 26(a) and (c) of the Master
Lease shall not apply to an assignment or a sublease described hereinabove.
In the event that Sublessor so elects, Sublessee shall at its own cost and
expense modify the passageway between the Subleased Premises and the
Sublessor's space to discourage customer access between spaces while allowing
private access for employees and others to use the shared bathrooms. Further,
the owners of Sublessee shall be allowed to transfer ownership interests to
and among existing shareholders or family members of existing shareholders
without obtaining the further consent to said transfers by Landlord, Master
Ground Lessor, or Sublessor. In the event Sublessor is allowed to assign or
sublease the premises occupied by it in a transaction other than a sale of
the stock or assets of Sublessor, and elects to sublease said premises to a
direct competitor of Sublessee, then in such event Sublessee shall have a
right of first refusal to assume Sublessor's space under paragraph 10 above,
which right of first refusal must be exercised by requesting same from
Landlord within seven (7) days of receiving notice from Sublessor of its
intention to assign or sublease the portion of the premises occupied by it as
set forth above.
ATTORNEYS' FEES
12. If any action or other proceeding arising out of this Sublease is
commenced by either party to this Sublease concerning the subleased premises,
then as between Sublessor and Sublessee, the prevailing party shall be
entitled to receive from the other party, in addition to any other relief
that may be granted, the reasonable attorneys' fees, costs, and expenses
incurred in the action or other proceeding by the prevailing party.
Executed at San Luis Obispo, California, as of the date specified in the
first paragraph of this Sublease.
SUBLESSOR SUBLESSEE
/s/ Gwen R. Pelfrey /s/ Sam Blakeslee
- -------------------------- ------------------------------
By: Gwen R. Pelfrey By: Sam Blakeslee
Its: Executive Vice President Its: Executive Vice President
4
<PAGE>
CONSENT OF LESSORS
The undersigned are the Landlords under the Master Lease and the Master
Ground Lease described in the foregoing Sublease and hereby consent to the
terms of the sublease of the premises described in this Sublease to Blakeslee
& Blakeslee, subject to the conditions referenced below.
CONDITIONS TO APPROVAL:
1. Modifications to the premises, as referenced in paragraph 11 of the
Sublease, will require Landlord's and Master Ground Lessor's prior written
approval; which approval shall not be unreasonably withheld, delayed or
conditioned.
Sublessor shall provide Landlord with plans and specifications in sufficient
detail to allow appropriate review, including, without limitation,
mechanical, electrical and plumbing ("MEP") plans.
2. Notwithstanding paragraphs 10 and 11 of the Sublease, should Sublessee
exercise any of its rights with respect to the Lease assumption, Landlord,
in its sole and absolute discretion, may require, at a minimum, that the
President and Executive Vice President of Blakeslee & Blakeslee personally
guarantee the Lease upon its assumption thereof.
3. In the event that Blakeslee & Blakeslee assigns or further subleases its
premises to a person or entity that acquires 50% or more of Sublessee,
Landlord may, in its sole and absolute discretion, require that the
principals of such acquiring concern personally guarantee the Lease,
Sublease or Sub-sublease ("Transaction" or "Assigned Lease"), as the case
may be.
Sublessee shall be required to submit proof to Landlord that the principals
of any acquiring party have personally guaranteed the Assigned Lease. In the
event that a guarantee is not obtained, Landlord, in its sole and absolute
discretion, may declare the Assigned Lease in default and may pursue all
remedies associated with such default.
In granting this consent, the undersigned do not waive any of their
rights under the Master Lease or Master Ground Lease as to the Tenant or
under the Sublease as to the Sublessee.
LANDLORD:
/s/ Sharon Driben
----------------------------------
By: Sharon Driben
Regional Vice President
MASTER GROUND LESSOR
MRP INSTITUTIONAL ASSOCIATES,
AN Illinois general partnership
By: URBAN RETAIL PROPERTIES CO., Agent
LaBonney P. Taylor
Its: Authorized Signatory
<PAGE>
[GRAPHIC]
EXHIBIT B
EXHIBIT B- Breakdown of the building space between Heritage Oaks Bank and
subleased space to Blakeslee and Blakeslee, along with the common shared
space.
<PAGE>
BANK BUILDING LEASE
TABLE OF CONTENTS
SECTION
1. Basic Lease Terms..................................... 1
2. Premises and Common Areas Leased...................... 2
3. Term.................................................. 2
4. Possession............................................ 2
5. Rent.................................................. 2
6. Rental Adjustment..................................... 3
7. Security Deposit...................................... 3
8. Use................................................... 3
9. Notices............................................... 4
10. Brokers............................................... 4
11. Holding Over.......................................... 4
12. Taxes on Tenant's Property............................ 4
13. Condition of Premises................................. 5
14. Alterations........................................... 5
15. Repairs............................................... 5
16. Liens................................................. 6
17. Entry By Landlord..................................... 6
18. Utilities and Services................................ 6
19. Bankruptcy ........................................... 6
20. Indemnification and Exculpation of Landlord........... 6
21. Damage to Tenant's Property........................... 7
22. Tenant's Insurance.................................... 7
23. Damage or Destruction................................. 8
24. Eminent Domain........................................ 9
25. Defaults and Remedies................................. 10
26. Assignment and Subletting............................. 11
27. Subordination......................................... 12
28. Estoppel Certificate.................................. 12
29. Conflict of Laws...................................... 13
30. Successors and Assigns................................ 13
31. Surrender of Premises................................. 13
32. Professional Fees..................................... 13
33. Performance by Tenant................................. 13
34. Mortgagee Protection.................................. 13
35. Definition of Landlord................................ 14
36. Waiver................................................ 14
37. Identification of Tenant.............................. 14
38. Force Majeure......................................... 14
39. Terms and Headings.................................... 15
40. Examination of Lease.................................. 15
41. Time.................................................. 15
42. Prior Agreement or Amendments......................... 15
43. Separability.......................................... 15
44. Recording............................................. 15
45. Limitation on Liability............................... 15
46. Modification For Lender............................... 16
47. Financial Statements.................................. 16
48. Quiet Enjoyment....................................... 16
49. Tenant as Corporation................................. 16
Addendum to Lease.....................................
EXHIBITS
A Outline of Floor Plan or Premises
B Plot Map
C Ground Lease
D Definition of Fair Market Rental Rate
<PAGE>
BANK LEASE
1. BASIC LEASE TERMS.
a. DATE OF LEASE EXECUTION: June 26, 1997
b. TENANT: Heritage Oaks Bank, a California corporation
Trade Name: Heritage Oaks Bank
Address (leased Premises): 297 Madonna Road
San Luis Obispo, California 93405
Address (For Notices): 545 12th Street
Paso Robles, CA 93405
c. LANDLORD: Great Western Bank, a federal savings bank
Address (For Notices): 9200 Oakdale Avenue, Mail Stop N-11-45
Chatsworth, CA 91311 Attn: Lease Administration
d. PREMISES AREA: Approximately 6,200 Rentable Square Feet
e. PROJECT AREA: Approximately 41,000 sq. Ft Square Feet
f. TENANT'S PERCENTAGE: 100%
g. TERM OF LEASE: The term of this Lease shall be for approximately 12 years
commencing upon mutual execution and delivery of this Lease and terminating
no later than June 30, 2009, subject to paragraph 9 of the Addendum. A
separate document shall be prepared by Landlord setting forth the actual
commencement date.
Reference in this lease to a "Lease Year" shall mean each successive twelve
month period commencing with the first day of the month in which the term
of this Lease commences.
h. BASE MONTHLY RENT: $6,200.00, subject to paragraph 2 of the Addendum to
Lease attached hereto.
i. RENT ADJUSTMENT: See paragraph 3 of the Addendum.
j. ANNUAL OPERATING EXPENSE ALLOWANCE: N/A
k. PREPAID RENT: $6,200
l. TOTAL SECURITY DEPOSIT: $7,000.00, including a non-refundable cleaning
fee.
m. TENANT IMPROVEMENT ALLOWANCE: $0 square foot of Usable Area
See paragraph 7 of the Lease.
n. TENANT'S USE OF PREMISES: Banking, related financial services and
financial product sales.
o. BROKER(S): Mark J. Smith, Commercial Real Estate Brokerage
p. BROKERAGE COMMISSION PAYABLE BY: Landlord
q. GUARANTOR(S): None
r. ADDITIONAL SECTIONS:
See Addendum to Lease attached hereto and made a part hereof.
Section 1 represents a summary of the basic terms of this Lease. In the
event of any inconsistency between the terms contained in Section 1 and any
specific clause of this Lease, the terms of the more specific clause shall
prevail.
Page 1
<PAGE>
The parties hereto agree that said letting and hiring is upon and
subject to the terms, covenants and conditions herein set forth. Tenant
covenants, as a material part of the consideration for this Lease to keep and
perform each and all of said terms, covenants and conditions for which tenant
is liable and that this Lease is made upon the condition of such performance.
2. PREMISES AND COMMON AREAS LEASED.
a. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord
those certain premises described in Section 1 and in Exhibit A attached
hereto (the "Premises"), provided that the rentable square feet shall be
adjusted by Landlord's architect in accordance with the method of measuring
rentable office space specified in the American National Standard Institute
Publication ANSI 265.1-1980 (the "BOMA Standard").
b. The Premises may also be referred to as the "Project" or the "Building"
as such terms are interchangeable.
c. Tenant's Percentage of the Project shall be adjusted upon the
determination of the exact number of rentable square feet within the Premises
to equal a fraction numerator is the number of rentable square feet within
the Premises determined in accordance with subparagraph 2.a. above and whose
denominator is the approximate number of rentable square feet within the
Project as determined by Landlord's architect in accordance with the BOMA
Standard.
3. TERM
The term of this Lease shall be for the period designated in Section 1,
commencing on the Commencement Date, and ending on the expiration of such
period, unless the term hereby demised shall be sooner terminated as
hereinafter provided.
4. POSSESSION
Tenant agrees that, if Landlord is unable to deliver possession of the
Premises to Tenant on the scheduled commencement of the term of this Lease, this
Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for
any loss or damage resulting therefrom, nor shall the expiration date of the
above term be in any way extended, but in such event Tenant shall not be liable
for any rent until Landlord tenders possession of the Premises to Tenant.
5. RENT
a. Tenant shall pay Landlord monthly base rent in the initial amount set forth
in Section 1 which shall be payable monthly in advance on the first day of each
and every calendar month ("Base Monthly Rent") provided, however, the first
month's rent shall be due and payable upon execution of this lease. See
paragraphs 2 and 3 of the Addendum.
b. All rent shall be paid by Tenant to Landlord monthly in advance on the
first day of every calendar month, at the address shown in Section 1, or such
other place as Landlord may designate in writing from time to time. All rent
shall be paid without prior demand or notice and without any deduction or
offset whatsoever. All rent shall be paid in lawful currency of the United
States of America. All rent due for any partial month shall be prorated at
the rate of 1/30th of the total monthly rent per day. Tenant acknowledges
that late payment by Tenant to Landlord of any rent or other sums due under
this Lease will cause Landlord to incur cost not contemplated by this Lease,
the exact amount of such costs being extremely difficult and impracticable to
ascertain. Late payment of rent shall be defined as any rent not paid prior
to the 10th day of any month. Such costs include, without limitation,
processing and accounting charges and late charges that may be imposed on
Landlord by the terms of any encumbrance or note secured by the Premises.
Therefore, if any rent or other sum due from Tenant is not received when due,
Tenant shall pay to landlord an additional sum equal to 10% of such overdue
payment. Landlord and Tenant hereby agree that such late charge represents a
fair and reasonable estimate of the costs that Landlord will incur by reason
of any such late payment. Additionally, all such delinquent rent or other
sums, plus this estate charge, shall bear interest at the then maximum lawful
rate permitted to be charged by Landlord. Any payments of any kind returned
for insufficient funds will be subject to an additional handling charge of
$25.00, and thereafter, Landlord may require Tenant to pay all future
payments of rent or other sums due by money order or cashier's check.
c. Upon the execution of the Lease, Tenant shall pay to Landlord the prepaid
rent set forth in Section 1, and if Tenant is not in default of any
provisions of the Lease, such prepaid rent shall be applied toward the rent
due for the last month of the term. Landlord's obligations with respect to
the prepaid
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<PAGE>
rent are those of a debtor and not of a trustee, and Landlord can commingle
the prepaid rent with Landlord's general funds. Landlord shall not be
required to pay Tenant interest on the prepaid rent. Landlord shall be
entitled to immediately endorse and cash Tenant's prepaid rent; however, such
endorsement and cashing shall not constitute Landlord's acceptance of this
Lease. In the event Landlord does not accept this Lease, Landlord shall
return said prepaid rent.
d. If the term of this Lease contains any rental abatement period, Tenant
hereby agrees that if Tenant breaches the Lease and/or abandons the Premises
before the end of the Lease term, or if Tenant's right to possession is
terminated by Landlord because of Tenant's breach of the Lease, Landlord
shall, at its option, (1) void the rental abatement period; and (2) recover
from Tenant, in addition to any damages due Landlord under the terms and
conditions of the Lease, rent for the duration of the rental abatement period.
e. "For purposes of Section 467 of the Internal Revenue Code, the parties to
this lease agreement hereby agree to allocate the stated rents, provided
herein, to the periods which correspond to the actual rent payments as
provided under the terms and conditions of this agreement."
6. RENTAL ADJUSTMENT.
a. For the purposes of this Paragraph 6, the following terms are defined as
follows:
(1) Tenant's Percentage shall mean that portion of the total rentable area
of the Project occupied by Tenant as set forth as a percentage in Section 1.
(2) See paragraph 2 and 3 of the Addendum attached hereto.
7. SECURITY DEPOSIT.
Upon execution of this Lease, Tenant shall deposit with Landlord the amount
of the security for the performance by Tenant of the provisions of this Lease
and in part as a cleaning fee. If Tenant is in default, Landlord can use the
security deposit or any portion of it to cure the default or to compensate
Landlord for all damage sustained by Landlord resulting from Tenant's default.
Upon demand, Tenant shall immediately pay to Landlord a sum equal to the portion
of the security deposit expended or applied by Landlord to maintain the security
deposit in the amount initially deposited with Landlord. In no event will Tenant
have the right to apply any part of the security deposit to any rent or other
sums due under this Lease. If Tenant is not in default at the expiration or
termination of this Lease, Landlord shall return the entire security deposit to
Tenant, except for 10% of first month's rent or $125, whichever is greater,
which Landlord shall retain as a non-refundable cleaning fee. Landlord's
obligations with respect to the deposit are those of a debtor and not of a
trustee, and Landlord can commingle the security deposit with Landlord's general
funds. Landlord shall not be required to pay Tenant interest on the deposit.
Landlord shall be entitled to immediately endorse and cash Tenant's prepaid
deposit; however, such endorsement and cashing shall not constitute Landlord's
acceptance of this Lease. In the event Landlord does not accept this Lease,
Landlord shall return said prepaid deposit. Should Landlord sell its interest in
the Premises during the term hereof and if Landlord deposits with the purchaser
thereof the then unappropriated funds deposited by Tenant as aforesaid,
thereupon Landlord shall be discharged from any further liability with respect
to the Security Deposit.
8. USE.
Tenant shall use the Premises for the uses set forth in Section 1 above,
and shall not use or permit the Premises to be used for any other purpose
without the prior written consent of Landlord. Nothing contained herein shall be
deemed to give Tenant any exclusive right to such use in the Building. Tenant
shall not use or occupy the Premises in violation of law or of the Certificate
of Occupancy issued for the Building, and shall, upon written notice from
Landlord, discontinue any use of the Premises which is declared by any
governmental authority having jurisdiction to be a violation of law or of
said Certificate of Occupancy. Tenant shall comply with any direction of any
direction of any governmental authority having jurisdiction which shall, by
reason of the nature of Tenant's use or occupancy of the Premises, impose any
duty upon Tenant or Landlord with respect to the use or occupation thereof.
Tenant shall comply with all rules, orders, regulations and requirements of
the Insurance Service Office or any other organization performing a similar
function. Tenant shall promptly, upon demand, reimburse Landlord for any
additional premium charged for such policy by reason of Tenant's failure to
comply with the provisions of this Paragraph. Tenant shall not do or permit
anything to be done in or about the Premises which will in any way obstruct
or interfere with the rights of other tenants or occupants of the Project, or
injure or annoy them, or use or allow the Premises to be used for any
improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause,
maintain or permit any nuisance in, on or about the Premises. Tenant shall
comply with all restrictive covenants and obligations created by private
contracts which affect the use and operation
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<PAGE>
of the Premises, the Building, the Common Area or the Project. Tenant shall not
commit or suffer to be committed any waste in or upon the Premises and shall
keep the Premises in first class repair and appearance. Landlord reserves the
right to prescribe the weight and position of all files, safes and heavy
equipment which Tenant desires to place in the Premises so as to properly
distribute the weight thereof. Further, Tenant's business machines and
mechanical equipment which cause vibration or noise that may be transmitted to
the building structure or to any other space in the building shall be so
installed, maintained and used by Tenant as to eliminate such vibration or
noise. Tenant shall be responsible for all structural engineering required to
determine structural load.
9. NOTICES.
Any notice required or permitted to be given hereunder must be in writing
and may be given by personal delivery or by mail, and if given by mail shall be
deemed sufficiently given after three business days, if sent by registered or
certified mail addressed to Tenant at the address designated in Section 1 or to
Landlord at both of the addresses designated in Section 1. Either party may
specify a different address for notice by written notice to the other.
10. BROKERS.
Tenant warrants that it has had no dealings with any real estate broker or
agent in connection with the negotiation of this Lease, except for those certain
brokers whose names are set forth in Section 1 and that it knows of no other
real estate broker or agent who is or might be entitled to a commission in
connection with this Lease. If Tenant has dealt with any other person or real
estate broker with respect to leasing or renting space in the Project, Tenant
shall be solely responsible for the payment of any fee due said person or firm
and Tenant shall hold Landlord free and harmless against any liability in
respect thereto, including attorneys' fees and costs.
11. HOLDING OVER.
If Tenant holds over after the expiration or earlier termination of the
term hereof without the express written consent of Landlord, Tenant shall become
a Tenant at sufferance only, at a rental rate equal to the greater of Landlord's
scheduled rent for the space or one hundred fifty percent (150%) of the rent in
effect upon the date of such expiration (subject to adjustment as provided in
Paragraph 6 hereof and prorated on a daily basis), and otherwise subject to the
terms, covenants and conditions herein specified, so far as applicable.
Acceptance by Landlord of rent after such expiration or earlier termination
shall not result in a renewal of this Lease. The foregoing provisions of this
Paragraph 11 are in addition to and do not affect Landlord's right of re-entry
or any rights of Landlord hereunder or as otherwise provided by law. If Tenant
fails to surrender the Premises upon the expiration of this Lease despite demand
to do so by Landlord, Tenant shall indemnify and hold Landlord harmless from all
loss or liability, including without limitation, any claim made by any
succeeding tenant founded on or resulting from such failure to surrender and any
attorneys fees and costs.
12. TAXES ON TENANT'S PROPERTY.
a. Tenant shall be liable for and shall pay, at least ten (10) days before
delinquency, all taxes levied against any personal property or trade fixtures
placed by Tenant in or about the Premises. If any such taxes on Tenant's
personal property or trade fixtures are levied against Landlord's property or
if the assessed value of the Premises is increased by the inclusion therein
of a value placed upon such personal property or trade fixtures of Tenant and
if Landlord, after written notice to Tenant, pays the taxes based upon such
increased assessment, which Landlord shall have the right to do regardless of
the validity thereof, but only under proper protest If requested by Tenant,
Tenant shall, upon demand, repay to Landlord the taxes so levied against
Landlord, or the portion of such taxes resulting from such increase in the
assessment.
b. If the Tenant Improvements in the Premises, whether installed, and/or paid
for by Landlord or Tenant and whether or not affixed to the real property so
as to become a part thereof, are assessed for real property tax purposes at a
valuation higher than the valuation at which tenant improvements conforming
to Landlord's "Building Standard" for other space in the building are
assessed, then the real property taxes and assessments levied against the
Building or Project by reason of such excess assessed valued, then the real
property taxes and assessments levied against the Building or Project by
reason of such excess assessed valuation shall be deemed to be taxes levied
against personal property of Tenant and shall be governed by the provisions
of Paragraph 12a above. If the records of the County Assessor are not
available or sufficiently detailed to serve as a basis for making said
determination, the actual cost of construction shall be used.
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<PAGE>
13. CONDITION OF PREMISES.
Tenant acknowledges that neither Landlord nor any agent of Landlord has
made any representation or warranty with respect to the Premises, the building
or the Project or with respect to the suitability of either for the conduct of
Tenant's business. Except for latent defects, the taking of possession of the
Premises by Tenant shall conclusively establish that the Premises and the
building were in satisfactory condition at such time.
14. ALTERATIONS.
a. Tenant shall make no alterations, additions or improvements in or to the
Premises without Landlord's prior written consent, and then only by
contractors or mechanics approved by Landlord. Tenant shall submit to
Landlord plans and specifications for any proposed alterations, additions or
improvements to the Premises, and may not make such alterations, additions or
improvements until Landlord has approved of such plans and specifications.
Tenant shall construct such alterations, additions or improvements in
accordance with the plans and specifications approved by Landlord, and shall
not amend or modify such plans and specifications without Landlord's prior
written consent. If the proposed change requires the consent or approval of
any lessor of a superior lease, or the holder of a mortgage encumbering the
Premises, such consent or approval must be secured prior to the construction
of such alteration, addition or improvement. All such work shall be done at
such times and in such manner as Landlord may from time to time designate.
Tenant covenants and agrees that all work done by Tenant shall be performed
in full compliance with all laws, rules, orders, ordinances, regulations and
requirements of all governmental agencies, offices and boards having
jurisdiction, and in full compliance with the rules, regulations and
requirements all governmental agencies, offices and boards having
jurisdiction, and in full compliance with the rules, regulations and
requirements of the Insurance Service Office, and any similar body. Before
commencing any work, Tenant shall give Landlord at least ten (10) days
written notice of the proposed commencement of such work and shall, if
required by Landlord, secure at Tenant's own cost and expense, a completion
and lien indemnity bond satisfactory to Landlord for said work. Tenant
further covenants and agrees that any mechanic's lien filed against the
Premises or against the Building for work claimed to have been done for, or
materials claimed to have been furnished to Tenant, will be discharged by
Tenant, by bond otherwise, within (10) days after the filing thereof, at the
cost and expense of Tenant. All alterations, additions or improvements upon
the Premises made by either party, including (without limiting the generality
of the foregoing) all wallcovering, built-in cabinet work, paneling and the
like, shall unless Landlord elects otherwise, become the property of
Landlord, and shall remain upon, and be surrendered with the Premises, as a
part thereof, at the end of the term hereof, except that Landlord may, by
written notice to Tenant, require Tenant to remove all partitions, counters,
railings and the like installed by Tenant, and Tenant shall repair all damage
resulting from such removal or, at Landlord's option, shall pay to Landlord
all costs arising from such removal.
b. All articles of personal property and all business and trade fixtures,
machinery and equipment, furniture and movable partitions owned by Tenant or
installed by Tenant at its expense in the Premises shall be and remain the
property of Tenant and may be removed by Tenant at any time during the lease
term when Tenant is not in default hereunder. If Tenant shall fail to remove
all of its effects from the Premises upon termination of this Lease for any
cause whatsoever, Landlord may, at its option, remove the same in any manner
that Landlord shall choose, and store said effects without liability to
Tenant for loss thereof. In such event, Tenant agrees to pay Landlord upon
demand any and all expenses incurred in such removal, including court costs
and attorneys' fees and storage charges on such effects, for any length of
time that the same shall be in Landlord's possession. Landlord may, at its
option, without notice, sell said effects, or any of the same, at private
sale and without legal process, for such price as Landlord may obtain and
apply the proceeds of such sale upon any amounts due under this Lease from
Tenant to Landlord and upon the expense incident to the removal and sale of
said effects.
15. REPAIRS.
By entry hereunder, Tenant accepts the Premises as being in good and sanitary
order. Tenant shall keep, maintain and preserve the Premises in first class
condition and repair, and shall, when if needed, at Tenant's sole cost and
expense, make all repairs to the Premises and every part thereof. Tenant
shall, upon the expiration or sooner termination of the term hereof,
surrender the Premises to Landlord in the same condition as when received,
usual and ordinary wear and tear excepted. Landlord shall have no obligation
to alter, remodel, improve, repair, decorate or paint the Premises or any
part thereof. The parties hereto affirm that Landlord has made no
representations to Tenant respecting the condition of the Premises, the
building, the Project or the Common Area except as specifically herein set
forth. See Addendum paragraph 4.
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16. LIENS.
Tenant shall not permit any mechanics', materialmens' or other liens to
be filed against Tenant's leasehold interest in the Premises. Landlord shall
have the right at all reasonable times to post and keep posed on the Premises
any notices which it deems necessary for protection from such liens. If any
such liens are filed, Landlord may, without waiving its rights and remedies
based on such breach of Tenant and without releasing Tenant from any of its
obligations, cause such liens to be released by any means it shall deem
proper, including payments in satisfaction of the claim giving rise to such
lien. Tenant shall pay to Landlord at once, upon notice by Landlord, any sum
paid by Landlord to remove such liens, together with interest at the maximum
rate per annum permitted by law from the date of such payment by Landlord.
17. ENTRY BY LANDLORD.
Landlord reserves and shall, at normal business hours, have the right to
enter the Premises to inspect the same.
18. UTILITIES AND SERVICES.
Tenant shall, at its sole cost and expense, furnish or cause to be
furnished to the Premises all utilities and other services.
19. BANKRUPTCY.
If Tenant shall file a petition in bankruptcy under any provision of the
Bankruptcy Code as then in effect, or if Tenant shall be adjudicated a
bankrupt in involuntary bankruptcy proceedings and such adjudication shall
not have been vacated within thirty (30) days from the date thereof, or if a
receiver or trustee shall be appointed of Tenant's property and the order
appointing such receiver of trustee shall not be set aside or vacated within
(30) days after the entry thereof, or if Tenant shall assign Tenant's estate
or effects for the benefit of creditors, or if this Lease shall, by operation
of law or otherwise, pass to any person or persons other than Tenant, then in
any such event Landlord may terminate this Lease, if Landlord so elects, with
or without notice of such election and with or without entry or action by
Landlord. In such case, notwithstanding any other provisions of this Lease,
Landlord, in addition to any and all rights and remedies allowed by law or
equity, shall, upon such termination, be entitled to recover damages in the
amount provided in Paragraph 25b hereof. Neither Tenant nor any person
claiming through or under Tenant or by virtue of any statute or order of any
court shall be entitled to possession of the Premises but shall surrender the
Premises to Landlord. Nothing contained herein shall limit or prejudice the
right of Landlord to recover damages by reason of any such termination equal
to the maximum allowed by any statute or rule of law in effect a the time
when, and governing the proceedings in which, such damages are to be proved;
whether or not such amount is greater, equal to or less than the amount of
damages recoverable under the provisions of this Paragraph 19.
20. INDEMNIFICATION AND EXCULPATION OF LANDLORD.
a. Except for latent defects, Tenant shall indemnify, defend and hold
Landlord harmless from all claims arising from Tenant's use of the Premises
or the conduct of its business or from any activity, work or thing done,
permitted or suffered by Tenant in or about the Premises, the Building, the
Project or the Common Area. Tenant shall further indemnify, defend and hold
Landlord harmless from all claims arising from any breach or default in the
performance of any obligation to be performed by Tenant under the terms of
this Lease, or arising from any act, neglect, fault or omission of Tenant or
of its agents or employees, and from and against all costs, attorneys' fees,
expenses and liabilities incurred in or about such claim or any action or
proceeding brought thereon. In case any action or proceeding shall be brought
against Landlord by reason of any such claim, Tenant, upon notice from
Landlord, shall defend the same at Tenant's expense by counsel approved in
writing by Landlord. Tenant, as a material part of the consideration to
Landlord, hereby assumes all risk of damage to property or injury to person
in, upon or about the Premises from any cause whatsoever except for latent
defects and that which is caused by the failure of Landlord to observe any of
the terms and conditions of this Lease where such failure has persisted for
an unreasonable period of time after written notice of such failures. Tenant
hereby waives all its claims in respect thereof against Landlord.
b. Neither Landlord nor any partner, director, officer, agent or employee of
Landlord shall be liable to Tenant or its partners, directors, officers,
contractors, agents, employees, invitees, sublessees or licensees, for any
loss, injury or damage to Tenant or to any other person, or to its or their
property, irrespective of the cause of such injury, damage or loss, except
for latent defects or unless solely caused by or solely resulting from the
gross negligence or willful misconduct of Landlord or its employees in the
operation or maintenance of the
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Premises, the building, or the Project without contributory negligence on
the part of Tenant or any of its sublessees or licensees or its or their
employees, agents or contractors, or any other lessees or occupants of the
building or Project. Further, neither Landlord nor any partner, director,
officer, agent or employee of Landlord shall be liable (i) for any such damage
caused by other lessees or persons in or about the building or Project, or
caused by quasi-public work; or (ii) for consequential damages arising out of
any loss of the use of the Premises of any equipment or facilities therein by
Tenant or any person claiming through or under Tenant.
21. DAMAGE TO TENANT'S PROPERTY.
Notwithstanding the provisions of Paragraph 20 to the contrary and
excepting latent defects, Landlord or its agents shall not be liable for (i) any
damage to any property entrusted to employees of the building or Project, (ii)
loss or damage to any property by theft or otherwise, (iii) any injury or damage
to persons or property resulting from fire, explosion, failing plaster, steam,
gas, electricity, water or rain which may leak from any part of the building or
from the pipes, appliances or plumbing work therein or from the roof, street or
subsurface or from any other place or resulting from dampness or any other cause
whatsoever. Landlord or its agents shall not be liable for interference with
light or other incorporeal hereditaments. Tenant shall give prompt notice to
Landlord in case of fire or accidents in the Premises or in the building or of
defects therein or in the fixtures or equipment.
22. TENANT'S INSURANCE.
a. Tenant shall, during the term hereof and any other period of occupancy, at
its sole cost and expense, keep in full force and effect the following
insurance:
(1) Standard form property insurance insuring against the perils of
fire, extended coverage, vandalism, malicious mischief, special extended
coverage ("All-Risk") and sprinkler leakage. This insurance policy shall be
upon all property owned by Tenant, for which Tenant is legally liable or that
was installed at Tenant's expense, and which is located in the Project
including, without limitation, furniture, fittings, installations, fixtures
(other than Tenant improvements installed by Landlord), and any other
personal property, in an amount not less than ninety percent (90%) of the
full replacement cost thereof. In the event that there shall be a dispute as
to the amount which comprises full replacement cost, the decision of Landlord
or any mortgagees of Landlord shall be conclusive. This insurance policy
shall also be upon direct or indirect loss of Tenant's earnings attributable
to Tenant's inability to use fully or obtain access to the Premises, Building
or Project in an amount as will properly reimburse Tenant. Such policy shall
name Landlord and any mortgagees of Landlord as insured parties, as their
respective interests may appear.
(2) Comprehensive General Liability Insurance insuring Tenant against
any liability arising out of the lease, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be in the
amount of $1,000,000 Combined Single Limit for injury to, or death of one or
more persons in an occurrence, and for damages to tangible property
(including loss of use) in an occurrence, with such liability amount to be
adjusted from year to year to reflect increase in the Consumer Price Index.
The policy shall insure the hazards of the Premises and Tenant's Operations
thereon, independent contractors, contractual liability (covering the
indemnity contained in Paragraph 20 hereof) and shall (a) name Landlord as an
additional insured, (b) contain a cross liability provision and (c) contain a
provision that the insurance provided the Landlord hereunder shall be primary
and non-contributing with any other insurance available to the Landlord.
(3) Workers' Compensation and Employees Liability insurance (as required
by state law).
(4) Any other form or forms of insurance as Tenant or Landlord or any
mortgages of Landlord may reasonably require from time to time in form, in
amounts and for insurance risks against which a prudent tenant would protect
itself.
b. All policies shall be written in a form satisfactory to Landlord and shall
be taken out with insurance companies holding a General Policyholders Rating
of "A" and a Financial Rating of "X" or better, as set forth in the most
current issue of Best's Insurance Reports. Within ten (10) days after the
execution of this Lease, Tenant shall deliver to Landlord copies of policies
or certificates evidencing the existence of the amounts and forms of coverage
satisfactory to Landlord. No such policy shall be cancelable or reducible in
coverage except after thirty (30) days prior written notice to Landlord.
Tenant shall, within ten (10) days prior to the expiration of such policies,
furnish Landlord with renewals or "binders" thereof, or Landlord may order
such insurance and charge the cost thereof to Tenant as additional rent. If
Landlord obtains any insurance that is the responsibility of Tenant under
this Paragraph, Landlord shall deliver to Tenant a written statement setting
forth the cost of any such insurance and showing in reasonable detail the
manner in which it has been computed.
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c. During the term of this Lease, Landlord shall insure the Building (excluding
any property which Tenant is obligated to insure under Subparagraphs 22a and b
hereof) against damage with All-Risk insurance and public liability insurance,
all in such amounts and with such deductions as Landlord considers appropriate.
Landlord may, but shall not be obligated to, obtain and carry any other form or
forms of insurance as it or Landlord's mortgagees may determine advisable.
Notwithstanding any reimbursement by Tenant to the cost of insurance premiums,
as provided herein, Tenant acknowledges that it has not right to receive any
proceeds from any insurance policies carried by Landlord.
d. Tenant will not keep, use, sell or offer for sale in or upon the Premises
any article which may be prohibited by any insurance policy periodically in
force covering the Building. If Tenant's occupancy or business in, or on, the
Premises, whether or not Landlord has consented to the same, results in any
increase in premiums for the insurance periodically carried by Landlord with
respect to the Building, Tenant shall pay any such increase in premiums as
additional rent within ten (10) days after being billed therefore by
Landlord. In determining whether increased premiums are a result of Tenant's
use of the Premises, a schedule issued by the organization computing the
insurance rate on the Building or the Tenant Improvements 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 any present or future
insurer relating to the Premises.
e. If any of Landlord's insurance policies shall be canceled or cancellation
shall be threatened or the coverage thereunder reduced or threatened to be
reduced in any way because of the use of the Premises or any part thereof by
Tenant or any assignee or subtenant of Tenant or by anyone Tenant permits on
the Premises and, if Tenant fails to remedy the condition giving rise to
such cancellation, threatened cancellation, reduction of coverage, threatened
reduction of coverage, increase in premiums, or threatened increase in
premiums, within forty-eight (48) hours after notice thereof, Landlord may,
at its option, either terminate this Lease or enter upon the Premises and
attempt to remedy such condition, and Tenant shall promptly pay the cost
thereof to Landlord as additional rent. Landlord shall not be liable for any
damage or injury caused to any property of Tenant or of others located on the
Premises resulting from such entry. If Landlord is unable, or elects not to
remedy such condition, then Landlord shall have all of the remedies provided
for in this Lease in the event of a default by Tenant. Notwithstanding the
foregoing provisions of this Subparagraph 22e, if Tenant fails to remedy as
aforesaid, Tenant shall be in default of its obligation hereunder and
Landlord shall have no obligation to remedy such default.
f. All policies of insurance required hereunder shall include a clause or
endorsement denying the insurer any rights of subrogation against the other
party to the extent rights have been waived by the insured before the
occurrence of injury or loss. Landlord and Tenant waive any rights of
recovery against the other for injury or loss due to hazards covered by
policies of insurance containing such a waiver of subrogation clause or
endorsement to the extent of the injury or loss covered thereby.
23. DAMAGE OR DESTRUCTION.
a. In the event the building and/or the Premises is damaged by fire or other
perils covered by Landlord's insurance, Landlord shall:
(1) In the event of total destruction, at Landlord's option, as soon as
reasonably possible thereafter, commence repair, reconstruction and
restoration of the building and/or the Premises and prosecute the same
diligently to completion, in which event this Lease shall remain in full
force and effect; or within ninety (90) days after such damage, elect not to
so repair, reconstruct or restore the building and/or the Premises, in which
event this Lease shall terminate. In either event, Landlord shall give Tenant
written notice of its intention within said ninety (90) day period. In the
event Landlord elects not to restore the building, and/or the Premises, this
Lease shall be deemed to have terminated as of the date of such total
destruction.
(2) In the event of a partial destruction of the building and/or the
Premises, to an extent not exceeding twenty-five percent (25%) of the full
insurable value thereof, and if the damage thereto is such that the building
and/or the Premises may be repaired, reconstructed or restored within a period
of ninety (90) days from the date of the happening of such casualty, and if
Landlord will receive insurance proceeds sufficient to cover the cost of such
repairs, then Landlord shall commence and proceed diligently with the work
repair, reconstruction and restoration and this Lease shall continue in full
force and effect. If such work of repair, reconstruction and restoration shall
require a period longer than ninety (90) days or exceeds twenty-five percent
(25%) of the full insurable value thereof, or if said insurance proceeds will
not be sufficient to cover the cost of such repairs, then Landlord either may
elect to so repair, reconstruct or restore and the Lease shall continue in full
force and effect or Landlord may elect not to repair, reconstruct or restore and
the Lease shall then terminate. Under any of the conditions of this Subparagraph
23a (2), Landlord shall give written notice to Tenant of its intention within
said ninety (90) day period. In the event Landlord elects not to restore the
building
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and/or the Premises, this Lease shall be deemed to have terminated as of the
date of such partial destruction.
b. Upon any termination of this Lease under any of the provisions of this
Paragraph 23, the parties shall be released without further obligation to the
other from the date possession of the Premises is surrendered to Landlord
except for items which have therefore accrued and are then unpaid.
c. In the event of repair, reconstruction and restoration by Landlord as
herein provided, the rental payable under this Lease shall be abated
proportionately with the degree to which Tenant's use of the Premises is
impaired during the period of such repair, reconstruction or restoration;
provided that there shall be no abatement of rent if such damage is the
result of Tenant's negligence or intentional wrongdoing. Tenant shall not be
entitled to any compensation or damages for loss in the use of the whole or
any part of the Premises and/or any inconvenience or annoyance occasioned by
such damage, repair, reconstruction or restoration.
d. Tenant shall not be released from any of its obligations under this Lease
except to the extent and upon the conditions expressly stated in this
Paragraph 23. Notwithstanding anything to the contrary contained in this
Paragraph 23, if Landlord is delayed or prevented from repairing or restoring
the damaged Premises within one (1) year after the occurrence of such damage
or destruction by reason of acts of God, war, governmental restrictions,
inability to procure the necessary labor or materials, or other cause beyond
the control of Landlord, Landlord, at its option, may terminate this Lease,
whereupon Landlord shall be relieved of its obligation to make such repairs
or restoration and Tenant shall be released from its obligations under this
Lease as of the end of said one year period.
e. If damage is due to any cause other than fire or other peril covered by
extended coverage insurance, Landlord may elect to terminate this Lease.
f. If Landlord is obligated to or elects to repair or restore as herein
provided, Landlord shall be obligated to make repair or restoration only of
those portions of the building and the Premises which were originally
provided at Landlord's expense, and the repair and restoration of items not
provided at Landlord's expense shall be the obligation of Tenant.
g. Notwithstanding anything to the contrary contained in this Paragraph 23,
Landlord shall not have any obligation whatsoever to repair, reconstruct or
restore the Premises when the damage resulting from any casualty covered
under this Paragraph 23 occurs during the last twelve (12) months of the term
of this Lease or any extension hereof.
h. Landlord and Tenant hereby waive the provisions of any statues or court
decisions which relate to the abatement or termination of leases when
property is damaged or destroyed and agree that such event shall be
exclusively governed by the terms of this Lease.
24. EMINENT DOMAIN.
a. In case all of the Premises, or such part thereof as shall substantially
interfere with Tenant's use and occupancy thereof, shall be taken for any
public or quasi-public purpose by any lawful power of authority by exercise
of the right of appropriation, condemnation or eminent domain, or sold to
prevent such taking, either party shall have the right to terminate this
Lease effective as of the date possession is required to be surrendered to
said authority. Tenant shall not assert any claim against Landlord or the
taking authority for any compensation because of such taking, and Landlord
shall be entitled to receive the entire amount of any award without deduction
for any estate or interest of Tenant. In the event the amount of property or
the type of estate taken shall not substantially interfere with the conduct
of Tenant's business, Landlord shall be entitled to the entire amount of the
award without such partial taking, and a proportionate allowance shall be
made to Tenant for the rent corresponding to the time during which, and to
the part of the Premises of which, Tenant shall be so deprived on account of
such taking and restoration. Nothing contained in this paragraph shall be
deemed to give Landlord any interest in any award made to Tenant for the
taking of personal property and fixtures belonging to Tenant.
b. In the event of taking of the Premises or any part thereof for temporary
use, (1) this Lease shall be and remain unaffected thereby and rent shall not
abate, and (2) Tenant shall be entitled to receive for itself such portion or
portions of any award made for such use with respect to the period of the
taking which is within the term, provided that if such taking shall remain in
force at the expiration or earlier termination of this Lease, Tenant shall
then pay to Landlord a sum equal to the reasonable cost of performing
Tenant's obligations under Paragraph 15 with respect to surrender of the
Premises and upon such payment shall be excused from such obligations. For
purpose of this Subparagraph 24b, a temporary taking shall be defined as a
taking for a period of 270 days or less.
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25. DEFAULTS AND REMEDIES.
a. The occurrence of any one or more of the following events shall constitute
a default hereunder by Tenant:
(1) The vacation or abandonment of the Premises by Tenant. Abandonment
is herein defined to include, but is not limited to, any absence by Tenant
from the Premises for ten (10) business days or longer while in default of
any provision of this Lease.
(2) The failure by Tenant to make any payment of rent or additional rent
or any other payment required to be made by Tenant hereunder, as and when due.
(3) The failure by Tenant to observe or perform any of the express or
implied covenants or provisions of this Lease to be observed or performed by
Tenant, other than as specified in Subparagraph 25a. (1) or (2) above, where
such failure shall continue for a period of ten (10) days after written
notice thereof from Landlord to Tenant. If the nature of Tenant's default is
such that more than (10) days are reasonably required for its cure, then
Tenant shall not be deemed to be in default if Tenant shall commence such
cure within said ten (10) day period and thereafter diligently prosecute such
cure to completion, which completion shall occur not later than sixty (60)
days from the date of such notice from Landlord.
(4) The making by Tenant of any general assignment for the benefit of
creditors; the filing by or against Tenant of a petition to have Tenant
adjudged a bankrupt or a petition for reorganization or arrangement under any
law relating to bankruptcy (unless, in the case of a petition filed against
Tenant, the same is dismissed within thirty (30) days); the appointment of a
trustee or receiver to take possession of substantially all of Tenant's
assets located at the Premises or of Tenant's interest in this Lease, where
possession is not restored to Tenant within thirty (30) days; or the
attachment, execution or other judicial seizure of substantially all of
Tenant's assets located at the Premises or of Tenant's interest in this Lease
where such seizure is not discharged within thirty (30) days.
b. In the event of any such default by Tenant, in addition to any other
remedies available to Landlord at law or in equity, Landlord shall have the
immediate option to terminate this Lease and all rights of Tenant hereunder.
In the event that Landlord shall elect to so terminate this Lease then
Landlord may recover from Tenant:
(1) The worth at the time of award of any unpaid rent which had been earned
at the time of such termination; plus
(2) the worth at the time of award of the amount by which the unpaid
rent for the balance of the term after the time of award exceeds the amount
of such rental loss that Tenant proves could be reasonably avoided; plus
(3) the worth at the time of award of the amount by which the unpaid
rent for the balance of the term after the time of award exceeds the amount
of such rental loss that Tenant proves could be reasonably avoided; plus
(4) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform Tenant's
obligations under this Lease or which in the ordinary course of things would
be likely to result therefrom.
As used in Subparagraphs 25b (1) and (2) above, the "worth at the time of
award" is computed by allowing interest at the maximum rate permitted by law.
As used in Subparagraph 25b (3) above, the "worth at the time of award" is
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%).
c. In the event of any such default by Tenant, Landlord shall also have the
right, with or without terminating this Lease, to re-enter the Premises and
remove all persons and property from the 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 re-entry or taking possession of the Premises by
Landlord pursuant to this paragraph 25c shall be construed as 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.
d. In the event of the vacation or abandonment of the Premises by Tenant or
in the event that Landlord shall elect to re-enter as provided above or shall
take possession of the Premises pursuant to legal proceeding or pursuant to
any notice provided by law, then if Landlord does not elect to terminate this
Lease as provided above, Landlord may from time to time, without terminating
this Lease, either recover all rent as it becomes due or relet the Premises
or any part thereof for the term
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for this Lease on terms and conditions as Landlord in its sole discretion may
deem advisable with the right to make alterations and repairs to the Premises.
In the event that Landlord shall elect to so relet, then rentals
received by Landlord from such reletting shall be applied: first, to the
payment of any indebtedness other than rent due hereunder from Tenant to
Landlord; second, to the payment of any cost of such reletting; third, to
the payment of the cost of any alterations and repairs to the Premises,
fourth, to the payment of rent due and unpaid hereunder and the residue, if
any, shall be held by Landlord and applied to payment of future rent as the
same may become due and payable hereunder. Should that portion of such
rentals received from such reletting during any month, which is applied to
the payment of rent hereunder, be less than the rent payable during that
month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord
immediately upon demand therefore by Landlord. Such deficiency shall be
calculated and paid monthly. Tenant shall also pay to Landlord, as soon as
ascertained, any costs and expenses incurred, including but not limited to
brokers' commissions, by Landlord in such reletting or in making such
alterations and repairs not covered by the rentals received from such
reletting.
e. All rights, options and remedies of Landlord contained in this Lease shall
be construed and held to be cumulative, and no one of them shall be exclusive
of the other, and Landlord shall have the right to pursue any one or all of
such remedies or any other remedy or relief which may be provided by law,
whether or not stated in this Lease. No waiver of any default of Tenant
hereunder shall be implied from any acceptance by Landlord of any rent or
other payments due hereunder or any omission by Landlord to take any action
on account of such default if such default persists or is repeated, and no
express waiver shall affect defaults other as specified in said waiver. The
consent or approval of Landlord to or of any act by Tenant requiring
Landlord's consent or approval shall not be deemed to waive or render
unnecessary Landlord's consent to or approval of any subsequent similar acts
by Tenant.
26. ASSIGNMENT AND SUBLETTING.
a. Tenant shall not voluntarily assign or encumber its interest in this Lease
or in the Premises or sublease all or any part of the Premises, or allow any
other person or entity to occupy or use all or any part of the Premises,
without first obtaining Landlord's prior written consent. Any assignment,
encumbrance or sublease without Landlord's prior written consent shall be
voidable at Landlord's election and shall constitute a default. For purposes
hereof, in the event Tenant is a partnership, a withdrawal or change in one
or more transfers of partners owning more than a fifty percent (50%) interest
in the partnership, of if Tenant's a corporation, any transfer of fifty
percent (50%) of its stock in one or more transfers, shall constitute a
voluntary assignment and shall be subject to these provisions. No consent to
an assignment, encumbrance or sublease shall constitute a further waiver of
the provisions of this Paragraph. Tenant shall notify Landlord in writing of
Tenant's intent to assign, encumber or sublease this Lease, the name of the
proposed assignee or sublessee, information concerning the financial
responsibility of the proposed assignee or sublessee and the terms of the
proposed assignment or subletting, and Landlord shall, within thirty (30)
days of receipt of such written notice, and additional information requested
by Landlord concerning the proposed assignee's financial responsibility,
elect one of the following: (1) consent to such proposed assignment,
encumbrance or sublease; (2) refuse such consent, which refusal shall be on
reasonable grounds; or (3) elect to terminate this Lease, or in the case of a
partial sublease, terminate this Lease as to the portion of the Premises
proposed to be sublet. As a condition for granting its consent to any
assignment, encumbrance or sublease, Landlord may require that the rent
payable by such assignee or sublessee is at the then current published rental
rates for the Premises or comparable premises in the Building, but not less
than the then current published rental rates for the Premises or comparable
premises in the Building, but not less than the then current Base Monthly
Rent under this Lease and may require that the assignee or sublessee remit
directly to Landlord on a monthly basis, all monies due to Tenant by said
assignee or sublessee. In addition, a condition to Landlord's consent to any
assignment, transfer or hypothecation of this Lease shall be the delivery to
Landlord of a true copy of the fully executed instrument of assignment,
transfer or hypothecation, and the delivery to Landlord of an agreement
executed by the assignee in form and substance satisfactory to Landlord and
expressly enforceable by Landlord, whereby the assignee assumes and agrees to
be bound by all of the terms and provisions of this Lease and to perform all
of the obligations of Tenant hereunder.
b. As a condition to Landlord's consent to any sublease, such sublease shall
provide that it is subject and subordinate to this Lease and to all mortgages;
that Landlord may enforce the provisions of the sublease, including collection
of rent; that in the event of termination of this Lease for any reason,
including without limitation a voluntary surrender by Tenant, or in the event of
any reentry or repossession of the Premises by Landlord, Landlord may, at its
option, either (1) terminate the sublease or (2) take over all of the right,
title and interest of Tenant, as sublessor, under such sublease, in which case
such sublessee shall attorn to Landlord, but that nevertheless Landlord shall
not (1) be liable for any previous act or omission of Tenant under such
sublease, (2) be subject to any defense or offset previously accrued in favor
of the sublessee against Tenant, or (3) be bound by any
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previous modification of any sublease made without Landlord's written
consent, or by previous prepayment by sublessee of more than one month's rent.
c. In the event that Landlord shall consent to an assignment or sublease
under the provisions of this Paragraph 26, Tenant shall pay Landlord's
processing costs of $750.00 and reasonable, but not more than actual,
attorneys' fees incurred in giving such consent. If Landlord shall consent to
any assignment of this Lease, Tenant shall pay to Landlord, as additional
rent, three-quarters (3/4) of all sums and other considerations payable to
and for the benefit of Tenant by the assignee on account of the assignment,
as and when such sums and other consideration are due and payable by the
assignee to or for the benefit of Tenant (or, if Landlord so requires, and
without any release of Tenant's proposed sublease Tenant receives rent or
other consideration, either initially or over the term of the sublease, in
excess of the rent called for hereunder or, in case of the sublease of a
portion of the Premises, in excess of such rent fairly allocable to such
portion, after appropriate adjustments to assure that all other payments
called for hereunder are taken into account. Tenant shall pay to Landlord as
additional rent hereunder three quarters (3/4) of the excess of each such
payment of rent or other consideration received by Tenant promptly after its
receipt. Landlord's waiver or consent to any assignment or subletting shall
not relieve Tenant or any assignee or sublessee from any obligation under
this Lease whether or not accrued. Occupancy of all or part of the Premises
by parent or subsidiary companies of Tenant shall not be deemed an assignment
or subletting. If Tenant requests Landlord's consent to any assignment of
this Lease or any subletting of all or a portion of the Premises, Landlord
shall have the right, to be exercised by giving written notice to Tenant
within (30) days of receipt by Landlord of the financial responsibility
information required by this Paragraph 26, to terminate this Lease effective
as of the date Tenant proposes to assign this Lease or sublet all or a
portion of the Premises. Landlord's right to terminate this Lease as to all
or a portion of the Premises or Landlord's failure to exercise this right
with respect to any assignment or subletting. Tenant understands and
acknowledges that the option, as provided in this Paragraph 26, to terminate
this Lease rather than approve the assignment thereof or the subletting of
all or any portion of the Premises, is a material inducement for Landlord's
agreeing to lease the Premises to Tenant upon the terms and conditions herein
set forth.
d. Notwithstanding the foregoing, Landlord hereby approves the sublease by
and between the Tenant as Sublessor and Blakeslee & Blakeslee as Sublessee
with an execution date of June 1, 1997 ("Sublease"), subject only to Ground
Lessor's approval. See Addendum paragraph 1.
27. SUBORDINATION.
a. Without the necessity of any additional document being executed by Tenant
for the purpose of effecting a subordination, and at the election of the
Landlord or any mortgage with a lien on the building or any ground lessor
with respect to the building, this Lease shall be subject and subordinate at
all times to:
(1) all ground lease or underlying leases which may now exist or
hereafter be executed affecting the building or the land upon which the
building is situated or both; and
(2) the lien of any mortgage or deed of trust which may now exist or
hereafter be executed in any amount for which the building, land, ground
leases or underlying leases, or Landlord's interest or estate in any of said
items is specified as security.
b. Notwithstanding the foregoing, Landlord shall have the right to
subordinate or cause to be subordinated any such ground leases or underlying
leases or any such liens to this Lease. In the event that any ground lease or
underlying lease terminates for any reason or any mortgage or deed of trust
is foreclosed or a conveyance in lieu of foreclosure is made for any reason,
Tenant shall, notwithstanding any subordination, attorn to and become the
Tenant of the successor in interest to Landlord, at the option of such
successor in interest. Tenant covenants and agrees to execute and deliver,
upon demand by Landlord and in the form requested by Landlord, any additional
documents evidencing the priority of subordination of this Lease with respect
to any such ground leases or underlying leases or the lien of any such
mortgage or deed of trust. Should Tenant fail to sign and return any such
documents within ten (10) business days of request Tenant shall be in
default, and Landlord may, at Landlord's option, terminate the Lease provided
written notice of such termination is received by Tenant prior to Landlord's
receipt of such documents. Tenant hereby irrevocably appoints Landlord as
attorney-in-fact of Tenant to execute, deliver and record any such document
in the name and on behalf of Tenant.
28. ESTOPPEL CERTIFICATE.
a. Within ten (10) days following any written request from either
party hereunder to the other, the parties hereto shall execute and deliver to
the other party a statement, certifying: (1) the date of
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commencement of this Lease: (2) the fact that this Lease is unmodified and in
full force and effect (or, if there have been modifications hereto, that this
Lease is in full force and effect, and stating the date and nature of such
modifications); (3) the date to which the rental and other sums payable under
this Lease have been paid; (4) that there are no current defaults under this
Lease by either Landlord or Tenant except as specified in the parties written
statement; and (5) such other matters requested by the requesting party.
Landlord and Tenant intend that any statement delivered pursuant to this
Paragraph 28 may be relied upon by any mortgagee, beneficiary, purchaser or
prospective purchaser of the Building or any interest therein.
b. Failure to deliver such statement within such time shall be conclusive
upon the parties that (1) that this Lease is in full force and effect,
without modification except as may be represented by the requesting party,
(2) that there are no uncured defaults in the requesting parties performance,
and (3) that not more than one (1) month's rental has been paid in advance.
29. CONFLICT OF LAWS.
This Lease shall be governed by and construed pursuant to the laws of
the state in which the premises are located.
30. SUCCESSORS AND ASSIGNS.
Except as otherwise provided in this Lease, all of the covenants,
conditions and provisions of this Lease shall be binding upon and shall inure
to the benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns.
31. SURRENDER OF PREMISES.
The voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation thereof, shall not work a merger, and shall, at the option of
Landlord, operate as an assignment to it of any or all subleases or
subtenancies. Upon the expiration or termination of this Lease, Tenant shall
peaceably surrender the Premises and all alterations and additions thereto,
broom clean the Premises, leave the Premises in good order, repair and
condition, reasonable wear and tear excepted, and comply with the provisions
of Paragraph 15. The delivery of keys to any employee of Landlord or to
Landlord's agent or any employee thereof shall not be sufficient to
constitute a termination of this Lease or a surrender of the Premises.
32. PROFESSIONAL FEES.
a. If Landlord should bring suit for possession of the Premises, for the
recovery of any sum due under this lease, or because of the breach of any
provisions of this Lease, or for any other relief against Tenant hereunder,
or in the event of any other litigation or appeal between the parties with
respect to this Lease, then all costs and expenses, including without
limitation, its reasonable, actual professional fees such as appraisers',
accountants' and attorneys' fees, incurred by the prevailing party therein
shall be paid by the other party, which obligation on the part of the other
party shall be deemed to have accrued on the date of the commencement of such
action and shall be enforceable whether or not the action is prosecuted to
judgment. If Landlord employs a collection agency to recover delinquent
charges, Tenant agrees to pay all reasonable collection agency fees charged
to Landlord in addition to rent, late charges, interest and other sums
payable under this Lease.
b. If Landlord is named as a defendant in any suit or appeal brought against
Tenant in connection with or arising out of Tenant's occupancy hereunder,
Tenant shall pay to Landlord its costs and expenses incurred in such suit,
including without limitation, its reasonable professional fees such as
appraisers', accountants' and attorneys' fees.
33. PERFORMANCE BY TENANT.
All covenants and agreements to be performed by Tenant under any of the
terms of this Lease shall be performed by Tenant at Tenant's sale cost and
expense and without any abatement of rent. If Tenant shall fail to pay any
sum of money owed to any party other than Landlord, for which it is liable
hereunder, or if Tenant shall fail to perform any other act on its part to be
performed hereunder, and such failure shall continue for ten (10) days after
notice thereof by Landlord, Landlord may, without waiving or releasing Tenant
from obligations of Tenant, but shall not be obligated to, making any such
payment or perform any such other act to be made or performed by Tenant. All
sums so paid by Landlord and all necessary incidental costs together with
interest thereon at the maximum rate permissible by law, from the date of
such payment by Landlord, shall be payable to Landlord on demand. Tenant
covenants to pay any such sums, and Landlord shall have (in addition to any
other right or remedy of Landlord) all rights and remedies in the event of
the non-payment thereof by Tenant as are set forth in Paragraph 25.
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34. MORTGAGEE PROTECTION.
In the event of any default on the part of Landlord, Tenant will give
notice by registered or certified mail to any beneficiary of a deed of trust
or mortgage covering the Premises whose address shall have been furnished to
Tenant, and shall offer such beneficiary or mortgagee a reasonable
opportunity to cure the default.
35. DEFINITION OF LANDLORD.
The term "Landlord," as used in this Lease, so far as covenants or
obligations on the part of the Landlord are concerned, shall be limited to
mean and include only the owner or owners, at the time in question, of the
fee title of the Premises or the lessees under any ground lease, if any. In
the event of any transfer, assignment or other conveyance or transfers of any
such title, Landlord herein named (and in case of any subsequent transfers or
conveyances, the then grantor) shall be automatically freed and relieved from
and after the date of such transfer, assignment or conveyance of all
liability as respects the performance of any covenants or obligations on the
part of Landlord contained in this Lease thereafter to be performed. Without
further agreement, the transferee of such title shall be deemed to have
assumed and agreed to observe and perform any and all obligations of Landlord
hereunder, during its ownership of the Premises. Landlord may transfer its
interest in the Premises without the consent of Tenant and such transfer or
subsequent transfer shall not be deemed a violation on Landlord's part of any
of the terms and conditions of this Lease.
36. WAIVER.
The waiver by either party of any breach of any term, covenant or
condition herein contained shall not be deemed to be a waiver of any
subsequent breach of the same or any other term, covenant or condition herein
contained, nor shall any custom or practice which may grow up between the
parties in the administration of the terms hereof be deemed a waiver of or in
any way affect the right of the parties to insist upon the performance by the
other party in strict accordance with said terms.
The subsequent acceptance of rent hereunder by Landlord shall not be deemed
to be a waiver of any preceding breach by Tenant of any term, covenant or
condition of this Lease, other than the failure of Tenant to pay the
particular rent so accepted, regardless of landlord's knowledge of such
preceding breach at the time of acceptance of such rent. No acceptance by
Landlord of a lessor sum than the basic rental and additional rent or other
sum then due shall be deemed to be other than on account of the earliest
installment of such rent or other amount due, nor shall any endorsement or
statement on any check or any letter accompanying any check be deemed an
accord and satisfaction, and Landlord may accept such check or payment
without prejudice to Landlord's right to recover the balance of such
installment or other amount or pursue any other remedy in this Lease provided.
37. IDENTIFICATION OF TENANT.
If more than one person executes this Lease as Tenant, (1) each of them
is jointly and severally liable for the keeping, observing and performing of
all of the terms, covenants, conditions, provisions and agreements of this
Lease to be kept, observed and performed by Tenant, and (2) the term "Tenant"
as used in this Lease shall mean and include each of them jointly and
severally. The act of or notice from, or notice or refund to, or the
signature of any one or more of them, with respect to the tenancy of this
Lease, including, but not limited to, any renewal, extension, expiration,
termination or modification of this Lease, shall be binding upon each and all
of the persons executing this Lease as Tenant with the same force and effect
as if each and all of them had so acted or so given or received such notice
or refund or so signed.
38. FORCE MAJEURE.
Except for the payment of rent by Tenant to Landlord, the parties shall
have no liability whatsoever to the other party on account of the inability
of one party to fulfill, or delay in fulfilling, any of such party's
obligations under this Lease by reason of strike, other labor trouble,
governmental preemption of priorities or other controls in connection with a
national or other public emergency, or shortages of fuel, supplies or labor
resulting therefrom or any other cause, whether similar or dissimilar to the
above, beyond the party's reasonable control.
Landlord shall have no liability to Tenant on account of any failure or
defect in the supply, quantity or character of electricity or water furnished
to the Premises, by reason of any requirement, act or omission of the public
utility or others furnishing the Project with electricity or water, or for
any other reason, whether similar or dissimilar to the above, beyond
Landlord's reasonable control. If this Lease specifies a time period for
performance of an obligation of Landlord, that time period shall be
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extended by the period of any delay in Landlord's performance caused by any
of the events of force majeure described above.
39. TERMS AND HEADINGS.
The words "Landlord" and "Tenant" as used herein shall include the
plural as well as the singular. Words used in any gender include other
genders. The paragraph headings of this Lease are not a part of this Lease
and shall have no effect upon the construction of interpretation of any part
hereof.
40. EXAMINATION OF LEASE.
Submission of this instrument for examination or signature by Tenant
does not constitute a reservation of or option for lease, and it is not
effective as a lease or otherwise until execution by and delivery to both
Landlord and Tenant.
41. TIME.
Time is of the essence with respect to the performance of every
provision of this Lease in which time of performance is a factor.
42. PRIOR AGREEMENT OR AMENDMENTS.
This Lease contains all of the agreements of the parties hereto with
respect to any matter covered or mentioned in the Lease, and no prior
agreement or understanding pertaining to any such matter shall be effective
for any purpose. No provisions of this Lease may be amended or added to
except by an agreement in writing signed by the parties hereto or their
respective successors-in interest.
43. SEPARABILITY.
Any provision of this Lease which shall prove to be invalid, void or
illegal in no way affects, impairs or invalidates any other provision hereof,
and such other provisions shall remain in full force and effect.
44. RECORDING.
Tenant may, without further approval from Landlord, record a short form
memorandum of this Lease.
45. LIMITATION ON LIABILITY.
In consideration of the benefits accruing hereunder, Tenant and all
successors and assigns covenant and agree that, in the event of any actual or
alleged failure, breach or default hereunder by Landlord:
(1) The sole and exclusive remedy shall be against the Landlord's
interest in the Project;
(2) No partner of Landlord shall be sued or named as a party in any suit
or action (except as may be necessary to secure jurisdiction of the
partnership);
(3) No service of process shall be made against any partner of Landlord
(except as may be necessary to secure jurisdiction of the partnership);
(4) No partner of Landlord shall be required to answer or otherwise
plead to any service of process;
(5) No judgment will be taken against any partner of Landlord;
(6) Any judgment taken against any partner of Landlord may be vacated and
set aside at any time nunc pro tunc;
(7) No writ of execution will ever be levied against the assets of any
partner of Landlord;
(8) The obligations of Landlord under this Lease do not constitute
personal obligations of the individual partners, directors, officers or
shareholders of Landlord, and Tenant shall not seek recourse against the
individual partners, directors, officers or shareholders of Landlord or any
of their personal assets for satisfaction of any liability in respect to this
Lease;
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(9) These covenants and agreements are enforceable both by Landlord and
also by any partner of Landlord.
46. MODIFICATION FOR LENDER.
If, in connection with obtaining construction, interim or permanent
financing for the Project the lender shall request reasonable modifications
In this Lease as a condition to such financing, Tenant will not unreasonably
withhold, delay or defer its consent thereto, provided that such
modifications do not increase the obligations of Tenant hereunder or
materially adversely affect the leasehold interest hereby created or Tenant's
rights hereunder.
47. FINANCIAL STATEMENTS.
At any time during the term of this Lease, Tenant shall upon ten (10)
days prior written notice from Landlord, provide Landlord with a current
financial statement and financial statements of the two (2) years prior to
the current financial statement year. Such statement shall be prepared in
accordance with generally accepted accounting principles and, if such is the
normal practice of Tenant, shall be audited by an independent certified
public accountant. In lieu thereof, if Tenant publishes a public Annual
Report, a submittal of such Annual Report shall fulfill the obligation
hereunder.
48. QUIET ENJOYMENT.
Landlord covenants and agrees with Tenant that upon Tenant paying the
rent required under this Lease and paying all other charges and performing
all of the covenants and provisions aforesaid on Tenant's part to be observed
and performed under this Lease, Tenant shall and may peaceably and quietly
have, hold and enjoy the Premises in accordance with this Lease.
49. TENANT AS CORPORATION.
If Tenant executes this Lease as a corporation, then Tenant and the
persons executing this Lease on behalf of Tenant represent and warrant that
the individuals executing this Lease on Tenant's behalf are duly authorized
to execute and deliver this Lease on its behalf in accordance with a duly
adopted resolution of the board of directors of Tenant, a copy of which is to
be delivered to landlord on execution hereof, and in accordance with the
bylaws of Tenant and that this Lease is binding upon Tenant in accordance
with its terms.
IN WITNESS WHEREOF, the parties have executed this Lease as of the date
first above written.
LANDLORD: Great Western Bank,
A Federal Savings Bank ADDRESS:
By: /s/ Sharon H. Driben 9200 Oakdale Ave
------------------------------ ------------------------------
Sharon H. Driben MSN 1142
Regional Vice President Chatsworth, CA 91311
---------------------------- ------------------------------
TENANT:
ADDRESS:
By: /s/ Gwen R. Pelfrey 545 12th Street
------------------------------ ------------------------------
Gwen R. Pelfrey
Executive Vice President Paso Robles, CA 93405
------------------------------ ------------------------------
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<PAGE>
ADDENDUM TO LEASE
THIS ADDENDUM TO LEASE is attached to and made apart of that certain Lease dated
as of the 26th day of June, 1997, by and between Great Western Bank, a federal
savings bank, and Heritage Oaks Bank, a California corporation, is made in
reference to the following:
1. This Lease is made subject to that certain underlying ground lease dated
as of January 16, 1978 by and between Great Western Bank, a federal savings
bank, successor in interest to Northern California Savings and Loan
Association, a California corporation, (as "Lessee") and MRP Institution
Associates, successor in interest to Leonard K. Firestone (as "Lessor")(the
"Ground Lease"). A copy of such Ground Lease is attached hereto and made a
part hereof as Exhibit C. Notwithstanding anything to the contrary, Tenant
shall completely assume the responsibilities of Landlord under the terms of
such underlying Ground Lease, except for (a) the obligations to pay rent
under the Ground Lease and (b) the insurance obligations under paragraph 17
and 18 of the Ground Lease.
2. Notwithstanding paragraph I.h. of the Basic Lease Terms, Tenant shall be
granted three (3) months of Base Monthly Rent abatement. Such rent
abatement period shall commence upon the commencement of the Lease.
3. The schedule of Base Monthly Rent shall be as follows:
Year 1 $6,200.00
Year 2 $6,820.00
Year 3 $6,820.00
Year 4 $7,750.00
Year 5 $7,750.00
Year 6 The Base Monthly Rent shall increase to 95% of the then
fair market rental rate for similar type buildings, in similar
areas, having a similar size. A further definition and
calculation criteria is described in Exhibit D attached hereto
and made a part hereof. In no event, however, shall the
Base Monthly Rent be less than any previous rental period.
Year 7 The Base Monthly Rent, commencing upon the 7th Lease
year and continuing annually thereafter, shall increase by
the change in the Consumer Price Index - All Urban
Consumers U.S. City Average (1982-84= 100), published
by the United States Department of Labor, Bureau of
Labor Statistics ("Index"). The Index published and in
effect on March 1, 2003 shall be utilized as the base
comparison year for all Index adjustments. Notwithstanding
the foregoing, in no event shall the Base Monthly Rent
increase less than 2.5% nor more than 8% annually.
4. Tenant, at its sole cost and expense, and without limitation, shall be
fully and completely responsible for all services, maintenance, replacements
and repairs to the Premises and the Project, except that Tenant shall not be
responsible for replacement and repairs resulting from damage caused by an
uninsured calamity or disaster such as earthquake, flood, or similar event
beyond the control of the parties.
Tenant shall further be responsible for payment of all real estate taxes and
insurance premiums associated with the Premises and the Project, except for
earthquake insurance premiums, if any. In the event that Landlord initially
pays for such taxes and insurance, Tenant hereby agrees to reimburse
Landlord for such payments within ten (10) days of Landlord's written
request to so reimburse.
<PAGE>
5. The validity of this Lease is contingent upon Tenant's receipt of sign and
occupancy approvals from the City of San Luis Obispo. Tenant shall be
required to submit its sign and occupancy requests to the City of San Luis
Obispo no later than thirty (30) days from execution hereof. In the event
that the City denies such sign or occupancy requests, then the Tenant may,
without penalty, terminate this agreement. Notwithstanding the foregoing,
Landlord, at its sole and absolute discretion, may terminate this Lease if
Tenant, for any reason whatsoever, has not (i) received such approvals by
August 1, 1997 or (ii) waived this occupancy approval contingency by August
1, 1997.
6. INTENTIONALLY DELETED
7. Tenant shall engage the services of a consulting firm to assist Tenant with
the determination and negotiating with the City of San Luis Obispo Tenant's
ability to utilize the existing drive-up window area. Landlord and Tenant
hereby agree to share equally in the expense of such consulting services.
In no event, however, shall Landlord's portion, based upon an equally
sharing of costs, exceed $1,000.
8. In the event Landlord is required to join or otherwise participate in any
type of Merchant Association or other mandated activity pursuant to the
underlying Ground Lease, Tenant shall assume all responsibilities thereto.
9. Tenant shall have one 10-year option to extend the term of the Lease by
giving Landlord eighteen (18) months prior written notice. If Tenant so
exercises such option, all terms, covenants and conditions of the Lease
shall remain in full force and effect except the Base Monthly Rent, which
shall increase to the then Fair Market Rental, as such is further described
in Exhibit D. Such extension rent shall be adjusted annually by the
Consumer Price Index. The Index published and in effect March 1, 2009 shall
be utilized as the base comparison year for all extension term Index
adjustments.
Notwithstanding anything to the contrary herein, the Base
Monthly Rent, as adjusted, shall never be less than the current Base
Monthly Rent payable.
10. In the event Tenant exercises its option to extend the term of the Lease as
per paragraph 9 above, Landlord shall be obligated to likewise extend the
term of the underlying Ground Lease.
11. Landlord makes no warranties or representations of any kind or nature with
respect to the Premises and Project and Tenant hereby agrees to lease and
occupy such Premises and Project in their present "as-is" condition,
subject, only, to any latent defects.
12. Tenant may not install any signs, banners or other marketing materials in
or around the Premises or Project until (i) the receipt or waiver thereof
of the contingency issues referenced in Addendum paragraph 5 and 6
hereunder, (ii) the actual commencement date of the Lease or (iii) upon the
removal of Landlord's automated teller machine ("ATM"), whichever is
latest.
13. Tenant is aware that Landlord is currently operating an ATM from the
Premises. Landlord shall cease operation and shall remove such ATM within
30 days of mutual execution and delivery of this Lease.
<PAGE>
EXHIBIT A
OUTLINE OF FLOOR
PLAN OR PREMISES
[GRAPHIC]
Detailed outline of floor plan for Heritage Oaks Bank with teller line and
vault. Floor plan of Blakeslee and Blakeslee along with common space of
breakroom and restroom facilities.
Page 17
<PAGE>
EXHIBIT B
PLOT PLAN
[GRAPHIC]
Site and roof Plan of 297 Madonna Rd and Surrounding Roads.
Page 18
<PAGE>
EXHIBIT C
GROUND LEASE
<PAGE>
[LETTERHEAD]
November 14, 1978
Mr. Michael E. Klingler
Assistant Secretary and Counsel
Northern California Savings & Loan Association
Post Office Box 560
Palo Alto, Ca. 94301
Re: Madonna Road Plaza Shopping Center
San Luis Obispo, California
Dear Mr. Klingler:
This letter will serve to amend the Lease between Leonard K. Firestone,
Lessor, and Northern California Savings and Loan Association, Lessee, dated
January 16, 1978, covering a building pad in Madonna Road Plaza Shopping
Center, San Luis Obispo, California.
The parties agree that the dates of June 1, 1978 and July 1, 1978 contained
in Section 8 on page 5 of the Lease shall be changed to read June 1, 1979 and
July 1, 1979 respectively. All other terms and conditions of said Lease shall
remain in full force and effect.
Please sign in the space provided below and return the duplicate copy to me.
Yours very truly,
MADONNA ROAD PLAZA
/s/ William H. Moll
William H. Moll
Attorney-In-Fact for
Leonard K. Firestone
The Foregoing Lease Amendment
is approved:
NORTHERN CALIFORNIA SAVINGS AND LOAN
By: /s/ Michael E. Klingler
--------------------------------------------------------
Michael E. Klingler, Assistant Secretary and Counsel
WHM:vr
<PAGE>
NORTHERN
CALIFORNIA SAVINGS
AND LOAN ASSOCIATION
June 1, 1978
Mr. William H. Moll
Manager
Madonna Road Plaza
221 Madonna Road
San Luis Obispo, CA 93401
Re: Letter Amendment to Lease
Dear Bill:
This letter will serve to amend the Lease between Leonard K.
Firestone, Lessor and Northern California Savings and Loan Association,
Lessee, dated January 16, 1978 covering a pad in the Madonna Road Plaza
Shopping Center, San Luis Obispo, California.
The parties agree that the dates of June 1, 1978 and July 1, 1978
contained in Section 8 on page 5 of the Lease shall be changed to read
January 1, 1979 and February 1, 1979 respectively. All other terms and
conditions of said Lease shall remain in full force and effect.
You should have already received the Association's check in the
amount of $4,000.00 to cover the payments called for under Paragraph 3-a of
the Lease for the months of March through June, 1978.
Very truly yours,
/s/ Michael E. Klingler
Michael E. Klingler
Assistant Secretary and Counsel
MEK/Joy
Enclosure
THE FOREGOING LEASE AMENDMENT IS APPROVED:
Leonard K. Firestone
By: /s/ William H. Moll
-----------------------------------
William H. Moll
Attorney-in-Fact
<PAGE>
L E A S E
This Lease, made and entered into this 16th day of January, 1978, by
and between LEONARD K. FIRESTONE, hereinafter referred to as "LESSOR", and
NORTHERN CALIFORNIA SAVINGS AND LOAN ASSOCIATION, a California
corporation, hereinafter referred to as "LESSEE",
WITNESSETH:
1. LEASING. That Lessor, for and in consideration of the rents,
covenants, conditions and agreements herein contained on the part of the
Lessee to be paid, kept and performed, has granted, demised and let, and
by these presents does grant, demise and let unto Lessee, and said Lessee
does hereby lease and accept from Lessor the ground only of certain
property, located at the corner of Madonna Road and Calle Joaquin, in the
Madonna Road Plaza Shopping Center, San Luis Obispo, California, and more
fully described in Exhibit "B" attached hereto and incorporated herein,
for a period of thirty years beginning on the commencement date. The
commencement date (beginning date of the thirty (30) year lease term)
shall be the first day of the month following the day all conditions set
forth in Section 7 of this Lease have been satisfied, provided, however,
that in no event shall the commencement be later than July 1, 1979.
2. RENTAL. Lessee covenants and agrees to pay Lessor as rental for
the demised premises the sum of Twenty-five Thousand Dollars ($25,000.00)
per year for years one, two, three, four and five; the sum of Thirty
Thousand Dollars, ($30,000.00) per year for years six, seven, eight, nine
and ten; the sum of Thirty-five Thousand Dollars ($35,000.00) per year for
years eleven, twelve, thirteen, fourteen and fifteen; the sum of Forty
Thousand Dollars, ($40,000.00) per year for years sixteen, seventeen,
eighteen, nineteen and twenty; the sum of Forty-five Thousand Dollars
($45,000.00) per year for years twenty-one, twenty-two, twenty-three,
twenty-four and twenty-five; the sum of Fifty Thousand Dollars,
($50,000.00) per year for years twenty-six, twenty-seven, twenty-eight,
twenty-nine and thirty. Rent shall be paid in lawful money of the United
States of America to Lessor at such address as he may designate, without
offset of diminution for any reason whatsoever.
This rental is an annual rental, but it shall be divided into twelve (12)
equal installments and paid monthly, in advance, throughout each year of
the term of this Lease.
-1-
<PAGE>
3. PAYMENTS BY LESSEE PRIOR TO COMMENCEMENT:
a) As consideration for Lessor entering into this Lease, Lessee agrees
to pay to Lessor $1,000.00 per month commencing on the first day of
February , 1978. Said payments shall continue until the Lease
commences. If the Lease commences on a day other than the first day of a
calendar month, then the payment for the fractional month shall be
computed on a daily basis (at $33.33 per day) from the first day of the
month to the day the Lease commences.
b) In the event the conditions to commencement of the Lease are not
satisfied, all pre-commencement payments described herein shall promptly
be returned to Lessee by Lessor.
4. SHOPPING CENTER. The demised premises, together with and including
other property owned by Lessor, comprise a shopping center development
known as MADONNA ROAD PLAZA, referred to hereinafter throughout this
lease as the "Shopping Center" and are now devoted to or are being
developed for the purpose of a shopping center. A general site plan of the
Shopping Center, showing, among other things, the principal improvements
which comprise said Shopping Center, is attached hereto as Exhibit A and
made a part hereof, Lessee acknowledges that the site plan shown on Exhibit
A is tentative and that Lessor may change the shape, size, location,
number and extent of the improvements shown thereon and eliminate or add
any improvements to any portion of the Shopping Center, provided Lessor
shall not change the size or location of the demised premises. Lessor
reserves the absolute right to effect such other tenancies in the Shopping
Center as Lessor in the exercise of this sole business judgment shall
determine to best promote the interest of the Shopping Center.
4A. COMMON AREAS. The Shopping Center plot plan attached hereto as
Exhibit "A" outlines parking and other "Common Areas" which have been
designated and improved for common use by and for the benefit of all the
tenants leasing space in the Shopping Center. Such Common Areas include
parking areas, access and perimeter roads, service corridors, landscaped
areas, sidewalks, loading areas, etc.. All common areas are and shall be
subject to the exclusive control and management of the Lessor, and
Lessor's nominees and assigns shall have the right to establish, modify,
amend and enforce reasonable rules and regulations with respect to the
common areas.
-2-
<PAGE>
It is agreed by and between Lessor and Lessee that Lessee will develop
and maintain sufficient parking, landscaping and other common areas within
Lessee's demised premises to accommodate all of the Lessee's employees,
customers, officers, etc. However, it is agreed between Lessor and Lessee
that the parking and common areas of the demised premises and of the
entire Shopping Center are subject to the non-exclusive use of any and
all customers of the entire Shopping Center. Lessee covenants and agrees
that employees and officers will park their automobiles in designated
areas within Lessee's demised premises. Lessor will use Lessor's best
efforts to prevent employees of other Shopping Center tenants from
parking their automobiles in Lessee's demised premises.
Lessor shall have the right to establish, modify, amend and enforce
reasonable rules and regulations with respect to the common areas in the
Shopping Center and in the demised premises. Lessee agrees to abide by and
conform with such rules and regulations; to cause its concessionaires,
and its and their employees and agents, so to abide and conform; and to use
its best efforts to cause its customers, invitees and licensees to so
abide and conform. In no event shall Lessee have the right to sell or
solicit in any manner in any of the common areas.
Lessee shall be responsible for the cost of maintaining and operating
the common areas within its demised premises and Lessor shall be
responsible of the remainder of the common areas in the Shopping Center.
Lessee shall pay no part of taxes, insurance, maintenance or other costs
associated with the common areas of the Shopping Center not included
within this Lease.
5. USE. It is understood and agreed by and between the parties
hereto, that Lessor is leasing to Lessee the ground only, and that Lessee
shall use the premises for the operation of a savings and loan business
similar to Lessee's other operations in California and for no other use or
purpose whatsoever without first securing the written approval of the
Lessor which consent shall not be unreasonably withheld.
6. IMPROVEMENTS AND PERMITS. As quickly as reasonably possible,
Lessee shall prepare plans and specifications for a "Savings and Loan
Building" one story in height and containing not less than 6000 square
feet and not more than 8000 square feet in floor area. Said building shall
be similar in design to Lessee's other buildings. Lessor shall have the
right to approve the exterior design of the building. Plans shall show all
site work, landscaping, parking area, signs, etc.
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Lessee shall be responsible for all work and costs incurred in
connection with all phases of planning, construction, site work, street
improvements, demolition, landscaping, permits, survey, title reports, etc.
Lessor shall not be required to pay any portion of the cost. Lessee agrees to
complete plans and specifications, secure permits and complete the
construction of the improvements and development of the leased premises as
quickly as reasonably possible. All such construction and development work
shall be at the sole cost and expense of Lessee and be of good quality,
consistent with the then existing standards of practice in the City of San
Luis Obispo for developments of a comparable nature. All buildings and/or
improvements erected on the demised premises shall be and become the property
of Lessor, upon the expiration or sooner termination of this lease.
Notwithstanding the provisions of this Section 6, Lessor agrees that in
the event the City of San Luis Obispo (as a condition to granting Lessee
permit) requires certain improvements in parts of the Shopping Center (other
than the demised premises) Lessor will pay the cost of such improvements, up
to, but not in excess of five thousand dollars ($5,000.00).
7. CONDITIONS TO COMMENCEMENT OF THE LEASE. The commencement date of
the thirty (30) year term of the lease and payment of rental shall begin on
the first day of the month following the date the following conditions have
been completed:
1. Lessee has received all final permits and approvals for Lessee's
proposed improvements from State, County, City and other governmental
or regulatory agencies and from private groups and individuals.
2. Lessee has approved costs for offsite and other improvements,
repairs and changes to the Shopping Center required as a result of Lessee's
proposed construction.
3. Lessor has received written approval from the other Tenants in the
Shopping Center to the location of Lessee's building on the demised
premises.
As soon as the commencement date has been determined, Tenant shall give
Landlord written notice of same. Landlord and Tenant shall thereupon sign a
memorandum setting forth the actual commencement date of the term of this
Lease and certifying that this Lease is in full force and effect.
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Lessee and Lessor agree that each shall use its best efforts to satisfy
the said conditions to commencement of the Lease.
8. CANCELLATION OF THE LEASE. Lessee shall have until January 1, 1979,
with the option of extending such period for an additional six (6) months,
to satisfy the conditions set forth in Section 7 of this Lease. In the event
said conditions are not satisfied within such period, all of Lessee's rights
to lease the premises from Lessor shall immediately cease. At Lessor's
request, Lessee shall execute a Quitclaim Deed or other document sufficient
to verify the cessation of Lessee's interest in the premises.
In the event Lessor has failed to secure all necessary approvals to this
Lease Agreement from other Shopping Center Tenants by June 1, 1979, Lessor
may, at its option, cancel this lease by notice in writing delivered to
Lessee on or before July 1, 1979. In the event of lease termination pursuant
to this Section 8, all advance rentals paid to Lessor by Lessee shall be
returned to Lessee.
9. INTENTION OF THE PARTIES. Nothing in this lease shall cause Lessor
in any way to be construed as a partner, a joint venturer, or associated in
any way with the Lessee in the operation of said premises, or subject Lessor
to any obligation, loss, charge, or expense connected with or arising from
the operation or use of said premises or any part thereof. It is understood
and agreed that this lease shall be a net-net lease with respect to Lessor,
and that all taxes, assessments, insurance, utilities and other operating
costs and all repairs, remodeling, renovations, alterations and improvements,
and all other costs, charges and expenses of any kind whatsoever respecting
the leased premises accruing after the date of this lease shall be borne by
Lessee and not by Lessor, so that the rental return to Lessor shall not be
reduced, offset, or diminished directly or indirectly by any cost or charge,
nor subject to suspension or termination for any cause, except as otherwise
expressly provided in Paragraph 20 herein. It is further agreed that upon the
expiration or other termination of this lease, Lessee shall peacefully
surrender to Lessor the premises with the improvements in good repair and in
satisfactory condition for the immediate continuation thereon of such
businesses as were conducted thereon prior thereto.
10. UTILITIES. Lessee shall pay for water, gas and heat, light, power,
telephone service, and all other utility services supplied to said premises
during the entire term of the within lease.
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11. REPAIRS AND MAINTENANCE. Lessee shall, at his sole cost, keep and
maintain the demised premises, and every part thereof, now or hereafter
constructed or located on the demised premises, in good and sanitary order,
condition and repair, and agrees to surrender on the last day of the term of
this lease or sooner termination of this lease unto Lessor all and singular
said premises with improvements thereon in good condition.
Lessee hereby waives all rights to make repairs at the expense of
Lessor, as provided in Section 1942 of the California Civil Code, and all
rights provided for by Section 1941 of the California Civil Code.
Lessee hereby acknowledges that he has inspected the premises and
improvements thereon and does hereby declare that he accepts the same in
their present condition and state of repair, without any representations or
warranties, express or implied, on the part of the Lessor, except as
otherwise specifically provided herein or in the option attached to this
lease.
12. USE PROHIBITED BY FIRE INSURANCE POLICY. Lessee shall not use or
permit said premises or any part thereof to be used for any purpose or
purposes other than the purpose or purposes for which said premises are
hereby leased; and no use shall be made or permitted to be made of said
premises or acts done which will cause the cancellation of any insurance
policy required under the terms of this lease. Lessee shall, at his sole
cost, comply with any and all requirements pertaining to the use of said
premises of any insurance organization or company necessary for maintenance
of all insurance required under the terms of this lease.
13. COMPLIANCE WITH LAW. Lessee shall, at his sole cost and expense,
comply with all of the requirements of all municipal, state and federal,
authorities now in force, or which may hereafter be in force, pertaining to
the said premises, and shall faithfully observe in the use of the premises
all municipal ordinances and state and federal statutes now in force or which
may hereafter be in force. The judgment of any court of competent
jurisdiction, or the admission of Lessee in any action or proceeding against
Lessee, whether Lessor be a party thereto or not, that Lessee has violated
any such ordinances or statutes in the use of the premises shall be
conclusive of that fact as between Lessor and Lessee.
14. WASTE. Neither Lessor nor Lessee shall commit, or suffer to be
committed, any waste on said premises, or any nuisance or other act or
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thing which may disturb the quiet enjoyment of the other in the leased
premises.
15. TAXES. Lessee agrees to pay all taxes and assessments, general and
special, and all other impositions, ordinary and extraordinary, of every kind
and nature whatsoever, levied or assessed on the premises, or any part
thereof, or on any buildings or improvements at any time situated thereon, or
levied or assessed on the interest of Lessor in and/or under this lease, said
obligation to begin as of the date of the commencement of the lease and
continue for the term of this lease. All such taxes, assessments and other
impositions shall be paid by Lessee in the name of Lessor before the same
shall become delinquent. For purposes of this Section 15, "taxes" shall also
include any tax assessed upon or measured by rents received by Lessor under
or in connection with this lease.
The preceeding paragraph shall not be deemed or construed so as to require
Lessee to pay any personal income taxes, personal property taxes, estate or
inheritance taxes or franchise taxes against Lessor, but not directly against
said property, even though such taxes shall become a lien against the demised
premises.
Lessee shall have the right to contest the validity of any tax or special
assessment payable by him, which he deems to have been illegally levied or
assessed against the premises, and for that purpose shall have the right to
institute such proceeding or proceedings in the name of Lessor as he may deem
necessary; provided that expenses incurred by reason thereof shall be paid by
Lessee, and provided further that all such proceedings may be carried on in
the name of Lessor and Lessor shall receive notice and full information of
all steps during said proceedings; provided further, that, upon the final
determination of such contest, Lessee shall immediately pay and discharge any
judgment rendered, together with all costs and charges incidental thereto,
and shall cause the lien thereof to be released from the lease premises.
Lessee agrees without demand or notice to deliver to Lessor from time to
time satisfactory evidence of payment of all taxes, assessments and other
impositions.
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16. MECHANICS LIENS. The Lessee agrees to keep the leased premises and any
part thereof at all times free of mechanics liens and other liens for labor,
services, supplies, equipment or material purchased or procured, directly or
indirectly, by or for Lessee. Lessee, however, shall have the right to
contest the validity or amount of any such lien as filed and upon the final
determination of such contest, shall immediately pay and discharge any
judgment rendered, together with all costs and charges incidental thereto,
and shall cause the lien thereof to be released from the leased premises.
Should the Lessee fail, within thirty (30) days after notice of the filing of
any such lien, to discharge or cause the release of such liens or charges or
to contest the same then the Lessor, at Lessor's option, may satisfy said
liens by payment thereof, and in such event, the amount of such payment,
together with interest thereon at the rate of eight per cent (8%) per year
from the time the payment is so made until repayment thereof shall be payable
by Lessee at the time the next installments of rental shall be due and
payable.
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17. INSURANCE. The Lessee shall, at his sole cost, at all times
during the term of this Lease keep the improvements to be constructed on
real property herein demised insured against loss by fire and the perils
covered by an extended coverage endorsement in an amount not less than
that required by an eighty percent (80%) co-insurance policy covering
all buildings now or hereafter located on the demised premises,
exclusive of foundations and excavations, and shall keep the contents of
said demised premises insured in an amount sufficient to satisfy said 80%
co-insurance policy. The full insurable value of said building and
contents shall be fixed and determined by audit-appraisal at least every
five (5) years during the within term in order to qualify for 80%
co-insurance.
In the event any insurance provided for in this paragraph shall become
payable on account of damage to or destruction of the improvements now or
hereafter constructed on the demised premises, Lessee shall forthwith expend
the full amount, or so much thereof as is required, to restore the premises
to the condition in which they were prior to such damage or destruction, or
with improvements of comparable value of any type then permitted under the
then applicable zoning regulations. Any surplus remaining after completion of
said work shall belong to Lessee. Any deficiency shall be the responsibility
of Lessee. Lessor shall have no responsibility concerning said reconstruction
work or the payment therefor, but shall be named as joint payee of any
insurance proceeds solely for his security.
Notwithstanding anything to the contrary contained in this Section 17, if
during the last five years of the lease term or any extension or extensions
thereof, any improvement erected on the land shall be damaged by fire or
other casualty and if the cost of repairing or restoring the same shall
exceed the insurance proceeds payable for such damage, then Lessee shall have
the option, to be exercised within thirty (30) days after such event, (1) to
repair or to restore the improvement, or (2) to terminate this Lease by
written notice to Lessor.
Such option to terminate shall be conditioned as follows:
1) Lessee shall at its expense within ninety (90) days after the damage
occurs, tear down and remove all parts of the building and other improvements
then remaining and the debris resulting from such fire or other casualty and
otherwise clean up and restore the land, as far as practicable, to its
original condition; and
2) Within ten (10) days after the completion of the clean-up and
restoration, Lessee shall surrender to Lessor possession of the land, cleaned
up and restored, and shall pay to Lessor any rent accruing to the date of
such surrender; and
3) Thereupon, but not before, said Lease shall terminate.
18. INDEMNITY AND LIABILITY INSURANCE. This Lease is made upon the
express condition that Lessor is to be free from all liability and claims for
damages by reason of any injury to any person or persons, including Lessee,
all property of any kind whatsoever and to whomsoever belonging, including
Lessee, from any cause or causes whatsoever, except for negligence or wilful
acts by Landlord or its agents or employees, while in, upon, about, or in any
way connected with the said demised premises or the sidewalk adjacent thereto
during the term of this Lease or any extension thereof or any occupancy
hereunder, Lessee hereby covenanting and agreeing to indemnify and save
harmless Lessor from all liability, loss, cost, and obligation on account of
or arising out of any such injury or loss however occurring, including, but
not by way of limitation, reasonable attorney's fees.
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Lessee further agrees to take out and keep in force during the life
hereof at Lessee's expense, public liability insurance against any liability
to the public incident to the use of or resulting from any accident occurring
in or about said demised premises, the liability under such insurance to be
not less than Two Hundred Thousand Dollars ($200,000.00) for any one person
injured, or Five Hundred Thousand ($500,000.00) for any one accident, or One
Hundred Thousand Dollars ($100,000.00) for property damage.
There policies shall insure the contingent liability of Lessor and
Lessor shall be named as co-insured in such policies.
Respecting the insurance coverage required both by this paragraph
and by paragraph 17 above, a certificate of insurance shall be placed with
Lessor, and Lessee agrees to obtain a written obligation on the part of the
insurance carriers to notify Lessor in writing at least thirty (30) days
prior to any cancellation thereof, and Lessee further agrees that if Lessee
does not keep such insurance in full force and effect, Lessor may take out the
necessary insurance and pay the premium and the repayment thereof, with
interest at the rate of eight percent (8%) per year, shall be deemed to be
part of the rental and repaid at the time that the next installment of rent
becomes due.
19. WAIVER OF LIABILITY. Lessee, as a material part of the
consideration to be rendered to Lessor, hereby waives all claims against
Lessor for damages to goods, wares, merchandise, in, upon, or about said
premises, and for injuries to Lessee, his agents or third parties in and
about said premises from any cause arising at any time, other than due to
fault of Lessor not otherwise absolved under the terms hereof.
20. EMINENT DOMAIN.
A. If title to all of the lease premises is taken for any public
or quasi-public use under any statute, or by right of eminent domain, or by
private purchase in lieu of eminent domain, or if title to so much of the
premises is so taken that the portion of the premises remaining will not be
reasonably suited for Lessee's continued occupancy for the purpose of
conducting the savings and loan business, then in either event, this Lease
shall terminate on the date that possession or title is taken by the
condemning authority, whichever first occurs.
If any of the premises shall be so taken and the remaining part
thereof is reasonably suitable for Lessee's continued occupancy for the
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purpose of conducting a savings and loan business, this Lease shall, as to
the part so taken, terminate as of the date possession or title of such part
is taken by the condemning authority, whichever first occurs, and the current
rental shall be reduced in the same proportion that the square footage of the
premises so taken bears to the original square footage of the premises.
B. All condemnation awarded or paid upon a total or partial
taking of the premises shall belong to the Lessor and Lessee as their
respective interests appear; provided, however, and without limiting the
generality of the foregoing, Lessee shall have a claim for the unamortized
value over the term of this Lease, or the then current extension thereof if
applicable, for all improvements constructed or otherwise installed on or
about the premises by Lessee plus the value of its furniture, fixtures and
equipment, and for moving or relocation expenses to the extent that any such
items of damages are reflected or are included in the condemnation award, but
Lessee shall in no event be entitled to any part of any award for land.
C. In the event of a taking of a strip of land twenty-four (24)
feet wide or less for the purpose of widening Madonna Road and/or Calle
Joaquin, Lessee shall not be entitled to any award, reduction in rental or
termination rights.
D. Lessee's rights under this Section 19 are subordinate to the
rights of the Lessor in that certain ground lease referred to in Section 21,
(Title and Possession) of this lease.
21. TITLE AND POSSESSION. Lessor covenants and warrants that
Lessor has good leasehold title to the demised premises and has good and
proper right to enter into this lease. Lessor covenants that there are no
liens upon its estate other than (a) Ground lease dated December 19, 1966,
(and later modified) by and between Valley Vista Land Corporation, as Lessor
and San Luis Obispo Shopping Center as Lessee; Lessee's interest was later
assigned to Leonard K. Firestone; a Trust Deed in favor of New York Life
Insurance Company; Sub-leases with Shopping Center Tenants giving them
certain rights to parking and common areas; and (b) the effect of covenants,
conditions, restrictions, easements, rights and rights of way of record, if
any; and (c) the effect of any zoning laws of the City and County of San Luis
Obispo; and (d) general and special taxes not delinquent. The Lessor agrees
that the Lessee
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upon paying the rent and performing the covenants and conditions of this
Lease may quietly have, hold and enjoy the demised premises during the term
hereof or any extension thereof.
22. ASSIGNMENT AND SUBLEASE. Tenant shall not voluntarily or by
operation of law assign, license, transfer, mortgage or otherwise encumber
all or any part of Lessee's interest in this Lease or in the demised
premises, and shall not sublet or license all or any part of the demised
premises, without the prior written consent of Lessor in each instance, which
consent shall not be unreasonably withheld, and any attempted assignment,
transfer, mortgage, encumbrance or subletting without such consent shall be
wholly void. No subletting or assignment, even with the consent of Lessor,
shall relieve Lessee of its obligation to pay the rent and to perform all of
the other obligations to be performed by Lessee hereunder. The acceptance of
rent by Lessor from any other person shall not be deemed to be a waiver by
Lessor of any provision of this Lease or to be a consent to any assignment,
subletting or other transfer. Consent to one assignment, subletting or other
transfer shall not be deemed to constitute consent to any subsequent
assignment, subletting or other transfer. No name change, merger, or the sale
or other transfer of a controlling percentage of the capital stock of Lessee,
or the sale of 51% or more of the value of the assets of Lessee shall be
deemed an assignment requiring the consent of Lessor.
23. MERCHANTS ASSOCIATION. Upon commencement of this Lease,
Lessee shall join and thereafter maintain, until the termination of this
Lease, membership in a non-profit businessmen's association composed of a
majority of the occupants of the Shopping Center. By-laws of the association
shall be originally adopted by a majority vote of the members of the
association and shall thereafter be subject to amendment as provided in said
by-laws. Each member of the association and the Lessor shall have one (1)
vote. Such membership shall include the obligation of Lessee to pay
assessments, as determined by said association, to cover the expense of all
advertising and other activities carried on by such association for the
mutual benefit of its members. In no event shall Lessee's contribution in any
calendar year be more than Five Hundred Dollars ($500.00).
24. RENEWAL. Lessee shall have the right to renew or extend the
within Lease for a period of ten (10) years following the expiration of the
original term hereof, at a rental of Fifty-five Thousand Dollars ($55,000.00)
per year for the first five (5) years, and a rental of Sixty Thousand Dollars
($60,000.00) for the second five (5) years, and otherwise under the same
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terms and conditions as for the original term as set out herein, except for this
option. In the event Lessee exercises this option to renew or extend, written
notice thereof shall be given Lessor at least twelve (12) months prior to the
commencement of such renewal or extension period.
25. RENEWAL. Lessee shall have the right to renew or extend the
within lease for a period of ten (10) years following the expiration of the term
provided for in Section 24 hereof, at a rental of Sixty-five Thousand Dollars
($65,000.00) per year for the first five (5) years, and a rental of Seventy
Thousand Dollars ($70,000.00) per year for the last five (5) years, and
otherwise under the same terms and conditions as for the original term as set
out herein, except for this option. In the event Lessee exercises this option
to renew or extend, written notice thereof shall be given Lessor at least twelve
(12) months prior to the commencement of such renewal or extension period.
26. DEFAULTS BY LESSEE AND LESSOR'S REMEDIES.
A. The occurrence of any one or more of the following events shall
constitute a material default and breach of this lease by Lessee:
(i) Any failure by Lessee to pay the rental or make any other payment
required to be made by Lessee hereunder (where such failure continued for 10
days after written notice thereof by Lessor to Lessee.)
(ii) The abandonment or vacation of the premises by Lessee.
(iii) A failure by Lessee to observe and perform any other provisions
of this lease to be observed or performed by Lessee, where such failure
continues for 30 days after written notice thereof by Lessor to Lessee;
provided, however, that if the nature of such default is such that the same
cannot reasonably be cured within such 30-day period, Lessee shall not be deemed
to be in default if Lessee shall within such period commence such cure and
thereafter deligently prosecute the same to completion.
(iv) The making by Lessee of any general assignment for the benefit of
creditors; the filing by or against Lessee of a petition to have Lessee adjudged
a bankrupt or of a petition for reorganization or arrangement under any law
relating to bankruptcy (unless, in the case of a petition filed against Lessee,
the same is dismissed within sixty (60) days); the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days;
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or the attachment, execution to other judicial seizure of substantially all of
Lessee's assets located at the premises or of Lessee's interest in this lease,
where such seizure is not discharged within thirty (30) days.
B. In the event of any such default by Lessee, then in addition to
any other remedies available to Lessor at law or in equity, Lessor shall have
the immediate option to terminate this lease and all rights of Lessee hereunder
by giving written notice of such intention to terminate. In the event that
Lessor shall elect to so terminate this lease then Lessor may recover from
Lessee.
(i) the worth at the time of award of any unpaid rent which had been
earned at the time of such termination; plus
(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 rental loss Lessee proves could have been reasonably
avoided; plus
(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 rental loss that Lessee proves could be reasonably avoided; plus
(iv) any other amount necessary to compensate Lessor for all the
detriment proximately caused by Lessee's failure to perform his obligations
under this lease or which in the ordinary course of things would be likely to
result therefrom and
(v) at Lessor's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by applicable
California law.
The term "rent" as used herein shall be deemed to be and to mean the
annual rental and all other sums required to be paid by Lessee pursuant to the
terms of this lease. All such sums, other than the annual rental, shall be
computed on the basis of the average monthly amount thereof accruing during the
immediately preceding 60 months period prior to default, except that if it
becomes necessary to compute such rental before such a 60-month period has
occurred, then on the basis of the average monthly amount accruing during such
shorter period.
As used in subparagraphs (i) and (ii) above, the "worth at the time of
award" is computed by allowing interest at the rate of ten percent (10%) per
annum.
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As used in subparagraph (iii) above, the "worth at the time of award" is
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%).
C. In the event of any such default by Lessee, Lessor shall also
have the right, with or without terminating this lease, to re-enter the premises
and remove all persons and property from the premises; such property may be
removed and stored in a public warehouse or elsewhere at the cost of and for the
account of Lessee.
D. In the event of the vacation or abandonment of the premises by
Lessee or in the event that Lessor shall elect to re-enter as provided in
paragraph C above or shall take possession of the premises pursuant to legal
proceeding or pursuant to any notice provided by law, then if Lessor does not
elect to terminate this lease as provided in paragraph B above, then Lessor may,
from time to time, without terminating this lease, either recover all rental as
it becomes due or relet the premises or any part thereof for such term or terms
and at such rental or rentals and upon such other terms and conditions as Lessor
in its sole discretion may deem advisable with the right to make alterations and
repairs to the premises.
In the event that Lessor shall elect to so relet, then rentals
received by Lessor from such reletting shall be applied: first, to the payment
of any indebtedness other than rent due hereunder from Lessee to Lessor; second,
to the payment of any cost of such reletting; third, to the payment of the cost
of any alterations and repairs to the premises; fourth, to the payment of rent
due and unpaid hereunder; and the residue, if any, shall be held by Lessor and
applied in payment of future rent as the same may become due and payable
hereunder. Should that portion of such rentals received from such re-letting
during any month, which is applied by the payment of rent hereunder, be less
than the rent payable during that month by Lessee hereunder, then Lessee shall
pay such deficiency to Lessor. Such deficiency shall be calculated and paid
monthly. Lessee shall also pay to Lessor, as soon as ascertained, any costs and
expenses incurred by Lessor in such reletting or in making such alterations and
repairs not covered by the rentals received from such reletting.
E. No re-entry or taking possession of the premises by Lessor
pursuant to subparagraphs C or D of this paragraph 26 shall be construed as an
election to terminate this lease unless a written notice of such intention be
given to Lessee or unless the termination thereof be decreed by a court
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of competent jurisdiction. Notwithstanding any reletting without termination
by Lessor because of any default by Lessee, Lessor may at any time after such
reletting elect to terminate this lease for any such default.
27. DEFAULTS BY LESSOR. In the event Lessor shall neglect or fail to
perform or observe any of the covenants, provisions or conditions contained
in this lease on its part to be performed or observed within thirty (30)
days after written notice of default (or if more than thirty (30) days shall
be required because of the nature of the default, if Lessor shall fail to
proceed diligently to cure such default after notice), then in that event
Lessor shall be responsible to Lessee for any and all damages sustained by
Lessee as a result of Lessor's breach; further, Lessee shall have the right
to cure any such default at Lessor's expense including in such expenditure
all costs and attorneys' fees incurred to cure such default or breach of
lease. Lessee shall have no right to terminate this lease except as herein
otherwise specifically provided.
28. ABANDONMENT. Lessee shall not vacate or abandon the premises at any
time during the within term; and if Lessee shall abandon, vacate or surrender
said premises, or be dispossessed by process of law, or otherwise, any
personal property belonging to Lessee and left on the premises shall be deemed
abandoned, at the option of the Lessor.
29. NOTICE OF NON-RESPONSIBILITY. Upon the commencement of any work or
alteration or repair in excess of Twenty-five Hundred Dollars, ($2,500.00) in
and about said leased premises at any time, Lessee agrees immediately to
notify Lessor thereof in writing, and Lessor shall be permitted to post on
and affix to said premises "Notice of Non-Responsibility" as provided in the
California Code of Civil Procedure, Section 1183.1.
30. ENTRY BY LESSOR. Lessee shall permit Lessor or his agents to enter
into and upon said premises at all reasonable times for the purpose of
inspecting same, or for the purpose of displaying the premises to any
prospective purchaser, or for any other lawful purpose contemplated by the
provisions of this lease.
31. WAIVER. A waiver by Lessor of any breach of any term, covenant or
condition herein contained shall not be deemed to be a waiver of such term,
covenant or condition or any subsequent breach of the same or any other
term, covenant or condition herein contained. Acceptance of a rent
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payment or of a series of rent payments on a date later than that called for
herein shall not be a waiver of the right to receive future rent payments
promptly on the due date thereof. Acceptance of a rent payment shall not
be a waiver of any then existing default.
32. TERMINATION AND QUITCLAIM. Upon the termination of this lease,
whether by the expiration of the term thereof or for any other reason as
provided in this lease, then the title to said demised premises shall revert
to the Lessor, and the Lessee shall, upon demand, execute and deliver a
Quitclaim Deed in favor of the Lessor, quitclaiming and releasing all his
right, title and interest in and to the said demised premises.
33. LESSEE'S RECEIVERSHIP. Either (a) the appointment of a receiver
to take possession of all or substantially all of the assets of Lessee, or
(b) a general assignment by Lessee for the benefit of creditors, or (c) any
action taken or suffered by Lessee under any insolvency or bankruptcy act
shall, in any such appointment, assignment or action continuous for a period
of thirty (30) days, constitute a breach of this lease by Lessee.
34. COSTS AND ATTORNEY'S FEES. In case any litigation is commenced
by or against the parties herein, or any party herein is made a party to
any litigation involving this lease or the demised premises, the losing party
shall pay to the prevailing party all costs and attorney's fees and other
expenses incurred in enforcing agreements and provisions of this lease.
35. NOTICES. Whenever under this lease a provision is made for any
demand, notice or declaration of any kind where it is deemed desirable or
necessary by either party to give or serve any such notice, demand or
declaration to the other, it shall be in writing and either served
personally or sent by registered mail or certified mail, return receipt
requested, with postage prepaid, addressed as follows:
To Lessor: 221 Madonna Road To Lessee: 300 Hamilton Avenue
------------------- -------------------
San Luis Obispo, Ca. 93401 Palo Alto, Ca. 94301
------------------------------ ------------------------------
and either party may by like notice at any time and from time to time
designate a different address to which notices shall be sent. Such notices,
demands or declarations shall be deemed sufficiently served or given for all
purposes hereunder at the time they shall be mailed by United States mail, as
aforesaid.
-17-
<PAGE>
36. SUBORDINATION ATTORNMENT. Upon request of the Lessor, and any
mortgageee or beneficiary of Lessor, Lessee will in writing subordinate
its rights hereunder to the lien of any first mortgage or first deed of
trust to any bank, insurance company or other lending institution, now or
hereafter in force against the land and building of which the demised
premises are a part, and to all advances made or hereafter to be made
upon the security thereof. Any mortgagee of any First Mortgage or beneficiary
of any First Deed of Trust at any time existing or encumbering the estate of
Lessor may at its option subordinate its Mortgage of Deed of Trust to this
lease.
In the event any proceedings are brought for foreclosure, or in the
event of the exercise of the power of sale under any mortgage or deed of
trust made by the Lessor covering the demised premises, the Lessee shall
attorn to the purchaser upon any such foreclosure or sale and recognize such
purchaser as the Lessor under this lease.
The provisions of this Article to the contrary notwithstanding, and so
long as Lessee is not in default hereunder, this lease shall remain in full
force and effect for the full term hereof.
37. GENERAL COVENANTS. No remedy or election given by any provision in
this lease shall be deemed exclusive unless so indicated, but it shall
wherever possible be cumulative with all other remedies in law or equity as
otherwise herein specifically provided. The terms and agreements as contained
in this lease shall apply to, run in favor of and shall be binding upon and
inure to the benefit of the parties hereto, and also their respective, heirs,
executors, administrators, personal representatives and assigns and
successors in interest, subject at all times nevertheless to the provisions
of Article 22 of this lease relating to restrictions upon assignments or
subletting this lease or the demised premises. This lease shall be construed
in accordance with the laws of the State of California. The invalidity of any
portion of this lease shall not prevent the remainder from being carried into
effect. Whenever the context of any provision shall require it, the singular
number shall be held to include the plural number, and vice versa, and the
use of any gender shall include any other or all genders. Time is of the
essence of this lease. The paragraph and section headings in this lease
contained are for convenience only, and do not constitute a part of the
provisions hereof. This lease constitutes the whole agreement between the
parties. There are no terms, obligations, covenants
-18-
<PAGE>
or conditions other than contained herein. No oral modification of, or
amendment to, this Lease shall be effective, but this Lease may be modified
or amended by written agreement signed by the Lessee and by the Lessor. This
lease binds, applies to and inures to the benefit of, as the case may
require, the respective heirs, executors, administrators, successors and
assigns of Lessor and the Lessee.
38. RECORDING. This Agreement, or any memorandum thereof, may be recorded
by either party on or after the date it is executed by both parties.
IN WITNESS WHEREOF, the parties have executed this Lease as of the day and
year hereinabove first set forth.
LESSOR:
LEONARD K. FIRESTONE
By:
------------------------------------
William H. Moll
Attorney-In-Fact
LESSEE:
NORTHERN CALIFORNIA SAVINGS
AND LOAN ASSOCIATION
By: /s/ J. Lance Erikson
------------------------------------
J. Lance Erikson
Secretary
By: /s/ Michael E. Klingler
------------------------------------
Michael E. Klingler
Assistant Secretary
-19-
<PAGE>
[MAP]
Madonna Road Plan. Site plan of the Shopping Center. This site plan outlines
parking and other "Common Areas" including access and perimeter roads,
service corridors, landscaped areas, sidewalks and loading areas.
<PAGE>
EXHIBIT "B"
DESCRIPTION OF DEMISED PREMISES
A parcel of land in Madonna Road Plaza Shopping Center, San Luis Obispo,
California, located at the corner of Madonna Road and Calle Joaquin,
having frontages of approximately 201 feet on Madonna Road and
approximately 201 feet on Calle Joaquin, with an area of approximately
one (1) acre. Said parcel is a part of the land legally described on
Exhibit "B", page 2 hereof and further described and outlined in red on
Exhibit "B" page 3 and Exhibit "B" page 4 also attached hereto and made
parts of this lease.
EXHIBIT "B" Page 1 of 4
<PAGE>
A parcel of land being a portion of Lots C, E, F, G, and H of RR
resubdivision of lots 58, 61, 62, 63, 64, and 65 of J. T. Strattons survey of
the Ranchos Canada de Las Osos and La Laguna, San Luis Obispo County, State
of California, as said Lots are shown on map filed for record in Book A page
161 of Maps in the office of the San Luis Obispo County recorded, being more
particularly described as follows:
Commencing at a point on the South right of way line of Madonna Road
distance South 39 degrees 46 minutes 29 seconds East, 30.00 feet from Enginers
Station 35+00.00 of Madonna Road as per State Highway Map of V-SLO-2-SLO
recorded in Book 2 at Page 617 of State Highway Maps in the office of the San
Luis Obispo County Recorder thence along the South right of way line Of
Madonna Road through the following courses South 39 degrees 46 minutes 29
seconds East, 10.00 feet; thence North 50 degrees 13 minutes 31 seconds East
250.00 feet, thence North 55 degrees 25 minutes 11 seconds East, 106.70 feet
to the true point of beginning thence continuing along said South right of
way line, North 55 degrees 25 minutes 11 seconds East 169.43 feet to a point
on the West right of way line of the freeway on-ramp; thence along the West
right of way line of freeway on-ramp through the following courses: South 69
degrees 41 minutes 57 seconds East, 71.62 feet; thence South 41 degrees 03
minutes 04 seconds East, 449.65 feet thence on a curve to the right from a
tangent which bears South 39 degrees 51 minutes 08 seconds East, having a
radius of 752.00 feet through a central angle of 31 degrees 15 minutes 38
seconds for an arc length of 410.29 feet; thence South 8 degrees 35 minutes
30 seconds East, 179.61 feet to a point which is 106.47 feet left of Engineers
Station 737+13.47 SLO as shown on said State Highway map; thence along the
West right of way line of said freeway on a curve to the right from a tangent
which bears South 7 degrees 27 minutes 13 seconds East, having a radius of
2400.00 feet through a central angle of 21 degrees 39 minutes and 35 seconds
for an arc length of 907.28 feet to a point on a line which is parallel to
and 53.00 feet distance measured at right angles to the North-east line of
that parcel of land described in deed recorded in Book 560 at page 45 of
Official Records of said County Recorder; thence leaving said West right of
way line and running along said parallel line, North 46 degrees 04 minutes 00
seconds West 1716.38 feet; thence on a curve to the right tangent to the last
mentioned course having a radius of 20.00 feet, through a central angle of 96
degrees 14 minutes 16 seconds, for a distance of 33.59 feet to a point;
thence North 50 degrees 10 minutes 16 seconds East, 772.24 feet to the true
point of begging and containing 28.149 acres.
EXHIBIT "B" Page 2 of 4
<PAGE>
[MAP]
3of4 Map of Lots C, E, F, G and H located at the corner of Madonna Rd. and
Calle Joaquin.
EXHIBIT "B" Page 3 of 4
<PAGE>
[MAP]
EXHIBIT B - 4of4 Leased Premises situated on corner of Calle Joaquin and
Madonna Rd. next to the Texaco Station.
EXHIBIT "B" Page 4 of 4
<PAGE>
EXHIBIT D
DEFINITION OF FAIR MARKET RENTAL RATE
For the purposes of the Lease, the term "Fair Market Rental Rate" shall mean
the monthly amount per rentable square foot that landlords have accepted in
current transactions between non-affiliated parties from new, non-expansion,
non-renewal and non-equity tenants of comparable credit-worthiness, for
comparable space, a comparable use for a comparable period of time
("Comparable Transactions") in comparable buildings with comparable vacancy
factors. In any determination of Comparable Transactions appropriate
consideration shall be given to the annual rental rates per rentable square
foot, the standard of measurement by which the rentable square footage is
measured, the ratio of rentable square feet to usable square feet, the type
of escalation clause (e.g., whether increases in additional rent are
determined on a net or gross basis, and if gross, whether such increases are
determined according to a base year or a base dollar amount expense stop),
the extent of Tenant's liability under the Lease, abatement provisions
reflecting free rent and/or no rent during the period of construction or any
other period during the lease term, brokerage commissions, if any, which
would be payable by Landlord in similar transactions, length of the lease
term, size and location of premises being leased, building standard work
letter and/or tenant improvement allowances, if any, and other generally
applicable conditions of tenancy for such Comparable Transactions.
Landlord shall determine the Fair Market Rental Rate by using its good faith
judgment. Landlord shall provide written notice of such amount within thirty
(30) days (but in no event later that sixty (60) days) after Tenant provides
the notice to Landlord exercising Tenant's option rights which require a
calculation of the Fair Market Rental Rate. Tenant shall have fifteen (15)
days ("Tenant's Review Period") after receipt of Landlord's notice of the new
rental within which to accept such rental. In the event Tenant fails to
accept in writing such rental proposed by Landlord then such proposal shall
be deemed rejected, and Landlord and Tenant shall attempt to agree upon such
Fair Market Rental Rate, using their best good faith efforts. If Landlord and
Tenant fail to reach agreement within fifteen (15) days following Tenant's
Review Period ("Outside Agreement Date"), then each party shall place in a
separate sealed envelope their final proposal as to Fair Market Rental Rate
and such determination shall be submitted to arbitration in accordance with
subsections (a) through (e) below.
In the event that Landlord fails to timely generate the initial written
notice of Landlord's opinion of the Fair Market Rental Rate which triggers
the negotiation period of this Addendum Provision, then Tenant may commence
such negotiations by providing the initial notice, in which event Landlord
shall have fifteen (15) days ("Landlord's Review Period") after receipt of
Tenant's notice of the new rental within which to accept such rental. In the
event Landlord fails to accept in writing such rental proposed by Tenant,
then such proposal shall be deemed rejected, and Landlord and Tenant shall
attempt in good faith to agree upon such Fair Market Rental Rate, using their
best good faith efforts. If Landlord and Tenant fail to reach agreement
within fifteen (15) days following Landlord's Review Period (which shall be,
in such event, the "Outside Agreement Date" in lieu of the above definition
of such date), then each party shall place in a separate sealed envelope
their final proposal as to Fair Market Rental Rate and such determination
shall be submitted to arbitration in accordance with subsections (a) through
(e) below.
a. Landlord and Tenant shall meet with each other within five (5)
business days of the Outside Agreement Date and exchange the sealed
envelopes and then open such envelopes in each other's presence, If
Landlord and Tenant do not mutually agree upon the Fair Market Rental
Rate within one (1) business day of the exchange and opening of
envelopes, then, within ten (10 business days of the exchange and
opening of envelopes Landlord and Tenant shall agree upon and jointly
appoint a single arbitrator who shall agree by profession be a real
estate lawyer or broker who shall have been active over the five (5)
year period ending on the date of such appointment in the leasing of
commercial high-rise properties in the vicinity of the Building. Neither
Landlord nor Tenant shall consult with such broker or lawyer as to his
or her opinion as to Fair Market Rental Rate prior to the appointment.
The determination of the arbitrator shall be limited solely to the issue
of whether Landlord's or Tenant's submitted Fair Market Rental Rate for
the Premises is the closest to the actual Fair Market Rental Rate for
the Premises as determined by the arbitrator, taking into account the
requirements of this Addendum Provision. Such arbitrator may hold such
hearings and require such briefs as the arbitrator, in his or her sole
discretion, determines is necessary. In addition, Landlord or Tenant may
submit to the arbitrator with a copy to the other party within five (5)
business days after the appointment of the arbitrator any market data
and additional information that such party deems relevant to the
determination of Fair Market Rental Rate ("FMRR Data") and the other
party may submit a reply in writing within five (5) business days after
receipt of such FMRR Data.
<PAGE>
b. The arbitrator shall, within thirty (30) days of his or her
appointment, reach a decision as to whether the parties shall use
Landlord's or Tenant's submitted Fair Market Rental Rate, and shall
notify Landlord and Tenant of such determination.
c. The decision of the arbitrator shall be binding upon Landlord and
Tenant, except as provided below.
d. If Landlord and Tenant fail to agree upon and appoint an
arbitrator, then the appointment of the arbitrator shall be made by the
Presiding Judge of the San Luis Obispo Superior Court, or, if he or she
refuses to act, by any judge having jurisdiction over the parties.
e. The cost of arbitration shall be paid by Landlord and Tenant
equally.
In the event that Tenant objects to the Fair Market Rental
Rate as determined by the arbitration provision specified above, Tenant
may elect to terminate the Lease upon twelve (12) months' written notice
sent to Landlord at any time within ninety (90) days following the
establishment of the Fair Market Rental Rate as determined by such
arbitration. In the event Tenant elects to terminate the Lease, Tenant
shall reimburse Landlord for its reasonable attorneys' fees and
reasonable costs associated with such arbitration. In the event that the
above-referenced twelve (12) month period overlaps beyond the expiration
of the Lease Term or any extension thereof, Tenant shall pay rental to
Landlord during the period of such overlap at the Fair Market Rental
Rate determined pursuant to such arbitration.
<PAGE>
CONSENT TO LEASE
The undersigned, as Master Ground Lessor, under that certain Lease
dated as of the 16th day of January, 1978, by and between Great Western
Bank, a federal savings bank, successor in interest to Northern
California Savings and Loan Association, a California corporation
("Lessee") and MRP Institution Associates, successor in interest to
Leonard K. Firestone ("Lessor") hereby consents to the Lease by and
between Great Western Bank and Heritage Oaks Bank, a California
corporation, as further described in the accompanying Lease document
dated as of June 26, 1997.
Approved:
Master Ground Lessor
MRP Institution Associates
By: Urban Retail Properties Co. Agent
By /s/ LaBonney P. Taylor
-------------------------------------
LaBonney P. Taylor
Its Authorized Signatory
------------------------------------
Date August 7, 1997
----------------------------------
<PAGE>
[VAVRINEK, TRINE, DAY & CO., LLP
LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To: Heritage Oaks Bancorp
We consent to the incorporation of our report dated February 13, 1998, on the
consolidated financial statements of Heritage Oaks Bancorp as of December 31,
1997 and 1996, and for each of the three years in the period ended December
31, 1997, included in its Annual Report on form 10-KSB for the year ended
December 31, 1997.
VAVRINEK, TRINE, DAY & CO., LLP
Certified Public Accountants
Rancho Cucamonga, California
March 23, 1998
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