-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F/BPo6sPDs7oMae94hB9X5YdlMZEtg+HA3M/BV/+oH3QnzjAlz7XKEHQmFEsJkNJ p9GaqrGrkhEvi1PCrUu9iA== 0000912057-96-027817.txt : 19961202 0000912057-96-027817.hdr.sgml : 19961202 ACCESSION NUMBER: 0000912057-96-027817 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19961127 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BSM BANCORP CENTRAL INDEX KEY: 0001027324 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-16951 FILM NUMBER: 96673468 BUSINESS ADDRESS: STREET 1: P O BOX 6090 CITY: SANTA MARIA STATE: CA ZIP: 93456-6090 MAIL ADDRESS: STREET 1: P O BOX 6090 CITY: SANTA MARIA STATE: CA ZIP: 93456-6090 S-4 1 S-4 As filed with the Securities and Exchange Commission on November 27, 1996. Registration No. 33-_________ - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- BSM BANCORP (Exact name of registrant as specified in charter)
CALIFORNIA 6712 77-0442667 (State or other jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.) incorporation or organization) Classification Code Number)
BANK OF SANTA MARIA 2739 SANTA MARIA WAY SANTA MARIA, CALIFORNIA 93455 (805) 937-8551 (Address, including zip code, and telephone number, including area code, or registrant's principal executive offices) ---------------------------------- Mr. William A. Hares President and Chief Executive Officer Bank of Santa Maria 2739 Santa Maria Way Santa Maria, California 93455 (805) 937-8551 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------------------------------- With a copy to: Loren P. Hansen, Esq. Knecht & Hansen 1301 Dove Street, Suite 900 Newport Beach, California 92660 (714) 851-8070 ---------------------------------- Approximate date of commencement of proposed sale to public: As soon as practicable following the effective date of this Registration Statement. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- PROPOSED PROPOSED MAXIMUM MAXIMUM TITLE OF EACH CLASS OF SECURITIES TO OFFERING PRICE AGGREGATE AMOUNT OF BE REGISTERED AMOUNT BEING REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE(1) - --------------------------------------------------------------------------------------------------------------------------------- Common Stock, no par value 2,764,261 shares (2) $15.50 $42,846,046 $12,983.65 - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------- (1) The proposed maximum offering price and proposed maximum aggregate offering price reflect the market price and market value of the common stock of the Bank to be converted and exchanged in connection with the reorganization described in the Written Consent Statement/Prospectus, calculated pursuant to Section 6(b) of the Securities Act of 1933, as amended, and Rule 457(f)(2) under the Securities Act of 1933, as amended, based on the average bid and asked price of Bank Common Stock on November 22, 1996. (2) Based on approximate number of shares to be issued in respect to the same number of outstanding shares of common stock of Bank of Santa Maria (the "Bank"). The proposed maximum offering price and proposed maximum aggregate offering price are estimated solely in order to determine the registration fee. BSM BANCORP Cross Reference Sheet Pursuant to Rule 501(b) of Regulation S-K
INFORMATION STATEMENT/PROSPECTUS ITEM AND CAPTION OF FORM S-4 CAPTION OF LOCATION ---------------------------- -------------------------------- A. INFORMATION ABOUT THE TRANSACTION 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus............. Facing Page of Registration Statement; Cross Reference Sheet; Outside Front Cover Page of Written Consent Statement/Prospectus 2. Inside Front and Outside Back Cover Page of Prospectus........................... Inside Front Cover Page; Available Information; Table of Contents 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information................ SUMMARY OF WRITTEN CONSENT STATEMENT/ PROSPECTUS; SOLICITATION OF WRITTEN CONSENTS; INFORMATION REGARDING THE BUSINESS AND PROPERTIES OF THE HOLDING COMPANY; BANK HOLDING COMPANY REORGANIZATION; COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK 4. Terms of the Transaction............. SUMMARY OF WRITTEN CONSENT STATEMENT/PROSPECTUS; COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK; SOLICITATION OF WRITTEN CONSENTS 5. Pro Forma Financial Information.......................... Not Applicable 6. Material Contacts with the Company Being Acquired............... BANK HOLDING COMPANY REORGANIZATION 7. Additional Information Required for Reoffering by Persons and Parties Deemed to be Underwriters................... Not Applicable 8. Interests of Named Experts and Counsel.......................... EXPERTS; LEGAL MATTERS 9. Disclosure of Commission Position on Indem- nification for Securities Act Liabilities...................... COMMISSION'S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES B. INFORMATION ABOUT THE REGISTRANT 10. Information with Respect to S-3 Registrant Not Applicable 11. Incorporation of Certain Information by Reference......................... Not Applicable 12. Information with Respect to S-2 or S-3 Registrant................ Not Applicable 13. Incorporation of Certain Information by Reference............. Not Applicable 14. Information with Respect to Registrants Other Than S-3 or S-2 Registrants................... INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF THE HOLDING COMPANY; SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK - Holding Company, Effect of Governmental Policies and Recent Legislation; RESTRICTIONS ON TRANSFERS OF FUNDS TO THE HOLDING COMPANY BY THE BANK; MARKET PRICE OF AND DIVIDENDS ON HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED 15. Information with Respect to S-3 Companies........................ Not Applicable 16. Information with Respect to S-2 or S-3 Companies................. Not Applicable 17. Information with Respect to Companies Other Than S-2 or S-3 Companies........................ MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE BANK; INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF THE BANK; SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK - The Bank; Effect of Governmental Policies and Recent Legislation; RESTRICTIONS ON TRANSFERS OF FUNDS TO THE HOLDING COMPANY BY THE BANK; MARKET PRICE OF AND DIVIDENDS ON HOLDING COMPANY AND BANK COMMON STOCK; INDEX TO FINANCIAL STATEMENTS 18. Information if Proxies, Consents or Authorizations are to be Solicited.................. Written Consent Statement/Prospectus Cover Page; SUMMARY OF WRITTEN CONSENT STATEMENT/PROSPECTUS; BANK HOLDING COMPANY REORGANIZATION - Organizational Transactions; SOLICITATION OF WRITTEN CONSENTS - Record Date and Persons Entitled to Give Written Consent; Written Consent and Revocability of Written Consents; Security Ownership of Certain Beneficial Owners and Management; BANK HOLDING COMPANY REORGANIZATION - Terms of the Merger Agreement; Dissenting Shareholders' Rights; INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF THE HOLDING COMPANY - Management; Employees 19. Information if Proxies, Consents or Authorizations are not to be Solicited or in an Exchange Offering.............. Not Applicable 20. Indemnification of Directors and Officers............... Part II 21. Exhibits and Financial Statement Schedules.................. Part II 22. Undertakings......................... Part II
DRAFT TRANSMITTAL LETTER WRITTEN CONSENT STATEMENT FOR APPROVAL OF PLAN OF REORGANIZATION AND MERGER AGREEMENT IN CONNECTION WITH THE FORMATION OF HOLDING COMPANY AND APPROVAL OF BSM BANCORP 1996 STOCK OPTION PLAN ______________, 1997 Dear Shareholder: The enclosed Written Consent Statement/Prospectus is provided by the Board of Directors of Bank of Santa Maria in connection with the solicitation of consent of our shareholders for approval of the formation of a bank holding company for Bank of Santa Maria. Upon approval of the Plan of Reorganization and Merger Agreement, Bank of Santa Maria will become a subsidiary of the newly formed holding company, BSM Bancorp. Written consents for approval of this action are being solicited from all shareholders of the Bank. Banking has changed dramatically over the past 18 years since we first started Bank of Santa Maria. In order to take full advantage of the changes in the banking environment the Bank must continue to evolve and grow. We believe establishing a holding company will give us a broader range of options with respect to access to additional capital, possibilities for expansion of the branch system and expanded abilities in the financial services area, as well as other business activities. For these reasons, the Board of Directors has unanimously approved the proposal to form a bank holding company and recommends that you vote in favor of this proposal. The enclosed Written Consent Statement/Prospectus is also provided by the Board of Directors in connection with the solicitation of consent of our shareholders as prospective shareholders of the holding company, for approval of the BSM Bancorp 1996 Stock Option Plan (the "1996 Plan"). Written consents for approval of this action are also being solicited from all shareholders of the Bank as prospective shareholders of the holding company. We are asking all of the Bank's shareholders to consider and vote upon approval of the Plan of Reorganization and Merger Agreement ("Merger Agreement") entered into as of November 20, 1996, by the Bank of Santa Maria, BSM Bancorp and BSM Merger Company, a California corporation. This Merger Agreement provides for the merger of BSM Merger Company with and into the Bank, as a result of which the bank surviving the merger, Bank of Santa Maria, will be the wholly-owned subsidiary of BSM Bancorp. We are also asking that all of the Bank's shareholders, as prospective shareholders of the holding company, to consider and vote upon approval of the 1996 Plan. ____________, 1997 Page 2 BSM Bancorp is a newly-formed California corporation, organized at the direction of the Bank's Board of Directors for the purpose of becoming a bank holding company. In accordance with the Merger Agreement, as more fully described in the attached Written Consent Statement/Prospectus, BSM Bancorp will acquire all of the outstanding shares of the Bank by issuing, subject to certain limitations, common stock in BSM Bancorp to each of the Bank's shareholders, in exchange for all of the outstanding shares of Bank of Santa Maria's common stock. After this exchange you will have the same number of shares in BSM Bancorp as you have in the Bank. It is important to note that your stock in the Bancorp will have a value equal to the value of your stock in the Bank and therefore the exchange will take place without any recognition of gain or loss for federal income tax purposes. It is equally important to inform you that no changes in the Bank's directors, officers, or other personnel are contemplated as a result of the formation of the bank holding company. Additionally, after formation of the bank holding company, the Bank of Santa Maria will continue its present business and operations under the name of Bank of Santa Maria. The new 1996 Plan is intended to replace the Bank's 1988 Stock Option Plan. The 1996 Plan would reserve _______ shares or 30% of the unissued Common Stock of BSM Bancorp. In addition, the 1996 Plan would allow for the granting of options to directors, officers, employees, as well as consultants, advisors and others having a business relationship with BSM Bancorp and Bank of Santa Maria by attracting and retaining competent managerial personnel, added incentive for high levels of performance and for unusual efforts to increase the earnings of BSM Bancorp and Bank of Santa Maria. The terms and conditions of the 1996 Plan are described in the Written Consent Statement/Prospectus. Section 902 and 903 of the California Corporations Code require the approval of the Plan of Reorganization and Merger Agreement by a majority of the outstanding shares of common stock of the Bank. Section 603 of the Corporations Code and Section 2.8 of Article II of the Bylaws of the Bank authorize the Bank to obtain the necessary shareholder approvals by written consent without a meeting. Pursuant to SEC rules because certain documents are incorporated by reference, the Bank will be able to effect the proposed Merger Agreement after 20 business days have elapsed from the date the Written Consent Statements are sent to shareholders, following all necessary regulatory agency approvals. You are urged to read the attached documents carefully as they contain the terms of the merger, facts concerning the business, results of operations, financial condition and properties of both BSM Bancorp and Bank of Santa Maria. It is very important that your shares be represented because the affirmative vote of a majority of the outstanding shares of Bank of Santa Maria is required to approve the Merger Agreement and the 1996 Plan. It is therefore essential that all shareholders vote. ____________, 1997 Page 3 You are urged to fill in, date, sign and mail the enclosed Written Consent form in the enclosed self-addressed postage prepaid envelope. It is expected that the enclosed Written Consent Statement/Prospectus and accompanying Consent form will be mailed or delivered to shareholders of the Bank on or after ________________, 1997. We hope that the Written Consent Statement/Prospectus will answer any questions you may have concerning the proposed formation of the bank holding company. If you have any questions, concerning this Written Consent Statement/Prospectus or the accompanying proxy, or if you need any help voting your shares, please telephone Mr. F. Dean Fletcher of Bank of Santa Maria at (805) 937-8551. Your interest and participation are appreciated. Sincerely, William A. Hares A.J. Diani President and Chief Executive Officer Chairman of the Board Directors: _____________________________ _____________________________ Armand R. Acosta Toshiharu Nishino _____________________________ _____________________________ Richard E. Adam Joseph Sesto, Jr. _____________________________ _____________________________ Fred L. Crandall, Jr. William L. Snelling _____________________________ _____________________________ Roger A. Ikola Mitsuo Taniguchi _____________________________ Joseph F. Ziemba SOLICITATION OF WRITTEN CONSENTS TO APPROVE THE PLAN OF REORGANIZATION AND MERGER AGREEMENT PROVIDING FOR THE FORMATION OF A BANK HOLDING COMPANY, AND TO APPROVE THE 1996 STOCK OPTION PLAN OF THE PROPOSED BANK HOLDING COMPANY PROSPECTUS OF BSM BANCORP WRITTEN CONSENT STATEMENT OF BANK OF SANTA MARIA BSM Bancorp, a California corporation (the "Holding Company"), has filed this Prospectus of BSM Bancorp and Written Consent Statement of Bank of Santa Maria (collectively the "Written Consent Statement/Prospectus") with the Securities and Exchange Commission (the "Commission") as part of a Registration Statement on Form S-4 (the "Registration Statement"), pursuant to the Securities Act of 1933, as amended (the "Securities Act"), for the purpose of registering thereunder up to _______ shares of the Holding Company's common stock, no par value ("Holding Company Common Stock"), in connection with the acquisition of Bank of Santa Maria, a California state-chartered banking corporation (the "Bank"), by the Holding Company through a merger (the "Merger") of BSM Merger Company (the "Merger Corp."), a wholly-owned subsidiary of the Holding Company, with and into the Bank, as a result of which the Bank surviving the Merger, Bank of Santa Maria (the "Surviving Bank"), shall become the wholly-owned subsidiary of the Holding Company and the Bank's shareholders will receive for their Bank Common Stock, no par value ("Bank Common Stock"), an equal number of shares of Holding Company Common Stock (the "Reorganization"). This Written Consent Statement/Prospectus is being furnished to the shareholders of the Bank (the "Bank Shareholders") in connection with the solicitation of Written Consents by the Board of Directors of the Bank for the approval of the Plan of Reorganization and Merger Agreement (the "Merger Agreement"). In addition, this Written Consent Statement/Prospectus is being furnished to Bank Shareholders to consider and vote upon, as prospective shareholders of the Holding Company, the Holding Company's 1996 Stock Option Plan (the "1996 Plan") that would reserve ______ shares of the unissued Common Stock of the Holding Company as described in this Written Consent Statement/Prospectus that was approved by the Holding Company's Board of Directors, subject to the approval of the California Commissioner of Corporations and the holders of a majority of the issued and outstanding shares of the Bank as prospective shareholders of the Holding Company. This Registration Statement is not registering any shares reserved for issuance under the 1996 Plan. This Written Consent Statement/Prospectus also serves as the Prospectus of the Holding Company under the Securities Act with respect to the issuance of up to _______ shares of Holding Company Common Stock pursuant to the Merger Agreement more fully described herein whereby the Surviving Bank will become a wholly-owned subsidiary of the Holding Company. As a result of the Merger, the Holding Company will, (subject to certain limitations described elsewhere in this Written Consent Statement/Prospectus and in the Merger Agreement), issue Holding Company Common Stock to each of the Bank Shareholders in exchange for all of the outstanding 1 shares of Bank Common Stock. See "BANK HOLDING COMPANY REORGANIZATION," and the text of the Merger Agreement which is attached hereto as Annex I to this Written Consent Statement/Prospectus and is hereby incorporated by reference and made a part hereof. The enclosed Written Consent Statement/Prospectus does not cover any resales of Holding Company Common Stock received by Bank Shareholders upon consummation of the proposed Reorganization pursuant to the Merger Agreement, and no person is authorized to make any use of this Written Consent Statement/Prospectus in connection with any such resale or in connection with the offer or sale of any other securities. The consummation of the proposed Reorganization is subject to the receipt of the requisite approvals of applicable regulatory agencies and the shareholders of both the Holding Company and the Bank as well as the fulfillment of certain other conditions, as more fully described in this Written Consent Statement/Prospectus. See "BANK HOLDING COMPANY REORGANIZATION - Terms of the Merger Agreement; Conditions to the Merger, Termination of Merger Agreement; - Regulatory Approvals," herein. The 1996 Plan is subject to the receipt of the requisite approvals of applicable regulatory agencies and the shareholders of the Bank as prospective shareholders of the Holding Company. See "APPROVAL OF THE BSM BANCORP 1996 STOCK OPTION PLAN." This Written Consent Statement/Prospectus is being first mailed or delivered to shareholders of the Bank on or about ____________________, 1997. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS WRITTEN CONSENT STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS WRITTEN CONSENT STATEMENT/PROSPECTUS IS _________________, 1997 2 AVAILABLE INFORMATION No person has been authorized to give any information or to make any representation not contained in or incorporated by reference in this Written Consent Statement/Prospectus, and, if given or made, such information or representation not contained herein must not be relied upon as having been authorized by the Holding Company or the Bank. This Written Consent Statement/Prospectus does not constitute an offer to sell, or the solicitation of an offer to purchase, any of the securities offered by this Written Consent Statement/Prospectus, or the solicitation of Written Consents, in any jurisdiction to or from any person to or from whom it is unlawful to make such offer or solicitation of an offer, or consent solicitation in such jurisdiction. Neither the delivery of this Written Consent Statement/Prospectus nor the issuance or sale of any securities hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Holding Company or the Bank since the date hereof or that the information herein is correct as of any time subsequent to the date hereof. The Holding Company is a newly formed corporation organized at the direction of the Bank's Board of Directors for the purpose of acquiring voting control of the Bank and thereby becoming a bank holding company. As a newly formed corporation, the Holding Company has not been subject to the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and there is currently no public market for its common stock. However upon consummation the Reorganization, the Holding Company will become subject to the information, reporting and proxy solicitation requirements of the Exchange Act and filings thereby required to be made with the Commission will be available for inspection and copying at the offices of the Commission set forth below. The Bank is subject to the information, reporting and proxy solicitation requirements of the Exchange Act, and in accordance therewith files reports and other information with the Federal Deposit Insurance Corporation (the "FDIC"). Such reports and other information can be inspected and copied at the public reference facilities for the Registrations and Disclosure Division maintained by the FDIC at 550 17th Street, Room F-643, Washington, D.C. 20429, telephone number (202) 393-8400, and by contacting Mr. F. Dean Fletcher, Executive Vice President of the Bank, at Bank of Santa Maria, 2739 Santa Maria Way, Santa Maria, California 93455, telephone number (805) 937-8551. This Written Consent Statement/Prospectus does not contain all of the information set forth in the Registration Statement. For further information with respect to the Holding Company and the securities offered hereby, reference is made to the Registration Statement, including the exhibits filed therewith or incorporated by referenced therein. Statements contained herein concerning the provisions of documents filed with, or incorporated by reference in, the Registration Statement as exhibits are necessarily summaries of such documents and such statement is qualified in its entirety by reference to the copy of the applicable document filed with the Commission. Copies of the Registration Statement, including exhibits, may be obtained from the Commission upon payment of a prescribed fee, or may be examined without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the following regional offices of the Commission: 75 Park Place, Room 1228, New York, New York 10007 and Room 3190, Kluczynski, Federal Building, 230 South, Dearborn Street, Chicago, Illinois 60604. The SEC also maintains a Web Site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at HTTP://www.sec.gov. 3 TABLE OF CONTENTS PAGE ---- AVAILABLE INFORMATION.........................................................3 SUMMARY OF WRITTEN CONSENT STATEMENT/PROSPECTUS...............................7 BANK HOLDING COMPANY REORGANIZATION.......................................7 PARTIES TO THE MERGER AGREEMENT......................................7 RIGHTS OF DISSENTING SHAREHOLDERS....................................8 RECORD DATE..........................................................8 CONSENT REQUIRED.....................................................8 THE REORGANIZATION...................................................8 REASONS FOR THE REORGANIZATION.......................................9 INTERESTS OF CERTAIN PERSONS IN THE MERGER..........................9 CONDITIONS TO THE REORGANIZATION AND REGULATORY APPROVALS...........10 CERTAIN FEDERAL INCOME TAX CONSEQUENCES.............................11 WRITTEN CONSENTS....................................................11 RECOMMENDATIONS.....................................................11 BSM BANCORP 1996 STOCK OPTION PLAN.......................................11 SUMMARY OF THE 1996 PLAN............................................11 CONSENT REQUIRED....................................................12 SELECTED FINANCIAL DATA......................................................13 SOLICITATION OF WRITTEN CONSENTS.............................................16 WRITTEN CONSENT AND REVOCABILITY OF WRITTEN CONSENTS.....................16 RECORD DATE AND PERSONS ENTITLED TO GIVE WRITTEN CONSENTS................16 COST OF SOLICITATIONS OF WRITTEN CONSENTS................................17 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...........17 BANK HOLDING COMPANY REORGANIZATION..........................................19 GENERAL..................................................................19 REASONS FOR REORGANIZATION...............................................19 ORGANIZATIONAL TRANSACTIONS..............................................20 TERMS OF THE MERGER AGREEMENT............................................21 CONVERSION..........................................................21 EFFECTIVE TIME OF THE MERGER........................................21 INTERESTS OF CERTAIN PERSONS IN THE MERGER..........................21 EMPLOYEE BENEFITS...................................................22 CONDITIONS TO THE MERGER............................................22 TERMINATION OF MERGER AGREEMENT.....................................22 EXCHANGE OF SHARE CERTIFICATES...........................................23 COSTS OF REORGANIZATION..................................................23 REGULATORY APPROVALS.....................................................23 DISSENTING SHAREHOLDERS' RIGHTS..........................................24 ACCOUNTING TREATMENT.....................................................24 CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................24 RESTRICTIONS ON AFFILIATES...............................................25 RECOMMENDATIONS..........................................................26 CAPITALIZATION...........................................................26 4 COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK.......................................................27 BANK COMMON STOCK........................................................27 HOLDING COMPANY COMMON STOCK.............................................27 COMPARISON OF BANK COMMON STOCK AND HOLDING COMPANY COMMON STOCK.........29 ASSESSABILITY.......................................................29 CLASSIFICATION OF BOARD OF DIRECTORS.....................................30 VOTING RIGHTS............................................................30 NUMBER OF DIRECTORS......................................................30 DIVIDEND RESTRICTIONS...............................................31 DISSENTERS' RIGHTS..................................................31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE BANK...........................................32 INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF THE HOLDING COMPANY.....................................................................41 ORGANIZATION.............................................................41 BUSINESS.................................................................41 MANAGEMENT...............................................................41 EMPLOYEES................................................................42 PROPERTIES...............................................................42 LEGAL PROCEEDINGS........................................................42 INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF THE BANK...............42 GENERAL..................................................................42 ACQUISITION OF TEMPLETON NATIONAL BANK...................................43 ACQUISITION OF CITIZENS BANK OF PASO ROBLES, N.A.........................43 ACQUISITION OF EL CAMINO NATIONAL BANK...................................43 SERVICES.................................................................43 EMPLOYEES................................................................44 PROPERTIES...............................................................44 LEGAL PROCEEDINGS........................................................45 SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK...............45 THE HOLDING COMPANY......................................................45 THE BANK.................................................................46 EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION...................48 OTHER ITEMS.........................................................52 CAPITAL ADEQUACY GUIDELINES.........................................53 SAFETY AND SOUNDNESS STANDARDS......................................54 PREMIUMS FOR DEPOSIT INSURANCE......................................54 INTERSTATE BANKING AND BRANCHING....................................55 COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS............56 CHANGES IN ACCOUNTING PRINCIPLES....................................57 OTHER REGULATIONS AND POLICIES......................................59 RESTRICTIONS ON TRANSFERS OF FUNDS TO THE HOLDING COMPANY BY THE BANK........60 5 MARKET PRICE OF AND DIVIDENDS ON HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK.......................................................61 MARKET INFORMATION.......................................................61 SHAREHOLDERS.............................................................62 DIVIDENDS................................................................62 DIRECTORS AND EXECUTIVE OFFICERS OF THE HOLDING COMPANY AND THE BANK.........64 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS REGARDING BANK OF SANTA MARIA......................................................70 APPROVAL OF BSM BANCORP 1996 STOCK OPTION PLAN...............................71 INTRODUCTION.............................................................71 SUMMARY OF PLAN..........................................................71 COMPARISON TO THE BANK OF SANTA MARIA 1988 STOCK OPTION PLAN.............73 FEDERAL INCOME TAX CONSEQUENCES..........................................73 COMMISSION'S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES......74 EXPERTS......................................................................75 LEGAL MATTERS................................................................75 ANNUAL REPORT................................................................75 INDEX TO FINANCIAL STATEMENTS................................................78 6 SUMMARY OF WRITTEN CONSENT STATEMENT/PROSPECTUS The following is a summary of certain information contained elsewhere in this Written Consent Statement/Prospectus, and is intended to assist shareholders in their review of this Written Consent Statement/Prospectus. This summary does not purport to be complete and is qualified in its entirety by reference to the full text of the more detailed Written Consent Statement/Prospectus, the annexes and the exhibits thereto, and the documents referred to herein and therein. Each Bank shareholder is urged to read this Written Consent Statement/Prospectus and the annexes hereto in their entirety and with care. BANK HOLDING COMPANY REORGANIZATION PARTIES TO THE MERGER AGREEMENT. . . The Holding Company is a California corporation, and, subject to the consummation of the Reorganization, including the approval of the Holding Company's Application to the Board of Governors of the Federal Reserve System, will acquire 100% of the outstanding shares of the Bank, and will be registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The principal executive office of the Holding Company is located at 2739 Santa Maria Way, Santa Maria, California 93455, telephone number (805) 937-8551. Upon consummation of the Reorganization, the Holding Company's business will be to act as a bank holding company for Bank of Santa Maria, the bank surviving the Merger. See "BANK HOLDING COMPANY REORGANIZATION" and "INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF THE HOLDING COMPANY", herein. The Bank is a California state-chartered bank. The principal executive office of the Bank is located at 2739 Santa Maria Way, Santa Maria, California 93455, telephone number (805) 937-8551. The Bank's principal business is that of an independent commercial bank. The Bank provides a wide range of banking services to primarily small and medium sized businesses and individuals in Santa Barbara County and in the California Central Coast area. See "BANK HOLDING COMPANY REORGANIZATION" and "INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF THE BANK." The Merger Corp. is a California corporation organized by the Directors of the Bank as a wholly-owned subsidiary of the Holding Company. The 7 Merger Corp.'s principal purpose is to merge with the Bank in order to facilitate the Holding Company's acquisition of the Bank. See "BANK HOLDING COMPANY REORGANIZATION - ORGANIZATIONAL TRANSACTIONS." RIGHTS OF DISSENTING SHAREHOLDERS . . Bank shareholders do not have dissenters' rights with respect to the Merger. RECORD DATE . . . . . . . . . . . . . ______________, 1997 (the "Record Date"). CONSENT REQUIRED. . . . . . . . . . . The affirmative consent of the holders of a majority of the issued and outstanding shares of Bank Common Stock entitled to vote (the "Required Vote") is required to approve the Reorganization Proposal. A copy of the Merger Agreement is attached to this Written Consent Statement/Prospectus as Annex I. See "SOLICITATION OF WRITTEN CONSENTS - WRITTEN CONSENT AND REVOCABILITY OF WRITTEN CONSENTS." The affirmative vote of a majority of the outstanding shares of the Merger Corp. and the and the Holding Company entitled to vote are also required for approval of the Reorganization Proposal. See "BANK HOLDING COMPANY REORGANIZATION - TERMS OF THE MERGER AGREEMENT; CONDITIONS TO THE MERGER." THE REORGANIZATION. . . . . . . . . . The Merger Agreement provides for the acquisition of the Bank by the Holding Company by means of the Merger. Upon consummation of the Merger, the Merger Corp. will be merged with and into the Bank under the charter of the Bank and the separate corporate existence of the Merger Corp. will cease. As a result of the Merger, the surviving entity will continue to be known as "Bank of Santa Maria" and will continue the Bank's current business and operations as a California state-chartered bank in essentially the same manner as it was conducted prior to the Reorganization. Each share of Bank Common Stock outstanding immediately prior to the Merger will, on and after the consummation of the Merger, automatically represent one share of Holding Company Common Stock. Upon consummation of the Merger, all of the Surviving Bank's common stock will be owned by the Holding Company. See "BANK HOLDING COMPANY REORGANIZATION - 8 GENERAL; TERMS OF THE MERGER AGREEMENT; CONVERSION." REASONS FOR THE REORGANIZATION. . . . In the opinion of the Bank's Board of Directors, the bank holding company structure will permit greater flexibility in responding to evolving changes in the banking and financial services industries and meeting the competition of other financial institutions. The Board of Directors of the Bank believes that the Reorganization will provide Bank Shareholders with the opportunity to own a business entity which will provide greater operating and financial flexibility and will permit expansion into a broader range of financial services and other business activities. The Holding Company anticipates that during the initial months following the consummation of the Reorganization, its principal business and activity will be to serve as the bank holding company for the Surviving Bank. See "BANK HOLDING COMPANY REORGANIZATION - REASONS FOR REORGANIZATION." INTERESTS OF CERTAIN PERSONS IN THE MERGER . . . . . . . . . . . . . The Reorganization will not have any substantive effect on the operation or management of the Surviving Bank which will continue to have the same directors, officers, management personnel, assets and operating policies as the Bank had prior to the Reorganization. Upon consummation of the Reorganization, the Holding Company will have the same directors and executive officers as the Holding Company had prior to consummation of the Reorganization. See "BANK HOLDING COMPANY REORGANIZATION - TERMS OF THE MERGER AGREEMENT - INTERESTS OF CERTAIN PERSONS IN THE MERGER", and "INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF THE HOLDING COMPANY - MANAGEMENT." As of the Record Date, the Bank's directors, executive officers and their affiliates beneficially owned, in the aggregate, approximately ____% of the Bank's outstanding shares entitled to vote for the approval of the Merger Agreement. The Holding Company has one shareholder, also a director and executive officer of the Bank, who beneficially owns 100% of the Holding Company's common stock, who intends to vote such shares in favor of approval of the Merger Agreement. Following consummation of the Reorganization, 9 the Holding Company will repurchase such shares of the Holding Company Common Stock. See "SOLICITATION OF WRITTEN CONSENTS - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT"; and "BANK HOLDING COMPANY REORGANIZATION - ORGANIZATIONAL TRANSACTIONS." The affirmative consent of a majority of the outstanding shares of Bank Common Stock and Holding Company Common Stock, respectively, are required to approve the Merger Agreement. See "SOLICITATION OF WRITTEN CONSENTS"; and "BANK HOLDING COMPANY REORGANIZATION - TERMS OF THE MERGER AGREEMENT; CONDITIONS TO THE MERGER", herein. CONDITIONS TO THE REORGANIZATION AND REGULATORY APPROVALS . . . . . . In addition to approval of the Merger Agreement by the Board of Directors and the shareholders of the Bank, the Merger Corp. and the Holding Company, consummation of the Reorganization will require the prior approval, on terms satisfactory to the Bank, the Merger Corp. and the Holding Company, of certain regulatory agencies, including the Board of Governors of the Federal Reserve System ("Federal Reserve Board"), the Federal Deposit Insurance Corporation ("FDIC"), and the California Superintendent of Banks (the "Superintendent"). Management of the Bank is not aware of any circumstances which would lead it to believe that such agencies will not approve the Merger and the Reorganization. Even if such approvals are obtained, the Board of Directors of the Bank, the Holding Company or the Merger Corp. may, under certain circumstances, terminate the Merger Agreement. See "BANK HOLDING COMPANY REORGANIZATION - REGULATORY APPROVALS." An application for prior approval of the Holding Company to acquire the Bank was filed by the Holding Company with the Federal Reserve Board on ____________, 1996. An application (the "Merger Application") for prior approval of the Merger was filed with the FDIC on ____________, 1996. An application (the "State Application") for an acquisition of control was filed with the Superintendent on _____________, 1996. 10 CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . The Reorganization is conditioned upon receipt of a ruling from the Internal Revenue Service or an opinion to the effect, among other things, that no gain or loss will be recognized by Bank Shareholders upon the exchange of their common stock solely for Holding Company Common Stock. The Bank, the Holding Company or the Merger Corp. may terminate the Merger Agreement in the event a favorable ruling from the Internal Revenue Service is not received or a favorable opinion of counsel with respect to the tax effect of the reorganization is not received. See "BANK HOLDING COMPANY REORGANIZATION - CERTAIN FEDERAL INCOME TAX CONSEQUENCES." WRITTEN CONSENTS. . . . . . . . . . . The enclosed Written Consent is being solicited by the Board of Directors of the Bank. Each share of the Bank Common Stock represented by a properly executed Written Consent will, unless such Written Consent has been previously revoked, be voted in accordance with the instructions indicated on such Written Consent. Any Written Consent may be revoked at any time prior to the receipt of sufficient written consents to approve the Reorganization and not before 20 business days after the Written Consent Statement/Prospectus is sent to the Bank's shareholders. See "SOLICITATION OF WRITTEN CONSENTS." RECOMMENDATIONS . . . . . . . . . . . On November 12, 1996, the Board of Directors of the Bank approved the Merger Agreement and the Reorganization and determined that the transactions contemplated by the Merger Agreement were in the best interests of the Bank and its shareholders and recommended that such shareholders approve the Merger Agreement. See "BANK HOLDING COMPANY REORGANIZATION - RECOMMENDATIONS." BSM BANCORP 1996 STOCK OPTION PLAN SUMMARY OF THE 1996 PLAN . . . . . . The 1996 Plan proposes to reserve _____ shares of Common Stock of the Holding Company for issuance pursuant to the exercise of options. The 1996 Plan is designed to replace the Bank's 1988 Stock Option Plan, which will expire in 1998, with certain changes, as described in this Written Consent Statement/Prospectus. See "APPROVAL OF BSM BANCORP 1996 STOCK OPTION PLAN." 11 CONSENT REQUIRED. . . . . . . . . . . The affirmative vote of a majority of the outstanding shares of the Bank, as prospective shareholders of the Holding Company entitled to vote are also required for approval of the BSM Bancorp 1996 Stock Option Plan. See "APPROVAL OF BSM BANCORP 1996 STOCK OPTION PLAN." 12 SELECTED FINANCIAL DATA The following table presents selected financial data for the Bank as of and for each of the five years in the period ended December 31, 1995 and as of and for the nine months ended September 30, 1996 and 1995. The data as of and for each of the five years in the period ended December 31, 1995 is derived from audited financial statements of the Bank and the notes thereto. The data at September 30, 1996 and for the nine months ended September 30, 1995 and 1996 is derived from the unaudited financial statements of the Bank. In the opinion of management, such unaudited financial statements have been prepared on the same basis as the audited financial statements, and include all adjustments, which consist solely of normal recurring accruals, necessary for a fair statement of the results for the unaudited interim periods. Results for the nine months ended September 30, 1996 should not be considered necessarily indicative of the results to be expected for the full year. The information below is qualified in its entirety by the detailed information and financial statements included elsewhere herein, and should be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", "SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK", and the financial statements of the Bank and notes thereto included elsewhere in this Written Consent Statement/Prospectus. 13 SELECTED FINANCIAL DATA OF BANK OF SANTA MARIA
At, or for the Nine Months ended As of and for the Years Ended December 31, ----------------------------------------------------------------------------------- (In Thousands, unless noted otherwise) 9/30/96 9/30/95 1995 1994 1993 1992 1991 ----------------------------------------------------------------------------------- SUMMARY STATEMENT OF INCOME DATA Interest income $ 15,885 $ 15,293 $ 20,429 $ 17,606 $ 16,690 $ 18,510 $ 19,410 Interest expense 5,313 4,513 6,181 4,816 4,875 6,590 8,881 ----------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest before loan loss provision 10,572 10,780 14,248 12,790 11,815 11,920 10,529 Provision for loan losses 0 315 700 250 602 1,089 542 Non-interest income 2,232 1,978 2,592 2,358 2,460 2,308 1,966 Non-interest expense 8,329 8,398 11,112 10,808 10,307 9,879 9,139 ----------- ---------- ---------- ---------- ---------- ---------- ---------- Earnings before income taxes 4,475 4,044 5,028 4,090 3,366 3,260 2,814 Provision for income taxes 1,721 1,553 1,879 1,529 1,246 1,247 944 ----------- ---------- ---------- ---------- ---------- ---------- ---------- Net Income $ 2,754 $ 2,492 $ 3,149 $ 2,561 $ 2,120 $ 2,013 $ 1,870 ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- SUMMARY BALANCE SHEET DATA Net loans $ 161,896 $ 148,212 $ 148,692 $ 146,534 $ 145,767 $ 155,118 $ 150,930 Allowance for loan losses 2,580 2,208 2,537 2,228 2,254 2,415 2,043 Investment securities: Taxable 75,367 46,969 59,281 50,312 36,225 32,762 35,695 Non-taxable 11,629 15,424 11,257 7,058 9,293 3,161 2,411 Earning assets 258,816 227,132 235,194 216,261 206,991 199,904 191,475 Total assets 294,132 254,194 263,577 244,135 231,128 224,675 214,382 Interest-bearing deposits 204,385 173,010 176,388 168,447 161,086 162,679 162,464 Total deposits 262,632 227,433 234,054 218,595 209,278 204,808 196,266 Stockholders' equity 29,330 26,761 27,504 23,974 20,437 18,372 16,453 PER SHARE DATE Net income(1) $ 0.98 $ 0.91 $ 1.15 $ 0.96 $ 0.81 $ 0.78 $ 0.75 Book value(2) $ 10.61 $ 9.76 $ 10.01 $ 8.96 $ 8.13 $ 7.34 $ 6.59 Cash dividends declared(3) $ 0.35 $ 0.11 $ 0.11 $ 0.10 $ 0.06 $ 0.06 $ 0.06 Weighted average shares outstanding used in earnings per share 2,800 2,749 2,748 2,667 2,603 2,565 2,495 (In Thousands, unless noted otherwise) SELECTED FINANCIAL RATIOS Return on average equity(6) 12.94% 13.12% 12.16% 11.38% 10.91% 11.43% 12.09% Return on average assets(6) 1.34% 1.35% 1.26% 1.08% 0.94% 0.93% 0.92% Net interest spread(7) 5.10% 5.92% 5.74% 5.55% 5.38% 5.20% 5.51% Net interest margin(7) 5.91% 6.67% 6.53% 6.15% 5.97% 5.95% 5.40% Leverage capital ratio 9.49% 10.58% 10.72% 9.83% 8.80% 8.34% 7.53% Tier 1 capital ratio 14.65% 13.49% 13.66% 13.51% 10.80% 9.05% 7.57% Risk-based capital ratio 15.90% 14.62% 14.89% 14.76% 12.02% 10.38% 10.10% Nonperforming loans to total loans(4) .61% .17% 0.10% 1.00% 1.75% 3.25% 0.60% Nonperforming assets to total assets(5) 0.81% 0.60% 0.53% 1.25% 1.97% 2.26% 0.43% Net charge-offs to average net loans(6) 0.16% 0.28% 0.27% 0.19% 0.52% 0.48% 0.11% Average equity to average total assets 10.36% 10.27% 10.38% 9.51% 8.65% 8.11% 7.61% Total interest expenses to interest income 33.45% 29.51% 30.26% 27.35% 29.21% 35.60% 45.75% Gross loans to deposits 62.63% 66.14% 64.61% 68.05% 70.73% 76.92% 77.94% Net income to average daily total deposits(6) 15.06% 15.12% 14.19% 12.02% 10.42% 10.18% 9.52%
(1) Net income per share represents net income for the specified period divided by the weighted average number of shares outstanding during the specified period plus shares issuable upon the assumed exercise of outstanding common stock options. (2) Book value per share is defined as total shareholders equity divided by the number of common shares actually outstanding as of the defined date. 14 (3) Cash dividends declared have not been restated for shares issued in conjunction with subsequent acquisitions. The figure is the amount per share reported as of the declaration date. (4) Non-performing loans consist of loans on non-accrual and all loans past due 90 days or more. (5) Non-performing assets consist of loans on non-accrual, all loans past due 90 days or more and OREO. (6) Operating ratios for the nine month period have been annualized. (7) Average earning assets consist of securities, Fed funds and net loans. 15 SOLICITATION OF WRITTEN CONSENTS This Written Consent Statement/Prospectus is furnished in connection with the solicitation of Written Consents for approval of the Merger Agreement providing for the merger of BSM Merger Company (the "Merger Corp.") with and into the Bank, as a result of which the Bank will be the wholly-owned subsidiary of BSM Bancorp. In addition, this Written Consent Statement/Prospectus is also furnished in connection with the solicitation of Written Consents of shareholders of the Bank as prospective shareholders of the Holding Company for approval of the BSM Bancorp 1996 Stock Option Plan (the "1996 Plan"). WRITTEN CONSENT AND REVOCABILITY OF WRITTEN CONSENTS A form of Written Consent is enclosed. Written Consents are being solicited from all shareholders of the Bank. Sections 902 and 903 of the California Corporations Code require the approval of the Merger Agreement and the 1993 Plan by a majority of the outstanding shares of Common Stock of the Bank. Section 603 of the Corporations Code and Section 2.8 of Article II of the Bylaws of the Bank authorize the Bank to obtain the necessary shareholder approvals by written consent without a meeting. Pursuant to SEC rules, because certain documents are incorporated by reference, the proposal will be deemed approved after twenty (20) business days have elapsed from the date the Written Consents are sent to shareholders if sufficient Written Consents, and all necessary regulatory approvals, are received. Shareholders of the Bank are requested to complete, sign and date the accompanying Written Consent form and return it to the Bank as soon as possible. Any shareholder may revoke his or her Written Consent at any time prior to receipt by the Bank of the number of Written Consents required to authorize the approval of the Merger Agreement. To effect a revocation prior to that time, a shareholder must file a written instrument revoking such shareholder's Written Consent with the Secretary of the Bank. Any shareholder who signs and returns the Written Consent form but does not indicate a choice thereon will be deemed to have consented to the Reorganization and Merger Agreement and the 1996 Plan. THE BANK MUST RECEIVE WRITTEN CONSENTS REPRESENTING A MAJORITY OF THE OUTSTANDING SHARES OF THE BANK'S COMMON STOCK FOR APPROVAL OF THE MERGER AGREEMENT AND THE 1996 PLAN. RECORD DATE AND PERSONS ENTITLED TO GIVE WRITTEN CONSENTS There were issued and outstanding ___________ shares of the Bank's Common Stock at the close of business on _______, 1997, which has been set as the Record Date for the purpose of determining the shareholders entitled to consent to the proposed amendment to the Articles of Incorporation. The Bank has no other class of stock outstanding. Consent to the Merger Agreement and the 1996 Plan may be given by any person in whose name shares of Common Stock stand on the books of the Bank as of the Record Date, or by his or her duly authorized agent. Each holder of Bank Common Stock will be entitled to one vote for each share of Bank Common Stock standing in his or her name on the books of the Bank as of the Record Date. A majority of the outstanding shares of Bank Common Stock entitled to vote shall constitute a quorum. Under the Bank's Articles of Incorporation, the Reorganization Proposal requires the affirmative vote of a majority of the outstanding shares of Bank Common Stock. In addition, approval 16 of the 1996 Plan requires the affirmative vote of a majority of the outstanding shares of Bank Common Stock as proposed to be exchanged for Holding Company Common Stock. Accordingly, abstentions from voting will have the effect of a vote "AGAINST" the Reorganization Proposal. If you hold your Bank Common Stock in "street name" and you fail to instruct your broker or nominee as to how to vote your Bank Common Stock, you broker or nominee MAY NOT, pursuant to applicable stock exchange rules, vote your Bank Common Stock with respect to the Reorganization Proposal. COST OF SOLICITATIONS OF WRITTEN CONSENTS This Written Consent Statement/Prospectus is made on behalf of the Board of Directors of the Bank and the Company, and the Bank will bear the costs of solicitation. The expense of preparing, assembling, printing and mailing this Written Consent Statement/Prospectus and the materials used in this solicitation of Written Consents also will be borne by the Bank. It is contemplated that Written Consents will be solicited principally through the mail, but directors, officers and regular employees of the Bank may solicit Written Consents personally or by telephone. Although there is no formal agreement to do so, the Bank may reimburse banks, brokerage houses and other custodians, nominees and fiduciaries for their reasonable expenses in forwarding these proxy materials to their principals. The Bank does not intend to utilize the services of other individuals or entities not employed by or affiliated with the Bank in connection with the solicitation of Written Consents. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Management of the Bank does not know of any person who owns beneficially or of record more than 5% of the Bank's outstanding common stock. The following table sets forth certain information as of _________, 1997 concerning the beneficial ownership of the Bank's outstanding common stock by each of the directors of the Bank and by all directors and executive officers of the Bank as a group. Management is not aware of any change in control of the Bank or of any arrangement which may, at a subsequent date, result in a change of control of the Bank. As used throughout this Written Consent Statement/Prospectus, the term "executive officer" means the President and Chief Executive Officer of the Bank, the Executive Vice President/Chief Financial Officer of the Bank, the Executive Vice President/Loan Administrator of the Bank, and the Executive Vice President/Branch Manager of the Bank's Santa Maria Way office. Neither the Chairman of the Board nor the Secretary of the Bank are treated as executive officers. 17
NAME AND ADDRESS OF AMOUNT OF PERCENT OF TITLE OF CLASS BENEFICIAL OWNER AND TITLE BENEFICIAL OWNERSHIP(1) CLASS(2) - -------------- -------------------------- ----------------------- ---------- Common Armand R. Acosta, Director 22,220(3) .8% Common Richard E. Adam, Director 98,743(3) 3.6% Common Fred L. Crandall, Jr., Director 80,176(3) 2.9% Common A.J. Diani, Director and Chairman 84,588(3) 3.0% Common William A. Hares, President/CEO 40,448(4) 1.5% Common Roger A. Ikola, Director 73,148(3) 2.6% Common Toshiharu Nishino, Director 91,974(3) 3.3% Common Joseph Sesto, Jr., Director 12,000(3) .4% Common William L. Snelling, Director and Secretary 79,140(3) 2.9% Common Mitsuo Taniguchi, Director 72,524(3) 2.6% Common Joseph F. Ziemba, Director 46,956(3) 1.7% Common All Directors and Executive Officers (14 in number) 758,560(5) 26.6%
- ---------------------- (1) Beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (a) voting power, which includes the power to vote, or to direct the voting of such security; and/or (b) investment power which includes the power to dispose, or to direct the disposition of such security. Beneficial owner also includes any person who has the right to acquire beneficial ownership of such security as defined above within 60 days of the filing date. (2) Shares subject to option held by directors and executive officers that were exercisable within 60 days after _____, 1997 ("vested"), are treated as issued and outstanding for the purpose of computing the percentage of class owned by such person (or group) but not for the purpose of computing the percentage of class owned by any other individual person. (3) Includes 2,000 vested shares from the 1988 stock option plan. (4) Includes 12,000 vested shares from the 1978 stock option plan and 2,000 from the 1988 stock option plan. (5) Includes 9,500 vested shares and 15,441 shares owned directly by the executive officers not listed individually. 18 BANK HOLDING COMPANY REORGANIZATION GENERAL The Board of Directors of the Bank has unanimously approved the formation of a holding company, to be known as BSM Bancorp, for the Bank, by means of the Merger pursuant to the terms and conditions of the Merger Agreement described herein and unanimously recommends that shareholders of the Bank vote to approve the Reorganization Proposal. A copy of the Merger Agreement is attached hereto as Annex I. The following discussion of the Reorganization Proposal is a summary only and does not purport to be a complete description and is qualified in its entirety by reference to the complete Merger Agreement. At the Effective Time of the Merger (defined below), the Merger Corp. will be merged with and into the Bank, with the Bank as the Surviving Bank, as a result of which each outstanding share of Bank Common Stock shall be converted into Holding Company Common Stock on a one-for-one basis. As a result of the Merger, the current Bank Shareholders will become the sole shareholders of the Holding Company and the Holding Company will become the sole shareholder of the Surviving Bank. Upon consummation of the Reorganization, the Surviving Bank will continue the Bank's present business and operations under the name "Bank of Santa Maria", as a wholly-owned subsidiary of the Holding Company and under the Articles of Incorporation and Bylaws of the Bank. The consolidated capitalization, assets, liabilities, income and financial statements of the Holding Company immediately following the Reorganization will be substantially the same as those of the Bank immediately prior to the consummation of the Reorganization. See "BANK HOLDING COMPANY REORGANIZATION - CAPITALIZATION." REASONS FOR REORGANIZATION In the opinion of the Bank's Board of Directors, the bank holding company structure will permit greater flexibility in responding to evolving changes in the banking and financial services industries and meeting the competition of other financial institutions. The Bank's Board of Directors believes that a bank holding company is an entity which can provide greater operating and financial flexibility and will permit expansion into a broader range of financial services and other business activities. Management of the Bank believes that a bank holding company will permit Bank shareholders to participate in the ownership of a more flexible entity for financing and growth within the banking and financial services industries. A bank holding company may provide more alternatives in the raising of funds required by the Bank or by the Holding Company under changing conditions in financial and monetary markets. For example, if a subsidiary bank required additional capital, the bank holding company might raise funds by relying on its own borrowing ability without having to go to the equity market. At present the Holding Company has no plans, arrangements or commitments to borrow any funds if the Merger Agreement is approved. Furthermore, upon consummation of the Reorganization and until such time as the Holding Company receives income in the form of dividends from the Surviving Bank, the Holding Company is not expected to be able to rely on its own borrowing ability to raise funds as it will not have any significant assets, other than its investment in the Surviving Bank, to support such borrowing. Flexibility in financing also will be provided by the Holding Company's authorized capitalization of 50,000,000 shares of Holding Company Common Stock, no par value, and 25,000,000 shares of Holding Company Preferred Stock, no par value. If the Reorganization Proposal is approved, up to _________ shares of Holding Company Common Stock will be issued to the shareholders of the 19 Bank, up to _______ shares of Holding Company Common Stock may be issued pursuant to outstanding stock option grants and up to ______ shares will be available for future grants issued under the Holding Company's Stock Option Plan, leaving _______ shares of authorized but unissued Holding Company Common Stock. These shares will be available for issuance from time to time to raise additional capital (such as in connection with a subsequent offering following the Reorganization, as discussed above), for acquisitions or for any other corporate purposes and, to the extent authorized by law, may be issued without further action by the Holding Company's shareholders. The Reorganization will also provide certain flexibility for acquiring or establishing other banking operations. For example, in the event an opportunity for the acquisition of another bank were to develop, it might be desirable to maintain the separate existence of the other bank after the acquisition rather than merging it into the Surviving Bank. The existence of a bank holding company would allow such an acquisition. However, except for the acquisition of the Bank described herein, at this time the Holding Company does not have any specific plans, arrangements or commitments to acquire or establish any such banking operations. It is also anticipated that the new corporate structure can be used advantageously to engage in other financially oriented activities, either directly, or indirectly through newly formed subsidiaries or by acquiring companies already established in such fields. Such activities currently are limited to activities permissible under the Federal Bank Holding Company Act of 1956, as amended (the "BHC Act"). Neither the Bank nor the Holding Company is currently engaged in any specific discussions relating to acquisitions nor do they anticipate engaging in any such discussions in the immediate future. However, should the Surviving Bank or the Holding Company be presented with an acquisition opportunity within their market areas, either or both the Surviving Bank and the Holding Company expects to make a determination whether or not to and the manner in which it should pursue such opportunity, although this may require the prior approval or consent of the Federal Reserve Board and/or the Superintendent. See "SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK - THE HOLDING COMPANY." Management of the Bank believes that the Reorganization will enhance the Bank's ability to satisfy ever changing and expanding needs of present customers for banking and banking-related services and to continue to attract new customers for financial services. The recommended corporate form will better suit expansion into new areas of service than would the existing structure. The Holding Company anticipates that during the initial months following the consummation of the Reorganization, the principal business and activity of the Holding Company will be to serve as the bank holding company for the Surviving Bank. ORGANIZATIONAL TRANSACTIONS At the direction of the Board of Directors of the Bank, the Holding Company was incorporated under the laws of the State of California on November 12, 1996 for the purpose of becoming a bank holding company by acquiring all of the outstanding Bank Common Stock. Mr. William A. Hares, by purchasing 150 shares of Holding Company Common Stock at $10.00 per share, providing the Holding Company's initial capitalization of $1,500. See "BANK HOLDING COMPANY REORGANIZATION - REGULATORY APPROVALS." Upon consummation of the Merger, these 150 shares of Holding Company Common Stock will be repurchased by the Holding Company for the same aggregate sum of $1,500 and cancelled. The obligation of the Holding Company to repurchase said shares and the obligation of Mr. Hares to resell 20 those shares to the Holding Company is set forth in the "BSM Bancorp Stockholder Agreement" attached to this Written Consent Statement/Prospectus as Annex II. At the direction of the Board of Directors of the Bank, the Merger Corp. was incorporated under the laws of the State of California on November 12, 1996 for the purpose of merging with the Bank in order to facilitate the Holding Company's acquisition of the Bank. In order to capitalize the Merger Corp., the Merger Corp. will issue 100 shares of common stock of the Merger Corp. (the "Merger Corp. Common Stock") to the Holding Company for $1,000. Prior to the Effective Time of the Merger, the Holding Company will be the sole shareholder of the Merger Corp. Upon consummation of the Merger, these 100 shares of Merger Corp. Common Stock will be converted into Surviving Bank Common Stock. TERMS OF THE MERGER AGREEMENT CONVERSION. At the Effective Time of the Merger (defined below), the shares of common stock of the Bank, Merger Corp. and Holding Company, parties to the Merger Agreement, shall be converted and exchanged as described herein. Each share of Bank Common Stock issued and outstanding immediately prior to the Effective Time of the Merger will, at the Effective Time of the Merger, automatically become and be converted into the right to receive, at the election of the shareholder, one share of Holding Company Common Stock. Each share of Merger Corp. Common Stock issued and outstanding immediately prior to the Effective Time of the Merger will, on and after the Effective Time of the Merger, be converted into one (1) share of Bank Common Stock and, as a result, at the Effective Time of the Merger, all of the common stock of the Surviving Bank will be owned by the Holding Company. Each share of Holding Company Common Stock issued and outstanding immediately prior to the Effective Time of the Merger will, at the Effective Time of the Merger, be repurchased by the Holding Company. At the Effective Time of the Merger, the Bank shareholders will be the shareholders of the Holding Company. As shareholders of the Holding Company, they will have essentially the same rights to govern the Holding Company's activities as they have with respect to the Bank; however, as shareholders of the Holding Company, they will not be entitled to vote on matters requiring the approval of Bank shareholders. Shareholders of the Holding Company will be entitled to vote with respect to matters affecting the Holding Company which will own 100% of the Surviving Bank. A discussion of those rights is contained in the section entitled "COMPARISON OF BANK COMMON STOCK AND HOLDING COMPANY COMMON STOCK." EFFECTIVE TIME OF THE MERGER. The Merger will be effective at the time the Merger Agreement is filed in the office of the Secretary of State of California (the "Effective Time of the Merger"). The Effective Time of the Merger will not occur until (i) all requisite board of directors, shareholders and regulatory approvals and consents for the Merger and the Reorganization are obtained; (ii) the expiration of any applicable waiting periods under the BHC Act and the Bank Merger Act; and (iii) the satisfaction of all of the requirements of law and conditions specified in the Merger Agreement. INTERESTS OF CERTAIN PERSONS IN THE MERGER. The Merger Agreement provides that the directors of the Bank immediately prior to the Effective Time of the Merger will be directors of the Surviving 21 Bank. Additionally, the officers and other employees of the Bank immediately prior to the Effective Time of the Merger will all be employed in substantially the same capacities by the Surviving Bank. EMPLOYEE BENEFITS. Upon consummation of the Reorganization, the Bank's Stock Option Plan (the "Plan") will be terminated and a new Stock Option Plan of the Holding Company will be established. Stock options with respect to shares of Bank Common Stock granted under the Plan and outstanding prior to consummation of the Reorganization will automatically become options to purchase the same number of shares of Holding Company Common Stock upon identical terms and conditions, subject to such modifications as may be required, and for an identical price. The Holding Company will assume all of the Bank's obligations with respect to such outstanding options. All other employee benefits and benefit plans of the Bank in effect immediately prior to the Effective Time of the Merger will be unchanged by the Reorganization, except that any plan which refers to Bank Common Stock will, following consummation of the Reorganization, be deemed to refer instead to Holding Company Common Stock and will become the employee benefits and benefit plans solely of the Surviving Bank. CONDITIONS TO THE MERGER. The obligations of each of the parties to the Merger Agreement to consummate the Merger are subject to the satisfaction, on or before the Effective Time of the Merger, of the following conditions (i) approval of the terms of the Reorganization Proposal including the Merger Agreement, by the shareholders of the Bank owning at least a majority of the capital stock of the Bank; (ii) approval of the Merger Agreement by a majority of the outstanding shares of the Holding Company and the Merger Corp.; (iii) approval by a majority of the Board of Directors of both the Bank and the Merger Corp. of the Merger Agreement; (iv) approval of the Merger Agreement by the Holding Company; (v) all consents and approvals prescribed by law, including, without limitation, the approval of the Federal Reserve Board, the FDIC and the Superintendent, for the consummation of the Merger and Reorganization; and (vi) all other requirements prescribed by law which are necessary for the consummation of the Merger and Reorganization including, but not limited to, the expiration of any applicable waiting periods under the Bank Merger Act and the BHC Act. The Merger Agreement does not provide for an outside closing date for the transactions contemplated herein. The directors of the Bank, the Merger Corp. and the Holding Company have unanimously approved the Reorganization Proposal. The Holding Company has filed an application for prior approval to become a bank holding company pursuant to Section 3(a)(1) of the BHC Act with the Federal Reserve Board and an application to acquire control of the Bank under Section 700 of the California Financial Code with the Superintendent. In addition, the Bank and the Merger Corp. have filed applications for approval of the Merger with the FDIC and the Superintendent. See "BANK HOLDING COMPANY REORGANIZATION - REGULATORY APPROVALS." TERMINATION OF MERGER AGREEMENT. The Merger Agreement may be terminated before the Effective Time of the Merger if (i) the number of shares voting against the Reorganization Proposal is such that the Board of Directors of the Bank determines that it is inadvisable to consummate the Merger or Reorganization and the Board of Directors of the Bank determines that it is inadvisable to consummate the Merger or Reorganization; (iii) any action, consent or approval, governmental or otherwise, necessary to permit the Surviving Bank to conduct all or any part of the business activities of the Bank prior to the Effective Time of the Merger, shall not have been obtained; or (iv) for any other reason the consummation of the Merger and Reorganization is inadvisable in the opinion of the Board of Directors of the Bank, the Merger Corp. or the Holding Company. If the holders of a majority of the outstanding shares of Bank Common Stock fail to approve the Reorganization Proposal, or the 22 transaction is otherwise terminated, as provided above, then the business of the Bank would continue to operate under the ownership of its existing shareholders. No assurances can be given as to when or if all conditions will be satisfied. EXCHANGE OF SHARE CERTIFICATES As soon as practicable after consummation of the Reorganization, the Holding Company will mail to each holder of record of Bank Common Stock immediately prior to the Effective Time of the Merger, a letter of transmittal which is to be used by each such Bank Shareholder to return to the Holding Company the stock certificates representing Bank Common Stock owned by him or her, which certificates should be duly endorsed in blank by such Bank Shareholder. As soon as practicable after receiving such certificates from a Bank Shareholder, together with the duly executed letter of transmittal and any other items specified by the letter of transmittal, the Holding Company will deliver to such Bank Shareholder new certificates evidencing the appropriate number of shares of Holding Company Common Stock. If the new certificates are to be delivered to a person other than the record holder of the certificates of Bank Common Stock surrendered in exchange therefor (i) the certificate so surrendered must be properly endorsed or accompanied by appropriate stock powers and otherwise be in proper form for transfer; (ii) the transfer must otherwise be proper; and (iii) the person requesting the transfer must pay to the Holding Company any transfer or other taxes payable by reason of the transfer or must establish to the satisfaction of the Holding Company that such taxes have been paid or are not required to be paid. COSTS OF REORGANIZATION The costs of the Reorganization are estimated at approximately $50,000. If the Reorganization is consummated, the costs of the Reorganization will be assumed and paid, to the extent properly allocated, by the Holding Company, the Bank and/or the Surviving Bank and, to the extent appropriate, offset against the proceeds of the Offering. In the event the Reorganization is not consummated, such costs as have been incurred, including the cost of organizing the Holding Company and the Merger Corp., will be assumed and paid by the Bank. REGULATORY APPROVALS Federal and California law and regulations provide that certain acquisition transactions, such as the Reorganization, may not be consummated unless approved in advance by applicable regulatory authorities. The Merger Agreement provides that the Holding Company, the Bank and the Merger Corp. shall proceed expeditiously and cooperate fully in the procurement of any consents and approvals and in the taking of any other action and the satisfaction of all requirements, prescribed by law or otherwise, necessary for consummation of the Merger, including the preparation and submission of applications required to be filed with the FDIC, the Superintendent and the Federal Reserve Board. Receipt of all requisite regulatory approvals and consents is a condition precedent to the consummation of the Merger and the Reorganization. See "BANK HOLDING COMPANY REORGANIZATION - TERMS OF THE MERGER AGREEMENT - CONDITIONS TO THE MERGER." An application for prior approval of the Holding Company to acquire the Bank was a filed with the Federal Reserve Board on __________, 199_. An application for prior approval of the Merger was filed with the FDIC on __________, 199_. An Application for prior approval of the Merger was filed 23 with the Superintendent on __________, 199_. There can be no assurances that the required approvals will be obtained, or as to conditions or timing of such approvals. Although neither the Holding Company nor the Bank is aware of any reason why the requisite approvals of and consents to the Merger and Reorganization would not be granted, there can be no assurance such approvals and consents will be obtained or that, if obtained, such approvals and consents will not include conditions which would be of a type that would relieve the Holding Company, the Bank or the Merger Corp. from their obligation to consummate the Merger and Reorganization. See "BANK HOLDING COMPANY REORGANIZATION - TERMS OF THE MERGER AGREEMENT - CONDITIONS TO THE MERGER" AND "- TERMINATION OF MERGER AGREEMENT." DISSENTING SHAREHOLDERS' RIGHTS Pursuant to the provisions of California law, shareholders of the Bank will not have dissenting rights in the Merger. ACCOUNTING TREATMENT Because the Merger is a reorganization with no change in ownership interests, the consolidated financial statements of the Holding Company and the financial statements of the Surviving Bank will retain the former bases of accounting of the Bank and will be presented substantially identical to the Bank's financial statements prior to the Reorganization. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following discussion is limited to certain federal income tax consequences of the proposed Reorganization and does not discuss state, local or foreign tax consequences or all of the tax consequences that might be relevant to shareholders of the Bank entitled to special tax treatment. In the opinion of Vavrinek, Trine, Day & Co., the Bank's certified public accountants, the proposed Merger will qualify for federal income tax purposes as a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). This opinion is conditioned upon the accuracy of various representations made to counsel and certain assumptions made by counsel. The assumptions include, among others, the assumption that there is no, and through the Effective Time of the Merger there will be no, plan or intention on the part of shareholders of the Bank who own one percent (1%) or more of Bank Common Stock and, to the best knowledge of the management of the Bank, the Merger Corp. and the Holding Company, there is no, and through the Effective Time of the Merger there will be no, plan or intention on the part of the remaining shareholders of the Bank to sell or otherwise dispose of the Holding Company Common Stock to be received in the Merger. The opinion is based on current law and assumes that the Merger is consummated as described herein. Neither this summary nor the opinion of Vavrinek, Trine, Day and Co. is binding on the IRS and no ruling from the IRS has been sought or will be sought with respect to such tax consequences. Based upon the qualification of the Merger as a reorganization within the meaning of Section 368 of the Code: (a) No gain or loss will be recognized by the Bank, the Merger Corp. or the Holding Company as a result of the Merger; 24 (b) No gain or loss will be recognized by the shareholders of the Bank upon receipt of the Holding Company Common Stock in exchange for their shares of Bank Common Stock pursuant to the Merger; (c) The basis of the Holding Company Common Stock received by the shareholders of the Bank pursuant to the Merger will be the same as the basis of the shares of Bank Common Stock surrendered in exchange therefor; (d) The holding period of the Holding Company Common Stock received by shareholders of the Bank pursuant to the Merger will include the holding period of the Bank Common Stock surrendered in exchange therefor, provided that such Bank Common Stock is held as a capital asset on the date of consummation of the Merger; (e) A holder of an outstanding option granted under the Bank's Stock Option Plans will not recognize income, gain or loss solely as a result of the assumption of the Bank's Stock Option Plans by the Holding Company. (f) The assumption by the Holding Company of outstanding incentive stock options granted under the Bank's Stock Option Plans will not be deemed a modification of the option under Section 424(h) of the Code. THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY. THE BANK'S SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER INCLUDING TAX RETURN REPORTING REQUIREMENTS AND THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER APPLICABLE TAX LAWS. RESTRICTIONS ON AFFILIATES The obligation of the Bank and the Holding Company to consummate the Reorganization is subject to the condition that each person who is an "affiliate" of the Bank for purposes of Rule 145 promulgated under the Securities Act, execute and deliver a letter to the effect that, among other things; (i) such person will not dispose of any shares of Holding Company Common Stock to be received by him pursuant to the Merger Agreement (a) in violation of the Securities Act or the rules and regulations of the SEC promulgated thereunder (and, accordingly, that any public offering or sale of such shares will require either registration under the Securities Act or compliance with the resale provision of Rule 145 or the availability of another exemption from the registration requirements of the Securities Act), or (b) prior to such time as financial results covering at least 30 days of postmerger combined operations have been published; and (ii) such person consents to the placing of a legend on the certificate evidencing such shares referring to the issuance of such shares in a transaction to which Rule 145 is applicable and to the giving of stop-transfer instructions to the Holding Company's transfer agent with respect to such certificates. For purposes of Rule 145, affiliates include the Bank's directors and executive officers. According to Rule 145, the affiliates will be restricted in their ability to resell their stock. These restrictions include the limitation, subject to certain exceptions, that not more than one percent (1%) of the total number of Holding Company shares outstanding be sold for the account of any affiliate in any three month period. 25 RECOMMENDATIONS The Bank's Board of Directors has carefully reviewed the Reorganization Proposal and believes that, for the reasons set forth in this Written Consent Statement/Prospectus, the proposed Reorganization, is fair to and in the best interests of the Bank and the Bank's shareholders. On November 12, 1996, the Bank's Board of Directors unanimously approved the Merger Agreement and the Reorganization and unanimously recommended that the Bank's shareholders consent to the Merger Agreement. CAPITALIZATION If the Reorganization had been consummated and the Holding Company had owned all the common stock of the Surviving Bank prior to September 30, 1996, the financial condition and results of operations of the Holding Company and the Bank would have been the same in all material respects as that shown in the Bank's financial statements included in Bank's 1995 Annual Report to Shareholders. The following table sets forth the actual capitalization of the Bank at September 30, 1996, the proposed capitalization of the Merger Corp. and the Holding Company immediately prior to consummation of the Reorganization, and the pro forma capitalization of the Surviving Bank and the Holding Company on a consolidated basis to reflect the consummation of the Reorganization.
BANK OF BSM MERGER BSM BANCORP AND SANTA MARIA COMPANY (1) BSM BANCORP(2) BANK OF SANTA MARIA ----------- ------------ -------------- ------------------- Shareholders' Equity Common Stock $ 8,649,978 $ 1,000 $ 1,500 $ 8,649,998 Additional Paid-In Capital 17,925,672 0 0 17,925,672 Net Income 2,753,942 0 0 2,753,942 ----------- --------- ---------- ----------- Total $29,329,612 $ 1,000 $ 1,500 $29,329,612 ----------- --------- ---------- ----------- ----------- --------- ---------- ----------- Share Data: Common Stock Authorized 25,000,000 1,000,000 50,000,000 50,000,000 Outstanding 2,764,261 100 150 2,764,261 Par Value No Par No Par No Par No Par Preferred Stock Authorized None None None 25,000,000 Outstanding N\A N/A None None
- ------------------- (1) Funds to capitalize the Merger Corp. will be obtained by issuing 100 shares of common stock to the Holding Company for $1,000. Upon consummation of the Merger, these 100 shares of Merger Corp. Common Stock will be converted into Surviving Bank Common Stock. (2) Funds to capitalize the Holding Company have been obtained by issuing 150 shares of common stock to Mr. William A. Hares for $1,500. Upon consummation of the Reorganization, and pursuant to a written agreement, these will be repurchased for $1,500 and cancelled by the Holding Company. 26 COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK The Bank is a California banking corporation organized under the laws of the State of California, and the rights of Bank Shareholders are governed by the California Financial Code, the California Corporations Code (the "Corporations Code"), the Articles of Incorporation of the Bank (the "Bank Articles"), and the bylaws of the Bank, as amended (the "Bank Bylaws"). Upon consummation of the Reorganization, the Bank Shareholders will become shareholders of the Holding Company ("Holding Company Shareholders"). As shareholders of the Holding Company, the rights of the then former Bank Shareholders will be governed by Division 1, Chapters 1 - 23 of the Corporations Code, other applicable California statutes, the Articles of Incorporation of the Holding Company (the "Holding Company Articles"), and the bylaws of the Holding Company (the "Holding Company Bylaws"). BANK COMMON STOCK The Bank is authorized by its Articles of Incorporation, as amended, to issue 25,000,000 shares of Bank Common Stock, without par value. At September 30, 1996, 2,764,261 shares of Bank Common Stock were issued and outstanding. Holders of Bank Common Stock are entitled to one vote, in person or by proxy, for each share of Bank Common Stock held of record in the shareholder's name on the books of the Bank as of the record date on any matter submitted to the vote of the shareholders, except that in connection with the election of directors, the shares may be voted cumulatively. Each share of Bank Common Stock has the same rights, privileges and preferences as every other share and will share equally in the Bank's net assets upon liquidation or dissolution. The Bank Common Stock has no preemptive, conversion or redemption rights or sinking fund provisions and all the shares offered hereby will, when issued, be fully paid. Shares of Bank Common Stock are subject to assessment by the Bank upon order of the Superintendent for the purpose of correcting an impairment of contributed capital in the manner and to the extent provided in Division 1 of the California Financial Code. See "COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK - ASSESSABILITY." California law prohibits a California state-chartered bank from lending on the security of its own stock. Shareholders are entitled to dividends when, as and if declared by the Bank's Board of Directors out of funds legally available therefor (and after satisfaction of the prior rights of holders of outstanding preferred stock, if any) subject to certain restrictions on payment of dividends imposed by the California Financial Code and other applicable regulatory limitations. See "COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK - DIVIDEND RESTRICTIONS." The transfer agent and registrar for the Bank Common Stock is U.S. Stock Transfer Corporation. HOLDING COMPANY COMMON STOCK The Holding Company is authorized by its Articles of Incorporation to issue 50,000,000 shares of Holding Company Common Stock, without par value, and 25,000,000 shares of Holding Company Preferred Stock, without par value. As of the date hereof, 150 shares of Holding Company Common Stock were issued and outstanding. Holders of Holding Company Common Stock will be entitled to 27 one vote, in person or by proxy, for each share of Holding Company Common Stock held of record in the shareholder's name on the books of the Holding Company as of the record date on any matter submitted to the vote of the shareholders, except that in connection with the election of directors, and until the Holding Company is considered to be a "listed corporation" as provided in Corporations Code Section 310.5, the shares may be voted cumulatively. However, the Holding Company's Articles of Incorporation provide there will be no cumulative voting for the election of directors if and when the Holding Company becomes a "listed corporation" (i.e., outstanding shares listed on the New York or American Stock Exchange or outstanding securities designated as qualified for trading as a national market security on the National Association of Securities Dealers Automatic Quotation System and has at least 800 holders of its equity securities; the Bank currently has over ___ holders of its securities). The Holding Company's Articles of Incorporation provide that the Board of Directors will be divided into three classes, with any class having a term of three years, if and when the Holding Company becomes a "listed corporation" (as defined in the previous paragraph). Upon the Holding Company becoming a "listed corporation," the Board of Directors of the Holding Company will be divided into three classes, each of which shall contain approximately one-third of the whole number of the members of the Board. The members of each class shall be elected for a term of three years, with the terms of office of all members of one class expiring each year so that approximately one-third of the total number of directors are elected each year. The Holding Company's Articles of Incorporation also provide that any vacancy occurring in the Board, including a vacancy created by an increase in the number of directors, shall be filled by a vote of two-thirds of the directors then in office and any director so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which the director has been chosen expires. The classified Board is intended to provide for continuity of the Board of Directors and to make it more difficult and time consuming for a stockholder group to fully use its voting power to gain control of the Board of Directors without consent of the incumbent Board of Directors of the Holding Company. The Articles of Incorporation of the Holding Company also require the approval of the holders of at least 66-2/3% of the Holding Company's outstanding shares of voting stock to approve certain "Business Combinations" (as defined therein) involving a "Related Person" (as defined therein) except in cases where the proposed transaction has been approved in advance by a majority of those members of the Holding Company's Board of Directors who are unaffiliated with the Related Person and were directors prior to the time when the Related Person became a Related Person. The term "Related Person" is defined to include any individual, corporation, partnership or other entity (other than the Bank or its subsidiary) which owns beneficially or controls, directly or indirectly, 10% or more of the outstanding shares of voting stock of the Holding Company or an affiliate of such person or entity. This proposed provision of the Articles of Incorporation applies to any "Business Combination," which is defined to include: (i) any merger or consolidation of the Holding Company with or into any Related Person; (ii) any sale, lease, exchange, mortgage, transfer, or other disposition of 25% or more of the assets of the Holding Company or combined assets of the Holding Company and its subsidiaries to a Related Person; (iii) any merger or consolidation of a Related Person with or into the Holding Company or a subsidiary of the Holding Company; (iv) any sale, lease, exchange, transfer, or other disposition of 25% or more of the assets of a Related Person to the Holding Company or a subsidiary of the Holding Company; (v) the issuance of any securities of the Holding Company or a subsidiary of the Holding Company to a Related Person; (vi) the acquisition by the Holding Company or a subsidiary of the Holding Company of any securities of a Related Person; (vii) any reclassification of common stock of the Holding Company or any recapitalization involving the common stock of the Holding Company; or (viii) any agreement or other arrangement providing for any of the foregoing. 28 Under California law, absent this proposed provision, business combinations, including mergers, consolidations and sales of substantially all of the assets of a corporation must, subject to certain exceptions, be approved by the vote of the holders of a majority of the outstanding shares of common stock of the Holding Company and any other affected class of stock. The increased stockholder vote required to approve a business combination may have the effect of foreclosing mergers and other business combinations which a majority of stockholders deem desirable and place the power to prevent such a merger or combination in the hands of a minority of stockholders. Each share of Holding Company Stock has the same rights, privileges and preferences as every other share and will share equally in the Holding Company's net assets upon liquidation of dissolution. Holding Company Common Stock will have no preemptive, conversion or redemption rights or sinking fund provisions and all of the issued and outstanding shares of Holding Company Common Stock, when issued, will be fully paid and nonassessable. The Holding Company's Articles of Incorporation also provide that amendments to the Holding Company's Articles of Incorporation must be approved by a majority vote of its Board of Directors and also by a majority of the outstanding shares of its voting stock, provided, however, that an affirmative vote of at least 66-2/3% of the outstanding voting stock entitled to vote (after giving effect to the provision limiting voting rights) is required to amend or repeal certain provisions of the Articles of Incorporation, including the provision limiting voting rights, the provisions relating to approval of certain business combinations, the number and classification of directors, director and officer indemnification by the Holding Company and amendment of the Holding Company's Bylaws and Articles of Incorporation. The Holding Company's Bylaws may be amended by its Board of Directors, or by a vote of 66-2/3% of the total votes eligible to be voted at a duly constituted meeting of stockholders. See "COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK - ASSESSABILITY." Shareholders are entitled to dividends when, as and if declared by the Holding Company's Board of Directors out of funds legally available therefor (and after satisfaction of the prior rights of holders of outstanding preferred stock, if any (subject to certain restrictions on payment of dividends imposed by the General Corporation Law of California. See "COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK - DIVIDEND RESTRICTIONS." Following consummation of the Reorganization, the transfer agent and registrar for the Holding Company Common Stock will be U.S. Stock Transfer Corporation. COMPARISON OF BANK COMMON STOCK AND HOLDING COMPANY COMMON STOCK ASSESSABILITY. As a California state-chartered bank, the Bank's Common Stock is subject to assessment pursuant to the provisions of Division 1 of the California Financial Code. Section 662 of Division 1 of the California Financial Code provides that when a bank's contributed capital is "impaired" (when the retained earnings deficit is in excess of 40% of contributed capital), the Superintendent shall order the bank to restore its capital impairment within 60 days of the issuance of such an order. If the contributed capital is not restored by other means, the bank's board is required to levy and collect an assessment on its outstanding common shares pursuant to Section 423 of the California Corporations Code. The date the bank levies the assessment must be within 60 days after the Superintendent's order and the resolutions levying the assessment of the common stock must fix a date not more than 60 days after the date of the adoption of the assessment resolution on which the assessment is payable (the "Payable Date"); fix a date not less than 30 nor more than 60 days from the Payable Date on which such assessment becomes delinquent if not paid 29 (the "Delinquency Date"); fix a date not less than 15 nor more than 60 days from the Delinquency Date for the sale of the delinquent shares (the "Sale Date"); and fix the hour and place of sale. If an assessment is levied, the shareholders of the bank are required to pay the assessment on a pro rata basis determined by the number of shares held by each shareholder. If a shareholder has not paid the amount of the assessment by the Delinquency Date, the shareholder may, prior to the Sale Date, redeem his shares by paying the amount of the assessment together with a penalty of 5% of the amount of the assessment on such shares. If a particular shareholder fails or refuses to pay such shareholder's pro rata portion of the assessment, the assessed shares may be sold by the bank in satisfaction of the assessment and penalties thereon. The shareholders are not subject to personal liability for payment of such an assessment. The bank's only remedy for the collection of any such assessment is the sale of the shares as described above or, in the event no such sale can be consummated, forfeiture of such shares. Holding Company Common Stock is not assessable. Under applicable regulatory policies, however, holding companies of federally insured financial institutions such as the Bank are required to serve as a "source of strength" for their insured subsidiaries. As a practical matter, this may result in the Holding Company being required by regulatory order or directive to contribute additional capital to the Bank, to guarantee certain Bank obligations or to take other actions requiring the investment of Holding Company capital or resources for the Bank's benefit. CLASSIFICATION OF BOARD OF DIRECTORS The Bank's Articles of Incorporation does not permit the Bank Board of Directors to be divided into classes with any class having a term of office of longer than one year. Each director of the Bank must be elected annually. However, the Holding Company's Articles of Incorporation and Bylaws provide for its Board of Directors to be divided into classes with any class having a term of two or three years, if and when the Holding Company becomes a "listed corporation". VOTING RIGHTS In addition to the description of voting rights contained in "COMPARISON OF THE RIGHTS OF HOLDERS OF HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK - BANK COMMON STOCK" and "- HOLDING COMPANY COMMON STOCK", the Bank may amend its Articles of Incorporation or Bylaws to eliminate cumulative voting if and when the Bank becomes a "listed corporation" (as defined above). NUMBER OF DIRECTORS Although the Corporations Code does not require the Holding Company or the Bank to maintain any specific range of number of directors, the number of directors of the Holding Company and the Bank may not be less than a stated minimum nor more than a stated maximum (which in no case shall be greater than two times the stated minimum minus one) with the exact number of directors to be fixed, within the limits specified. The Bank Bylaws currently provide that the number of directors on the Bank Board of Directors may not be fewer than eight nor more than fourteen, and the current number of members on the Bank's Board of Directors has been fixed at eleven. The Holding Company Bylaws currently provide that the number of directors on the Holding Company Board of Directors may not be fewer than nine nor more than seventeen, and the current number of members on the Holding Company's Board of Directors has been fixed at eleven. 30 DIVIDEND RESTRICTIONS. Since the Bank is a state-charted bank, its ability to pay dividends or make distributions to its shareholders is subject to restrictions set forth in the California Financial Code. The California Financial Code provides that neither a bank nor any majority-owned subsidiary of a bank may make a distribution to its shareholders in an amount which exceeds the lesser of (i) the bank's retained earnings; or (ii) 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 a bank may, with the prior approval of the Superintendent, make a distribution to the shareholders of the bank in an amount not exceeding the greatest of (i) its retained earnings; (ii) its net income for its last fiscal year; or (iii) stockholders' equity of a bank is inadequate or that the making of a distribution by a bank would be unsafe our unsound, the Superintendent may order the bank to refrain from making a proposed distribution. The ability of the Holding Company to pay cash dividends is limited by the provisions of Section 500 of the California Corporations Code, which prohibits the payment of dividends unless (i) the retained earnings of the corporation immediately prior to the distribution exceeds the amount of the distribution; (ii) the assets of the corporation exceed 11/4 times its liabilities; or (iii) the current assets of the corporation exceed its current liabilities, but if the average pre-tax earnings of the corporation before interest expense for the two years preceding the distribution was less than the average interest expense of the corporation for those years, the current assets of the corporation must exceed 11/4 times its current liabilities. DISSENTERS' RIGHTS. Pursuant to the General Corporation Law of California, holders of Holding Company Common Stock would be entitled, subject to the provisions of Chapter 13, to dissenters' rights in connection with any transaction which constitutes a reorganization (as defined in Section 181 of the California Corporations Code). However, pursuant to the California Financial Code, shareholders of Bank Common Stock are not entitled to dissenters' rights in connection with any transactions between two banking institutions which constitutes a reorganization (as defined in Section 181 of the California Corporations Code) where the Bank is the corporation surviving such transaction, even if dissenters' rights were otherwise available pursuant to Chapter 13. Therefore, no dissenters' rights will apply to the Reorganization. 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE BANK The following discussion is intended to provide information to facilitate the understanding and assessment of significant changes and trends related to the financial condition of the Bank and the results of its operations. This discussion and analysis should be read in conjunction with the Bank's audited and unaudited financial statements and the notes thereto included elsewhere in this report. As reported in Note L to the Financial Statements, Bank of Santa Maria and Templeton Nation Bank were merged on September 8, 1995. All prior years' numbers contained in this section have been restated to give effect for this merger on a pooling of interest basis. Reference should also be made to Note I to the Interim Financial Statements, where an evaluation has been made of the financial effects of the merger with Citizens Bank of Paso Robles on May 3, 1996, which was accounted for using the purchase method of accounting. OVERVIEW The Bank reported net earnings of $2,754,000, or $.98 per share for the first nine months of 1996. This represents an increase of 10.5% over a the same period in 1995, where net earnings were $2,492,000, or $.91 per share. The increase in profitability is the net results of several major factors, both positive and negative, which occurred in the nine month period under review here. On a pre-tax basis, the difference between the two periods is approximately $430,000. This recap is presented as a preview to a more detailed discussion to follow. All numbers are pre-tax figures. Contribution of former Citizens' branches to profitability since merger $144,000 Reduction in net losses on the sale of fixed assets and other real estate 183,000 Reduction in regulatory assessments 238,000 Reduction in merger-related expenses 270,000 Reduction in provision of loan losses 315,000 Increase in promotional and advertising costs (80,000) Decline in net interest income (excluding the effects of Citizen merger) (800,000) -------- CHANGE IN PRETAX INCOME BETWEEN THE TWO NINE MONTH PERIODS $430,000 -------- -------- Other key financial ratios are listed below to facilitate easy comparison: TABLE 1 - KEY FINANCIAL RATIOS FOR PERIOD ENDED SEPT. 30, 1996 SEPT. 30, 1995 - -------------------------------------------------------------------------------- Annualized return on average assets 1.34% 1.35% Annualized return on average equity 12.94% 13.12% Annualized return on beginning equity 13.38% 13.89% Dividend payout ratio 35.59% 10.53% Average equity to average assets 10.36% 10.27% NET INTEREST INCOME AND NET INTEREST MARGIN Table 2 entitled AVERAGE BALANCE AND INTEREST RATES shows the Bank's average assets, liabilities, and stockholders' equity with the related interest income, interest expense and rates for the nine month interim periods ended September 30, 1996, and September 30, 1995; such information for the final year ends December 31, 1995, 1994 and 1993 is contained in the 1995 Annual Report of the Bank that is contained in "ANNUAL REPORT" herein. Rates for tax preferenced investments are 32 shown on a tax equivalent basis using a 34% tax rate. Table 3 entitled RATES AND VOLUME ANALYSIS reports the factors causing the change in net interest income. Reference should be made to both Table 2 and Table 3 to assist in understanding this major component of bank profitability. Net interest income is the difference between the interest and fees earned on interest-bearing assets, such as loans and investments, and the interest paid on interest-bearing liabilities, such as deposits. Net interest income is similar to "gross profits on sales" used in financial statements for retail sales organizations. Net interest income for the first nine months of 1996, was $10.6 million compared to $10.8 million for the same period in 1995. Net interest income, when expressed as a percentage of total average interest-earning assets, (defined herein as investments, Fed funds and net loans) is referred to as net interest margin or NIM. The Bank's NIM was 5.91% for the first nine months of 1996, compared with 6.67% for a similar period in 1995. NIM is used as a measure of the efficiency of the Bank's asset/liability management. The Bank's NIM declined by approximately 11.4% between the period ended September, 1995 and the same period in 1996, with most of the decline occurring during the last quarter of 1995. There are several reasons for this decline, which are best explained by an analysis of the NIM's major components, interest income and interest expense. The first component of NIM is interest income. Loans are the largest interest bearing assets group which contributes to interest income. Loan demand in California has not yet recovered. Although the average earning assets, (AFTER EXCLUDING THE EFFECT OF THE PURCHASE OF CITIZENS' ASSETS) increased by approximately $10 million between September 30, 1995 and September 30, 1996, loans as a percentage of earning assets declined from 67% to 56%. The investment portfolio absorbed these dollars which resulted in the percentage of earning assets in investments moving up by 26.7% to 34% of pre-Citizen's average earning assets. This change in mix of approximately $5 million from the higher yielding loans grouping to the moderate yields available in investments that would have the effect of lowering interest income by approximately $200,000. However, in addition, the bank's average base rate declined from 8.89% for the first nine months of 1995, to 8.28% for the same period in 1996. This 61 basis point move has a significant effect on the bank's loan portfolio, as approximately 38% of all bank loans are tied to base rates which reprice immediately upon movements in prime rates. Close to 60% of all loan dollars are subject to repricing within 90 days, and more than 72% of all loan dollars can be repriced within any 12 month period. The actual decline in effective rates of the loan portfolio was 62 basis points from the third quarter of 1995 to the third quarter of 1996. During the third quarter of 1995, the bank benefited from the payoff of a large loan, which had been on non-accrual since 1991. As reported in the annual report, this resulted in the recapture of over $270,000, of which $210,000 would have been reported over several years prior to 1995. The recapture of this prior period interest resulted in increasing the year-to-date third quarter effective average loan yield by approximately 19 basis points. The restated loan yield as of September 30, 1995, would have been 11.03% and the overall decline between periods would have been reduced to 43 basis points. The effect on interest loan income of this overall decline in interest rates would approximate $475,000, excluding the $270,000 from the large loan payoff. Interest income is also generated from the bank's investment portfolio, where overall income between the two periods increased by $900,000. This was largely attributable to the increase in volume by close to $20 million, although the effective yield on the portfolio increased by 19 basis points. Total interest income on earning assets for the nine months ended September 30, 1996, was up by $593,000 over the nine months reported in 1995, despite the large decline in interest rate yields. This is primarily the result of the increase in average loans outstanding acquired in the Citizen's purchase. The funding of earning assets comes primarily from deposits. Between September of 1996 and September of 1995, the percentage of average interest bearing deposits remained constant at approximately 78% of all deposits. However, the mix among average interest bearing deposits changed with time deposits growing from 32.5% to 45.3% of all average interest bearing funds. This resulted in an increase in the cost of interest-bearing funds by 20 basis points at the same time interest-earning assets were experiencing a decline of 61 basis points. Contributing to the change in deposit mix was the Bank's entrance in the northern San Luis Obispo County market place where meeting competition has required the Bank to be more aggressive than in the past. The average interest rate from interest expense used in NIM is based upon average earning assets rather than average interest-bearing deposits. Accordingly, fluctuations in earning assets can affect both the interest yield and the interest cost 33 percentages. Earning assets, as a percentage of total assets, were essentially constant between the two periods, only the mix rather than the volume of earning assets had any effect on the decline in NIM by 76 basis points. Discounting the effect of the large non-accrual loan payoff, the decline in NIM would have been reduced to 63 basis point. A quarter-by quarter review of the decline of the NIM (again after discounting the effect of the large prior period recapture), shows that 64% of the decline occurred in the last quarter of 1995, during the same period when slowness in the economy promoted several declines in market rates within a seven month period. TABLE 2 - AVERAGE BALANCES AND INTEREST RATES
FOR THE NINE MONTHS ENDED 09/30/96 FOR THE NINE MONTHS ENDED 09/30/95 ---------------------------------- ---------------------------------- AVERAGE AMOUNT AVERAGE AMOUNT BALANCE OF AVERAGE BALANCE OF AVERAGE (000'S) INTEREST RATE (000'S) INTEREST RATE ---------------------------------- ----------------------------------- INTEREST EARNING ASSETS: INVESTMENT SECURITIES TAXABLE $ 63,731 $ 2,837 5.95% $ 47,658 $ 2,046 5.74% NON-TAXABLE 14,754 425 5.82% 10,948 309 5.71% -------- ------- ------ -------- ------- ----- TOTAL SECURITIES 78,485 3,262 5.92% 58,606 2,355 5.73% -------- ------- ------ -------- ------- ----- FEDERAL FUNDS SOLD 12,915 510 5.27% 12,986 543 5.59% NET LOANS 152,652 12,114 10.60% 147,705 12,395 11.22% -------- ------- ------ -------- ------- ------ *TOTAL EARNING ASSETS* 244,051 $15,885 8.81% 219,297 $15,293 9.42% -------- ------- ------ -------- ------- ------ ------- ------ ------- ------ TOTAL NON-EARNING ASSETS 30,497 28,065 -------- -------- **TOTAL ASSETS** $274,548 $247,363 -------- -------- -------- -------- LIABILITIES AND CAPITAL: INT-BEARING DEMAND/SAVINGS 104,422 1,797 2.30% $108,740 2,130 2.62% TIME DEPOSITS UNDER $100M 58,163 2,361 5.42% 43,401 1,627 5.01% TIME DEPOSITS $100M OR + 28,458 1,154 5.42% 19,830 756 5.10% -------- ------- ------ -------- ------- ------ TOTAL INT/BEAR'G DEPOSITS 191,042 $ 5,313 3.71% 171,971 $ 4,513 3.51% -------- ------- ------ -------- ------- ------ ------- ------ ------- ------ DEMAND DEPOSITS 53,187 48,274 OTHER LIABILITIES 1,881 1,724 CAPITAL 28,438 25,393 -------- -------- **TOTAL LIAB & CAPITAL** $274,548 $247,363 -------- -------- -------- -------- SPREAD ON AVERAGE INTEREST-BEARING FUNDS 5.10% 5.92% INTEREST INCOME/EARNING ASSETS 8.81% 9.42% INTEREST EXPENSE/EARNING ASSETS 2.91% 2.75% ------ ------ NET INTEREST MARGIN 5.91% 6.67% ------ ------ ------ ------
(1) NON-ACCRUAL LOANS HAVE BEEN INCLUDED IN NET LOAN FIGURES (2) YIELDS ARE CALCULATED ON A TAX EQUIVALENT BASIS The impact of changes in the net interest income spread between the two nine month periods can also be analyzed by reference to Table 3, where increase or decreases in interest income or interest expense are broken down into two components. Such information for the fiscal year ending December 31, 1995, 1994 and 1993 is contained in the 1995 Annual Report of the 34 Bank that is contained in "Annual Report" herein. Changes due primarily to increases or decreases in the size of each category are called volume variances. Changes due primarily to increases or decreases in rates are called rate variances. TABLE 3 - RATE AND VOLUME ANALYSIS Period ended September 30, 1996 over 1995 Increase (Decrease) due to change in ---------------------------------- INTEREST EARNING ASSETS: Volume Rate Total - ------------------------------------------------------------------------------ Investment Securities Taxable $ 715 $ 76 $ 791 Non-Taxable 110 6 116 ------ ----- ----- TOTAL SECURITIES 824 82 907 Federal funds sold (3) (30) (33) Net loans 585 (867) (282) ------ ----- ----- TOTAL EARNING ASSETS $1,406 $(814) $ 593 ------ ----- ----- ------ ----- ----- INTEREST BEARING LIABILITIES: Interest-bearing demand/savings (226) (106) (331) Time deposits under $100,000 594 143 737 Time deposits $100,000 or above 344 50 394 ------ ----- ----- TOTAL INTEREST BEARING DEPOSITS $ 713 $ 87 $ 800 ------ ----- ----- ------ ----- ----- Increase (decrease) in interest differential $ 694 $(901) $(208) ------ ----- ----- Information is provided in each category with respect to (a) changes attributable to changes in volume (changes in volume multiplied by prior period's rate); (b) changes attributable to changes in rates (changes in rates multiplied by prior volume); and (c) the net change. Changes attributable to the combined impact of volume and rate have been allocated proportionately to the volume and rate changes. The method of accounting for the merger of Citizens into Bank of Santa Maria tends to limit the full benefits normally derived from Table # 3. If we attempted to isolate the effects of the purchase of Citizens, and applying the variance to the volume column, certain changes between periods become clearer. RESTATED RATE AND VOLUME ANALYSIS RESTATED PER TABLE VOLUME RATE TOTAL 3 ---------------------------------- Total Earning Assets $477 $(814) $(337) $ 593 Total Interest-Bearing Liabilities $388 $ 87 $ 475 $ 800 ---- ----- ----- ----- Increase (decrease) in interest differential $ 89 $(901) $(812) $(208) ---- ------ ------ ------ ---- ------ ------ ------ The level of non-performing loans in the Bank's portfolio affects the amount of interest income. As noted in the notes to the financial statements, when serious doubt exists as to the repayment of a loan, that loan is placed on non-accrual status and previously accrued and uncollected interest for the current year is reversed against income. Had non-performing loans as of September 30, 1996 complied with original terms, related interest income would have been approximately $51,000, of which approximately $15,000 was collected. The difference of approximately $36,000 was not taken into income, which resulted in lowering NIM for the first nine months of 1996 by less than 2 basis points. SUMMARY OF CREDIT LOSS EXPERIENCE The Bank maintains an allowance for loan losses, which is reduced by net loan charge-offs and increased by provisions for loan losses charged against operating income. The adequacy of the allowance for loan losses is reviewed on a continual basis. The amount of provisions and the level of the total allowance are based upon the Bank's loan loss experience, the performance of loans in the portfolio, evaluation of loan collateral, the financial abilities and net worth of the borrowers or guarantors and such other factors as, in management's judgment, deserve recognition. 35 In addition to internal evaluation, the adequacy of the allowance for loan losses is subject to review by regulators and outside consultants. While no assurance can be given that economic conditions, which adversely affect the Bank's service areas, or other unforeseen circumstances, will not require increased provisions for loan losses in the future. It is management's opinion that the allowance for loan losses as of September 30, 1996, of $2,580,000 (or 1.57% of total loans) was adequate to absorb losses from any known or inherent risks in the portfolio. Table 4 shows comparative statistics and a more detailed breakdown of activity in the loan loss reserve account. The level of the provision, at $ 0 for 1996, reflects the limited growth of outstanding loan dollars, the favorable ratio of charge-offs and reduction in non-performing loans to outstanding loans during 1996. A provision of $315,000 was made during the nine month period ending September 30, 1995. Such information for the fiscal year ending December 31, 1993, 1992 and 1991 is contained in the 1995 Annual Report of the Bank that is contained in "ANNUAL REPORT" herein. TABLE 4 - SUMMARY OF LOAN LOSS EXPERIENCE FOR PERIOD ENDED --------------------------------------- September 30, 1996 September 30, 1995 - ------------------------------------------------------------------------------ BALANCE OF RESERVE AT BEGINNING OF YEAR $2,537 $2,228 CHARGE-OFFS Consumer 92 92 Commercial 97 164 Agricultural 0 0 Construction and Development 19 0 Other Real Estate Loans 53 152 ------ ------ TOTAL CHARGE-OFFS 261 408 ------ ------ RECOVERIES Consumer 15 15 Commercial 60 46 Agricultural 0 0 Construction and Development 0 0 Other Real Estate Loans 1 12 ------ ------ TOTAL RECOVERIES 76 73 ------ ------ NET CHARGE-OFFS 185 335 Adjustment due to Citizens Merger 228 0 Provision charge to operations 0 315 ------ ------ BALANCE AT YEAR-END $2,580 $2,208 ------ ------ ------ ------ Ratio of net charge-offs to average net loans during the nine month period 0.12% 0.23% Allowance for loan losses to loans at end of period 1.76% 1.51% Net loan charge-offs to beginning of period allowances for loan losses 7.29% 15.04% Net loan charge-offs to provisions charged to operating expense N/A 106.35% The ratio of net charge-offs to average net loans during the 1994-1996, period remains quite favorable when compared with industry standards. The 1996 net charge-off ratio is extremely encouraging, although the local economy remains weak. The Bank anticipates that net charge-offs will remain stable but has budgeted to provide approximately $50,000 per month to the provision for loan losses account, if conditions warrant a change in the future. 36 NON INTEREST INCOME Non-Interest income increased by $ 254,000 to $2.2 million for the first nine months of 1996 over the similar period in 1995. Service charges related to the Bank's deposit products account for the largest portion of other operating income. The increase noted in service charges and fees comes primarily from increased service charges on many of the bank's deposit products. Merchant discount fees are obtained in conjunction with the processing of credit card drafts and related products. Increases in fees are generally offset by increased costs from the bank's service provider. Other fee income includes servicing fees on loans sold into the secondary market, and other non-deposit related charges including wires, safe deposit, ATM's, etc. The increase noted in this category was primarily from service and loan fees on the loans sold into the secondary market. Other non-interest income includes net gains on sale of fixed assets, and other real estate, plus income generated from the holding of other real estate owned. The increase noted in this category was from the gain on sale of fully depreciated computer products. NON-INTEREST EXPENSE The Bank's total non-interest expense declined by $69,000 to $8.3 million for the first nine months of 1996, when compared with the first nine months of 1995. As noted before, the reduction in the cost of FDIC insurance was a major contributor to this reduction. However, other savings from the merger with Templeton National Bank (included in OTHER EXPENSES), also offset other increases in the other expense categories attributable to the Bank's growth. Non-interest expense, as a percentage of average assets, declined to 4.1% during this nine month period from the historical range of 4.5% to 4.6% BALANCE SHEET ANALYSIS Total assets as of September 30, 1996, have increased 11.6% to $294.1 million in comparison to total assets of $263.6 million as of the end of 1995. The growth in assets during the same period in 1995 was only 4.1 percent. However, the majority of the growth in assets and in deposits during 1996, can be attributed to the acquisition of Citizens Bank. Net loans have increased 8.9% to $164.5 million during this 1996. Deposits grew throughout the period with a 12.2% increase to $264.8 million. Again, the purchase of Citizens Bank of Paso Robles as of May 3, 1996, was the primary reason for the large increases noted. As of the acquisition date, Citizens' assets totaled approximately $32 million, loans were at $18 million and deposits were at just over $29 million. INVESTMENT SECURITIES The Bank maintains a portfolio of investment securities to provide income and to serve as a secondary source of liquidity for its operations in conjunction with moneys sold overnight in the Federal funds market. The types of investments held in the portfolio include; U.S. Treasury Bills and Notes, Government Agency issues, short-term municipal issues and corporate obligations guaranteed by the U.S. Government. The type of investments held in the Bank's portfolio are influenced by several factors, among which are; rate of return, maturity, and risk. Note B to the financial statements, sets forth additional information regarding our investment portfolio as well as Table 5, INVESTMENT PORTFOLIO which reports maturity distributions by contractual maturity dates and weighted tax-equivalent rates by types of investments. Such information for the fiscal year ending December 31, 1995, 1994 and 1993 is contained in the 1995 Annual Report of the Bank that is contained in "ANNUAL REPORT" herein. 37 TABLE 5 - INVESTMENT PORTFOLIOS (In thousands)
AS OF SEPTEMBER 30, 1996 TOTAL SECURITIES WITHIN ONE YEAR 1-5- YEARS 5- 10 YEARS OVER 10 YEARS ---------------- --------------- ---------- ----------- ------------- Weighted Weighted Weighted Weighted Weighted Book average Book average Book average Book average Book average U.S. TREASURY value T/E yield value T/E yield value T/E yield value T/E yield value T/E yield - --------------------------------------------------------------------------------------------------------------------- Held to Maturity, at Amortized Cost: U.S. Treasury $ 3,203 6.85% $ 3,203 6.85% $ 0 0.00% $ 0 0.00% $ 0 0.00% U.S. Government Agencies 46,627 5.92% 13,192 5.78% $33,435 5.98% 0 0.00% 0 0.00% Municipal Issues 11,629 6.61% 3,132 6.31% 7,630 6.52% 867 8.45% 0 0.00% Other Debt Securities 3,031 5.57% 1,200 5.07% 1,832 5.89% 0 0.00% 0 0.00% ------- ----- ------- ----- ------- ----- ---- ----- ---- ----- 64,490 6.07% 20,726 5.99% 42,897 6.07% 867 8.45% 0 0.00% Available for Sale, at Market: U.S. Treasury 4,986 6.18% 3,482 5.68% 1,505 7.34% 0 0.00% 0 0.00% U.S. Government Agencies 17,519 5.94% 8,040 5.66% 9,479 6.17% 0 0.00% 0 0.00% ------- ----- ------- ----- ------- ----- ---- ----- ---- ----- 22,505 5.99% 11,522 5.67% 10,984 6.33% 0 0.00% 0 0.00% TOTAL SECURITIES $86,995 6.05% $32,248 5.87% $53,881 6.12% $867 8.45% $ 0 0.00% ------- ----- ------- ----- ------- ----- ---- ----- ---- ----- ------- ----- ------- ----- ------- ----- ---- ----- ---- -----
LOANS Table 6, entitled LOAN PORTFOLIO ANALYSIS BY CATEGORY, sets forth the distribution of the Bank's loan portfolio for the periods under review. During 1996, the loan portfolio mix had several notable changes. Consumer loans grew by 13% and now represents 25% of the Bank's portfolio. Agricultural loans grew by 9% and now represent 16% of the portfolio. Construction and land development loans grew by 14% and other types of real estate loans declined to 20% of the portfolio. Commercial loans, at 31% of the portfolio, remains the most constant category for the Bank. TABLE 6 - LOAN PORTFOLIO ANALYSIS BY CATEGORY (In Thousands) SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 1996 1995 ----------------------------- Consumer $ 41,500 $ 37,574 Commercial 50,299 46,561 Agricultural 25,667 18,818 Construction/Development 14,396 15,649 Other Real Estate Loans 32,614 31,817 -------- -------- TOTAL LOANS $164,476 $150,419 -------- -------- -------- -------- The vast majority of the loans in the portfolio are either amortizing monthly or have relatively short maturities. This helps maintain liquidity in the portfolio. Most of the loans which have floating rates are tied to the Bank's base rate or other market rate indicators. This serves to lessen the risk to the Bank from movement in interest rates, particularly rate increases. See Table 7 in the annual report which shows the maturity of certain loan categories outstanding as of December 31, 1995, net of deferred fees and deferred costs. 38 NON-PERFORMING ASSETS At September 30, 1996, non-performing assets (non-accrual loans, loans 90 days or more past due, restructured loans and other real estate owned) totaled $2.4 million or .82% of total assets, up from $1.4 million or .53% at December 31, 1995. At September 30, 1995, non performing assets totaled $1.5 million, down from the December 31, 1994 balance of $3.1 million. The payoff on the large non-accrual loan mentioned elsewhere in this discussion was the primary reason for this large reduction. Management believes that non-performing loans are generally well secured and that potential losses are reflected in the allowance for loan losses. Table 7 in this discussion sets forth information on non-performing assets for the periods indicated. The market value of other real estate owned and collateral securing non-performing loans is regularly monitored for changes. Such information for the fiscal year ending December 31, 1993, 1992 and 1991 is contained in the 1995 Annual Report of the Bank that is contained in "ANNUAL REPORT" herein. TABLE 7 - NON-ACCRUAL AND NON-PERFORMING ASSETS (In thousands) FOR PERIOD ENDED ---------------- SEPT. 30, 1996 SEPT. 30, 1995 - --------------------------------------------------------------------------- Non-Accrual $ 690 $ 238 Loans currently accruing which are past due 90 days or more 310 23 ------ ------ Total Loans 1,000 261 Other real estate owned 1,382 1,268 ------ ------ TOTAL NON-PERFORMING ASSETS $2,382 $1,529 ------ ------ Percentage of non-performing loans to total loans 0.61% 0.17% Percentage of non-performing assets to total assets 0.81% 0.60% DEPOSITS As was noted, deposits have grown steadily over the reporting periods. The average balances for deposit categories and their associated costs are presented in Table 8, DETAILED DEPOSIT SUMMARY. TABLE 8 - DETAILED DEPOSIT SUMMARY (In thousands) For the Periods Ending ---------------------- Sept. 30, 1996 Sept. 30, 1995 - ------------------------------------------------------------------------------ Average Average Balance Rate Balance Rate - ------------------------------------------------------------------------------ Interest-bearing demand 26,709 1.19% 25,103 1.34% Savings accounts 31,255 2.42% 31,770 2.69% Money market savings 46,458 2.86% 51,867 3.19% TCD less than $100,000 58,163 5.42% 43,401 5.01% TCD $100,000 or more 28,458 5.42% 19,830 5.10% ------ ----- ------ ----- TOTAL INTEREST- BEARING DEPOSITS 191,042 3.71% 171,971 3.51% ----- ----- Demand 53,187 48,274 ------ ------ TOTAL DEPOSITS $244,228 2.91% $220,245 2.74% -------- ----- -------- ----- -------- ----- -------- ----- 39 The effective cost of all funds increased during 1996, as noted earlier in this discussion. Demand deposits continue to represent 22% of all deposits. However, funds formerly included in money market savings have gravitated towards time deposits with the promise of better returns in exchange for liquidity. Table 9 sets forth the remaining maturities of large denomination time deposits, including public funds as of September 30, 1996. TABLE 9 - MATURITY DISTRIBUTION OF TCD'S OF $100,000 OR MORE (In thousands) For period ending Sept. 30, 1996 -------------------------------- Three months or less $12,670 After three months to six months 8,763 After six months to one year 7,727 Over one year 2,761 ------- TOTAL $31,921 ------- ------- LIQUIDITY Liquidity is the Bank's ability to meet fluctuations in deposit levels and to provide for the credit needs of its customers. The objective in liquidity management is to maintain a balance between the sources and uses of funds. Principal sources of liquidity include interest and principal payments on loans and investments, proceeds from the maturity of investments and growth in deposits. The Bank holds overnight Federal funds as a cushion for temporary liquidity needs. During the first nine months of 1996, Federal funds averaged $12.9 million, or 4.7% of total average assets. During the first nine months of 1995, Federal funds averaged $13.0 million or 5.2% of total average assets. In addition, the Bank maintains Federal funds credit lines with major correspondents aggregating $11.1 million, subject to the customary terms for such arrangements. There are several accepted methods of measuring liquidity as used by the regulators. One ratio is referred to as the liquidity ratio and measures the percentage of deposits which are used to fund cash, cash equivalents, and marketable securities. The Bank has set a minimum standard percentage of 20%, and as of September 30, 1996, the Bank's liquidity ratio was 41.4%, more than twice that set as a minimum to meet liquidity needs. The same ratio for last year was 43.7%. The Bank appears to be sufficiently liquid to meet all operating concerns. CAPITAL RESOURCES The primary source of capital for the Bank is the retention of operating profits. The Bank reviews its capital needs on an ongoing basis to ensure an adequate level of capital to support growth and to ensure depositor protection. The level of capital required to operate safely is measured by the regulators using three primary methodologies. The results of these measurements are reported in Note H of the Interim Financial Statements. The Bank has recently purchased land adjacent to the Paso Robles branch for the purpose of building a permanent building. The cost of the land was approximately $900,000. The Bank has sufficient liquidity to purchase the land without financing either by debt or equity funding. The Bank of Santa Maria can operate safely at its current level of capital and is positioned to grow within acceptable parameters. 40 INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF THE HOLDING COMPANY ORGANIZATION The Holding Company was organized under the laws of California on November 12, 1996 at the direction of the Board of Directors of the Bank for the purpose of becoming a bank holding company by acquiring all of the outstanding Bank Common Stock. Mr. William A. Hares has provided the Holding Company's initial capitalization of $1,500 by purchasing 150 shares of Holding Company Common Stock at $10.00 per share. Upon consummation of the Reorganization, these 150 shares will be repurchased, for the same aggregate sum of $1,500, and cancelled by the Holding Company, in accordance with the terms of the "BSM Bancorp Stockholder Agreement" attached hereto as Appendix II. Prior to the Effective Time of the Merger, the Holding Company will purchase, for $1,000, and will own 100% of the common stock of the Merger Corp., a California corporation organized for the sole purpose of facilitating the Reorganization. At the Effective Time of the Merger, the outstanding shares of Merger Corp. Common Stock will be cancelled and will cease to be outstanding. See "BANK HOLDING COMPANY REORGANIZATION - ORGANIZATIONAL TRANSACTIONS." BUSINESS The Holding Company has not yet engaged in any substantial business activity. The Holding Company has filed with the Federal Reserve Board its application for prior approval to become a bank holding company through the acquisition of 100% of the voting shares of the Bank pursuant to the BHC Act. Furthermore, the Holding Company and the Merger Corp. have filed an application with the FDIC, providing for the merger of the Merger Corp. with and into the Bank. See "BANK HOLDING COMPANY REORGANIZATION - REGULATORY APPROVALS." Upon consummation of the Reorganization, the Holding Company will own all of the common stock of the Surviving Bank, the Surviving Bank will be the Holding Company's wholly-owned bank subsidiary and the Holding Company will be registered as a bank holding company. There can be no assurances that the required approvals will be obtained, or as to conditions or timing of such approvals. Subject to constraints under the BHC Act, the Holding Company may acquire other financial institutions in the future. See "BANK HOLDING COMPANY REORGANIZATION - REASONS FOR THE REORGANIZATION." During the initial months following the consummation of the Reorganization, the principal business activity of the Holding Company will be to serve as the bank holding company for the Surviving Bank. At the present time, the Holding Company has no specific plans to engage in any activities other than acting as a bank holding company for the Surviving Bank. The Holding Company may, however, seek to raise additional equity capital through a sale of Holding Company securities shortly following the Reorganization, although no specific proposals have been made at this time. MANAGEMENT The Board of Directors of the Holding Company consists of Armand R. Acosta, Richard E. Adam, Fred L. Crandall, Jr., D.D.S., A.J. Diani, William A. Hares, Roger A. Ikola, M.D., Toshiharu Nishino, Joseph Sesto, Jr., William L. Snelling, Mitsuo Taniguchi and Joseph F. Ziemba, M.D., all of whom are presently directors of the Bank and who will continue to serve as directors of the Holding Company until the first annual meeting of shareholders of the Holding Company and until their successors are elected and qualified. It is anticipated that, initially, directors of the Holding Company 41 will receive no fees for their attendance at Holding Company Board of Directors meetings. For additional information regarding the directors, see "SOLICITATION OF WRITTEN CONSENTS - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." The officers of the Holding Company are, and upon consummation of the Reorganization will continue to be, Mr. Hares, who will serve as President and Chief Executive Officer, Mr. F. Dean Fletcher, who will serve as Executive Vice President and Chief Financial Officer, Ms. Carol Bradfield, who will serve as Executive Vice President, Ms. Susan D. Forgone, who will serve as Executive Vice President, Mr. James D. Glines, who will serve as Executive Vice President, and Mr. Snelling, who will serve as Secretary. It is expected that until the officers of the Holding Company begin to devote significant time to the separate management of the Holding Company's business, which is not expected to occur until such time as the Holding Company becomes actively involved in additional businesses, the officers will only receive compensation for services as directors, officers and employees of the Bank, and no separate compensation will be paid for their services to the Holding Company. At the present time, the Holding Company does not intend to employee any persons other than its officers. If the Holding Company establishes or acquires other businesses, it may add additional employees at that time. EMPLOYEES Currently, the Holding Company has no full-time or part-time employees. It is anticipated that the Holding Company will utilize the employees of the Surviving Bank without payment therefor until it becomes actively engaged in business. Thereafter, the Holding Company will pay the Surviving Bank for a fair and reasonable amount for all services furnished to it. PROPERTIES Currently, the Holding Company does not own or lease any property. It is anticipated that the Holding Company will utilize the premises of the Surviving Bank without payment therefor until it becomes actively engaged in business. Thereafter, the Holding Company will pay the Surviving Bank for a fair and reasonable amount for all services furnished to it. LEGAL PROCEEDINGS The Holding Company is not a party to any pending legal proceeding and is unaware of any proceeding being contemplated against it by any governmental entity. INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF THE BANK GENERAL The Bank was incorporated under the laws of California on June 27, 1977, was licensed by the Superintendent and commenced operations as a California state-chartered bank on March 18, 1978. The Bank is a member of the Federal Reserve System, and its deposits are insured by the FDIC to the maximum amount permitted under the Federal Deposit Insurance Act. The Bank currently operates _____ retail banking offices along the central coast of California. The main office and two branch offices are located in the City of Santa Maria with additional offices located in the communities of Guadalupe, Oak Knolls, Vandenberg Village, Nipomo, Grover Beach, 42 Pismo Beach, Paso Robles, __________, __________, and two offices in Templeton. The Bank has its headquarters in the City of Santa Maria at 2739 Santa Maria Way, Santa Maria, California 93455. Its telephone number is (805) 937-8551. ACQUISITION OF TEMPLETON NATIONAL BANK Following all necessary regulatory approvals, on September 8, 1995, the Bank acquired Templeton National Bank ("Templeton") pursuant to an Agreement and Plan of Reorganization dated March 10, 1995 providing for the merger of Templeton into the Bank. The Agreement provided for Templeton shareholders to receive shares of the Bank Common Stock based upon the comparative book values of the banks at the closing plus a premium of $500,000. The Bank issued 397,561 shares of its Common Stock to the former shareholders of Templeton. As of the merger date, Templeton's deposits were approximately $24 million, and loans were approximately $18 million. Templeton had one office and two ATM locations. Since the acquisition, one of the offsite ATM locations was closed as its location was directly across from the recently acquired Templeton office of Citizens Bank of Paso Robles. This acquisition was treated as a pooling transaction for accounting purposes. ACQUISITION OF CITIZENS BANK OF PASO ROBLES, N.A. Following all necessary regulatory approvals, on May 3, 1996, the Bank acquired Citizens National Bank of Paso Robles, N.A. ("Citizens") pursuant to an Agreement and Plan of Reorganization dated October 30, 1995, providing for the merger of Citizens into the Bank. The Agreement provided for the shareholders of Citizens to receive cash per share at the rate of 1.6 times book value per share of Citizens stock as the end of the month preceding the closing. The exchange value used in the merger was $16.94 of each share of Citizens stock surrendered. The transaction was treated as a purchase for accounting purposes and approximately $1.9 million of goodwill was recorded. Acquired deposits were recorded at approximately $29 million and acquired loans at $18 million. The Bank continues to operate at both former Citizens' locations. ACQUISITION OF EL CAMINO NATIONAL BANK. Following all necessary regulatory approvals, on _________, 1997, the Bank acquired El Camino National Bank ("El Camino") pursuant to an Agreement and Plan of Reorganization dated July 16, 1996, providing for the merger of El Camino into the Bank. The Agreement provides for the shareholders of El Camino to receive shares of Bank Common Stock based upon the comparative book values of the banks as of the end of the months preceding the closing. As of the closing date, El Camino's deposits were approximately $___ million, and loans were approximately $__ million. This acquisition was treated as a pooling transaction for accounting purposes. The exchange value used in the merger was ____ shares of Bank Common Stock for each share of El Camino Common Stock. The Bank issued ________ shares to complete this transaction. El Camino had only one office in Lompoc, California, and the Bank continues to operate from this location. SERVICES The Bank offers a full range of commercial banking services including the acceptance of checking and savings deposits, Money Market checking and savings accounts, Time Certificates of Deposit of varying maturities, Individual Retirement Accounts, the making of commercial loans, various types of consumer loans and real estate loans and provides safe deposits, travelers cheques, 43 notary public and other customary non-deposit banking services. The Bank is a merchant depository for Master Charge and Visa drafts enabling merchants to deposit both types of drafts with the Bank. Banks in California have been empowered to conduct certain insurance activities and to market that services to the consuming public. The Bank did obtain its Organizational Insurance License in the fall of 1989, but has not elected to offer products which require this license. The Bank's organization and operations have been designed to serve the banking needs of individuals and small to medium sized businesses located in the Northern Santa Barbara and San Luis Obispo County areas of California. EMPLOYEES As of September 30, 1996, the Bank had a total of 151 full-time employees and 59 part-time employees. The management of the Bank believes that its employee relations are satisfactory. PROPERTIES The Bank owns the land and buildings at nine of its twelve locations. Those locations include: OFFICE NAME ADDRESS Head Office 2739 Santa Maria Way Santa Maria, California South Broadway 528 South Broadway Santa Maria, California Oak Knolls 1070 East Clark Avenue Santa Maria, California Guadalupe 905 Guadalupe Street Guadalupe, California Vandenberg Village 2745 Constellation Vandenberg Village, California Grover Beach 1580 Grand Avenue Grover Beach, California Pismo Beach 790 Price Street Pismo Beach, California Las Tablas 1025 Las Tablas Road Templeton, California Main Street 599 Main Street Templeton, California The Bank has an option to purchase land which it is currently leasing as the parking lot adjacent to the Head Office. The option can be exercised at the earlier of two events: (1) the 44 expiration of the lease in December 1996, or (2) at any time during the lease when requested by the lessor. The price has been set at the higher of $270,000 or the currently fair market value. On December __, 1996, the Bank exercised its option at a price of $________ to purchase the land adjacent to the Bank's head office. The Bank also leases the land where the Nipomo branch has been built and a portion of the land upon which the North Broadway branch building now stands. Both leases were long-term (25 years with an option to renew for a like period), and do contain the right of first refusal if the lessor elects to sell. However, neither lease has an options to purchase and, therefore, no ownership is assumed. The Bank also leases the land upon which the modular unit at the Paso Robles branch now sits. The lease expires in 1997. The Bank intends to complete a new permanent building adjacent to the present location on land which was recently purchase for this purpose. The Bank also leases approximately 3,850 square feet of space for the Lompoc branch office. The lease expires in 1999; subject to one option to renew for five (5) years. LEGAL PROCEEDINGS There are no material pending legal proceedings, other than ordinary, routine litigation incidental to the Bank's business, to which the Bank is a party or of which any of its property is subject. SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK THE HOLDING COMPANY If the Reorganization is consummated, the Holding Company, as a registered bank holding company, will be subject to regulation under the BHC Act. The Holding Company will be required to file with the Federal Reserve Board quarterly and annual reports and such additional information s the Federal Reserve Board may require pursuant to the BHC Act. The Federal Reserve Board may conduct examinations of the Holding Company and its subsidiaries. The Federal Reserve Board may require that the Holding Company terminate an activity or terminate control of or liquidate or divest certain subsidiaries or affiliates when the Federal Reserve Board believes the activity or the control or the subsidiary or affiliate constitutes a 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 Holding Company would be required to file written notice and obtain approval from the Federal Reserve Board prior to purchasing or redeeming its equity securities. Under the BHC Act and regulations adopted by the Federal Reserve Board, a bank holding company and its nonbanking subsidiaries are prohibited from requiring certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. Further, the Holding Company is required by the Federal Reserve Board to maintain certain levels of capital. See "SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK - EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION - CAPITAL ADEQUACY GUIDELINES." 45 The Holding Company will be required to obtain the prior approval of the Federal Reserve Board for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior approval of the Federal Reserve Board will also be required for the merger or consolidation of the Holding Company and another bank holding company. The Holding Company will be prohibited by the BHC 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 Holding Company would be able, subject to the prior approval of the Federal Reserve Board, to engage in any, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making any such determination, the Federal Reserve Board is required to consider whether the performance of such activities by the Holding Company or an affiliate can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve Board is also empowered to differentiate between activities commenced DE NOVO and activities commenced by acquisition, in whole or in part, of a going concern and is generally prohibited from approving an application by a bank holding company to acquire voting shares of any commercial bank in another state unless such acquisition is specifically authorized by the laws of such other state. A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board's regulations or both. The Holding Company will also be a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, the Holding Company and its subsidiaries would be subject to examination by, and may be required to file reports with, the Superintendent. Finally, the Holding Company will be subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, including but not limited to, filing annual, quarterly and other current reports with the Securities and Exchange Commission. THE BANK The Bank, as a California state-chartered bank, is subject to primary supervision, periodic examination and regulation by the Superintendent. As a member of the Federal Reserve System, the Bank also is subject to certain regulations of the Federal Reserve Board should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank's operations are unsatisfactory or that the Bank or its management is violating 46 or has violated any law or regulation, various remedies are available to the Federal Reserve Board. Such remedies include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove officers and directors and ultimately to terminate the Bank's deposit insurance, which for a California state-chartered bank, would result in revocation of the Bank's charter. The Superintendent has many of the same remedial powers. As an FDIC-insured institution, the bank is also subject to certain rules and regulations of the FDIC. The Bank is insured by the FDIC, which currently insured deposits of each member bank to a maximum of $100,000 per depositor. For this protection, the bank, as is the case with all insured banks, pays a semi-annual statutory assessment and is subject to the rules and regulations of the FDIC. See "SUPERVISION AND REGULATION OF HOLDING COMPANY AND BANK - EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION." Various requirements and restrictions under the laws of California and the United States affect the operations of the Bank. State and federal statutes and regulations 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. See "SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK - EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION - - CAPITAL ADEQUACY GUIDELINES." There are statutory and regulatory limitations on the amount of dividends by state chartered banks to the lesser of retained earnings or the bank's net income for its las three fiscal years (less any distributions to shareholders made during such period). In the event a bank has not retained earnings or net income for its last three fiscal years, cash dividends may be paid in an amount not exceeding the net income for such bank's last preceding fiscal year only after obtaining the prior approval of the Superintendent. Furthermore, the FDIC also has authority to prohibit the Bank from engaging in what, in the FDIC's opinion, constitutes an unsafe or unsound practice in conducting its business. It is possible, depending upon the financial condition of the bank in questions and other factors, that the FDIC could assert that the payment of dividends or other payments might, under some circumstances, be such an unsafe or unsound practice. Further, the FDIC and the Federal Reserve Board have established guidelines with respect to the maintenance of appropriate levels of capital by banks or bank holding companies under their jurisdiction. Compliance with the standards set forth in such guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of the FDIC Improvement Act could limit the amount of dividends which the Bank may pay. See "SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK - FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 - PROMPT CORRECTIVE REGULATORY ACTION" AND "- CAPITAL ADEQUACY GUIDELINES" for a discussion of these additional restrictions on capital distributions. The Bank is subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of its affiliates, the purchase of or investments in stock or other securities thereof, the taking of such securities as collateral for loans and the purchase of assets of its affiliates. Such restrictions prevent its affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by the Bank in any other affiliate is limited to 10% of the Bank's capital and surplus (as defined by federal regulations) and such secured loans and 47 investments are limited, in the aggregate, to 20% of the Bank's capital and surplus (as defined by federal regulations). California law also imposes certain restrictions with respect to transactions involving controlling persons of the Bank. Additional restrictions on transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of the FDIC Improvement Act. See "SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK - EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION - FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 - PROMPT CORRECTIVE REGULATORY ACTION." The Bank is also subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, including, but not limited to, filing annual, quarterly, and other current reports with the Federal Reserve Board. EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION The commercial banking business is not only affected by general economic conditions but is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Federal Reserve Board. The Federal Reserve Board implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial intermediaries subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial intermediaries. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial intermediaries are frequently made in Congress, in the California legislature and before various bank regulatory and other professional agencies. The likelihood of any major changes and the impact such changes might have on the Bank are impossible to predict. Certain of the potentially significant changes which have been enacted and proposals which have been made recently are discussed below. Federal Deposit Insurance Corporation Improvement Act of 1991. On December 19, 1991, the FDIC Improvement Act was enacted into law. Set forth below is a brief discussion of certain portions of this law and implementing regulations that have been adopted or proposed by the Federal Reserve Board, the Comptroller of the Currency ("Comptroller"), the Office of Thrift Supervision ("OTS") and the FDIC (collectively, the "federal banking agencies"). STANDARDS FOR SAFETY AND SOUNDNESS. The FDIC Improvement Act requires the federal banking agencies to prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating to internal controls, loan documentation, credit underwriting, interest rate exposure and asset growth. Standards must also be prescribed for classified loans, earnings and the ratio of market value to book value for publicly traded shares. The FDIC Improvement Act also requires the federal banking agencies to issue uniform regulations prescribing standards for real estate lending that are to consider such factors as the risk to the deposit insurance fund, the need for safe and sound operation of insured depository institutions and the availability of credit. Further, the FDIC Improvement Act requires the federal banking agencies to establish 48 standards prohibiting compensation, fees and benefit arrangements that are excessive or could lead to financial loss. In July 1992, the federal banking agencies issued a joint advance notice of proposed rule making requesting public comment on the safety and soundness standards required to be prescribed by the FDIC Improvement Act. The purpose of the notice is to assist the federal banking agencies in the development of proposed regulations. In accordance with the FDIC Improvement Act, final regulations must become effective no later than December 1, 1993. In December 1992, the federal banking agencies issued final regulations prescribing uniform guidelines for real estate lending. The regulations, which became effective March 19, 1993, require insured depository institutions to adopt written policies establishing standards, consistent with such guidelines, for extensions of credit secured by real estate. The policies must address loan portfolio management, underwriting standards and loan-to-value limits that do not exceed the supervisory limits prescribed by the regulations. PROMPT CORRECTIVE REGULATORY ACTION. The FDIC Improvement Act requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions that fall below one or more prescribed minimum capital ratios. The purpose of this law is to resolve the problems of insured depository institutions at the least possible long-term cost to the appropriate deposit insurance fund. The 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 (significantly exceeding the required minimum capital requirements), adequately capitalized (meeting the required capital requirements), undercapitalized (failing to meet any one of the capital requirements), significantly undercapitalized (significantly below any one capital requirement) and critically undercapitalized (failing to meet all capital requirements). In September 1992, the federal banking agencies issued uniform final regulations implementing the prompt corrective action provisions of the FDIC Improvement Act. Under the regulations, an insured depository institution will be deemed to be: - "well capitalized" if it (i) has total risk-based capital of 10% or greater, Tier 1 risk-based capital of 6% or greater and a leverage capital ratio of 5% or greater and (ii) is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure; - "adequately capitalized" if it has total risk-based capital of 8% or greater, Tier 1 risk-based capital of 4% or greater and a leverage capital ratio of 4% or greater (or a leverage capital ratio of 3% or greater if the institution is rated composite 1 under the applicable regulatory rating system in its most recent report of examination); - "undercapitalized" if it has total risk-based capital that is less than 8%, Tier 1 risk-based capital that is less than 4% or a leverage capital ratio that is less than 4% (or a leverage capital ratio that is less than 3% if the institution is rated composite 1 under the applicable regulatory rating system in its most recent report of examination); 49 - "significantly undercapitalized" if it has total risk-based capital that is less than 6%, Tier 1 risk-based capital that is less than 3% or a leverage capital ratio that is less than 3%; and - "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2%. An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized or undercapitalized may be reclassified to the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, (i) determines that the institution is an unsafe or unsound condition or (ii) deems the institution to be engaging in an unsafe or unsound practice and not to have corrected the deficiency. At each successive lower capital category, an insured depository institution is subject to more restrictions and federal banking agencies are given less flexibility in deciding how to deal with it. 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 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 executive officers, subject to certain grandfather provisions for those elected prior to enactment of the FDIC Improvement Act; (vii) prohibitions on the receipt of deposits from correspondent institutions; (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, 50 impose restrictions on affiliate transactions and impose restrictions on rates paid on deposits unless it determines that such actions would not further the purpose of the prompt corrective action provisions. In addition, without the prior written approval of the appropriate federal banking agency, a significantly undercapitalized institution may not pay any bonus to its senior executive officers or provide compensation to any of them at a rate that exceeds such officer's average rate of base compensation during the 12 calendar months preceding the month in which the institution became undercapitalized. 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. The FDIC has adopted risk-based minimum capital 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. In addition to the risk-based guidelines, the FDIC requires banks to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a bank rated in the highest of the five categories used by the FDIC to rate banks, the minimum leverage ratio of Tier 1 capital to total assets is 3%. For all banks not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or 4% to 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the FDIC has the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. In August 1995, the federal banking agencies adopted final regulations specifying that the agencies will include, in their evaluations of a bank's capital adequacy, an assessment of the exposure to declines in the economic value of the bank's capital due to changes in interest rates. The final regulations, however, do not include a measurement framework for assessing the level of a bank's exposure to interest rate risk, which is the subject of a proposed policy statement issued by the federal banking agencies concurrently with the final regulations. The proposal would measure interest rate risk in relation to the effect of a 200 basis point change in market interest rates on the economic value of a bank. Banks with high levels of measured exposure or weak management systems generally will be required to hold additional capital for interest rate risk. The specific amount of capital that may be needed would be determined on a case-by-case basis by the examiner and the appropriate federal banking agency. Because this proposal ha only recently been issued, the Bank 51 currently is unable to predict the impact of the proposal on the Bank if the policy statement is adopted as proposed. In January 1995, the federal banking agencies issued a final rule relating to capital standards and the risks arising from the concentration of credit and nontraditional activities. Institutions which have significant amounts of their assets concentrated in high risk loans or nontraditional banking activities and who fail to adequately manage these risks, will be required to set aside capital in excess of the regulatory minimums. The federal banking agencies have not imposed any quantitative assessment for determining when these risks are significant, but have identified these issues as important factors they will review in assessing an individual bank's capital adequacy. In December 1993, 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 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. As of September 30, 1996, the Bank had a total risk-based capital ratio of 15.90%, a Tier 1 risk-based capital ratio of 14.65% and a leverage capital ratio of 9.49%. The Bank is considered to be adequately capitalized as of September 30, 1996. A subsequent reduction in the Bank's capital could cause it to fall within a lower capital category and subject it to the mandatory and discretionary sanctions applicable to that category. Further, as noted above, an institution that, based upon its capital levels, is well capitalized, adequately capitalized or undercapitalized can, under certain circumstances, be reclassified to the next lower capital category. OTHER ITEMS. The FDIC Improvement Act also, among other things, (i) limits the percentage of interest paid on brokered deposits and limits the unrestricted use of such deposits to only those institutions that are well capitalized; (ii) requires the FDIC to charge insurance premiums based on the risk profile of each institution; (iii) eliminates "pass through" deposit insurance for certain employee benefit accounts unless the depository institution is well capitalized or, under certain circumstances, adequately capitalized; (iv) prohibits insured state chartered banks from engaging as principal in any type of activity that is not permissible for a national bank unless the FDIC permits such activity and the bank meets all of its regulatory capital requirements; (v) directs the appropriate federal banking agency to determine the amount of readily marketable purchased mortgage servicing rights that may be included in calculating such institution's tangible, core and risk-based capital; and (vi) provides that, subject to certain limitations, any federal savings association may acquire or be acquired by any insured depository institution. In addition, the FDIC has issued final and proposed regulations implementing provisions of the FDIC Improvement Act relating to powers of insured state banks. Final regulations issued in October 1992 prohibit insured state banks from making equity investments of a type, or in an amount, that are not permissible for national banks. In general, equity investments include equity securities, partnership interests and equity interests in real estate. Under the final regulations, non-permissible investments must be divested by no later than December 19, 1996. The Bank has no such non-permissible investments. Regulations issued in December 1993 prohibit insured state banks from engaging as principal in any activity not permissible for a national bank, without FDIC approval. The proposal also provides 52 that subsidiaries of insured state banks may not engage as principal in any activity that is not permissible for a subsidiary of a national bank, without FDIC approval. The impact of the FDIC Improvement Act on the Bank is uncertain, especially since many of the regulations promulgated thereunder have only been recently adopted and certain of the law's provisions still need to be defined through future regulatory action. Certain provisions, such as the recently adopted real estate lending standards and the limitations on investments and powers of state banks and the rules to be adopted governing compensation, fees and other operating policies, may affect the way in which the Bank conducts its business, and other provisions, such as those relating to the establishment of the risk-based premium system, may adversely affect the Bank's results of operations. Furthermore, the actual and potential restrictions and sanctions that apply to or may be imposed on undercapitalized institutions under the prompt corrective action and other provisions of the FDIC Improvement Act may significantly adversely affect the operations and liquidity of the Bank, the value of its Common Stock and its ability to raise funds in the financial markets. CAPITAL ADEQUACY GUIDELINES. The FDIC has issued guidelines to implement the risk-based capital requirements. The guidelines are intended to establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations, takes off-balance sheet items into account in assessing capital adequacy and minimizes disincentives to holding liquid, low-risk assets. Under these guidelines, assets and credit equivalent amounts of off-balance sheet items, such as letters of credit and outstanding loan commitments, are assigned to one of several risk categories, which range from 0% for risk-free assets, such as cash and certain U.S. Government securities, to 100% for relatively high-risk assets, such as loans and investments in fixed assets, premises and other real estate owned. The aggregated dollar amount of each category is then multiplied by the risk-weight associated with that category. The resulting weighted values from each of the risk categories are then added together to determine the total risk-weighted assets. A banking organization's qualifying total capital consists of two components: Tier 1 capital (core capital) and Tier 2 capital (supplementary capital). Tier 1 capital consists primarily of common stock, related surplus and retained earnings, qualifying noncumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries. Intangibles, such as goodwill, are generally deducted from Tier 1 capital; however, purchased mortgage servicing rights and purchase credit card relationships may be included, subject to certain limitations. At least 50% of the banking organization's total regulatory capital must consist of Tier 1 capital. Tier 2 capital may consist of (i) the allowance for possible loan and lease losses in an amount up to 1.25% of risk- weighted assets; (ii) perpetual preferred stock, cumulative perpetual preferred stock and long-term preferred stock and related surplus; (iii) hybrid capital instruments (instruments with characteristics of both debt and equity), perpetual debt and mandatory convertible debt securities; and (iv) eligible term subordinated debt and intermediate-term preferred stock with an original maturity of five years or more, including related surplus, in an amount up to 50% of Tier 1 capital. The inclusion of the foregoing elements of Tier 2 capital are subject to certain requirements and limitations of the federal banking agencies. The FDIC has also adopted a minimum leverage capital ratio of Tier 1 capital to average total assets of 3% for the highest rated banks. This leverage capital ratio is only a minimum. Institutions experiencing or anticipating significant growth or those with other than minimum risk profiles are expected to maintain capital well above the minimum level. Furthermore, higher leverage capital 53 ratios are required to be considered well capitalized or adequately capitalized under the prompt corrective action provisions of the FDIC Improvement Act. SAFETY AND SOUNDNESS STANDARDS. In February 1995, the federal banking agencies adopted final guidelines establishing standards for safety and soundness, as required by FDICIA. The guidelines set forth operational and managerial standards relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. Guidelines for asset quality and earnings standards will be adopted in the future. The guidelines establish the safety and soundness standards that the agencies will use to identify and address problems at insured depository institutions before capital becomes impaired. 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. In December 1992, the federal banking agency issued final regulations prescribing uniform guidelines for real estate lending. The regulations require insured depository institutions to adopt written policies establishing standards, consistent with such guidelines, for extensions of credit secured by real estate. The policies must address loan portfolio management, underwriting standards and loan to value limits that do not exceed the supervisory limits prescribed by the regulations. Appraisals for "real estate related financial transactions" must be conducted by either state-certified or state-licensed appraisers for transactions in excess of certain amounts. State-certified appraisers are required for all transactions with a transaction value of $1,000,000 or more; for all nonresidential transactions valued at $250,000 or more; and for "complex" 1-4 family residential properties of $250,000 or more. A state-licensed appraiser is required for all other appraisals. However, appraisals performed in connection with "federally related transactions" must now comply with the agencies' appraisal standards. Federally related transactions include the sale, lease, purchase, investment in, or exchange of, real property or interests in real property, the financing of real property, and the use of real property or interests in real property as security for a loan or investment, including mortgage backed securities. 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 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 implemented a final risk-based assessment system, as required by FDICIA, effective January 1, 1994, under which an institution's premium assessment is based on the probability that the deposit insurance fund will incur a loss with respect to the institution, the likely amount of any such loss, and the revenue needs of the deposit insurance fund. As long as BIF's reserve ratio is less than a specified "designated reserve ratio," 1.25%, the total amount raised from BIF members by the risk-based assessment system may not be less than the amount that would be raised if the assessment rate for all BIF members were .023% of deposits. 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 condition of the bank, as a result of the recapitalization of the BIF. 54 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. Governor Pete Wilson recently signed Assembly Bill 3351 (the "Banking Consolidation Bill"), authored by Assemblyman Ted Weggeland and sponsored by the California State Banking Department (the"Department"), effective July 1, 1997, which creates the California Department of Financial Institutions ("DFI") to be headed by a Commissioner of Financial Institutions out of the existing Department which regulates state chartered commercial banks and trust companies in California. The Banking Consolidation Bill, among other provisions, also (i) transfers regulatory jurisdiction over state chartered savings and loan associations from the Department of Savings and Loans ("DSL") to the newly created DFI and abolishes the DSL; (ii) transfers regulatory jurisdiction over state chartered industrial loan companies and credit unions from the Department of Corporations to the newly-created DFI; and (iii) establishes within the DFI separate divisions for credit unions, commercial banks, industrial loan companies and savings and loans. As the Banking Consolidation Bill has only recently been enacted, it is impossible to predict with any degree of certainty what impact it will have on the banking industry in general and the Bank in particular. Congress has recently passed, and the President has signed into law provisions to strengthen the Savings Association Insurance Fund (the "SAIF") and to repay outstanding bonds that were issued to recapitalize the SAIF's successor as result of payments made due to insolvency of savings and loan associations and other federally insured savings institutions in the late 1980's and early 1990's. The new law will require savings and loan associations to bear the cost of recapitalizing the SAIF and, after January 1, 1997, banks will contribute towards paying off the financing bonds, including interest. In 2000, the banking industry will assume the bulk of the payments. The new law also aims to merge the Bank Insurance Fund and SAIF by 1999 but not until the bank and savings and loan charters are combined. The Treasury Department has until March 31, 1997 to deliver to Congress on combining the charters. Additionally, the new provides "regulatory relief" for the banking industry by effecting approximately 30 laws and regulations. The costs and benefits of the new law to the Bank can not currently be accurately predicted. INTERSTATE BANKING AND BRANCHING. On September 29, 1994, the President signed in law the Riegle-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 regulatory approval 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 55 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 requirement and conditions as for a merger transaction. Effective October 2, 1995, California adopted legislation which "opts California into" the Interstate Act. However, the California Legislation restricts out of state banks from purchasing branches or starting a de novo branch to enter the California banking market. Such banks may proceed only by way of purchases of whole banks. The Interstate Act is likely to increase competition in the Bank's market areas especially from larger financial institutions and their holding companies. It is difficult to asses the impact such likely increased competition will have on the Bank' operations. In 1986, California adopted an interstate banking law. The law allows California banks and bank holding companies to be acquired by banking organizations in other states on a "reciprocal" basis (i.e., provided the other state's law permit California banking organizations to acquire banking organizations in that state on substantially the same terms and conditions applicable to banking organizations solely within that state). The law took effect in two states. The first state allowed acquisitions on a "reciprocal" basis within a region consisting of 11 western states. The second stage, which became effective January 1, 1991, allows interstate acquisitions on a national "reciprocal" basis. California has also adopted similar legislation applicable to savings associations and their holding companies. On September 28, 1995, Governor Wilson signed Assembly Bill No. 1482, the Caldera, Weggeland, and Killea California Interstate Banking and Branching Act of 1995 (the "1995 Act"). The 1995 Act, which was filed with the Secretary of State as Chapter 480 of the Statutes of 1995, became operative on October 2, 1995. The 1995 Acts opts in early for interstate branching, allowing out-of-state banks to enter California by merging or purchasing a California bank or industrial loan company which is at least five years old. Also, the 1995 Act repeals the California Interstate (National) Banking Act of 1986, which regulated the acquisition of California banks by out-of-state bank holding companies. In addition, the 1995 Act permits California state banks, with the approval of the Superintendent of Banks, to establish agency relationships with FDIC-insured banks and savings associations. Finally, the 1995 Act provides for regulatory relief, including (i) authorization for the Superintendent to exempt banks from the requirement of obtaining approval before establishing or relocating a branch office or place of business, (ii) repeal of the requirement of directors' oaths (Financial Code Section 682), and (iii) repeal of the aggregate limit on real estate loans (Financial Code Section 1230). 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 financial institutions in meeting the credit needs of their local community, 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 May 1995, the federal banking agencies issued final regulations which change the manner in which they measure a bank's compliance with its CRA obligations. The final regulations adopt a performance-based evaluation system which bases CRA ratings on an institutions' actual lending 56 service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. In March 1994, the Federal Interagency Tax 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 February 1995, the federal banking agencies adopted final safety and soundness standards for all insured depository institutions. The standards, which were issued in the form of guidelines rather than regulations, relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan may result in enforcement proceedings. Additional standards on earnings and classified assets are expected to be issued in the near future. CHANGES IN ACCOUNTING PRINCIPLES. In February 1992, the Financial Accounting Standards Board ("FASB") issued SFAS No. 109 ACCOUNTING FOR INCOME TAXES, which supersedes SFAS No. 96 of the same title. SFAS No. 109 is effective for fiscal years beginning after December 31, 1992, or earlier at the Bank's option. SFAS No. 109 employs an asset and liability approach in accounting for income taxes payable or refundable at the date of the financial statements as a result of all events that have been recognized in the financial statements and as measured by the provisions of enacted tax laws. SFAS No. 109 was adopted by the Bank in 1993 and there is no material impact on the Bank's financial statements. In addition, in December 1991, the FASB issued SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, which is effective for fiscal years ending after December 15, 1992 (December 15, 1995 in the case of entities with less than $150 million in total assets such as the Bank). SFAS No. 107 requires financial intermediaries to disclose, either in the body of their financial statements or in the accompanying notes, the "fair value" of financial instruments for which it is "practicable to estimate that value." SFAS No. 107 defines "fair value" as the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Quoted market prices, if available, are deemed the best evidence of the fair value of such instruments. Most deposit and loan instruments issued by financial intermediaries are subject to SFAS No. 107 and its effect will be to require financial statement disclosure of the fair value of most of the assets and liabilities of financial intermediaries such as the Bank. Management is unable to predict what effect, if any, such disclosure requirements could have on the market price of the common stock of the Bank or its ability to raise funds in the financial markets. In May 1993, the FASB issued Statement of Financial Standards No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN ("SFAS No. 114"). Under the provisions of SFAS No. 114, a loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. SFAS No. 114 requires creditors to measure impairment of a loan based on the present value of expected future cash flows discounted at the loan's effective interest rate. If the measure of the impaired loan is less than the recorded investment in the loan, a creditor shall recognize an impairment by creating a valuation allowance with a corresponding charge to bad debt expense. This statement also applies to restructured loans and changes the definition of in-substance foreclosures to apply 57 only to loans where the creditor has taken physical possession of the borrower's assets. SFAS No. 114 applies to financial statements for fiscal years beginning after December 15, 1994. Earlier implementation is permitted. The adoption of this statement did not have a material effect on the Bank's financial condition or results of operations at December 31, 1995. In June, 1993, the FASB issued Financial Accounting Series Statement No. 115 addressing the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments would be classified in three categories and accounted for as follows: (i) debt securities that the entity has the positive intent and ability to hold to maturity would be classified as "held to maturity" and reported at amortized cost; (ii) debt and equity securities that are held for current resale would be classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; and (iii) debt and equity securities not classified as either securities held to maturity or trading securities would be classified as securities available for sale, and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity. The rule is effective for financial statements for calendar year 1994, but may be applied to an earlier fiscal year for which annual financial statements have not been issued. Effective for 1994, the Bank has implemented SFAS No. 115 regarding its investment securities. Accordingly, all of the securities have been classified as "hold to maturity". The Bank has established this classification due to its intent and ability to hold such securities throughout their respective investment terms. As a result, any subsequent increases or decreases in the fair market values of the securities are not reflected on either the income statement or changes in stockholders equity. In December 1994, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 94-6, DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES. This SOP applies to financial statements prepared in conformity with GAAP by all nongovernmental entities. The disclosure requirements in SOP 94-6 focus primarily on risks and uncertainties that could significantly affect the amounts reported in the financial statements in the near-term functioning of the reporting entity. The risks and uncertainties discussed in SOP 94-6 stem from the nature of the entity's operations, from the necessary use of estimates in the preparation of the entity's financial statements and from significant concentrations in certain aspects of the entity's operations. SOP 94-6 is effective for financial statements issued for fiscal years ending after December 15, 1995 and did not have any impact in the financial position or results of operations of the Bank. In March of 1995, the FASB issued SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. The statement does not apply to financial instruments long-term customer relationships of a financial institution (core deposits), mortgage and other servicing rights, and tax deferred assets. SFAS 121 requires the review of long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances include, for example, a significant decrease in market value of an assets, a significant change in use of an asset, or an adverse change in a legal factor that could affect the value of an asset. If such an event occurs and it is determined that the carrying value of the asset may not be recoverable, an impairment loss should be recognized a measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value can be determined by a current transaction, quoted market prices, or present value of estimated expected future cash flows discounted at the appropriate rate. The statement is 58 effective for fiscal years beginning after December 15, 1995. The Bank does not anticipate that implementation of SFAS No. 121 will have a material impact on its results of operations or financial position. In May of 1995, the FASB issued SFAS 122, ACCOUNTING FOR MORTGAGE SERVICING RIGHTS. SFAS No. 122 eliminates distinctions between servicing rights that were purchased and those that were retained upon the sale of loans. The statement requires mortgage servicers to recognize as separate assets rights to service loans, no matter how the rights were acquired. Institutions who sell loans and retain the servicing rights will be required to allocate the total cost of the loans to servicing rights and loans based on their relative fair values if the value can be estimated. SFAS No. 122 is effective for fiscal years beginning after December 15, 1995. Further, SFAS No. 122 requires that all capitalized mortgage servicing rights be periodically evaluated for impairment based upon the current fair value of these rights. Management believes the implementation of this statement will not have a material effect on the Bank's financial condition and results of operations since it does not retain servicing on its sold mortgage loans. In October of 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR STOCK- BASED COMPENSATION, establishing financial accounting and reporting standards for stock-based employee compensation plans. This statement encourages all entities to adopt a new method of accounting to measure compensation cost of all employee stock compensation pans based on the estimated fair value of the award at the date it is granted. Companies are, however, allowed to continue to measure compensation cost for those plans using the intrinsic value based method of accounting, which generally does not result in compensation expense recognition for most plans. Companies that elect to remain with the existing accounting are required to disclose in a footnote to the financial statements pro forma net income and, if presented, earnings per share, as if this statement had been adopted. The accounting requirements of this statement are effective for transactions entered into in fiscal years that begin after December 15, 1995; however, companies are required to disclose information for awards granted in their first fiscal year beginning after December 15, 1994. Management of the Bank has not completed an analysis of the potential effects of this statement on its financial condition or results of operations. In June of 1996, the FASB issued SFAS No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, establishing accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of the financial-components approach. This approach requires the recognition of financial assets and servicing assets that are controlled by the reporting entity, the derecognition of financial assets when control is surrendered, and the derecognition of liabilities when they are extinguished. Specific criteria are established for determining when control has been surrendered in the transfer of financial assets. Liabilities and derivatives incurred or obtained by transferors in conjunction with the transfer of financial assets are required to be measured at fair value, if practicable. Servicing assets and other retained interests in transferred assets are required to be measured by allocating the previous carrying amount between the assets sold, if any, and the interest that is retained, if any, based on the relative fair values of the assets on the date of the transfer. Servicing assets retained are subsequently subject to amortization and assessment for impairment. Management believes the implementation of this statement will not have a material effect on the Bank's financial condition or results of operations. OTHER REGULATIONS AND POLICIES. The federal regulatory agencies have adopted regulations that implement Section 304 of FDICIA which requires federal banking agencies to adopt uniform regulations prescribing standards for real estate lending. Each insured depository institution must 59 adopt and maintain a comprehensive written real estate lending policy, developed in conformance with prescribed guidelines, and each agency has specified loan- to-value limits in guidelines concerning various categories of real estate loans. Various requirements and restrictions under the laws of the United States and the State of California affect the operations of the Bank. Federal regulations include requirements to maintain non-interest bearing reserves against deposits, limitations on the nature and amount of loans which may be made, and restrictions on payment of dividends. The California Superintendent of Banks approves the number and locations of the branch offices of a bank. California law exempts banks from the usury laws. RESTRICTIONS ON TRANSFERS OF FUNDS TO THE HOLDING COMPANY BY THE BANK The Holding Company is a legal entity separate and distinct from the Bank. There are statutory and regulatory limitations on the amount of dividends which may be paid to the Holding Company by the Bank. Under California law, no distribution of dividends is permitted unless: (i) such distribution would not exceed a bank's retained earnings; or (ii) in the alternative, after giving effect to the distribution, (y) the sum of a bank's assets (net of goodwill, capitalized research and development expenses and deferred charges) would be not less than 125% of its liabilities (net of deferred taxes, income and other credits), or (z) current assets would not be less than current liabilities (except that if a bank's average earnings before taxes for the last two years had been less than average interest expenses, current assets must not be less than 125% of current liabilities). The FDIC also has authority to prohibit the Bank from engaging in what, in the FDIC's opinion, constitutes an unsafe or unsound practice in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the FDIC could assert that the payment of dividends or other payments might, under some circumstances, be such an unsafe or unsound practice. Further, the FDIC has established guidelines with respect to the maintenance of appropriate levels of capital by bank under their jurisdiction. Compliance with the standards set forth in such guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of the FDIC Improvement Act could limit the amount of dividends which the Bank may pay to the Holding Company. See "SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK - FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 - PROMPT CORRECTIVE REGULATORY ACTION" AND "- CAPITAL ADEQUACY GUIDELINES" for a discussion of these additional restrictions on capital distributions. Following the Reorganization, the Bank would be subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, the Holding Company or other affiliates, the purchase of or investments in stock or other securities thereof, the taking of such securities as collateral for loans and the purchase of assets of the Holding Company or other affiliates. Such Restrictions would prevent the Holding Company and such other affiliates from borrowing from the bank unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by the Bank to or in the Holding Company or to in any other affiliate would be limited to 10% of the Bank's capital and surplus (as defined by federal regulations) and such secured loans and investments would be limited, in the aggregate, to 20% of the Bank's capital and surplus (as defined by federal regulations). In addition, following the Reorganization any transaction with an affiliate of the Bank must be on terms and under 60 circumstances that are substantially the same as a comparable transaction with a non-affiliate. Additional restrictions on transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of the FDIC Improvement Act. See "SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK - EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION - FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 - PROMPT CORRECTIVE REGULATORY ACTION." MARKET PRICE OF AND DIVIDENDS ON HOLDING COMPANY COMMON STOCK AND BANK COMMON STOCK MARKET INFORMATION Trading in the Bank Common Stock has been limited, and such trading cannot be characterized as amounting to an established public trading market. The Bank Common Stock is traded in the over-the-counter market. It is not listed on any exchange or on NASDAQ. Furthermore, the Bank Common Stock is not listed in the "pink sheets" published by National Quotation Bureau, Inc. or in any other published quotation service and, therefore, information about the high and low bid price is not readily obtainable. There is no trading in the Holding Company Common Stock. After consummation of the Holding Company Reorganization, it is anticipated that the Holding Company Common Stock will be traded in the over-the-counter market and most probably will not be, in the near term, listed on any exchange or on NASDAQ. Management of the Bank is aware of three securities dealers who maintain an inventory and make a market in Bank Common Stock. The market makers are Maquire Investments of Santa Maria, Hoefer & Arnett of San Francisco, and Sutro & Company, with a local office in Santa Maria. The information set forth in the table below summarizes, for the periods indicated, the bid and ask prices of Bank Common Stock based upon information provided by Maquire Investments, Inc. and by the OTC Bulletin Board. These quotes do not necessarily include retail markups, markdowns, or commissions and may not necessarily represent actual transactions. Additionally, there may have been transactions at prices other than those shown below. 1995 BID ASK First Quarter $13.25 $13.75 Second Quarter 13.25 13.75 Third Quarter 13.75 14.25 Fourth Quarter 13.75 14.25 1996 First Quarter 14.00 14.50 Second Quarter 13.75 14.25 Third Quarter 15.00 15.75 Fourth Quarter 15.00 15.88 The Bank has reserved _____ shares of Bank Common Stock for issuance upon the exercise of outstanding stock options granted pursuant to the Bank's Stock Option Plan and _____ shares that 61 may be issued pursuant to stock options that may be granted in the future. Upon consummation of the Reorganization, the Holding Company will assume the Bank's rights and obligations under the Plan and under each of the outstanding options previously granted under the Plan by which assumption the optionee shall have the right to purchase one share of Holding Company Common Stock for each share of Bank Common Stock the optionee was entitled to purchase prior the Holding Company Reorganization. Upon consummation of the Reorganization, up to 1% of the outstanding shares of Holding Company Common Stock could be sold pursuant to Rule 144 under the Securities Act for the account of an affiliate of the Holding Company during a three month period. For purposes of Rule 144, affiliates including the Holding Company's directors and executive officers and the Bank's directors and executive officers. The Holding Company has never paid a dividend. Since 1984, the Bank has consistently declared and paid a cash dividend, with the equivalent of $.06 per share being paid since February 1988. In 1994, the Board of Directors of the Bank increased the per share cash dividend to $.10. In 1995, the Board of Directors of the Bank again increased the per share cash dividend to $.11. In January 1996, the Board of Directors of the Bank declared a $.20 per share cash dividend. At the 1996 Annual Shareholders Meeting, the Bank announced that it would begin to pay dividends on a semi-annual basis. In July 1996, a $.15 dividend was declared to be paid in August. However, no assurance can be given that the pattern of dividends described herein will continue at the Bank, or if the Reorganization is consummated, at the Holding Company, or if any cash dividends will be paid in the future either by the Bank, or if the Reorganization Proposal is approved, by the Holding Company. SHAREHOLDERS As of the Record Date, there were ____ holders of record of Bank Common Stock. As of the Record Date, there was 1 shareholder of Holding Company Common Stock. DIVIDENDS Upon consummation of the Reorganization, as a bank holding company without significant assets other than its equity interest in the Surviving Bank, the Holding Company's ability to pay cash dividends will depend upon the dividends it receives from the Surviving Bank which, in turn, are subject to certain limitations. In addition, the Holding Company's and the Bank's ability to pay dividends are, and the Surviving Bank's ability to pay cash dividends will be, limited by California law. The Bank's Board of Directors intends to retain earnings, if any, in order to increase capital, and to pay cash dividends only when it is prudent to do so and the Bank's performance justifies such action. See "SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK - THE BANK - POTENTIAL AND EXISTING ENFORCEMENT ACTIONS." Since the Bank is a state-chartered bank, its ability to pay dividends or make distributions to its shareholders is subject to restrictions set forth in the California Financial Code. The California Financial Code provides that a bank may not make a distribution to its shareholders in an amount which exceeds the less of (i) the bank's retained earnings; or (ii) the bank's net income for its last three fiscal years, less the amount of any distributions made by the bank to the shareholders of the bank during such period. However, a bank may, with the prior approval of the Superintendent make a distribution to the shareholders of the bank in an amount not exceeding the greatest of (i) its retained earnings; (ii) its net income for its last fiscal year; or (iii) its net income for its current fiscal 62 year. In the event that the Superintendent determines that the stockholders' equity of a bank is inadequate or that the making of a distribution by a bank would be unsafe or unsound, the Superintendent may order the bank to refrain from making a proposed distribution. Under the FDIC Improvement Act, additional limitations can be imposed on the Bank with regard to making capital distributions if after such transaction the Bank would be undercapitalized. See "SUPERVISION AND REGULATION OF THE HOLDING COMPANY AND THE BANK - EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION - FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991." 63 DIRECTORS AND EXECUTIVE OFFICERS OF THE HOLDING COMPANY AND THE BANK Each of the current directors of the Bank are directors of the Holding Company. The following tables set forth certain information as of December 31, 1996, with respect to the directors and executive offices of the Bank of Santa Maria: YEAR FIRST APPOINTED BUSINESS EXPERIENCE OR ELECTED DIRECTORS AGE DURING PAST FIVE YEARS DIRECTOR Armand R. Acosta 71 Retailer, Retired 1977 Richard E. Adam 66 Farmer 1977 Fred L. Crandall, Jr., D.D.S. 68 Dentist 1978 A. J. Diani 74 Construction 1977 William A. Hares 62 President and Chief 1981 Executive Officer Roger A. Ikola, M.D. 65 Pediatrician 1977 Toshiharu Nishino 70 Wholesale Produce 1977 Joseph Sesto, Jr. 84 Investments, Retired 1977 William L. Snelling 65 Real Estate Development 1977 Mitsuo Taniguchi 70 Wholesale Produce, Retired 1977 Joseph F. Ziemba, M.D. 79 Physician, Retired 1978 YEAR FIRST APPOINTED BUSINESS EXPERIENCE EXECUTIVE EXECUTIVE OFFICERS AGE DURING PAST FIVE YEARS OFFICER William A. Hares 62 President and Chief 1978 Executive Officer Carol Bradfield(1) 42 Executive Vice President 1996 Administration F. Dean Fletcher 48 Executive Vice President 1991 and Chief Financial Officer Susan Forgnone (2) 35 Executive Vice President 1994 and Loan Administrator James D. Glines 54 Executive Vice President and 1992 Manager - Santa Maria Way Branch (1) Ms. Bradfield joined the Bank in April, 1988. She was formerly Senior Vice President - Human Resources prior to her appointment as an executive officer. (2) Ms. Forgnone joined the Bank in October, 1988. She has worked in various aspects of lending with the Bank prior to her appointment as an executive officer. All directors of the Bank of Santa Maria serve for a term of one year and hold office until the 1997 Annual Meeting of Shareholders or until their successors are duly elected and qualified. The executive officers are elected annually by the Board of Directors following the Annual Meeting of the Shareholders and serve at the pleasure of the Board. 64 The following provides information on the principal occupation or employment during the past five years of each of the Bank's directors and executive officers. CAROL BRADFIELD is presently the Executive Vice President responsible for the administrative departments within the Bank. She assumed this position in June of 1996. She previously held the position of Senior Vice President/Human Resources Officer. Her primary responsibility is to ensure efficient operations and effective communication between the administrative departments and the branch system. Her duties include supervision of the Human Resources Department, Credit Services Department, Loan Review and Compliance, the Marketing Department, Informational Services Department and the Operational Review Department. Ms. Bradfield graduated from Cal Poly with a Bachelor of Science in Agricultural Business Management. She has also graduated from a two year post graduate course with the California Banking School, and a two year course with the American Bankers Association in Human Resource Management. Ms. Bradfield has been in banking since 1978. She has worked for Wells Fargo Bank and Security Pacific Bank in a variety of positions, including branch manager, commercial and agricultural loan officer and in the commercial loan review function. She joined Bank of Santa Maria in 1988 as a commercial loan officer. In January 1989, she became the Bank's first full time manager of the Human Resources Department supervising the training division and administering the Bank's benefit programs. F. DEAN FLETCHER is currently employed as the Executive Vice President, Chief Financial Officer of Bank of Santa Maria, a position he has held five years. Mr. Fletcher has been in banking since 1976, where he started as the Assistant Controller of the billion dollar Zion First National Bank. Mr. Fletcher entered his banking career after leaving the CPA firm of what is now known as Deloitte & Touche. During his auditing career, he was actively involved in auditing financial institutions. Mr. Fletcher holds a degree in accounting from the University of Utah which he graduated cum laude. He has also completed a three year post graduate course at the Pacific Coast Banking School at the University of Washington. During his bank career, in addition to the accounting function, he has organized and opened a new bank, installed one of the first ATM systems in California, converted a bank to in-house processing, assisted in numerous conversions, facilitated several mergers and acquisitions, built or remodeled several bank facilities and has managed most bank operations and personnel functions where he has been employed. SUSAN D. FORGNONE is presently the Executive Vice President/Loan Administrator, having assumed the position in December, 1994. She previously held the position of Senior Vice President/Chief Lending Officer since June, 1994. She is also the Bank's CRA Officer and was appointed to this position in August, 1994. Duties include monitoring loan quality and the Allowance for Loan Loss Reserves, establishing policy specifically for the lending function and the Community Reinvestment Act. Ms. Forgnone graduated from Arkansas Tech University in 1983, with a degree in Business Administration. She has also graduated from a two year post graduate course with the California Banking School. Ms. Forgnone began her banking career in 1983, with Security Pacific National Bank. She entered SPNB's Commercial Loan Officer Training Program and later served as a Commercial Loan Associate with SPNB's Salinas Business Banking Center. In 1986, she transferred to SPNB's Credit Review Department in Los Angeles where she participated in a two year rotation program, reviewing the credit quality and documentation of various lending relationships throughout the bank's commercial loan centers, private banking centers and corporate departments. Upon completing the Credit Review rotational program in mid-1988, she was assigned as a Commercial Loan Officer with SPNB's Long Beach Commercial Loan Center. Ms. Forgnone joined Bank of Santa Maria as a Commercial Loan Officer in October, 1988. In December of 1992, she assumed the responsibility of managing the Credit Services Department and assisting the Loan Administrator in monitoring, structuring and the approval of credit. JAMES D. GLINES is the Executive Vice President/Manager of the Santa Maria Office. He attended school in Santa Maria and graduated from Cal Poly with a Bachelor of Science in Farm Management (Agricultural Economics). Mr. Glines joined Bank of Santa Maria in 1983, as a Commercial Loan Officer. He was appointed Vice President and Branch Manager in August, 1983, appointed Senior Vice President in December, 1987, and appointed to Executive Vice President as of December, 1992. Previous to working for BSM, he was employed by Wells Fargo Bank for thirteen years. He is active in various community activities such as the Elks Lodge #1538, the YMCA, Jr. Livestock Sales Committee for the Santa Barbara County Fair, Area Chairman for Duck's Unlimited and others. 65 ARMAND ACOSTA a fifty-one year resident of Santa Maria, is a retired retailer of menswear, owner of Armand's from 1963 until 1987. He is the past president of 20/30 International Service Club, charter member of Lions Noontimers Service Club, member of Santa Maria Country Club and has served on the Santa Barbara County Grand Jury. RICHARD E. ADAM is a lifetime vegetable grower in the Santa Maria area who owns and operates a substantial farm. Mr. Adam, a fourth generation resident of the Santa Maria area, is also involved in sales and cooling activities in connection with vegetable growing activities. He is currently an active member of the Santa Maria Valley Water Conservation District and was formerly a member and president of the Santa Maria Elementary School Board. He earned a B.S. Ag Econ Degree from the University of California at Berkeley and served in the U.S. Air Force from 1952 through 1957. FRED L. CRANDALL, JR. has been a practicing dentist in the Santa Maria area since 1961. Prior to this, he was in the U.S. Army Dental Corp based in Germany and Oklahoma. He is a member of the Central Coast Dental Society, Delta Sigma Delta, American Dental Association and involved in the Mental Health Association, serving ten years as President. He has a BA in Zoology from B.Y.U., attended Washington University, St. Louis, MO for dentistry and continued education programs in the Combined Therapy Study Group in Santa Barbara. A. J. DIANI is the founder of A.J. Diani Construction Company, Inc. a general engineering and building construction firm operating throughout California since 1949. Mr. Diani has extensive business experience having served on many boards, including several financial institutions and being a general partner in many real estate development ventures and construction related activities. Mr. Diani has also served the Santa Maria community through his affiliation with many civic organizations, including the Santa Maria Arts Council, the YMCA, Santa Maria Valley Developers, the Chamber of Commerce and others. WILLIAM A. HARES has been the President/CEO of Bank of Santa Maria since January 1982 and has been with the Bank since September 1978 and is on the Board of Directors. Prior to this date, he worked for several different banks dating back to 1951, in many capacities including marketing, operations, lending, credit administration, and personnel. He graduated from New Castle High School in Pennsylvania, completed several AIB courses and attended Riverside College. He has been a member of the Rotary Club, the Chamber of Commerce and many other organizations. ROGER A. IKOLA, M. D. has been a practicing pediatrician for thirty years. He is a founding Director and Chief Financial Officer of Marian Independent Physicians Association contracting with various HMO's to provide managed medical care. Dr. Ikola was the developer and has been the managing partner of the Marion Medical-Dental Center. Other non-medical business experience includes eighteen years owning and directing a Holiday Inn, ten years owner of a restaurant, three years strawberry growing, seven years Christmas tree farming and sixteen years as a Santa Maria High School District board member. TOSHIHARU NISHINO, owner of the wholesale produce business of Nishino and Taniguchi since 1957, is a leader of the Japanese-American community in Santa Maria and a resident of the Santa Maria area for forty years and is active in various Santa Maria civic and charitable activities. The bank believes that Mr. Nishino's experience as one of the area's leading wholesale produce merchants is useful in the development of loan programs suitable to Santa Maria's agricultural community. JOSEPH SESTO, JR., a forty year resident of Santa Maria, is a community leader in Santa Maria. As a retired independent insurance agent since 1949, Mr. Sesto has considerable experience in designing insurance funded programs for independent business enterprises. Mr. Sesto's numerous civic involvements include the Santa Maria Chamber of Commerce (of which he is a past President), and the Board of Directors of the Marian Hospital (of which he was Chairman of the Board from 1965 to 1976); Chairman of the Military Affairs Committee of the Chamber of Commerce and various other charitable and civic activities. WILLIAM L. SNELLING is currently active in commercial real estate development in Santa Maria area and has been a consultant to Southwest Leasing Corporation of Beverly Hills, California, to which Mr. Snelling was an officer and full time employee from 1968 to 1974. Mr. Snelling came to Santa Maria in October of 1974, as an officer and director of SAMHI Corporation, owner and operator of the Santa Maria Holiday Inn. His numerous civic activities include President of the Board of Directors of the YMCA of Santa Maria, a director of the Boys' Club, Visiting Nurses of Northern Santa Barbara County, Co-Chairman and Vice President of the United Way and many others. Mr. Snelling attended Oregon State University and UCLA and holds a Juris Doctorate Degree, Cum Laude, from the California College of Law. 66 MITSUO TANIGUCHI, retired from wholesale produce business, Nishino & Taniguchi, in 1992, of which he had been a partner since 1957 in Santa Maria. Mr. Taniguchi is a leader of the Japanese-American community in the Santa Maria area and has numerous civic and community involvements. His experience in the agricultural community is a great asset to the bank. JOSEPH F. ZIEMBA, M. D., an anesthesiologist, practiced in Santa Maria since 1958 until his retirement in 1992 at both Valley Community Hospital and Marian Hospitals. During this period, he participated, at various times, in many charitable and civic organizations such as the Chamber of Commerce, the YMCA, Visiting Nurse Service, Santa Barbara County Medical Society, American Lung Association, Tri County Blood Bank and others. 67 DIRECTOR COMPENSATION During 1995, each non-officer director received $650 for each Board of Directors meeting attended. The Chairman of the Board and the Secretary received an additional $650 and $225 respectively each month. Members of all other committees received $225 for each committee meeting attended. EXECUTIVE COMPENSATION SUMMARY It is expected that until the officers of the Holding Company begin to devote significant time to the separate management of the Holding Company's business, which is not expected to occur until such time as the Holding Company becomes actively involved in additional businesses, the officers will only receive compensation for services as directors, officers and employees of the Bank, and no separate compensation will be paid for their services to the Holding Company. At the present time, the Holding Company does not intend to employ any persons other than its officers. If the Holding Company establishes or acquires other businesses, it may add additional employees at that time. The following Summary Compensation Table shows compensation earned from the Bank for services rendered during fiscal years 1995, 1994, and 1993, to each of the Bank's executive officers whose salaries and bonuses exceeded $100,000 in 1995. SUMMARY COMPENSATION TABLE
Long-term Annual Compensation Compensation(1) Awards --------------------------------------------------- Securities All Other Salary Bonus Underlying Compensation Name and Principal Position Year ($)(2) ($)(4) Options(#)(5) ($)(3) - ---------------------------------------------------------------------------------------------------- William A. Hares 1995 $ 160,000 $ 150,000 10,000 $16,843 President and Chief 1994 147,818 115,000 5,000 16,796 Executive Officer 1993 140,550 90,000 21,006 F. Dean Fletcher 1995 93,000 45,000 15,223 Executive Vice President 1994 90,300 30,000 11,666 and Chief Financial Officer 1993 87,600 25,000 8,703 Susan Forgnone 1995 80,000 45,000 9,241 Executive Vice President 1994 54,063 15,000 5,976 and Loan Administrator 1993 N/A N/A N/A N/A James D. Glines 1995 85,000 45,000 12,025 Executive Vice President 1994 80,000 30,000 10,624 and Manager-Santa Maria 1993 73,925 25,000 7,146 Way Office
(1) The column for other annual compensation has been omitted since the only items reportable thereunder for the named persons are perquisites, which did not exceed the lessor of $50,000 or 10% of salary and bonus for any of the named persons. (2) Includes all contributions to the Bank's 401(k) Plan, and the Bank's Flexible Spending Account for medical and child care expenditures made through salary reductions and deferrals. (3) All employees of the Bank who have at least one year of service having worked at least 1,000 hours during that year and are at least 18 years of age are eligible to participate in the Bank's Profit Sharing and the 401(k) Salary Deferral Plan. The Salary Deferral Plan is a self funded voluntary plan that offers certain tax savings with tax deferred investment earnings. The amount contributed by the participants is fully vested from the date of deposit. The directors of the Bank, at their discretion, may elect to match an amount equal to $.50 for every $1.00 the 401(k) participant invests, not to exceed 2% of their gross compensation. This contribution is made as of June 30th and December 31st of each year. All matching contributions follows a seven year vesting schedule. 68 Contributions to the Bank's Profit Sharing Plan are also at the discretion of the Bank's directors. Any amount that is contributed is allocated to accounts established for each participating employee and is based on a percentage of their gross income. These are subject to a seven year vesting schedule with 100% vesting occurring after seven years of service. Funding for the plan always occurs in January of each year. Participants contributions toward the 401(k) are included in amounts shown as "Salary," above. The Bank's matching contributions are, as well as the Profit Sharing contribution, are aggregated and included under "All Other Compensation," above. (4) Cash bonuses are reported in the year earned and may be paid in that year or in January of the following year at the discretion of the officer. Bonuses are recommended by the Compensation Committee of the Board and are approved by the full board at the December meeting. Bonuses are discretionary, but are generally based upon the operating results of the Bank. (5) Options shown were issued under the Bank's Incentive Stock Option Plans. These plans are administered by the Compensation Committee. Options granted have an exercise price equal to the fair market value on the date of grant, vested over a term of 5 years and expired 5 years from the date of grant unless otherwise noted. (6) Ms. Bradfield was not included in the compensation tables as she was not named as an executive officer until June 11, 1996. STOCK OPTION GRANTS IN FISCAL 1995 The following table shows the number of shares with respect to which options were granted during 1995 to each of the named persons, together with the percentage of all grants to employees which the grant to the named person represents, the exercise price of such option and the expiration date of the option. Individual Grants -------------------------------------------------------------- % of Total Options Options Granted to Exercise Granted Employees Price Expiration Name (1) in Fiscal Year ($/Sh) Date - -------------------------------------------------------------------------------- William A. Hares 10,000 42.55% $ 13.50 8/8/00 F. Dean Fletcher 0 0 0 0 Susan Forgnone 0 0 0 0 James D. Glines 0 0 0 0 AGGREGATED OPTIONS EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth the number of shares acquired by any of the named persons upon exercise of stock options in 1995, the value realized through the exercise of such options and the number of unexercised options held by such person, including both those which are presently exercisable and those which are not presently exercisable.
Shares Number of Acquired Shares Underlying Value of Unexercised Upon Unexercised In-the Option Value Options Money Options Name Exercise (#) Realized($) at 12-31-95 (#) at 12-31-95 ($)(1) - ---- ---------------------------------------------------------------------------------------------------- Not Not Exercisable Exercisable Exercisable Exercisable ----------- ----------- ----------- ----------- William A. Hares 11,500 18,500 $ 88,063 $ 52,563 F. Dean Fletcher 12,000 3,000 54,000 13,500 Susan Forgnone 3,000 $ 13,500 2,000 5,500 5,000 13,125 James D. Glines 3,000 2,000 11,250 7,500
(1) Potential unrealized value is determined by multiplying the number of shares by the net of the fair market value at fiscal year end ($14.00) less the option exercise price. 69 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS REGARDING BANK OF SANTA MARIA There are no existing or proposed material transactions between the Bank's executive officers or directors or the immediate family or associates of any of the foregoing persons. None of the directors or executive officers of the Bank were selected pursuant to any arrangement or understanding, other than with the directors and executive officers of the Bank, acting with their capacities as such. There are no family relationships between the directors and executive officers of the Bank, except between Director Nishino and Director Taniguchi who are brothers-in-law. None of the directors or executive officers of the Bank serve as directors of any company which has a class of securities registered under or which is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, or any investment company registered under the Investment Company Act of 1940, as amended. Some of the Bank's directors, nominees for director, and executive officers and their immediate families, as well as the companies with which such directors and executive officers are associated, are customers of, and have had banking transactions with the Bank in the ordinary course of the Bank's business and the Bank expects to have such ordinary banking transactions with such persons in the future. In the opinion of Management of the Bank, all loans and commitments to lend included in such transactions were made in compliance with applicable laws on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with other persons of similar creditworthiness and did not involve more than a normal risk of collectibility or present other unfavorable features. 70 APPROVAL OF BSM BANCORP 1996 STOCK OPTION PLAN INTRODUCTION Shareholders of the Bank, as prospective shareholders of the Holding Company, are being asked to approve the proposed BSM Bancorp 1996 Stock Option Plan (the "1996 Plan"), which was adopted by the Board of Directors of Holding Company on November 12, 1996, subject to the approval of the California Commissioner of Corporations and the holders of a majority of the issued and outstanding shares of the Bank as prospective shareholders of the Holding Company. The purpose of the 1996 Plan is to strengthen the Holding Company and its prospective wholly-owned subsidiary bank, Bank of Santa Maria (the "Bank"), by providing an additional means of attracting and retaining competent managerial personnel and by providing to participating officers, key employees and directors, as well as consultants, advisors and others having a business relationship with the Holding Company and the Bank, added incentive for high levels of performance and for unusual efforts to increase the earnings of the Holding Company and the Bank. The 1996 Plan seeks to accomplish these purposes and achieve these results by providing a means whereby such officers, key employees and directors, as well as consultants, advisors and others having a business relationship with the Holding Company and the Bank, purchase shares of the Holding Company's Common Stock pursuant to options granted in accordance with the 1996 Plan. The Board of Directors believes the 1996 Plan is beneficial to the Holding Company, the Bank and the Holding Company's shareholder and prospective shareholders. The 1996 Plan is subject to approval of the California Commissioner of Corporations and the holders of a majority of the issued and outstanding shares of the Bank as prospective shareholders of the Holding Company, subject to any required changes of any regulatory agency. SUMMARY OF PLAN The purpose of the 1996 Plan is to strengthen the Holding Company and the Bank by providing an additional means of attracting and retaining competent managerial personnel. The 1996 Plan provides to participants added incentive for high levels of performance and for unusual efforts to increase the earnings of the Holding Company and the Bank. It is intended that the 1996 Plan will assist in accomplishing these objectives and facilitate in achieving these results by providing a means whereby directors, officers and key employees, as well as consultants, advisors and others having a business relationship with the Holding Company and the Bank, may purchase shares of the Common Stock of the Holding Company pursuant to options granted in accordance with the 1996 Plan. ______ unissued shares of the Holding Company, or approximately 30% of the issued and outstanding shares of the Holding Company, will be reserved for issuance to directors, officers and employees, as well as consultants, advisors and others having a business relationship with the Holding Company and the Bank ("Eligible Participants"). Options granted pursuant to the 1996 Plan may be non-qualified options or incentive stock options within the meaning of Section 422A of the Internal Revenue Code. The 1996 Plan will be administered by the Board of Directors of the Holding Company or by a committee appointed from time to time by the Board. The Board of Directors or the committee will determine with respect to the Eligible Participants in the 1996 Plan and the extent of their participation. The purchase price of stock subject to each option shall be not less than one hundred (100%) of the fair market value of such stock at the time such option is granted. An Eligible Participant owning more than ten percent (10%) of the total combined voting power of all classes of stock of 71 the Holding Company may only be granted an option with an exercise price at least 110% of the fair value of Holding Company stock at the date of grant. The purchase price of any shares exercised shall be paid in full in cash or, with the prior written approval of the committee, in shares of the Holding Company or on a deferred basis evidenced by a promissory note. In addition, the optionee shall have the right upon exercise of an option to surrender for cancellation a portion of the option for the number os shares exercised. Options may be granted pursuant to the 1996 Plan for a term of up to ten (10) years. Each option shall be exercisable according to the determination of the Board or committee, except that options shall be exercisable at a minimum of 20% per year over a five year period. Options granted under the 1996 Plan shall not be transferable by the optionee during the optionee's lifetime. In the event of termination of employment as a result of the optionee's disability or in the event of an employee's death during the exercise period, to the extent the option is exercisable on the date employment terminates or the date the employee dies, the option shall remain exercisable for up to one (1) year (but not beyond the end of the original option term) by the disabled optionee or, in the event of death of the optionee, a non-qualified option shall be exercisable by the person or persons to whom rights under the option shall have passed by will or the laws of descent and distribution. If an optionee's employment is terminated, unless termination was by reason of disability or death, the optionee shall have the right, for a 3-month period after termination, to exercise that portion of the option which was exercisable immediately prior to such termination. If an optionee's employment is terminated for cause, except for options granted to consultants and business advisors, the optionee shall have the right for a 30 day period after termination, to exercise that portion of the option which was exercisable immediately prior to such termination. In no event may the option be exercised after the end of the original option term. However, such termination provisions shall not apply for options granted to consultants, business associates or other persons or entities with important business relationships with the Holding Company. In the event of certain changes in the outstanding Common Stock of the Holding Company without receipt of consideration by the Holding Company, such as stock dividends, stock splits, recapitalization, reclassification, reorganization, merger, stock consolidation, or otherwise, appropriate and proportionate adjustments shall be made in the number, kind and exercise price of shares covered by any unexercised or partially unexercised options which were already granted. Optionees will receive prior notice of any pending dissolution or liquidation of the Holding Company, or reorganization, merger or dissolution or liquidations of the Holding Company, or reorganization, merger or consolidation where the Holding Company is not the surviving corporation or sale of substantially all the assets of the Holding Company or other form of corporate reorganization in which the Holding Company is not a surviving entity, or the acquisition of stock representing more than 50% of the voting power of the stock of the Holding Company then outstanding ("Terminating Event"). Optionees have thirty (30) days from the date of mailing of such notices to exercise any option in full. After such thirty (30) days, any option not exercised shall terminate and upon the occurrence of the Terminating Event, the 1996 Plan shall terminate, unless some other provision is made in connection with the Terminating Event. The Board reserves the right to suspend, amend, or terminate the 1996 Plan, and, with the consent of the optionee, make such modifications, of the terms and conditions of his or her option as it deems advisable, except that the Board may not, without further approval of a majority of the shares, increase the maximum number of shares covered by the 1996 Plan, change the minimum option price, increase the maximum term of options under the 1996 Plan or permit options to be 72 granted to any one other than an officer, employee or director, or consultant, advisor or other person having a business relationship with the Holding Company or the Bank. Unless previously terminated by the Board of Directors, the 1996 Plan shall terminate ten years from the date the 1996 Plan was adopted by the Board of Directors of the Holding Company, or November 12, 2006. Shares of the Holding Company's Common Stock to be issued upon exercise of stock options need not be registered with the SEC. However, the Holding Company has applied for a permit from the California Commissioner of Corporations and the Holding Company intends to register the Common Stock reserved for issuance under the 1988 Plan with the SEC prior to issuing any of its Common Stock upon exercise thereof. COMPARISON TO THE BANK OF SANTA MARIA 1988 STOCK OPTION PLAN The Holding Company's 1996 Plan differs from the Bank's 1988 Stock Option Plan (the "1988 Plan"), which will terminate in December 1998, and will be terminated by the Bank upon the assumption of the Bank's Stock Options by the Holding Company under the 1996 Plan, in several important respects. The 1996 Plan reserves up to _______ shares or approximately 30% of the currently issued and outstanding shares of the Holding Company. By comparison, the 1988 Plan reserves _______ shares of the Bank's Common Stock. The 1988 Plan will expire on December 13, 1998, and the establishment of the 1996 Plan is designed to replace the 1988 Plan. Currently, ________ shares are outstanding under the 1988 Plan. The total number of shares under the 1996 Plan will be equal to 30% of the issued and outstanding shares of the Holding Company, which is within the administrative standards of the California Commissioner of Corporations. The 1996 Plan allows for options to be exercised with cash, a promissory note, or the surrender of a portion of the option being exercised by applying the appreciated value of the shares being surrendered to payment of the exercise price. The 1988 Plan only allows options to be exercised with cash. The 1996 Plan also allows for the granting of options to business associates and others having a business relationship with the Holding Company and the Bank. In addition, options granted to such business associates may not be terminated before the expiration of such option. The 1988 Plan allows options to be granted to directors, officers and key employees only. The 1996 Plan requires a minimum exercise period of a stock option of at least 20% per year over five years from the date the option is granted. In comparison, the 1988 Plan allows the Bank and the optionee complete discretion in the vesting of such options. The 1996 Plan also allows that an optionee has the right to exercise vested options in the event of termination for cause for a period of at least 30 days following such termination. By comparison, the 1988 Plan provides that such options will terminate subject to possible reinstatement by the Stock Option Committee. FEDERAL INCOME TAX CONSEQUENCES To the extent that options granted under the 1996 Plan qualify as incentive stock options and (i) the optionee does not sell the stock acquired upon exercise of the options within two (2) years of the date of grant and one (1) year from the date of exercise and (ii) the optionee was employed by 73 the Holding Company or a subsidiary for the entire period beginning on the date of grant of option and ending three (3) months prior to the exercise of the option, then the optionee will not recognize compensation income to the extent of any "bargain element" determined as of the time of grant or exercise, and the Holding Company will not be entitled to a corresponding tax deduction. However, the bargain element is a time of tax preference for the purpose of determining the employee's alternative minimum tax. If the optionee disposes of the stock acquired through the exercise of the incentive stock option prior to satisfaction of the holding period or fails to satisfy the employment requirement, the optionee will recognize compensation income and the Holding Company will be entitled to a corresponding tax deduction to the extent of the lesser of (i) the excess of the fair market value of the stock at the date of exercise over the exercise price or (ii) the amount realized in excess of the tax basis of the stock if disposed in a taxable transaction. If the options granted under the 1996 Plan are nonqualified, the optionee will not recognize taxable income, and the Holding Company will not be entitled to a corresponding tax deduction, at the time of grant or exchange. Upon the exercise of a non-qualified stock option, however, the optionee will recognize taxable income equal to the "bargain element" or the "spread", the difference between the fair market value determined as of the time of exercise of the Holding Company's Common Stock acquired by the optionee and the option price paid for the stock. The Holding Company will be entitled to a corresponding tax deduction equal to the income recognized by the optionee provided that the income tax withholding attributable to the optionee's recognized income is collected from the optionee. Shares of the Holding Company's Common Stock to be issued upon exercise of stock options need not be registered with the Securities and Exchange Commission. However, the Holding Company has applied for a permit from the California Commissioner of Corporations and the Holding Company intends to register the Common Stock reserved for issuance under the 1996 Plan with the SEC prior to issuing any of its Common Stock upon exercise thereof. Approval of the 1996 Plan requires the affirmative vote of a majority of the issued and outstanding shares of the Bank as prospective shareholders of the Holding Company, and the 1996 Plan is subject to the approval of the California Commissioner of Corporations. The description herein is intended to highlight and summarize the principle terms of the 1996 Plan. For further information, shareholders are referred to a copy of the 1996 Plan which is available for inspection at the Holding Company. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE HOLDING COMPANY'S 1996 STOCK OPTION PLAN COMMISSION'S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Holding Company, the Holding Company has been advised that in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. 74 EXPERTS The financial statements as of the Bank as of December 31, 1995, 1994 and 1993 and for the years then ended included in this Written Consent Statement/Prospectus have been so included in reliance on the report of Dayton & Associates, independent certified public accountants, given on the authority of said firm as experts in accounting. Dayton & Associates was merged into Vavrinek, Trine, Day and Co. in 1996. LEGAL MATTERS The validity of the Holding Company Common Stock being registered with the Commission will be passed upon for the Holding Company and the Bank by Knecht & Hansen, Newport Beach, California. The opinion given under "Certain Federal Income Tax Consequences" has been rendered by Vavrinek, Trine, Day & Co. ANNUAL REPORT UPON WRITTEN REQUEST OF ANY PERSON ENTITLED TO VOTE AT THE MEETING, ADDRESSED TO BANK OF SANTA MARIA, 2739 SANTA MARIA WAY, SANTA MARIA, CALIFORNIA 93455-6090, ATTENTION: MR. F. DEAN FLETCHER, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, THE BANK WILL PROVIDE, WITHOUT CHARGE, A COPY OF ITS 1995 ANNUAL REPORT TO SHAREHOLDERS. 75 ANNEX I A copy of the Plan of Reorganization and Merger Agreement entered into as of November 20, 1996 by the Bank, Holding Company and the Merger Company is attached hereto. PLAN OF REORGANIZATION AND MERGER AGREEMENT This Plan of Reorganization and Merger Agreement is entered into as of November 20, 1996, by and between Bank of Santa Maria ("Bank"), BSM Merger Company ("Subsidiary"), and BSM Bancorp ("Holding Company"). RECITALS AND UNDERTAKINGS A. Bank is a California banking corporation with its principal office in the City of Santa Maria, County of Santa Barbara, California. Subsidiary and Holding Company are each corporations duly organized and existing under the laws of the State of California with their principal offices in the City of Santa Maria, County of Santa Barbara, California. B. As of September 30, 1996, Bank had 25,000,000 shares of no par value Common Stock authorized and 2,764,261 shares outstanding. C. As of the date hereof, Subsidiary has an authorized maximum number of shares of capital stock of 1,000,000 shares of no par value Common Stock, and at the time of the merger referred to herein 100 of such shares of Common Stock will be outstanding, all of which outstanding shares will be owned by Holding Company. D. As of the date hereof, Holding Company has an authorized maximum number of shares of capital consisting of 50,000,000 shares of no par value Common Stock, and 25,000,000 shares of no par value Preferred Stock, of which 150 shares of Common Stock will be outstanding and no shares of Preferred Stock will be outstanding at the time of the merger referred to herein. E. The Boards of Directors of Bank and Subsidiary have, respectively, approved this Agreement and authorized its execution; and the Board of Directors of Holding Company has approved this Agreement and has authorized the Holding Company to join in and be bound by this Agreement, and authorized the undertakings and representations made herein by Holding Company. NOW, THEREFORE, in consideration of the promises and the mutual covenants, agreements and undertakings of the parties herein set forth and for the purpose of prescribing the terms and conditions of the merger, the parties hereto agree as follows: SECTION 1. GENERAL 1.1 THE MERGER. On the Effective Date, Subsidiary shall be merged into Bank, which shall be the Surviving Corporation (the "Surviving Corporation") and a subsidiary of Holding Company, and its name shall continue to be "Bank of Santa Maria." -1- 1.2 EFFECTIVE DATE. The merger described herein shall become effective, and actions to consummate such merger shall commence, at the close of business on the date (the "Effective Date") upon which an executed counterpart of this Agreement (as amended, if necessary, to conform to any requirements of law or governmental authority or agency, which requirements are not materially in contravention of any of the substantive terms hereof) shall have been filed with the Office of the Secretary of State of the State of California, in accordance with Section 1103 of the California Corporations Code. 1.3 ARTICLES OF INCORPORATION, BYLAWS AND CERTIFICATE OF AUTHORITY. At the close of business on the Effective Date, the Articles of Incorporation of Bank, as in effect immediately prior to such time on the Effective Date, shall be and remain the Articles of Incorporation of the Surviving Corporation, the Bylaws of Bank shall be and remain the Bylaws of the Surviving Corporation until altered, amended or repealed; the Certificate of Authority of Bank issued by the Superintendent of Banks of the State of California shall be and remain the Certificate of Authority of the Surviving Corporation; and Bank insurance of deposits coverage by the Federal Deposit Insurance Corporation shall be and remain the deposit insurance of the Surviving Corporation. 1.4 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. At the close of business on the Effective Date, the directors and officers of Bank immediately prior to such time on the Effective Date shall be and remain the directors and officers of the Surviving Corporation. Directors of the Surviving Corporation shall serve until the next Annual Meeting of Shareholders of the Surviving Corporation or until such time as their successors are elected and have qualified. 1.5 EFFECT OF THE MERGER. (a) ASSETS AND RIGHTS. At the close of business on the Effective Date and thereafter, all rights, privileges, franchises and property of Subsidiary, and all debts and liabilities due or to become due to Subsidiary, including things in action and every interest or asset of conceivable value or benefit, shall be deemed fully and finally and without any right of reversion transferred to and vested in the Surviving Corporation without further act or deed, and the Surviving Corporation shall have and hold the same in its own right as fully as the same was possessed and held by Subsidiary. (b) LIABILITIES. At the close of business on the Effective Date and thereafter, all debts, liabilities, and obligations due or to become due of, and all claims and demands for any cause existing against, Subsidiary shall be and become the debts, liabilities or obligations of, or the claims and demands against, the Surviving Corporation in the same manner as if the Surviving Corporation had itself incurred or become liable for them. (c) CREDITORS' RIGHTS AND LIENS. At the close of business on the Effective Date and thereafter, all rights of creditors of Subsidiary, and all liens upon the property of Subsidiary, shall be preserved unimpaired, and shall be limited to the property affected by such liens immediately prior to the Effective Date. - 2 - (d) PENDING ACTIONS. At the close of business on the Effective Date and thereafter, any action or proceeding pending by or against Subsidiary shall not be deemed to have abated or been discontinued, but may be pursued to judgment with the full right to appeal or review. Any such action or proceeding may be pursued as if the merger described herein had not occurred, or with the Surviving Corporation substituted in place of Subsidiary, as the case may be. 1.6 FURTHER ASSURANCES. Bank and Subsidiary each agree that at any time, or from time to time, as and when requested by the Surviving Corporation, or by its successors and assigns, it will execute and deliver, or cause to be executed and delivered, in its name by its last acting officers, or by the corresponding officers of the Surviving Corporation, all such conveyances, assignments, transfers, deeds or other instruments, and will take or cause to be taken such further or other action as the Surviving Corporation, its successors or assigns may deem necessary or desirable in order to evidence the transfer, vesting or devolution of any property right, privilege or franchise or to vest or perfect in or confirm to the Surviving Corporation, its successors and assigns, title to and possession of all the property rights, privileges, powers, immunities, franchises and interests referred to in this Section 1, or otherwise to carry out the intent and purposes of this Agreement. SECTION 2. CAPITAL STOCK OF THE SURVIVING CORPORATION 2.1 STOCK OF SUBSIDIARY. At the close of business on the Effective Date, each share of Common Stock of Subsidiary issued and outstanding immediately prior thereto shall, by virtue of the merger described herein, be deemed to be exchanged for and converted into one fully paid share, assessable in accordance with Section 662 of the California Financial Code, of Common Stock of Bank as the Surviving Corporation. 2.2 STOCK OF BANK. At the close of business on the Effective Date, each share of Common Stock of Bank issued and outstanding immediately prior thereto shall, by virtue of the merger described herein, and without any action on the part of the holder thereof, be exchanged for and converted into one share of fully paid nonassessable Common Stock of Holding Company, in accordance with the provisions of Paragraph 2.3. 2.3 EXCHANGE OF STOCK BY BANK SHAREHOLDERS. The conversion of the shares of Bank provided in Paragraph 2.2 above shall occur automatically at the close of business on the Effective Date without action by the holders thereof. Each share certificate evidencing ownership of shares of Bank Common Stock thereupon shall be deemed to evidence one share of Common Stock of the Holding Company. Each holder of shares of Bank Common Stock may but is not required to surrender his share certificate or certificates to the Holding Company, or an Exchange Agent appointed by the Holding Company, and shall be entitled to receive in exchange therefor a certificate or certificates representing the number of shares into which his shares theretofore represented by a certificate or certificates so surrendered shall have been converted. - 3 - 2.4 EMPLOYEE STOCK OPTIONS. At the close of business on the Effective Date, the Holding Company will assume Bank's rights and obligations under Bank's Stock Option Plan (the "Plan") and under each of the outstanding options previously granted under the Plan (each such option existing immediately prior to the Effective Date being an "existing option" and each such option so assumed by the Holding Company being called an "assumed option"), by which assumption the optionee shall have the right to purchase one share of Holding Company Common Stock for each share of Common Stock of Bank he was entitled to purchase under such existing option, except that no option shall survive to purchase fractional shares. Each assumed option, subject to such modification as may be required, shall constitute a continuation of the existing option substituting the Holding Company for Bank and employment by the Holding Company or any of its subsidiaries for employment by the Bank. The price per share of Holding Company Common Stock at which the assumed option (or any installment) may be exercised shall be the price as was applicable to the purchase of the Bank Common Stock pursuant to the existing option, and all other terms and conditions applicable to the assumed options shall, except as herein provided, be unchanged. Each option granted under the Plan after the close of business on the Effective Date shall evidence the right to purchase shares of Common Stock of the Holding Company rather than shares of Common Stock of the Bank and the Plan shall be modified to so provide. 2.5 OTHER RIGHTS TO STOCK. From time to time, as and when required by the provisions of any agreement to which Bank or Holding Company shall become a party after the date hereof providing for the issuance of shares of Common Stock or other equity securities of Bank or Holding Company in connection with a merger into Bank of any other banking institution or other corporation, or the acquisition by the Bank of the assets or stock of any other banking institution or corporation, Holding Company shall issue in accordance with the terms of any such agreement, its Common Stock or other equity securities as required by such agreement, or in substitution of the shares of Common Stock or other equity securities of Bank required to be issued by such agreement, as the case may be, which the shareholders of any other such banking institution or other corporation shall be entitled to receive by virtue of any such agreement. SECTION 3. OBLIGATIONS OF THE PARTIES PENDING THE EFFECTIVE DATE OF MERGER 3.1 STOCKHOLDER APPROVALS. As soon as practicable, this Agreement shall be duly submitted to stockholders of Bank, Subsidiary and the Holding Company for the purpose of considering and acting upon this Agreement in the manner required by law. Each of the parties shall use its best efforts to obtain the requisite approval of its stockholders to this Agreement and the transactions contemplated herein. 3.2 REGULATORY APPROVALS. Each of the parties hereto shall execute and file with the appropriate regulatory authorities all necessary documents and instruments and shall take every reasonable and necessary step and action to comply with and to secure such regulatory approval of this Agreement and the transactions contemplated herein as may be required by all applicable statutes, rules and regulations, including - 4 - without limitation the consents and approvals referred to in Paragraphs 4.1(b), 4.1(c) and 4.1(d). SECTION 4. CONDITIONS PRECEDENT, TERMINATION AND PAYMENT OF EXPENSES 4.1 CONDITIONS PRECEDENT TO THE MERGER. Consummation of the merger described herein is subject to satisfaction of the following conditions: (a) Ratification and confirmation of this Agreement by the respective stockholders of Bank, the Subsidiary and the Holding Company, in accordance with the applicable provisions of law; (b) Obtaining all other consents and approvals, on terms and conditions satisfactory to each of the parties hereto, and satisfying all other requirements, prescribed by law or otherwise, which are necessary for the merger described herein to be consummated, including without limitation: approvals from the Federal Deposit Insurance Corporation, the Superintendent of Banks of the State of California, and the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, approval from the California Commissioner of Corporations under the California Corporate Securities Law of 1968 and authorizations, to the extent necessary under applicable blue sky laws with respect to the securities of the Holding Company issued upon consummation of the merger, and the declaration as effective by the Securities and Exchange Commission of a registration statement under the Securities Act of 1933 with respect to the securities of the Holding Company issuable upon consummation of the merger, (c) Issuance (unless waived by each of the parties hereto) of a favorable ruling by the Internal Revenue Service of the United States Department of the Treasury, in form and substance satisfactory to each of the parties hereto and their counsel, with respect to the tax consequences to the parties and their stockholders of the merger described herein; (d) Procuring all other consents or approvals, governmental or otherwise, which in the opinion of counsel for Bank are or may be necessary to permit or to enable the Surviving Corporation to conduct, upon and after the merger described herein, all or any part of the business and other activities in which Bank will be engaged up to the time of such merger, in the same manner and to the same extent Bank engages in such businesses and other activities immediately prior to such merger; and (e) Performance by each of the parties hereto of all obligations under this Agreement which are to be performed prior to the consummation of the merger described herein. 4.2 TERMINATION OF THE MERGER. If any condition specified in Paragraph 4.1 has not been fulfilled, or prior to the Effective Date a majority of the members of the Board of Directors of any of the parties hereto has determined that: - 5 - (a) The number of shares of Common Stock of Bank voting against the merger makes consummation of the merger inadvisable; or (b) Any action, suit, proceeding or claim relating to the merger described herein has been instituted, made or threatened which makes consummation of the merger inadvisable; or (c) For any other reason consummation of the merger is inadvisable; then this Agreement may be terminated at any time before the merger becomes effective. Upon termination, this Agreement shall be void and of no further effect, and there shall be no liability by reason of this Agreement or the termination thereof on the part of the parties or their respective directors, officers, employees, agents or shareholders. 4.3 EXPENSES OF THE MERGER. All expenses of the merger, described herein, including, without limitation, filing fees, printing costs, mailing costs, accountant's fees and legal fees, shall be borne jointly by the Surviving Corporation and the Holding Company; provided, however, that if the merger is abandoned for any reason, then all of such expenses, including but not limited to, the Holding Company's obligation to repurchase the shares issued to its initial shareholders, shall be paid by Bank. SECTION 5. MISCELLANEOUS 5.1 ENTIRE AGREEMENT. This Agreement embodies the entire agreement among the parties and there have been and are no agreements, representations or warranties among the parties with respect to the subject matter of this Agreement other than those set forth herein or those provided for herein. 5.2 GOVERNING LAW. This Agreement has been executed in the State of California and the laws of such State shall govern the validity and the interpretation hereof and the performance by the parties hereto. 5.3 COUNTERPARTS. To facilitate the filing of this Agreement, any number of counterparts hereof maybe executed and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one instrument. - 6 - IN WITNESS WHEREOF, the parties hereto have caused this Plan of Reorganization and Merger Agreement to be executed by their duly authorized officers as of the day and year first above written. BANK OF SANTA MARIA By: /s/ William A. Hares --------------------------------------- William A. Hares, President and Chief Executive Officer By: /s/ William Snelling --------------------------------------- William Snelling, Secretary BSM MERGER COMPANY By: /S/ William A. Hares --------------------------------------- William A. Hares, President and Chief Executive Officer By: /s/ F. Dean Fletcher --------------------------------------- F. Dean Fletcher, Secretary BSM BANCORP By: /s/ William A. Hares --------------------------------------- William A. Hares, President and Chief Executive Officer By: /s/ William Snelling --------------------------------------- William Snelling, Secretary - 7 - ANNEX II A copy of the BSM Bancorp Stockholder Agreement entered into as of November 12, 1996 by the Holding Company and Mr. William A. Hares is attached hereto. STOCKHOLDER AGREEMENT THIS AGREEMENT is entered into this 12th day of November, 1996 by and between William A. Hares ("Shareholder") and BSM Bancorp ("Corporation"), a California corporation with its principal executive office in Santa Maria, California 93455. A. WHEREAS, the Articles of Incorporation of BSM Bancorp currently authorize the issuance of up to 50,000,000 of its no par value Common Stock ("Common Stock") and 25,000,000 of its no par value Preferred Stock. B. WHEREAS, the Board of Directors of the Corporation have authorized the sale and issuance of 150 shares of the Corporation's Common Stock at the purchase price of $10.00 per share to Shareholder pursuant to the terms of Corporation Code Section 25102(f); C. WHEREAS, Shareholder desires to purchase 150 shares of the Corporation's Common Stock for the purchase price of $10.00 per share pursuant to the terms and conditions herein set forth; IT IS MUTUALLY AGREED by and between the parties hereto as follows: 1. PURCHASE. The Corporation agrees to sell and Shareholder agrees to for each purchase 150 shares of the Corporation's Common Stock at the price of $10.00 per share for an aggregate purchase price of $1500.00 2. TRANSFER OF SHARES. The Shareholder agrees not to sell, assign, transfer, encumber, hypothecate, or make any other disposition of any of the shares of the Common Stock to be purchased except with the prior written consent of the Corporation and except in accordance with the terms of this Stockholder Agreement. This Stockholder Agreement shall be binding upon and shall operate for the benefit of the Corporation and the Shareholder and the respective executors or administrators and any transferees or assignees of the Shareholder, whether such transfers or assignments are in accordance with or in violation of the provisions of this Stockholder Agreement. 3. THE PURCHASE BY THE CORPORATION. Upon consummation of the merger between the Corporation's wholly-owned subsidiary, BSM Merger Company, and pursuant to which this Corporation will issue shares of its Common Stock to the shareholders of Bank of Santa Maria ("the Merger"), the Corporation shall be obligated to repurchase for cash and the Shareholder shall be obligated to resell to the Corporation the above-mentioned shares at the repurchase price of $10.00 per share, for a total repurchase price of $1,500. The repurchase and repayment therefor shall 1 of 3 occur simultaneously with the consummation of the Merger, at which time Shareholder's share certificates shall be returned and cancelled. 4. TERMINATION. This Stockholder Agreement shall terminate upon the occurrence of any of the following events: (a) The bankruptcy, receivership, or dissolution of the Corporation; (b) Mutual agreement of the Corporation and Shareholder; or (c) The failure of the consummation of the Merger for any reason whatsoever. 5. LEGEND. Upon execution of this Stockholder Agreement, the certificate representing the number of shares of Stock to be issued shall be endorsed as follows: "It is unlawful to consummate a sale or transfer of this security, or any interest therein, or to receive any consideration therefor, without the prior written consent of the Commissioner of Corporations of the State of California, except as permitted by the Commissioner's rules. Additionally, this certificate is transferable only upon compliance with provisions of a Stockholder Agreement dated November 12, 1996." 6. GOVERNING LAW. This Stockholder Agreement shall be construed and governed by the laws of the State of California. The offer and sale of this stock will not be accompanied by the publication of any advertisement, that no selling expenses will be given, paid or incurred in connection therewith, that no promotional considerations will be given, paid or incurred in connection therewith, that a notice in the form prescribed by the rules of Commissioner of Corporations ("Commissioner") shall be filed with the Commissioner, and that a copy of Section 260.141.11 of the Corporate Securities Rules is attached hereto and is hereby acknowledged as received by shareholder. 7. ENTIRE AGREEMENT. This Stockholder Agreement constitutes the sole and only agreement of the parties hereto respecting the sale and purchase of the shares of the Corporation and the resale and repurchase of the shares of the Corporation's Common Stock and correctly sets forth the rights, duties, and obligations of each party to the other in relation thereto as of this date. Any prior agreements, promises, negotiations or representations concerning the subject matter of this Stockholder Agreement not expressly set forth in this Stockholder Agreement are of no force or effect. 2 of 3 IN WITNESS WHEREOF, the parties hereto have executed this Stockholder Agreement in Santa Maria, California on the date first above written. BSM BANCORP By /s/ A. J. Diani --------------------------------------- A. J. Diani Chairman of the Board By /s/ F. Dean Fletcher --------------------------------------- F. Dean Fletcher Chief Financial Officer By /s/ William A. Hares --------------------------------------- William A. Hares "Shareholder" 3 of 3 INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report Financial Statements of Bank of Santa Maria Balance sheets as of December 31, 1995 and 1994 Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993 Statements of Shareholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 Notes to Financial Statements Unaudited Financial Statements Balance Sheet as of September 30, 1996 Statements of Operations for the Nine Months Ended September 30, 1996 and 1995 Statements of Shareholders' Equity for the Nine Months Ended September 30, 1996 Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995 Notes to Financial Statements Financial Statements of the Holding Company are not presented herein because BSM Bancorp has not yet issued any stock, has no assets and liabilities and has not conducted any business other than of an organizational nature. All schedules are omitted because the required information is not applicable or is included in the Financial Statements of Bank of Santa Maria and the related notes. Notes to Financial Statements R E P O R T O F C E R T I F I E D P U B L I C A C C O U N T A N T S BOARD OF DIRECTORS BANK OF SANTA MARIA SANTA MARIA, CALIFORNIA I N D E P E N D E N T A U D I T O R ' S R E P O R T We have audited the accompanying statements of condition of Bank of Santa Maria as of December 31, 1995 and December 31, 1994, and the related statements of income, changes in capital, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bank of Santa Maria as of December 31, 1995 and December 31, 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Dayton and Associates Laguna Hills, California January 3, 1996 F-1 S T A T E M E N T S O F C O N D I T I O N DECEMBER 31, ------------------------------ ASSETS 1995 1994 - ------------------------------------------------------------------------------ Cash and Due from Banks $ 15,772,603 $ 14,899,27 Investment Securities - Note B: Securities available for sale 4,046,341 3,060,598 Securities held to maturity 66,490,797 54,309,136 -------------- ------------ TOTAL INVESTMENT SECURITIES 70,537,138 57,369,734 Federal Funds Sold 13,429,000 10,130,000 Loans - Note C: Commercial 46,357,520 42,629,045 Agricultural 23,633,081 22,806,450 Real Estate 44,443,104 44,292,650 Consumer 36,793,706 39,033,118 -------------- ------------ TOTAL LOANS 151,227,411 148,761,263 Allowance for possible credit losses (2,536,894) (2,227,725) -------------- ------------ NET LOANS 148,690,517 146,533,538 Premises and equipment - Note D 10,212,568 10,586,604 Accrued interest and other assets 3,677,219 3,066,534 Other Real Estate Owned 1,258,261 1,549,808 -------------- ------------ TOTAL ASSETS $263,577,306 $244,135,488 -------------- ------------ -------------- ------------ LIABILITIES AND CAPITAL - ------------------------------------------------------------------------------ Deposits Noninterest-bearing demand $ 57,666,556 $ 50,148,005 Interest-bearing demand and savings 103,180,201 108,714,246 Time deposits under $100,000 49,465,869 40,408,723 Time deposits of $100,000 or more 23,741,749 19,323,869 -------------- ------------ TOTAL DEPOSITS 234,054,375 218,594,843 Accrued interest and other liabilities 2,019,334 1,566,842 -------------- ------------ TOTAL LIABILITIES 236,073,709 220,161,685 -------------- ------------ Commitments - Note H Capital - Note E: Common shares - authorized 25,000,000 shares; issued and outstanding 2,748,261 as of December 31, 1995; 2,676,919 as of December 31, 1994 8,512,498 7,934,404 Undivided profits 18,946,368 16,053,808 Net unrealized depreciation on available for sale securities, net of taxes of $(29,820), in 1995 and $9,406 in 1994 44,731 (14,409) -------------- ------------ TOTAL CAPITAL 27,503,597 23,973,803 -------------- ------------ TOTAL LIABILITIES AND CAPITAL $263,577,306 $244,135,488 -------------- ------------ -------------- ------------ The accompanying notes are an integral part of these financial statements F-2 S T A T E M E N T S O F I N C O M E
DECEMBER 31, ----------------------------------------- INTEREST INCOME 1995 1994 1993 - ------------------------------------------------------------------------------------------ Interest and fees on loans $16,396,749 $14,869,663 $14,181,594 Interest on investment securities-taxable 2,857,080 1,991,678 1,958,588 Interest on investment securities-non taxable 463,366 324,462 233,429 Other interest income 711,811 420,009 316,534 ----------- ----------- ----------- TOTAL INTEREST INCOME 20,429,006 17,605,812 16,690,145 ----------- ----------- ----------- INTEREST EXPENSE - ------------------------------------------------------------------------------------------ Interest on demand and savings deposits 2,773,221 2,505,233 2,464,491 Interest on time CD's over $100,000r 1,102,190 776,500 698,958 Interest on time CD's less than $100,000 2,305,628 1,534,069 1,711,778 ----------- ----------- ----------- TOTAL INTEREST EXPENSE 6,181,039 4,815,802 4,875,226 ----------- ----------- ----------- NET INTEREST INCOME 14,247,967 12,790,010 11,814,919 Provision for credit losses 700,000 250,000 601,801 ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 13,547,967 12,540,010 11,213,118 ----------- ----------- ----------- NON-INTEREST INCOME - ------------------------------------------------------------------------------------------ Service charges on deposits 1,607,800 1,395,769 1,425,967 Merchant discount fees 405,924 384,311 331,872 Other fee income 462,380 433,249 543,054 Other non-interest income 116,209 144,620 114,810 ----------- ----------- ----------- TOTAL 2,592,313 2,357,948 2,415,703 ----------- ----------- ----------- NON-INTEREST EXPENSE - ------------------------------------------------------------------------------------------ Salaries and employee benefits 5,897,042 5,582,417 5,417,613 Occupancy expenses 786,278 781,363 749,613 Furniture and equipment 1,243,660 1,201,658 1,233,051 Advertising and promotion 397,649 362,583 340,886 Professional 454,320 346,347 371,682 Office expenses 720,131 642,139 564,145 Regulatory assessments 288,751 511,653 703,471 Merchant processing costs 338,431 320,282 301,265 Other OREO expense 39,658 306,090 62,525 Other expenses 946,068 753,666 518,800 ----------- ----------- ----------- TOTAL 11,111,988 10,808,198 10,263,052 ----------- ----------- ----------- INCOME BEFORE TAXES 5,028,292 4,089,760 3,365,768 Income taxes - Note H 1,878,900 1,529,000 1,245,650 ----------- ----------- ----------- NET INCOME $3,149,392 $2,560,760 $2,120,118 ----------- ----------- ----------- ----------- ----------- ----------- Per share data: Net income $1.15 $0.96 $0.81 ----------- ----------- ----------- ----------- ----------- ----------- Number of shares used in computation 2,748,000 2,667,000 2,603,000 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements F-3 S T A T E M E N T S O F C A S H F L O W S YEAR ENDED DECEMBER 31, ----------------------------------------- OPERATING ACTIVITIES 1995 1994 1993 - ----------------------------------------------------------------------------------------------- Net income $3,149,392 $2,560,759 $2,120,118 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,076,818 1,038,970 1,032,877 Provision for credit losses 700,000 250,000 601,801 Amortization of premium/discounts on investment securities 96,824 299,986 475,156 Net loss (gain) from sale of fixed assets (30,450) (16,540) (34,971) Net loss (gain) on sale of other real estate loans 149,571 61,613 (33,836) Net change in accrued interest, other assets and other liabilities (197,419) 185,533 (12,467) ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,944,736 4,380,321 4,148,678 INVESTING ACTIVITIES - ----------------------------------------------------------------------------------------------- Proceeds from maturities of securities held to maturity 30,085,000 23,453,600 20,235,000 Proceeds from maturities of securities held for sale 5,582,750 0 0 Purchases of held to maturity securities (45,918,382) (32,853,512) (30,305,388) Purchases of available for sale securities (2,915,230) (2,776,076) 0 Net (increase) decrease in loans (3,308,840) (1,224,469) 3,569,083 Purchases of premises and equipment (713,281) (3,097,065) (1,186,883) Proceeds from sales of other real estate owned 593,838 978,092 1,339,170 Proceeds from sales of fixed assets 40,949 44,524 40,581 ----------- ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES (16,553,196) (15,474,906) (6,308,437) FINANCING ACTIVITIES - ----------------------------------------------------------------------------------------------- Net increase (decrease) in demand deposits and savings accounts 1,984,507 10,418,720 12,334,976 Net increase (decrease) in time deposits 13,475,025 (1,101,739) (7,865,190) Payments for dividends/distributions (258,396) (219,103) (130,506) Proceeds from exercise of stock options 579,658 1,209,382 76,037 ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 15,780,794 10,307,260 4,415,317 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,172,333 (787,325) 2,255,558 Cash and cash equivalents at beginning of year 25,029,270 25,816,595 23,561,037 CASH AND CASH EQUIVALENTS AT END OF YEAR $29,201,603 $25,029,270 $25,816,595 ----------- ----------- ----------- ----------- ----------- ----------- Supplemental disclosures of cash flow information: Loans transferred to other real estate owned $451,861 $209,000 $2,977,971 Cash paid during the year for interest $5,703,359 $4,791,321 $5,070,481 Cash paid during the year for income taxes $2,194,780 $1,195,625 $1,246,871
The accompanying notes are an integral part of these financial statements F-4 S T A T E M E N T S O F C H A N G E S I N C A P I T A L
Net Unrealized Common Shares Adjustment in ------------------------- Available for Number of Undivided Sale Shares Amount Profits Securities Total - ------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1993 2,503,415 $6,537,252 $11,834,273 $0 $18,371,525 Proceeds from exercise of stock 11,500 76,037 76,037 options Dividends paid (130,506) (130,506) Net income for the year 2,120,118 2,120,118 ---------- ----------- ----------- ----------- ----------- Balance at January 1, 1994 2,514,915 6,613,289 13,823,885 0 20,437,174 ---------- ----------- ----------- ----------- ----------- Proceeds from exercise of stock options, including the realization of tax benefits of $197,000 145,650 1,209,382 1,209,382 5% stock dividend (Templeton only) 16,354 111,733 (112,175) (442) Dividends paid (218,661) (218,661) Net income for the period 2,560,759 2,560,759 Adjustment in Available for Sale Securities, Net of Taxes of $9,406 (14,409) (14,409) ---------- ----------- ----------- ----------- ----------- Balance at December 31, 1994 2,676,919 7,934,404 16,053,808 (14,409) 23,973,803 ---------- ----------- ----------- ----------- ----------- Proceeds from exercise of stock options 71,469 579,658 579,658 Partial Distribution-Templeton Merger (127) (1,564) (1,564) Dividends paid (256,832) (256,832) Net income for the period 3,149,392 3,149,392 Adjustment in Available for Sale Securities, Net of Taxes of $(39,227) 59,140 59,140 ---------- ----------- ----------- ----------- ----------- Balance at December 31, 1995 2,748,261 $8,512,498 $18,946,368 $44,731 $27,503,597 ---------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- -----------
N O T E S T O F I N A N C I A L S T A T E M E N T S NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows: INVESTMENT SECURITIES Securities held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts over the period to maturity, or to an earlier call, if appropriate, on a straight-line basis. Such securities include those that management intends and has the ability to hold into the foreseeable future. Securities would be considered available for sale if they would be sold under certain conditions, among these being changes in interest rates, fluctuations in deposit levels or loan demand, or need to restructure the portfolio to better match the maturity or interest rate characteristics of liabilities with assets. Securities classified as available for sale are accounted for at their current fair value rather than amortized historical cost. Unrealized gains or losses are not recognized as current income, but rather as an increase or decrease of capital through a separate reserve. The accompanying notes are an integral part of these financial statements F-5 NOTE A (CONTINUED) LOANS, FEES, AND ALLOWANCE FOR POSSIBLE LOAN LOSSES Loans are carried at amounts advanced less payments collected. Interest on loans is accrued on a simple interest basis, except where management believes that serious doubt exists as to the repayment of the loan. When a loan is placed on non-accrual status, previously accrued and uncollected interest for the current year is reversed from income. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to make all payments due according to the contractual terms of the loan agreement. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. For impairment recognized in accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN (SFAS No. 114), the entire change in present value of expected cash flows is reported as provision for credit losses in the same manner in which impairment initially was recognized or as a reduction in the amount of provision for credit losses that otherwise would be reported. Loan origination fees offset by certain direct origination costs are deferred and recognized over the contractual life of the loan as an adjustment to the yield. The unrecognized fees and costs are reported either as a reduction of the loan principal outstanding, or, if deferred costs are greater than deferred fees, as additions to the applicable loan grouping. Commitment fees are deferred and recognized over the term of the commitment. Most deferred fees and costs are recognized using the interest method. The determination of the balance in the allowance for possible loan losses is based on an analysis of the loan portfolio and reflects an amount which, in management's judgment, is adequate to provide for potential loan losses after giving consideration to the character of the loan portfolio, current economic conditions, past loan loss experience and such other factors as warrant recognition in estimating loan losses. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. OTHER REAL ESTATE OWNED Other real estate owned, which represents real estate acquired through foreclosure, or deed in lieu of foreclosure, is reported at the fair value of the property at the time of transfer to other real estate owned, reduced by estimated selling expenses. Any subsequent operating expenses, or income, reductions in estimated values, and gains or losses on disposition of such properties are charged to current operations. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation, which is computed principally on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of their economic lives or the term of the lease. F-6 NOTE A (CONTINUED) INCOME TAXES Income taxes are accounted for by the asset and liability method as required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Deferred tax liabilities or assets are established for temporary differences between financial and tax reporting basis and are subsequently adjusted to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is established for any deferred tax asset for which realization is not likely. STATEMENT OF CASH FLOWS For purposes of reporting cash flows, cash and cash equivalents include; cash on hand, amounts due from banks and Federal funds sold. Generally, Federal funds are purchased and sold for one-day periods. EARNINGS PER SHARE Earnings per common share are based on the weighted average number of shares outstanding during the year plus shares issuable upon the assumed exercise of outstanding common stock options. RECLASSIFICATION Certain reclassifications were made to prior years' presentations to conform to the current year. These reclassifications are of a normal recurring nature. All prior years' numbers have been reinstated to give affect for the acquisition of Templeton National Bank on a pooling of interest basis. F-7 NOTE B - INVESTMENT SECURITIES Securities have been classified in the Statements of Condition according to management's intent. The carrying amount of securities and their approximate fair values at December 31, were as follow:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value 1995: Available for Sale Securities: U.S. Treasury securities $3,971,790 $74,631 $80 $4,046,341 ----------- ------------ ------------ ------------ $3,971,790 $74,631 $80 $4,046,341 ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------ 1995: Held to Maturity Securities: U.S. Treasury securities $6,672,923 $50,332 $260 $6,722,995 U. S. Government and agency securities 41,332,055 157,919 50,307 41,439,667 Obligations of states and political subdivisions 16,419,726 95,150 5,067 16,509,808 Other debt securities 2,066,093 1,775 13,282 2,054,586 ----------- ------------ ------------ ------------ $66,490,797 $305,175 $68,916 $66,727,056 ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------ 1994: Available for Sale Securities: U.S. Treasury securities $1,078,861 $0 $1,341 $1,077,519 U.S. Government and agency securities 2,005,553 0 22,474 1,983,079 ----------- ------------ ------------ ------------ $3,084,414 $0 $23,815 $3,060,598 ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------ 1994: Held to Maturity Securities: U.S. Treasury securities $17,443,000 $1,361 $200,871 $17,243,490 U.S. Government and agency securities 27,665,418 1,229 841,226 26,825,421 Obligations of states and political subdivisions 7,946,948 4,112 87,539 7,863,521 Other debt securities 1,253,770 0 64,594 1,189,176 ----------- ------------ ------------ ------------ $54,309,136 $6,702 $1,194,230 $53,121,608 ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------
There were no gross realized gains or gross realized losses on sales of available for sale securities. The Bank does not expect to realize either gains or losses shown in the above schedule. The Bank fully expects to hold these securities to maturity/call date at which time the amortized cost and market value will be the same as the par value of the bond. F-8 NOTE B (CONTINUED) At December 31, 1995 and 1994, investment securities having an amortized cost of approximately $4,994,000 and $6,006,000 respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. The amortized cost and estimated market value of all debt securities as of December 31, 1995 by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Held to Maturity Available for Sale Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value ---- ---------- ---- ---------- Due in one year or less $26,671,648 $26,705,804 $2,503,065 $2,520,571 Due after one year to five years 39,111,554 39,310,825 1,468,726 1,525,770 Due after five years to ten years 108,420 108,916 Due after ten years 599,175 601,511 ------- ------- ---------- ---------- TOTAL $66,490,797 $66,727,056 $3,971,790 $4,046,341 ----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
NOTE C - LOANS The Bank's loan portfolio consists primarily of loans to borrowers within Santa Barbara and San Luis Obispo counties. Although the Bank seeks to avoid concentrations of loans to a single industry, loans to the agricultural community are listed separately as in total they exceed 10% of all loans outstanding as of December 31, 1995, and December 31, 1994. Concentrations also can occur based upon a single class of collateral. Real estate and real estate associated businesses are among the principal industries in the Bank's market area and, as a result, the Bank's loan and collateral portfolios are to some degree concentrated in those industries. Real estate related loans, net of deferred fees and costs, at December 31, 1995, and December 31, 1994 were as follows. 1995 1994 Construction and land development $12,619,000 $13,141,000 Home equity credit lines 18,002,000 19,556,000 Residential properties 14,878,000 13,705,000 Commercial properties 40,861,000 43,588,000 Farmland 5,537,000 4,259,000 ----------- ----------- $91,897,000 $94,249,000 ----------- ----------- ----------- ----------- The Bank also originates real estate related loans for sale to governmental agencies and institutional investors. At December 31, 1995, and at December 31, 1994, the Bank had outstanding approximately $1,300,000 and $958,000 in loans held for sale respectively, and was servicing approximately $40,700,000 and $40,007,000, respectively, in loans previously sold. F-9 NOTE C (CONTINUED) Impairment of loans having recorded investments of $146,602 as of December 31, 1995 has been recognized in conformity with SFAS No. 114. The average recorded investment in such impaired loans during 1995 was $1,000,544. The total allowance for loan losses related to these loans was $47,030 at December 31, 1995. Interest income on impaired loans of $339,868 was recognized for cash payments received in 1995. This amount was received on a single loan which had a protracted repayment period resulting from a bankruptcy. The loan paid in full in 1995 including all interest in arrears for approximately 43 months. A summary of the changes in the allowance for possible credit losses follows: 1995 1994 1993 ---- ---- ---- Balance at beginning of year $2,228,000 $2,254,000 $2,415,000 Additions to the allowance charged to expense 700,000 250,000 602,000 Recoveries on loans charged off 99,000 120,000 152,000 ------ ------- ------- Subtotal 3,027,000 2,624,000 3,169,000 --------- --------- --------- Less loans charged off 490,000 396,000 915,000 ------- ------- ------- TOTAL $2,537,000 $2,228,000 $2,254,000 ---------- ---------- ---------- ---------- ---------- ---------- NOTE D - PREMISES AND EQUIPMENT A summary of premises and equipment follows: 1995 1994 ---- ---- Land $1,623,724 $1,623,724 Buildings and improvements 7,398,803 7,465,309 Leasehold improvements 15,424 18,793 Furniture, fixtures, and equipment 6,701,407 6,179,900 --------- --------- Subtotal 15,739,358 15,287,726 Less accumulated depreciation/amortization 5,526,791 4,701,122 --------- --------- TOTAL $10,586,604 $10,586,604 ----------- ----------- ----------- ----------- NOTE E - STOCK OPTION PLAN In 1978, the Bank adopted a stock option plan under which the Bank's Common shares may be issued to officers and key employees at not less than 100% of fair market value at the date the options were granted. This plan expired in 1988. There are, however, 22,000 options outstanding, but not yet exercised (from this plan), which do not expire until 1998. In 1989, the Bank adopted a stock option plan under which up to 209,360 shares of the Bank's Common shares may be issued to directors, officers, and key employees at not less than 100% of the fair market value at the date the options are granted. The two for one stock split increased the shares in the plan available and granted, but not exercised by 208,960. F-10 NOTE E (CONTINUED) Changes in the number of shares subject to option during the years ended December 31, 1995. December 31, 1994, and December 31, 1993, have been restated for the stock split and are summarized as follows: 1995 1994 1993 ---- ---- ---- Outstanding at beginning of year 153,300 238,300 238,300 Options granted ($10.50 - $14.00 per share) 23,500 65,500 11,500 Options forfeited (4,450) (4,850) 0 Options exercised (18,450) (145,650) (11,500) ------- -------- ------- Outstanding at end of year 153,900 153,300 238,300 ------- ------- ------- ------- ------- ------- Total option price $1,627,550 $1,515,800 $1,832,538 ---------- ---------- ---------- ---------- ---------- ---------- Options exercisable 53,400 45,140 146,480 ------ ------ ------- ------ ------ ------- Available for future grant 118,420 137,470 198,120 ------- ------- ------- ------- ------- ------- NOTE F - RETIREMENT PLAN The Bank has a noncontributory retirement plan covering substantially all of its employees. The plan is a defined contribution plan with annual contributions established at the discretion of the Board of Directors. The retirement plan expense was $336,000 for 1995, $317,000 for 1994, and $303,000 for 1993. In 1988, the Bank established a Profit Sharing and Salary Deferral 401(K) Plan to allow employees to defer a portion of their current compensation until retirement. Since 1991, the Board of Directors, at their discretion, have elected to make a matching contribution at a predetermined percentage of deferred dollars up to 2% of the participant's gross salary. The expense of the matching contribution was $74,000 for 1995, $73,000 for 1994, and $63,000 for 1993. NOTE G - INCOME TAXES The provisions for income taxes included in the Statements of Income consist of the following: 1995 1994 1993 ---- ---- ---- Current: Federal $1,480,900 $1,168,000 $841,000 State 618,000 483,000 364,000 ------- ------- ------- 2,098,900 1,651,000 1,205,000 Deferred (220,000) (122,000) 40,650 -------- -------- ------ $1,878,900 $1,529,000 $1,245,650 ---------- ---------- ---------- ---------- ---------- ---------- F-11 NOTE G (CONTINUED) A comparison of the federal statutory income tax rates to the Bank's effective income tax rates follows:
1995 1994 1993 ---- ---- ---- Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- Federal tax rate $1,710,000 34.0% $1,390,000 34.0% $1,144,000 34.0% California franchise taxes, net of federal tax benefit 375,000 7.5% 308,000 7.5% 254,000 7.5% Tax savings from exempt loan and investment income (166,000) (3.3%) (121,000) (3.0%) (87,000) (2.6%) Other items - net (40,100) (.8%) (48,000) (1.1%) (65,350) (1.9%) ------- ---- ------- ----- ------- ----- $1,878,900 37.4% $1,529,000 37.4% $1,245,650 37.0% ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
The following is a summary of the components of the net deferred tax asset and liability accounts recognized in the accompanying statements of Condition: 1995 1994 ---- ---- Deferred Tax Assets: Allowance for Credit Losses Due to Tax Limitations $980,000 $761,000 Other Assets/Liabilities 217,000 98,000 ------- ------ 1,197,000 859,000 Deferred Tax Liability: Premises and Equipment Due to Depreciation Difference (611,000) (454,000) -------- -------- Net Deferred Tax $586,000 $405,000 -------- -------- -------- -------- NOTE H - FINANCIAL COMMITMENTS In the normal course of business, the Bank enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit and standby letters of credit. Those instruments involve to varying degrees elements of credit and interest rate risk not recognized in the Bank's financial statements. The Bank's exposure to credit loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for loans reflected in the financial statements. F-12 NOTE H (CONTINUED) As of December 31, 1995, the Bank had the following outstanding financial commitments whose contractual amount represents credit risk: Commitments to extend credit $34,248,129 Standby letters of credit 779,747 ----------- $35,027,876 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. Standby letters of credit are conditional commitments to guarantee the performance of a Bank customer to a third party. Since many of the commitments and standby letters of credit are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, is based on management's credit evaluation of the customer. The majority of the Bank's commitments to extend credit and standby letters of credit are secured by real estate. NOTE I - RELATED PARTY TRANSACTIONS In the ordinary course of business, the Bank has granted loans to certain officers, directors, and the companies with which they are associated. In the Bank's opinion, all loans and loan commitments to such parties are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. The balance of these loans outstanding at December 31, 1995 was $5,677,777. NOTE J - 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 on the next page) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1995, that the Bank meets all capital adequacy requirements to which it is subject. F-13 NOTE J (CONTINUED) The Bank's actual capital amounts and ratios are presented in the following table:
IN THOUSANDS To be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual Purposes Provisions ------ -------- ---------- Amount Ratio Amount Ratio Amount Ratio ---------------- ----------------- ---------------- As of December 31, 1995: Total Capital to Risk-Weighted Assets $29,995 14.89% $16,098 8.00% $20,123 10.00% Tier 1 Capital to Risk-Weighted Assets $27,458 13.66% $8,049 4.00% $12,074 6.00% Tier 1 Capital to Average Assets $27,458 10.72% $10,245 4.00% $6,403 5.00% As of December 31, 1994: Total Capital to Risk-Weighted Assets $26,202 14.76% $14,201 8.00% $17,752 10.00% Tier 1 Capital to Risk-Weighted Assets $23,974 13.51% $7,101 4.00% $10,651 6.00% Tier 1 Capital to Average Assets $23,974 9.83% $9,753 4.00% $12,191 5.00%
The California Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the lessor of (1) the bank's undivided profits or (2) the bank's net income for its last three fiscal years less the amount of any distribution made by the bank to shareholders during the same period. Under these restrictions, approximately $7,112,000 was available for payment of dividends at December 31, 1995. Banking regulations require that all banks maintain a percentage of their deposits as reserves at the Federal Reserve Bank. During the year ended December 31, 1995, required reserves averaged approximately $2,281,000. NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. For financial instruments, whether or not recognized in the Statements of Condition, the Bank is required to disclose the fair value of those instruments for which it is practicable to estimate that value. In addition, the Bank is required to disclose the methods and significant assumptions used to estimate those fair values. Considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Bank could realize in a current market exchange. This disclosure of the fair value of financial instruments should not be viewed as equivalent to the valuation of the Bank as a whole. F-14 NOTE K (CONTINUED) Fair value estimates, methods, and assumptions are set forth below: CASH, DUE FROM BANKS, AND FED FUND SOLD For these short-term instruments, the carrying amount approximates fair value. INVESTMENT SECURITIES For investment securities, fair value equals quoted market prices where available, or, if unavailable, the fair value is based upon similar securities. LOANS For those loans with floating interest rates, it is presumed that estimated fair value generally approximates the carrying value. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of non-accrual loans with a recorded book value of $147,000 was not estimated because it was not practicable to reasonably estimate the amount or timing of future cash flows for such loans. DEPOSITS The fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed- maturity certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities. COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT Commitments to extend credit and letters of credit are written at current market rates. The Bank does not anticipate any interest rate or credit factors that would materially affect the fair value of these commitments or letters of credit outstanding at December 31, 1995. F-15 NOTE K (CONTINUED) The estimated fair values of the Bank's financial instruments at December 31, 1995 are as follows: Carrying Amount Fair Value ------ ---------- Financial Assets: Cash and Due from banks $15,773,000 $15,773,000 Fed funds sold 13,429,000 13,429,000 Investment securities 70,537,000 73,773,000 Loans 151,227,000 150,727,000 Less: Non-Accruals 147,000 147,000 Allowance for losses 2,537,000 0 --------- ----------- Net Loans 148,543,000 150,580,000 Financial Liabilities: Deposits $234,054,000 $233,824,000 Unrecognized commitments to extend credit and standby letters of credit 35,038,000 35,038,000 NOTE L - MERGER WITH TEMPLETON NATIONAL BANK At the close of business on September 8, 1995, Bank of Santa Maria consummated a merger with Templeton National Bank. This merger was accounted for by the pooling of interest method, whereby the Statements of Condition and the Statements of Income are combined and restated as if the two banks were historically one unit. A total of 397,561 common shares were issued to the shareholders of Templeton National Bank in connection with this merger. The following summarizes the separate revenue and net income of Bank of Santa Maria and Templeton National Bank that have been reported in the restated financial statements included herein: Eight month Twelve month Twelve month period ended period ended period ended August 31, 1995 December 31, 1994 December 31, 1993 --------------- ----------------- ----------------- Interest and non-interest income Bank of Santa Maria $13,608,014 $17,696,229 $17,162,381 Templeton National Bank 1,754,146 2,267,531 1,987,919 --------- --------- --------- $15,362,160 $19,963,760 $19,150,300 ----------- ----------- ----------- ----------- ----------- ----------- Net Income Bank of Santa Maria $2,061,359 $2,264,500 $1,978,733 Templeton National Bank 199,598 296,259 141,385 ------- ------- ------- $2,260,957 $2,560,759 $2,120,118 ---------- ---------- ---------- ---------- ---------- ---------- F-16 MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion presents information about the results of operations and the financial condition of Bank of Santa Maria which expands upon the information contained in the financial statements and the notes thereto. Bank of Santa Maria was incorporated under the laws of the State of California on June 27, 1977 and was licensed by the California State Banking Department. The Bank commenced operations on March 18, 1978 and has grown to ten retail locations along the central coast of California. The Bank offers a full range of commercial banking services designed to serve the banking needs of individuals and small to medium sized businesses located within its primary market area. As reported in Note L to the Financial Statements, the Bank of Santa Maria and Templeton National Bank merged during 1995. All prior years' numbers contained in this section have been restated to give effect for this merger using the pooling of interest method. R E S U L T S O F O P E R A T I O N S The Bank reported net earnings of $3,149,392, or $1.15 per share, in 1995. This represents an increase of 23.0% over 1994 where net earnings were $2,560,759, or $.96 per share. Net earnings in 1993 were $2,120,118 or $.81 per share. Other key financial ratios are listed below: TABLE 1 - KEY FINANCIAL RATIOS Year ended December 31, --------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Return on average assets 1.26% 1.08% 0.94% 0.92% 0.91% Return on average equity 12.16% 11.38% 10.91% 11.47% 12.00% Return on beginning equity 13.14% 12.53% 11.54% 12.24% 12.72% Dividend payout ratio 8.33% 9.00% 6.44% 6.68% 7.13% Average equity to average assets 10.38% 9.50% 8.65% 8.05% 7.60% NET INTEREST INCOME AND NET INTEREST MARGIN Table 2 entitled Average Balances and Interest Rates, shows the Bank's average assets, liabilities, and stockholders' equity with the related interest income, interest expense and rates for the years 1995, 1994 and 1993. Rates for tax preferenced investments are shown on a tax equivalent basis using a 34% tax rate. Table 3 analyzes the reasons for change in net interest income resulting from movement in rates and changes in average outstanding balances. Reference should be made to both Table 2 and Table 3 in the discussion of net interest income and net interest margin. F-17 The primary component of the Bank's operating income is net interest income. This is the difference between the interest and fees earned on interest-bearing assets such as loans and investments and the interest paid on interest-bearing liabilities such as deposits. Net interest income is similar to "gross profits on sales" used in financial statements for retail sales organizations. Net interest income in 1995 was $14.2 million as compared to $12.8 million in 1994 and $11.8 million in 1993. Net interest income, when expressed as a percentage of total average interest-earning assets, is referred to as net interest margin or NIM. The Bank's NIM was 6.53% in 1995, compared to 6.14% in 1994, and 5.97% in 1993. NIM is used as a measure of the efficiency of the Bank's asset/liability management. The Bank's NIM in 1995 increased by 6.4% compared to the increase of 2.3% in 1994. There are several reasons for the improved NIM in 1995. The two components of NIM are interest income and interest expense. Loans are the largest interest earning assets group which contribute to interest income. During 1995, interest earned from loans increased by $1.5 million dollars, despite a decline in average loans outstanding by $1.8 million dollars. The loss in interest income from the decline in loans was more than offset by the increase in the effective yield on loans. The improvement in the loan earnings rate was effected by two factors. The primary factor was upward movement in the Bank's base lending rate which began increasing in the second quarter of 1994. The rates continued to increase through the second quarter of 1995, when interest rates declined in response to the decline in concern regarding inflation. The Bank's base lending rate at the end of 1995 was 8.5%. A significant portion (over 70%) of the Bank's loans are sensitive to changes in the Bank's base lending rate. The average base lending rate for 1993 was 6.50%, for 1994 - 7.41%, and for 1995 - 8.83%. In addition, a large loan, which was placed on non-accrual status in late 1991, paid off in full during 1995. This resulted in a recapture of approximately $210,000 in interest income previously excluded in previous periods. Of the 116 basis point increase in the average effective interest rates on loans between 1994 and 1995, 14 basis points resulted from the payment of this single credit. During 1994, while the average loans outstanding remained essentially level, the effective yield on those loans rose by 33 basis points to 9.97%. The additional interest income from loans, coupled with the interest income generated from Federal funds sales, offset the overall decline in average yield in the investment portfolio. Both new and reinvested dollars were invested according to Bank policy in short term instruments. The return available during 1992 through 1993 fell short of the returns available in the preceding three years. This resulted in an average yield on earning assets of 8.43%, which was essentially the same as in 1993. The cost of deposits also responded to market conditions. Interest expense on interest-bearing deposits increased $1.4 million in 1995 over 1994, after showing virtually no increase in 1994 over 1993. Average interest-bearing deposits grew $5.5 million in 1995, which was a modest 3.3% increase. Accordingly, most of the increase in interest expense ($1.2 million), resulted from the increase in average effective rates on interest-bearing liabilities which grew from 2.88% F-18 in 1994 to 3.58% in 1995, a 24.0% increase. In 1994, the effect of the overall decline in effect interest rates on interest-bearing deposits fully offset any additional interest expense for growth in deposits. The average interest rate from interest expense used in NIM is based upon average earning assets rather than average interest-bearing deposits. Accordingly, fluctuations in earning assets effect the results of the percentages used in arriving at NIM. In 1994, interest expense, as expressed as a percentage of earning assets, declined by 6.6% to 2.28%, but increased dramatically in 1995 to 2.78%, a 21.9% increase. NIM increased to 6.53% as of 1995, up 38 basis points from 1994, as a result of the greater movement upwards in interest-earning assets over the interest- bearing liabilities. NIM also benefited from the infusion of new capital from the exercise of stock options, which represents a non-interest bearing liability, which funded the increase in earning assets, primarily investments. F-19 TABLE 2 - AVERAGE BALANCES AND INTEREST RATES
Year ended December 31, ----------------------- 1995 1994 1993 ---------------------------------------------------------------------------------------- Average Amount Average Amount Average Amount INTEREST Balance of Average Balance of Average Balance of Average EARNING ASSETS: (000'S) Interest Rate(2) (000'S) Interest Rate(2) (000'S) Interest Rate(2) - ---------------------------------------------------------------------------------------------------------------- Investment Securities Taxable $49,572 $2,857 5.76% $41,935 $1,985 4.73% $35,455 $1,959 5.53% Non-Taxable 12,324 463 5.70% 9,019 334 5.61% 5,799 233 6.10% ------ --- ----- ----- --- ----- ----- --- ----- TOTAL SECURITIES 61,896 3,320 5.75% 50,954 2,319 4.89% 41,254 2,192 5.61% ------ ----- ----- ------ ----- ----- ------ ----- ----- Federal Funds Sold 12,809 712 5.56% 10,858 417 3.84% 11,606 317 2.73% Net Loans (1) 147,342 16,397 11.13% 149,156 14,870 9.97% 147,075 14,181 9.64% ------- ------ ------ ------- ------ ----- ------- ------ ----- TOTAL EARNING ASSETS 222,047 20,429 9.31% 210,968 17,606 8.43% 199,935 16,690 8.41% ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- TOTAL NON-EARNING ASSETS 27,525 25,810 24,492 ------ ------ ------ TOTAL ASSETS $249,572 $236,777 $224,427 -------- -------- -------- -------- -------- -------- LIABILITIES AND CAPITAL: - -------------------------------------------------------------------------------------------------------------- Interest-bearing demand/savings $107,464 $2,772 2.58% $105,823 $2,505 2.37% $98,718 $2,464 2.50% Time deposits under $100,000 44,519 2,302 5.17% 40,495 1,534 3.79% 43,040 1,712 3.98% Time deposits $100,000 or more 20,985 1,102 5.25% 21,170 777 3.67% 19,522 699 3.58% ------ ----- ----- ------ --- ----- ------ --- ----- TOTAL INTEREST BEARING DEPOSITS 172,968 $6,176 3.57% 167,488 $4,816 2.88% 161,280 $4,875 3.02% ------- ------ ----- ------- ------ ----- ------- ------ ----- ------ ----- ------ ----- ------ ----- Demand deposits 48,897 45,489 42,220 Other liabilities 1,806 1,294 1,503 Capital 25,901 22,506 19,424 TOTAL LIABILITIES AND CAPITAL $249,572 $236,777 $224,427 -------- -------- -------- -------- -------- -------- Spread on average interest-bearing funds 5.74% 5.55% 5.38% ----- ----- ----- ----- ----- ----- Interest income/earning assets 9.31% 8.43% 8.41% Interest expense/earning assets 2.78% 2.28% 2.44% ----- ----- ----- Net interest margin 6.53% 6.15% 5.97% ----- ----- ----- ----- ----- -----
(1) Non-accrual loans have been included in net loan figures (2) Yields are calculated on a tax equivalent basis F-20 The impact of changes in the net interest income spread during 1995 and 1994 can also be analyzed by reference to Table 3, where increases or decreases in interest income is broken down into two components. Changes due primarily to increases or decreases in the size of the category are called volume variances. Changes due primarily to increases or decreases in the rates associated with each category are called rate variances. During 1995, interest income increased by $2,832,000. Limited loan demand shifted the assets into the investment portfolio, where the largest volume variance is reflected. Most of the increase in interest income is attributable to upward rate movements in loans, Federal funds and investments. During 1994, interest income increased by $916,000. Again, limited loan demand shifted the increase in assets primarily into investments, with most of the interest income increase attributable to increases in overall asset growth. The shift in the deposit mix towards shorter-term interest bearing and non- interest bearing accounts was noted in 1994. During 1995, with an improvement in interest rates, there was some movement of funds into time deposits. However, the primary reason for the $1.4 million increase in interest expense was attributed to increasing rates. TABLE 3 - RATE AND VOLUME ANALYSIS (In thousands)
Year ended December 31, 1995 over 1994 1994 over 1993 Increase (Decrease) Increase (Decrease) due to change in due to change in -------------------- --------------------- INTEREST EARNING ASSETS: Volume Rate Total Volume Rate Total - ------------------------ ------ ---- ----- ------ ---- ----- Investment securities Taxable $397 $475 $872 $331 ($305) $26 Non-taxable 124 5 129 138 (37) 101 --- - --- --- --- --- TOTAL SECURITIES 521 480 1,001 469 (342) 127 Federal funds sold 84 211 295 (22) 122 100 Net loans (183) 1,710 1,527 202 487 689 ---- ------ ------ --- --- --- TOTAL EARNING ASSETS $422 $2,401 $2,823 $649 $267 $916 ---- ------ ------ ---- ---- ---- ---- ------ ------ ---- ---- ---- INTEREST BEARING LIABILITIES: - ----------------------------- Interest-bearing demand/savings $0 $267 $267 $173 ($132) $41 Time deposits under $100,000 165 603 768 (99) (79) (178) Time deposits $100,000 or above (7) 332 325 60 18 78 -- --- --- -- -- -- TOTAL INTEREST BEARING DEPOSITS $158 $1,202 $1,360 $135 ($193) ($59) ---- ------ ------ ---- ----- ---- ---- ------ ------ ---- ----- ---- Increase (decrease) in interest differential $264 $1,199 $1,463 $515 $460 $975
Information is provided in each category with respect to (a) changes attributable to changes in volume (changes in volume multiplied by prior rate); (b) changes attributable to changes in rates (changes in rates multiplied by prior volume); and (c) the net change. The change attributable to the combined impact of volume and rate has been allotted proportionately to the change due to volume and the change due to rate. F-21 The level of non-performing loans in the Bank's portfolio affects the amount of interest income. As noted in the notes to the financial statement, when the serious doubt exists as to the repayment of a loan, that loan is placed on non- accrual status and previously accrued and uncollected interest for the current year is reversed against income. Had non-performing loans as of December 31, 1995 complied with original terms, related interest income would have been approximately $11,000, of which approximately $0 was collected. The difference of approximately $11,000 was not taken into income, which was so immaterial it would have had no effect on NIM. SUMMARY OF CREDIT LOSS EXPERIENCE The Bank maintains an allowance for loan losses, which is reduced by net loan charge-offs and increased by provisions for loan losses charged against operating income. The adequacy of the allowance for loan losses is reviewed on a continual basis. The amount of provisions and the level of the total allowance are based upon the Bank's loan loss experience, the performance of loans in the portfolio, evaluation of loan collateral, the financial abilities and net worth of the borrowers or guarantors and such of the factors as, in management's judgment, deserve recognition. In addition to internal evaluation, the adequacy of the allowance for loan losses is subject to review by regulators and outside consultants. While no assurance can be given that economic conditions which adversely affect the Bank's service areas or other unforeseen circumstance will not require increased provisions for loan losses in the future, it is management's opinion that the allowance for loan losses as of December 31, 1995, of $2,537,000, or 1.70% of total loans, was adequate to absorb losses from any known or inherent risks in the portfolio. Table 4 shows comparative statistics and a more detailed breakdown of activity in the loan loss reserve account. The level of the provision at $700,000 for 1995 is up by 180% from 1994, reflecting management's conservative approach when establishing the allowance for potential loan losses. TABLE 4 - SUMMARY OF LOAN LOSS EXPERIENCE (In thousands)
Year ended December 31, -------------------------------------------- 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------------------------- BALANCE OF RESERVE AT BEGINNING OF YEAR $2,228 $2,254 $2,415 $2,043 $1,632 CHARGE OFFS Consumer 194 206 475 271 152 Commercial 242 138 144 470 70 Agricultural 0 0 64 0 0 Construction and development 0 0 151 0 0 Other real estate 54 52 82 37 0 -- -- -- -- - TOTAL CHARGE OFFS 490 396 916 778 222 RECOVERIES Consumer 40 28 63 21 20 Commercial 59 55 89 40 55 Agricultural 0 36 0 0 0 Construction and development 0 1 0 0 0 Other real estate 0 0 0 0 0 TOTAL RECOVERIES 99 120 152 61 75 -- --- --- -- -- NET CHARGE OFFS 391 276 764 717 147 --- --- --- --- --- Provision charged to operations 700 250 603 1,089 558 --- --- --- ----- --- BALANCE AT YEAR END $2,537 $2,228 $2,254 $2,415 $2,043 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Ratio of net charge-offs to average net loans during the period 0.27% 0.19% 0.52% 0.48% 0.11%
F-22 The ratio of net charge-offs to average net loans during the 1992-1993 period increased with the recessionary economy. It remained however, quite favorable when compared with industry standards. The 1994-1995 net charge-off ratio reflects an improvement in the local economy, although loan demand remains weak. The Bank does not anticipate higher levels of charge-offs in the future, but has elected to set aside $50,000 per month to the provision for loan losses account. NON-INTEREST INCOME Non-interest income increased by $234,000 to $2.6 million in 1995 from $2.4 million in 1994 and $2.5 million in 1993. Service charges related to the Bank's deposit products account for the largest portion of non-interest income. Other fee income includes servicing fees on loans sold in the secondary markets, and other non-deposit related charges, including wires, safe deposit, ATM's, merchant draft processing, etc. Other non-interest income includes net gains of sale of fixed assets and other real estate owned, income generated from the holding of other real estate owned, and other non-fee related income. NON-INTEREST EXPENSE The Bank's total non-interest expense amounted to $11.1 million in 1995, $10.8 million in 1994, and $10.3 million in 1993. The increase in 1995 of $303,000, or 2.8%, can be primarily attributed to the expansion of the Bank into San Luis Obispo County. The increase in 1994 of $501,000, or 4.9%, was due primarily to costs associated with maintenance and disposal of other real estate owned, plus costs associated with expansion of the Bank into San Luis Obispo County. Non-interest expense as a percentage of average assets has continued to decline from 1993 at 4.59%, to 1994 at 4.56%, to 1995 at 4.45%. B A L A N C E S H E E T A N A L Y S I S Total assets as of year end have increased by 8.0% in 1995 to $264 million, and by 5.6% in 1994 to $244 million. Net loans showed no growth in 1995, increasing by 1.5% to $149 million. Net loans in 1994 increased by only .5% due to the depressed economy. Deposits grew throughout the period with a 4.5% increase in 1994, followed by a 7.1% increase in 1995, to a year end total of $236 million. Certain components of the Bank's balance sheet are discussed below. INVESTMENT SECURITIES The Bank maintains a portfolio of investment securities to provide income and to serve as a secondary source of liquidity for its operations in conjunction with moneys sold overnight in the Federal funds market. The types of investments held in the portfolio include U.S. Treasury Bills and Notes, Government Agency issues, short-term municipal issues, and corporate obligations guaranteed by the U.S. Government. The type of investments held in the Bank's portfolio are influenced by several factors among which are; rate of return, maturity, and risk. Note B to the financial statement sets forth additional information regarding our investment portfolio as well as Table 5 which reports maturity distributions and weighted tax-equivalent rates by types of investments. F-23 TABLE 5 - INVESTMENT PORTFOLIO (In thousands)
Year ended December 31, 1995 ------------------------------------------------------------------------------------------------------------------------- After 1 But After 5 But Total Securities Within One Year Within 5 Years Within 10 Years After 10 Years ---------------- --------------- -------------- --------------- -------------- Weighted Weighted Weighted Weighted Weighted Book average Book average Book average Book average Book average U.S. TREASURY: value T/E yield value T/E yield value T/E yield value T/E yield value T/E yield Held to Maturity, at Amortized Cost: U.S. Treasury $6,673 6.07% $5,465 6.06% $1,208 6.11% $0 0.00% $0 0.00% U.S. Government Agencies 41,332 5.60% 14,700 5.10% 26,632 5.87% 0 0.00% 0 0.00% Municipal Issues 16,420 6.28% 6,019 5.68% 9,693 8.79% 108 7.65% 599 9.17% Other Debt Securities 2,066 5.42% 470 4.98% 1,596 5.55% 0 0.00% 0 0.00% ------------------------------------------------------------------------------------------------------------- 66,491 5.81% 26,654 5.43% 39,129 6.59% 108 7.65% 599 9.17% Available for Sale, at Market: U.S. Treasury 3,972 6.71% 2,503 6.33% 1,469 7.34% 0 0 ------------------------------------------------------------------------------------------------------------- TOTAL SECURITIES $70,463 5.86% $29,157 5.50% $40,598 6.62% $108 7.65% $599 9.17% ------- ----- ------- ----- ------- ----- ---- ----- ---- ----- ------- ----- ------- ----- ------- ----- ---- ----- ---- -----
LOANS Table 6 sets forth the distribution of the Bank's loan Portfolio for the past five years. During 1995 the loan portfolio mix had several notable changes. Commercial loans grew by 9.3% and now represent 30% of the Bank's portfolio. Construction and land development loans declined by 4.0%, to a low of 8% of the portfolio. Consumer loans also declined by 5.8%, and now only represent 24% of the loan portfolio of the Bank. TABLE 6 - LOAN PORTFOLIO ANALYSIS BY CATEGORY (In thousands)
Year ended December 31, ----------------------- 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------- Consumer $36,794 $39,033 $39,115 $42,261 $40,696 Commercial 46,357 42,629 34,316 33,140 34,825 Agricultural 23,633 22,806 21,722 22,439 18,202 Construction/Development 12,619 13,141 19,247 24,618 17,476 Other Real Estate 31,824 31,152 33,621 32,874 40,167 ------ ------ ------ ------ ------ TOTAL LOANS $151,227 $148,761 $148,021 $155,332 $151,366 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
F-24 The vast majority of the loans in the portfolio are either amortizing monthly or have relatively short maturities. This helps maintain liquidity in the portfolio. Most of the loans which have floating rates are tied to the Bank's base rate or other market rate indicators. This serves to lessen the risk to the Bank from movement in interest rates, particularly rate increases. Table 7 shows the maturity of certain loan categories outstanding as of December 31, 1995, net of deferred fees and deferred costs. TABLE 7 - MATURITIES AND SENSITIVITIES OF CERTAIN LOAN TYPES TO CHANGES IN INTEREST RATES (In thousands) Due after Due in one one year to Due after year or less five years five years Total ------------ ---------- ---------- ----- Commercial and Agricultural Floating Rate $25,087 $10,568 $12,572 $48,227 Fixed Rate 5,756 14,383 1,848 21,987 Real Estate Construction Floating Rate 5,318 2,016 0 7,334 Fixed Rate 5,029 256 0 5,285 ------------------------------------------------------ TOTAL $41,190 $27,223 $14,420 $82,833 ------------------------------------------------------ ------------------------------------------------------ At December 31, 1995, non-performing assets (non-accrual loans, loans 90 days or more past due, restructured loans and other real estate owned) totaled $1.4 million or .10% of total assets, down from $3.0 million or 1.25% at December 31, 1994. Management believes that these assets are generally well secured and that potential losses have already been reflected in valuation or allowance accounts. Table 8 sets forth information on non-performing assets for the periods indicated. The market value of other real estate owned and collateral securing non-performing loans is regularly monitored for changes. TABLE 8 - NON-ACCRUAL AND NON-PERFORMING ASSETS (In thousands)
Year ended December 31, ----------------------- - --------------------------------------------------------------------------------------------- 1995 1994 1996 1992 1991 - --------------------------------------------------------------------------------------------- Non-Accrual $147 $1,495 $2,425 $4,187 $809 Loans currently accruing which are 0 2 172 364 8 past due 90 days or more Other real estate owned 1,258 1,550 2,225 552 0 ------ ------ ------ ------ ---- TOTAL NON-PERFORMING ASSETS $1,405 $3,047 $4,822 $5,103 $817 ------ ------ ------ ------ ---- ------ ------ ------ ------ ---- Percentage of non-performing loans to total loans 0.10% 1.01% 1.75% 3.25% 0.60% ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Percentage of non-performing assets to total assets 0.53% 1.25% 1.97% 2.26% 0.43% ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
F-25 DEPOSITS As was noted, deposits have grown steadily over the reporting periods. The average balances for deposit categories and their associated costs are presented in Table 9. TABLE 9 - DETAILED DEPOSIT SUMMARY (In thousands)
Year ended December 31, ----------------------- 1995 1994 1993 ---------------------------------------------------------------------- Average Average Average Balance Rate Balance Rate Balance Rate ------- ---- ------- ---- ------- ---- Interest-bearing demand $25,250 1.34% $25,074 1.32% $23,386 1.64% Savings accounts 31,587 2.70% 32,584 2.53% 28,716 2.71% money market savings 50,627 3.12% 48,165 2.80% 46,616 2.79% TCD less than $100,000 44,519 5.17% 40,495 3.79% 43,040 3.98% TCD $100,000 or more 20,985 5.25% 21,170 3.67% 19,522 3.58% ------ ----- ------ ----- ------ ----- TOTAL INTEREST- BEARING DEPOSITS 172,968 3.57% 167,488 2.88% 161,280 3.02% Demand 48,897 45,489 42,220 ------ ----- ------ ----- -------- ----- TOTAL DEPOSITS $221,865 2.78% $212,977 2.26% $203,500 2.40% -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
The effective cost of all funds increased during 1995, reversing a trend which has existed for the last several years in which interest costs had been declining. The deposit mix has several notable changes, modifying the previous trend towards more liquidity and shorter-termed accounts. Time deposits of less than $100,000 grew by 10%, demand deposits were up by 7.5% and money market savings grew by 5%. Demand deposits now represent over 22% of all deposits in the Bank. Table 10 sets forth the remaining maturities of large denomination time deposits, including public funds, as of December 31, 1995. TABLE 10 - MATURITY DISTRIBUTION OF TCD'S OF $100,000 OR MORE (In thousands) Year ended December 31, 1995 Three months or less $10,514 After three months to six months 6,058 After six months to one year 4,514 Over one year 2,656 ----- TOTAL $23,742 ------- ------- F-26 LIQUIDITY Liquidity is the Bank's ability to meet fluctuations in deposit levels and provide for credit needs of its customers. The objective in liquidity management is to maintain a balance between the sources and uses of funds. Principal sources of liquidity include interest and principal payments on loans and investments, proceeds from the maturity of investments and growth in deposits. The Bank holds overnight Federal funds as a cushion for temporary liquidity needs. During 1995, Federal funds averaged $12.8 million, or 8.7% of total average assets. in addition, the Bank maintains Federal funds credit lines with major correspondents, aggregating $11.1 million, subject to the customary terms for such arrangements. There are several accepted methods of measuring liquidity as used by the regulators. One ratio which is fairly easy to understand is referred to as the liquidity ratio and measures the percentage of deposits which are used to fund cash, cash equivalents, and marketable securities. The Bank has set a minimum standard percentage of 20%, and as of December 31,1995 the Bank's liquidity ratio was 48.5%. The Bank appears to be sufficiently liquid to meet its operational needs. CAPITAL RESOURCES The primary source of capital for the Bank is the retention of operating profits. The Bank reviews its capital needs on an ongoing basis to ensure an adequate level of capital to support growth and to ensure depositor protection. Total capital grew by $3.5 million of 15% to $27 million as of December 31,1995. During 1995, the Bank's capital was augmented by the exercise of stock options originally granted to the Bank's directors in 1989. The exercise of these options contributed $953,000 in cash and tax benefits to the Bank's capital. Comments regarding the established minimum capital ratios can be found in footnote J of the financial statements. MARKET INFORMATION REGARDING THE BANK'S COMMON STOCK The common stock of the Bank is not listed on any national stock exchange or with NASDAQ. Trading in the stock has not been extensive and such trades which have occurred would not constitute an active trading market. As of December 31, 1995, there were approximately 1,000 shareholders. During 1995, the authorized number of shares the Bank can issue was increased from 3,000,000 to 25,000,000 shares. Since 1984, the Bank has consistently declared and paid a cash dividend to the then shareholders of Bank of Santa Maria, with the equivalent of $.06 being paid since February of 1988. In 1994, the Board of Directors increased the per share dividend to $.10, again to the holders of Bank of Santa Maria stock at that time. in 1995, the Board of Directors again increased the per share dividend to $.11 payable on February 17, 1995 to the holders of their stock. in 1996, the Board of Directors increased the cash dividend to $.20 payable on February 21, 1996. While future dividends are subject to the Bank's financial performance, it is reasonable that the current pattern of dividends will continue. Restrictions on dividend payments are outlined in the notes to the financial statements. F-27 The following quarterly summary of market activity is furnished by Maguire Investments of Santa Maria, the Bank's primary market maker. Bid Ask 1st Quarter 1994 $11.50 $12.00 2nd Quarter 1994 $11.50 $12.00 3rd Quarter 1994 $11.50 $12.00 4th Quarter 1994 $12.25 $12.75 1st Quarter 1995 $13.25 $13.75 2nd Quarter 1995 $13.25 $13.75 3rd Quarter 1995 $13.75 $14.25 4th Quarter 1995 $13.75 $14.25 SELECTED FINANCIAL DATA The following is a summary of operations of Bank of Santa Maria for each of the last five years ended December 31, 1995. This summary has not been examined by an independent public accountant. However, in the opinion of management, this summary reflects all adjustments which would be considered necessary for a fair presentation of the results of operations for each of these periods. This summary of operations should be read in conjunction with the financial statements and notes relating thereto included elsewhere in this report.
(In thousands) 1995 1994 1993 1992 1991 Total assets $263,577 $244,135 $231,128 $224,675 $214,365 Net interest income $14,248 $12,790 $11,815 $11,920 $10,529 Provision for loan loss $700 $250 $602 $1,089 $558 Other income $2,592 $2,358 $2,460 $2,308 $1,990 Other expense $11,112 $10,808 $10,308 $9,880 $9,164 Net income $3,149 $2,561 $2,103 $2,013 $1,856 Net income per share $1.15 $.96 $.81 $.78 $.73 Cash dividend per share $.096 $.086 $.052 $.052 $.052
F-28 BANK OF SANTA MARIA STATEMENTS OF CONDITION
UNAUDITED - --------- ASSETS SEP 30, 1996 SEP 30,1995 - ------ ------------ ------------ Cash and due from banks $18,466,275 $14,524,319 Investment securities: - Note B Securities available for sale (at market) 22,505,178 6,512,683 Securities held to maturity 64,489,908 55,879,597 ------------ ------------ (Market value of securities held to maturity $64,151,544 and $55,824,624) TOTAL INVESTMENT SECURITIES 86,995,086 62,392,280 Federal funds sold 7,345,000 14,320,000 Loans: - Note C Commercial 50,298,890 46,569,899 Agricultural 25,667,412 18,818,319 Real estate 47,009,894 47,457,463 Consumer 41,499,549 37,573,590 ------------ ------------ TOTAL LOANS 164,475,745 150,419,271 Allowance for possible credit losses (2,580,045) (2,207,660) ------------ ------------ NET LOANS 161,895,700 148,211,611 Premises and equipment - Note D 12,051,469 10,368,996 Accrued interest and other assets 4,094,841 3,108,339 Goodwill 1,901,440 0 Other Real Estate Owned 1,382,261 1,268,190 TOTAL ASSETS $294,132,072 $254,193,735 ------------ ------------ ------------ ------------ LIABILITES AND CAPITAL SEP 30, 1996 SEP 30, 1995 ------------ ------------ Deposit: Noninterest-bearing demand $58,247,460 $52,742,126 Interest-bearing demand and savings 108,638,775 103,190,458 Time deposits under $100,000 63,825,142 45,658,468 Time deposits of $100,000 or more 31,920,591 24,160,802 ------------ ------------ TOTAL DEPOSITS 262,631,968 225,751,854 Accrued interest and other liabilities 2,170,492 1,680,954 ------------ ------------ TOTAL LIABILITIES 264,802,460 227,432,808 ------------ ------------ ------------ ------------ Capital: - Note E Common shares - authorized 25,000,000 shares: issured and outstanding 2,764,261 as of September 30, 1996 2,740,811 as of September 30, 1995 8,649,998 8,441,723 Undivided profits 20,736,118 18,288,492 Net unrealized depreciation on available for sale securities, net of taxes of $37,670 and $(20,475) respectively (56,505) 30,712 ------------ ------------ TOTAL CAPITAL 29,329,612 26,760,927 ------------ ------------ TOTAL LIABILITIES AND CAPTITAL $294,132,072 $254,193,735 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. F-29 BANK OF SANTA MARIA STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited) 1995 1996 ---- ---- INTEREST INCOME: - ---------------- Interest and fees on loans $ 12,113,702 $ 12,395,468 Interest on investment securities-taxable 2,837,075 2,045,042 Interest on investment securities-non taxable 424,524 308,647 Other interest income 509,969 543,559 ------------ ------------ Total interest income 15,885,270 15,292,726 ------------ ------------ INTEREST EXPENSE: - ----------------- Interest on demand and savings deposits 1,797,181 2,130,091 Interest on time certificates of $100,000 and over 1,154,426 756,002 Interest on time certificates less than $100,000 2,361,392 1,627,071 ------------ ------------ Total interest expense 5,312,999 4,513,164 NET INTEREST INCOME 10,572,271 10,779,562 - ------------------- PROVISION FOR LOAN LOSSES - 315,000 - ------------------------- ------------ ------------ NET INTEREST INCOME AFTER PROVISION - ---------------------------------- FOR LOAN LOSSES 10,572,271 10,464,562 - --------------- ------------ ------------ SERVICE CHARGES AND OTHER INCOME - -------------------------------- Service charges and fees 1,287,914 1,210,900 Merchant discount fees 373,357 298,935 Other fee income 408,144 346,255 Other income 162,513 122,181 ------------ ------------ Total other income 2,231,928 1,978,271 ------------ ------------ OTHER EXPENSES - -------------- Salaries and employee benefits 4,573,951 4,419,375 Occupancy expenses 641,467 602,844 Furniture and equipment 995,778 921,643 Advertising and promotion 400,149 292,574 Professional expenses 245,823 357,338 Office Expenses 548,569 501,615 Regulatory assessments 18,248 255,976 Merchant processing costs 379,452 305,946 Other OREO expenses 22,452 23,592 Other operating expenses 503,367 717,438 ------------ ------------ Total Other Expenses 8,329,257 8,398,341 ------------ ------------ INCOME BEFORE PROVISION FOR INCOME TAXES 4,474,942 4,044,492 - ---------------------------------------- PROVISION FOR INCOME TAXES 1,721,000 1,552,976 - -------------------------- ------------ ------------ NET INCOME $ 2,753,942 $ 2,491,516 - ---------- ------------ ------------ ------------ ------------ EARNINGS PER SHARE $ 0.98 $ 0.91 - ------------------ ------------ ------------ NUMBER OF SHARES USED IN COMPUTATION 2,800,000 2,749,000 - ------------------------------------ ------------ -----------
The accompanying notes are an integral part of these financial statements. F-30 BANK OF SANTA MARIA STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
OPERATING ACTIVITIES (Unaudited) Period Ended September 30, - -------------------------------------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------------------------------------- Net income $ 2,753,942 $ 2,491,516 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 837,020 807,379 Amortization of Goodwill 56,170 0 Provision for credit losses - 315,000 Amortization of premium/discounts on investment securities 265,460 53,101 Net loss (gain) from sale of fixed assets 51,612 (30,405) Net loss (gain) on sale of other real estate owned (34,972) 101,933 Net change in accrued interest, other assets and other liabilities 253,470 42,426 ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,182,702 3,780,950 INVESTING ACTIVITIES - -------------------------------------------------------------------------------------------------------------- Proceeds from maturities of securities held to maturity 27,916,923 19,905,000 Proceeds from maturities of securities held for sale 3,000,000 3,082,750 Purchases of held to maturity securities (25,720,465) (25,073,165) Purchases of available for sale securities (21,589,931) (2,915,230) Net (increase) decrease in loans 3,661,574 (2,173,073) Purchases of premises and equipment (2,391,121) (600,270) Proceeds from sales of other real estate owned 985,972 359,686 Proceeds from sales for fixed assets 63,366 40,904 Net cash received for purchase of Citizens Bank of Paso Robles - Note 1 8,067,071 0 ------------- ------------- NET CASH USED BY INVESTING ACTIVITIES (6,006,611) (7,373,398) FINANCING ACTIVITIES - -------------------------------------------------------------------------------------------------------------- Net increase(decrease) in demand deposits and savings accounts (14,571,234) (2,929,707) Net increase(decrease) in time deposits 13,831,507 10,086,718 Payments for dividends/distributions (964,192) (258,396) Proceeds from exercise of stock options 137,500 508,883 ------------- ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES (1,566,419) 7,407,498 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,390,328) 3,815,050 Cash and cash equivalents at beginning of year 29,201,603 25,029,270 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,811,275 $ 28,844,319 ------------- ------------- ------------- ------------- Supplemental disclosures of cash flow information: Loans transferred to other real estate owned $ 836,000 $ 180,000 Cash paid during the period for interest $ 5,264,631 $ 4,254,286 Cash paid during the period for income taxes $ 1,758,007 $ 1,509,181
The accompanying notes are an integral part of these financial statements. F-31 BANK OF SANTA MARIA STATEMENT OF CHANGES IN CAPITAL FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
NET UNREALIZED COMMON SHARES ADJUSTMENT IN ------------- AVAILABLE FOR NUMBER OF UNDIVIDED SALE SHARES AMOUNT PROFITS SECURITIES TOTAL - --------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1996 2,748,261 $ 8,512,498 $ 18,946,368 $ 44,731 $ 27,503,597 Proceeds from exercise of stock options 16,000 137,500 137,500 Dividends paid (964,192) (964,192) Net income for the period 2,753,942 2,753,942 Adjustment in Available for Sale Securities, Net of Taxes of $67,490 (101,235) (101,235) --------- ----------- ------------ --------- ------------ Balance at September 30, 1996 2,764,261 $ 8,649,998 $ 20,736,118 ($ 56,504) $ 29,329,612 ---------- ----------- ------------ --------- ------------ ---------- ----------- ------------ --------- ------------
The accompanying notes are an integral part of these financial statements. F-32 NOTES TO FINANCIAL STATEMENTS FOR PERIODS ENDING SEPTEMBER 30, 1996 AND 1995. NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements for interim periods are unaudited. In the opinion of management, all material adjustments necessary for fair presentation of the interim financial statements have been included. Interim period financial statements are not necessarily indicative of results to be expected for the entire year. A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows: INVESTMENT SECURITIES Securities held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts over the period to maturity, or to an earlier call, if appropriate, on a straight-line basis. Such securities include those that management intends and has the ability to hold into the foreseeable future. Securities would be considered available for sale if they would be sold under certain conditions, among these being changes in interest rates, fluctuations in deposit levels or loan demand, or need to restructure the portfolio to better match the maturity or interest rate characteristics of liabilities with assets. Securities classified as available for sale are accounted for at their current fair value rather than amortized historical cost. Unrealized gains or losses are not recognized as current income, but rather as an increase or decrease of capital through a separate reserve. LOANS, FEES AND ALLOWANCE FOR POSSIBLE LOAN LOSSES Loans are carried at amounts advanced less payments collected. Interest on loans is accrued on a simple interest basis, except where management believes that serious doubt exists as to the repayment of the loan. When a loan is placed on non-accrual status, previously accrued and uncollected interest for the current year is reversed from income. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to make all payments due according to the contractual terms of the loan agreement. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. For impairment recognized in accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN (SFAS No. 114), the entire change in present value of expected cash flows is reported as provision for credit losses in the same manner in which impairment initially was recognized or as a reduction in the amount of provision for credit losses that otherwise would be reported. F-33 Loan origination fees offset by certain direct origination costs are deferred and recognized over the contractual life of the loan as an adjustment to the yield. The unrecognized fees and costs are reported either as a reduction of the loan principal outstanding, or, if deferred costs are greater than deferred fees, as additions to the applicable loan grouping. Commitment fees are deferred and recognized over the term of the commitment. Most deferred fees and costs are recognized using the interest method. The determination of the balance in the allowance for possible loan losses is based on an analysis of the loan portfolio and reflects an amount which, in management's judgment, is adequate to provide for potential loan losses after giving consideration to the character of the loan portfolio, current economic conditions, past loan loss experience and such other factors as warrant recognition in estimating loan losses. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. OTHER REAL ESTATE OWNED Other real estate owned, which represents real estate acquired through foreclosure, or deed in lieu of foreclosure, is reported at the fair value of the property at the time of transfer to other real estate owned, reduced by estimated selling expenses. Any subsequent operating expenses, or income, reductions in estimated values, and gains or losses on disposition of such properties are charged to current operations. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation, which is computed principally on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of their economic lives or the term of the lease. INCOME TAXES Income taxes are accounted for by the asset and liability method as required by Statement of Financial Accounting Standards No. 109, "ACCOUNTING FOR INCOME TAXES" (SFAS 109). Deferred tax liabilities or assets are established for temporary differences between financial and tax reporting basis and are subsequently adjusted to reflect changes in tax rate expected to be in effect when the temporary differences reverse. A valuation allowance is established for any deferred tax asset for which realization is not likely. STATEMENT OF CASH FLOWS For purposes of reporting cash flows, cash and cash equivalents include, cash on hand, amounts due from banks and Federal funds sold. Generally, Federal funds are purchased and sold for one day periods. EARNINGS PER SHARE Earning per common share are based on the weighted average number of shares outstanding during the year plus shares issuable upon the assumed exercise of outstanding common stock options. F-34 RECLASSIFICATION Certain reclassifications were made to prior years' presentations to conform to the current year. These reclassifications are of a normal recurring nature. All prior years' numbers have been restated to give effect for the acquisition of Templeton National Bank on a pooling of interest basis. As the acquisition of Citizens Bank of Paso Robles, N.A. was treated as a purchase, no restatement of prior period numbers was required. GOODWILL In accordance with the purchase method of accounting, the assets and liabilities of purchased banking and financial organizations were stated at estimated fair values at the date of acquisition. The excess of cost over fair value of net assets acquired has been accounted for as goodwill and is being amortized on the straight line method for a 15 year period. NOTE B - INVESTMENT SECURITIES Securities have been classified in the Statements of Condition according to management's intent. The carrying amount of securities and their approximate fair values at September 30, 1996, were as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value - ----------------------------------------------------------------------------------------------- 1996: Available for Sale Securities: U.S. Treasury securities $ 4,961,360 $ 26,894 $ 1,718 $ 4,986,536 U.S. Government and agency securities 17,637,992 12,268 131,619 17,518,641 ------------ ------------ ------------ ------------- $ 22,599,352 $ 39,162 $ 133,337 $ 22,505,177 ------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------- 1996: Held to Maturity Securities U.S. Treasury securities $ 3,202,668 $ 10,124 $ 431 $ 3,212,361 U.S. Government and agency securities 46,627,245 35,536 412,858 46,249,923 Obligations of states and Political subdivisions 11,628,553 45,214 8,765 11,665,002 Other debt securities 3,031,442 22,515 29,697 3,024,260 ------------ ------------ ------------ ------------- $ 64,489,908 $ 113,389 $ 451,751 $ 64,151,545 ------------ ------------ ------------ ------------- ------------ ------------ ------------ -------------
There were no gross realized gains or gross realized losses on sales of available for sale securities. The Bank does not expect to realize either gains or losses shown in the above schedule. The Bank fully expects to hold these securities to maturity/call date at which time the amortized cost and market value will be the same as the par value of the bond. F-35 NOTE B (CONTINUED) At September 30, 1996 and 1995, investment securities having an amortized cost of approximately $5,027,168 and $4,990,990 respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. The amortized cost and estimated market value of all debt securities as of September 30, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Held to Maturity Available for Sale ---------------------------------------------------------- Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value ---------------------------------------------------------- Due in one year or less $ 20,725,823 $ 19,334,816 $ 11,520,400 $ 11,502,750 Due after one year to five years 42,897,175 43,137,271 11,078,952 11,002,427 Due after five years to ten years 866,910 1,679,458 - - Due after ten years - - - - ------------- ------------- ------------- ------------- TOTAL $ 64,489,908 $ 64,151,545 $ 22,599,352 $ 22,505,177 ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
F-36 NOTE C - LOANS The Bank's loan portfolio consists primarily of loans to borrowers within Santa Barbara and San Luis Obispo counties. Although the Bank seeks to avoid concentrations of loans to a single industry, loans to the agricultural community are listed separately, as in total, they exceed 10% of all loans outstanding as of September 30, 1996 and 1995. Concentrations also can occur based upon a single class of collateral. Real estate and real estate associated businesses are among the principal industries in the Bank's market area and, as a result, the Bank's loan and collateral portfolios are, to some degree, concentrated in those industries. Real estate related loans, net of deferred fees and costs at September 30, 1996 and September 30, 1995, were as follows: Real estate related: September 30, September 30, 1996 1995 ---- ---- Construction and land development $ 14,169,000 $ 15,513,000 Home equity credit lines 20,321,000 18,204,000 Residential properties 17,329,000 14,963,000 Commercial properties 40,077,000 41,178,000 Farmland 5,343,000 4,885,000 ------------ ------------ $ 97,239,000 $ 94,743,000 ------------ ------------ ------------ ------------ The Bank also originates real estate loans for sale to governmental agencies and institutional investors. At September 30, 1996, the Bank had approximately $1,000,000 in loans to be sold, and, at September 30, 1995, the Bank had approximately $656,000 available for sale. The Bank was servicing approximately $40,545,000 in loans previously sold as of the end of September, 1996 and September, 1995. Impairment of loans having recorded investments of $690,089 as of September 30, 1996, has been recognized in conformity with SFAS No. 114. The average recorded investment in such impaired loans during this period was $719,088. The total allowance for loan losses related to these loans was $289,962 as of September 30, 1996. Interest income on impaired loans of $14,671 was recognized for cash payments received in 1996. A summary of the changes in the allowance for possible credit losses follows: 1996 1995 ---- ---- Balance at beginning of year $ 2,536,916 $ 1,974,237 Adjustment due to merger with Citizens 228,022 253,488 Additions to the allowance charged to expense - 315,000 Recoveries on loans charged off 76,084 72,700 ------------ ------------ Subtotal 2,841,022 2,615,425 Less: loans charged off 260,977 407,764 ------------ ------------ Balance as of September 30 $ 2,580,045 $ 2,207,661 ------------ ------------ ------------ ------------ F-37 NOTE D - PREMISES AND EQUIPMENT A summary of premises and equipment follows: September 30, 1996 September 30, 1995 ------------------ ------------------ Land $ 2,940,913 $ 1,623,724 Buildings and improvements 8,186,093 7,404,643 Leasehold improvements - 15,424 Furniture, fixtures, and equipment 6,787,220 6,583,645 ----------- ----------- Subtotal 17,914,226 15,627,436 Less accumulated depreciation/amortization 5,862,755 5,258,440 ----------- ----------- TOTAL $12,051,469 $10,368,996 ----------- ----------- ----------- ----------- NOTE E - STOCK OPTION PLAN In 1978, the Bank adopted a stock option plan under which the Bank's Common shares may be issued to officers and key employees at no less than 100% of the fair market value at the date the options were granted. This plan expired in 1988. There are, however, 15,000 options outstanding, (but not yet exercised from this plan) which do not expire until 1998. In 1989, the Bank adopted a stock option plan under which up to 209,360 shares of the Bank's Common shares may be issued to directors, officers and key employees at not less than 100% of the fair market value at the date the options are granted. The two for one stock split increased the shares in the plan available and granted, but not exercised by 208,960. Changes in the number of shares subject to option during the periods ending September 30, 1996 and September 30, 1995, have been restated to recognize the effect of the merger with Templeton National Bank. These numbers have been summarized as follows: Period Ended Sept. 30, 1996 Sept. 30, 1995 -------------- -------------- Outstanding at beginning of year 153,900 153,300 Options granted($13.50-$14.25 per share) 19,500 21,500 Options forfeited 600 2,450 Options exercised 16,000 11,000 -------------- -------------- Outstanding at end of period 156,800 161,350 -------------- -------------- -------------- -------------- Total option price $ 1,758,375 $ 1,725,025 -------------- -------------- -------------- -------------- Options exercisable 59,300 51,500 -------------- -------------- -------------- -------------- Available for future grant 99,520 118,420 -------------- -------------- -------------- -------------- F-38 NOTE F - FINANCIAL COMMITMENTS In the normal course of business, the Bank enters into financial commitments to meet the financing needs of its customers. These Financial commitments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk not recognized in the Bank's financial statements. The Bank's exposure to credit loss, in the event of nonperformance on commitments to extend credit and standby letters of credit, is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for loans reflected in the financial statements. As of September 30, 1996, the Bank had the following outstanding financial commitments whose contractual amount represents credit risk: Commitments to extend credit $ 44,504,066 Standby letters of credit 743,505 ------------ $ 45,247,571 ------------ ------------ 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. Standby letters of credit are conditional commitments to guarantee the performance of a Bank customer to third party. Since many of the commitments and standby letters of credit are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the bank, is based on management's credit evaluation of the customer. The majority of the Bank's commitments to extend credit and standby letters of credit are secured by real estate. NOTE G - RELATED PARTY TRANSACTIONS In the ordinary course of business, the Bank has granted loans to certain officers, directors and the companies with which they are associated. In the Bank's opinion, all loans and loan commitments to such parties are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. The aggregate amount of loans made to officers and directors for the period ending September 30, 1996, was $5,137,219. An analysis of loans to the Bank's officers and directors for the fiscal period ending December 31, 1995, is shown below: Balance at January 1,1995 $6,432,851 Additions 3,014,355 Payments 3,768,980 ---------- Balance at December 31, 1995 $5,678,226 ---------- ---------- F-39 NOTE H - 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 on the next page) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of September 30, 1996, that the Bank meets all capital adequacy requirements to which it is subject. The Bank's actual capital amounts and ratios are presented in the following table: IN THOUSANDS
To be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual Purposes Provisions ------ -------- ---------- Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------------------------------------------------------------------------- As of September 30, 1996: - ------------------------- Total Capital to Risk-Weighted Assets $29,833 15.90% $ 15,011 8.00% $18,764 10.00% Tier 1 Capital to Risk-Weighted Assets $27,485 14.65% $ 7,505 4.00% $11,258 6.00% Tier 1 Capital to Average Assets $27,485 9.49% $ 11,761 4.00% $9,382 5.00% As of September 30, 1995: - ------------------------- Total Capital to Risk-Weighted Assets $28,938 14.62% $ 15,840 8.00% $19,800 10.00% Tier 1 Capital to Risk-Weighted Assets $26,730 13.49% $ 7,920 4.00% $11,880 6.00% Tier 1 Capital to Average Assets $26,730 10.58% $ 10,190 4.00% $12,738 5.00%
The California Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the lessor of (1) the bank's undivided profits or (2) the bank's net income for its last three fiscal years less the amount of any distribution made by the bank to shareholders during the same period. Under these restrictions, approximately $7,112,000 was available for payment of dividends at December 31, 1995. Banking regulations require that all banks maintain a percentage of their deposits as reserves at the Federal Reserve Bank. During the period ended September 30, 1996, required reserves averaged approximately $3,609,000. F-40 NOTE I - BUSINESS COMBINATION WITH CITIZEN'S BANK OF PASO ROBLES, N.A. At the close of business on May 3, 1996, Bank of Santa Maria acquired Citizens' Bank of Paso Robles, N.A. The method used to record this business combination was the purchase method of accounting. Assets and liabilities were recorded at fair values. The excess of cost over fair value of net assets acquired became goodwill. Pro forma information for the period and for the corresponding period in the preceding year is disclosed below as if both banks were combined at the beginning of this reporting period. The income figure for Citizens' Bank for 1995, is that reported for the full nine months. The corresponding figure for 1996, includes only that income (net income) prior to the merger. Nine month Nine month period ended period ended September 30, 1996 September 30, 1995 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Interest and non-interest income(1) Bank of Santa Maria (as reported) $18,117,198 $17,270,998 Citizens Bank of Paso Robles (as reported) 1,024,332 2,399,272 ----------- ----------- $19,141,530 $19,670,270 ----------- ----------- ----------- ----------- Net Income Bank of Santa Maria (as reported) $ 2,753,942 $ 2,491,516 Citizens Bank of Paso Robles (as reported) 9,134 166,768 ----------- ----------- $ 3,076 $ 658,284 ----------- ----------- ----------- ----------- ADJUSTMENTS Data Processing expense (2) 60,942 106,410 Courier expense (2) 7,527 10,350 Goodwill (3) (43,920) (98,820) Depreciation (4) (14,489) (42,821) Citizens' Bank merger expense (5) 4,236 0 ----------- ----------- NET INCOME $ 2,907,372 $ 633,403 ----------- ----------- ----------- ----------- Net income per share for Bank of Santa Maria as restated $ 1.04 $ 0.96 ----------- ----------- Number of shares used in computation 2,800,000 2,749,000 ----------- ----------- (1) There are no adjustments required to restate income due to merger. (2) The cost of both data processing and courier expenses of Citizen's Bank, as reported, would have been fully eliminated if the merger had taken place at the beginning of the period. (3) The historical established goodwill amortization is assumed to have been begun at the beginning of each period. (4) This is the historically established increase in depreciation on assets placed into operations as required to incorporate Citizens' into the Bank's operating system. (5) Assuming that the merger was completed at the beginning of each period, the historical recorded merger related expenses for Citizens' Bank would not have occurred during 1996. No adjustment was required for 1995, as there were no merger expenses as of the September 30, 1995 date. F-41 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article V of the Registrant's Articles of Incorporation provides that the liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. Article VI of the Registrant's Articles of Incorporation provides that the corporation is authorized to provide for the indemnification of agents (as defined in Section 317 of the California General Corporation Law) of the corporation in excess of that expressly permitted by such Section 317 for breach of duty to the corporation and its shareholders to the fullest extent permissible under California law. Article III of the Registrant's Bylaws provides, in pertinent part, that each person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another foreign or domestic corporation or other entity, shall be indemnified by the Registrant to the full extent permitted by the General Corporation Law of the State of California or any other applicable laws. Article III also authorizes the registrant to enter into one or more agreements with any person which provides for indemnification greater or different than that provided for in that Article. Both the Registrant and its proposed wholly-owned subsidiary, Bank of Santa Maria, have entered into indemnification agreements with their respective officers and directors in the forms incorporated by reference as Exhibit 10.1 to this Registration Statement. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted pursuant to the foregoing provisions to directors, officers or persons controlling the Registrant, the Registrant has been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in said Act and is therefore unenforceable. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits. EXHIBIT NO. EXHIBIT ----------- ------- 2.1 Plan of Reorganization and Merger Agreement - Annex I of Written Consent Statement/Prospectus incorporated by reference 3.1 Articles of Incorporation of the Registrant. - 1 - 3.2 Amendment to Articles of Incorporation of Registrant 3.3 Bylaws of the Registrant 4.1 Specimen Certificate evidencing shares of Registrant's Common Stock 4.2 Stockholder Agreement Covering Issuance and Compulsory Repurchase of Organizing Shares of Registrant - Annex II of Written Consent Statement/Prospectus incorporated by reference 5.1 Opinion of Knecht & Hansen 8.1 Tax Opinion of Vavrinek, Trine, Day & Co. 10.1 Form of Indemnification Agreement 10.2 BSM Bancorp 1996 Stock Option Plan and form of Stock Option Agreement 10.3 Form of Written Consent 10.4 Nipomo Branch Land Lease 10.5 Lompoc Branch Lease 10.6 Unisys License and Service Agreement 10.7 Information Technology, Inc. 21.1 Subsidiary of BSM Bancorp 23.1 Consent of Vavrinek, Trine, Day & Co. 23.2 Consent of Knecht & Hansen (included in Exhibit 5.1) _________________________________________ (b) Financial Statement Schedules All schedules are omitted because the required information is not applicable or is included in the Financial Statements of the Bank and the related notes. (c) Not applicable. - 2 - ITEM 22. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes to file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officer and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the Written Consent Statement/Prospectus pursuant to Item 4 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. (d) The undersigned Registrant hereby undertakes to supply by mans of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. - 3 - SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Maria, State of California, on November 25, 1996. BSM BANCORP a California corporation By /s/ William A. Hares ---------------------------------------- William A. Hares, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ William A. Hares President and Chief Executive November 25, 1996 - ------------------------- Officer (Principal Executive William A. Hares Officer and Director) /s/ F. Dean Fletcher Executive Vice President and November 25, 1996 - ------------------------- Chief Financial Officer F. Dean Fletcher (Principal Financial Officer and Accounting Officer) /s/ Armand R. Acosta Director November 25, 1996 - ------------------------- Armand R. Acosta /s/ Richard E. Adam Director November 25, 1996 - ------------------------- Richard E. Adam /s/ Fred L. Crandall, Jr. Director November 25, 1996 - ------------------------- Fred L. Crandall, Jr. /s/ A.J. Diani Director November 25, 1996 - ------------------------- A.J. Diani - 4 - /s/ Roger A. Ikola Director November 25, 1996 - ------------------------- Roger A. Ikola /s/ Toshiharu Nishino Director November 25, 1996 - ------------------------- Toshiharu Nishino /s/ Joseph Sesto, Jr. Director November 25, 1996 - ------------------------- Joseph Sesto, Jr. /s/ William L. Snelling Director November 25, 1996 - ------------------------- William L. Snelling /s/ Miitsuo Taniguchi Director November 25, 1996 - ------------------------- Mitsuo Taniguchi /s/ Joseph F. Ziemba Director November 25, 1996 - ------------------------- Joseph F. Ziemba - 5 - EX-3.1 2 ARTICLES OF INCORPORATION ARTICLES OF INCORPORATION OF BSM BANCORP The undersigned incorporator for the purpose of forming a corporation under the General Corporation Law of the State of California hereby certifies: ARTICLE I - NAME The name of this corporation is BSM BANCORP. ARTICLE II - PURPOSE The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE III - AGENT FOR SERVICE OF PROCESS The name and address in the State of California of this Corporation's initial agent for service of process is: Loren P. Hansen, Esquire Knecht & Hansen 1301 Dove Street, Suite 900 Newport Beach, California 92660 ARTICLE IV - AUTHORIZED STOCK (a) The Corporation is authorized to issue two classes of shares designated "Preferred Stock" and "Common Stock", respectively. The number of shares of Preferred Stock authorized to be issued is 25,000,000 and the number of shares of Common Stock authorized to be issued is 50,000,000. (b) The Preferred Stock may be divided into such number of series as the board of directors may determine. The board of directors is authorized to determine and alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The board of directors, within the limits and restrictions stated in any resolution or resolutions of the board of directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of such series subsequent to the issue of shares of that series. -1- ARTICLE V - DIRECTOR LIABILITY The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. ARTICLE VI - INDEMNIFICATION The Corporation is authorized to provide indemnification of agents (as defined in Section 317 of the Corporations Code) for breach of duty to the corporation and its stockholders through bylaw provisions or through agreements with agents, or both, in excess of the indemnification otherwise permitted by Section 317 of the Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the Corporations Code. ARTICLE VII - MEETINGS OF STOCKHOLDERS Meetings of stockholders may be held at such place as the Bylaws may provide. ARTICLE VIII - DIRECTORS A. NUMBER; VACANCIES. The number of directors of the Corporation shall be such number, as shall be provided from time to time in the Bylaws; provided, however, that no decrease in the number of directors shall have the effect of shortening the term of any incumbent director, and provided further, that no action shall be taken to decrease or increase the number of directors within the range stated in the Bylaws unless at least two-thirds of the directors then in office shall concur in said action. Vacancies in the board of directors of the Corporation, however caused, and newly created directorships shall be filled by a vote of two-thirds of the directors then in office, whether or not a quorum, and any director so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which the director has been chosen expires and when the director's successor is elected and qualified. IX - APPROVAL OF CERTAIN BUSINESS COMBINATIONS The stockholder vote required to approve Business Combinations (as hereinafter defined) shall be as set forth in this section. A.1. Except as otherwise expressly provided in this Article IX, the affirmative vote of the holders of (i) at least 66 2/3% of the outstanding shares entitled to vote -2- thereon (and, if any class or series of shares is entitled to vote thereon separately, the affirmative vote of the holders of at least 66 2/3% of the outstanding shares of each such class or series), and (ii) at least a majority of the outstanding shares entitled to vote thereon, not including shares deemed beneficially owned by a Related Person (as hereinafter defined), shall be required in order to authorize any of the following: (a) any merger or consolidation of the Corporation with or into a Related Person (as hereinafter defined); (b) any sale, lease, exchange, transfer or other disposition, including without limitation, a mortgage, or any other security device, of all or any Substantial Part (as hereinafter defined) of the assets of the Corporation (including without limitation any voting securities of a subsidiary) or of a subsidiary, to a Related Person; (c) any merger or consolidation of a Related Person with or into the Corporation or a subsidiary of the Corporation; (d) any sale, lease, exchange, transfer or other disposition of all or any Substantial Part of the assets of a Related Person to the Corporation or a subsidiary of the Corporation; (e) the issuance of any securities of the Corporation or a subsidiary of the Corporation to a Related Person; (f) the acquisition by the Corporation or a subsidiary of the Corporation of any securities of a Related Person; (g) any reclassification of the common stock of the Corporation, or any recapitalization involving the common stock of the Corporation; and (h) any agreement, contract or other arrangement providing for any of the transactions described in this Article. 2. Such affirmative vote shall be required notwithstanding any other provision of these Articles, any provision of law, or any agreement with any regulatory agency or national securities exchange which might otherwise permit a lesser vote or no vote. 3. The term "Business Combination" as used in this Article IX shall mean any transaction which is referred to in any one or more of subparagraphs A(1)(a) through (h) above. B. The provisions of paragraph A shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by any other provision of these Articles, any provision of law, or any agreement with any regulatory agency or national securities exchange, if the Business Combination shall have been approved by a majority vote of the Continuing Directors (as hereinafter defined); provided, however, that such approval -3- shall only be effective if obtained at a meeting at which a Continuing Director Quorum (as hereinafter defined) is present. C. For the purposes of this Article IX the following definitions apply: 1. The term "Related Person" shall mean and include (a) any individual, corporation, partnership or other person or entity which together with its "affiliates" (as that term is defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended), "beneficially owns" (as that term is defined in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended) in the aggregate 10% or more of the outstanding shares of the common stock of the Corporation; and (b) any "affiliate" (as that term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of any such individual, corporation, partnership or other person or entity. Without limitation, any shares of the common stock of the Corporation which any Related Person has the right to acquire pursuant to any agreement, or upon exercise or conversion rights, warrants or options, or otherwise, shall be deemed "beneficially owned" by such Related Person. 2. The term "Substantial Part" shall mean more than 25% of the total assets of the Corporation, as of the end of its most recent fiscal year ending prior to the time the determination is made. 3. The term "Continuing Director" shall mean any member of the Board of Directors of the Corporation who is unaffiliated with the Related Person and was a member of the board prior to the time that the Related Person became a Related Person, and any successor of a Continuing Director who is unaffiliated with the Related Person and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the board. 4. The term "Continuing Director Quorum" shall mean a majority of the Continuing Directors capable of exercising the powers conferred on them. X - AMENDMENT OF BYLAWS In furtherance and not in limitation of the powers conferred by statute, the Board of Directors of the Corporation is expressly authorized to make, repeal, alter, amend and rescind the Bylaws of the Corporation by a majority vote of the board. Notwithstanding any other provision of these Articles (and notwithstanding the fact that some lesser percentage may be specified by law), the Bylaws shall not be adopted, repealed, altered, amended or rescinded by the stockholders of the Corporation except by the vote of the holders of not less than 66 2/3% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the stockholders called for that purpose (provided that notice of such proposed adoption, -4- repeal, alteration, amendment or rescission is included in the notice of such meeting), or, as set forth above, by the Board of Directors. XI - AMENDMENT OF ARTICLES OF INCORPORATION The Corporation reserves the right to repeal, alter, amend or rescind any provision contained in these Articles in the manner now or hereafter prescribed by law, and all rights conferred on stockholders herein are granted subject to this reservation. Notwithstanding the foregoing, the provisions set forth in Articles VII, VIII, IX, X, and this Article XI may not be repealed, altered, amended or rescinded in any respect unless the same is approved by the affirmative vote of the holders of not less than 66 2/3% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as a single class) cast at a meeting of the stockholders called for that purpose (provided that notice of such proposed adoption, repeal, alteration, amendment or rescission is included in the notice of such meeting). Dated: November 11, 1996 /s/ Loren P. Hansen -------------------------------------- Loren P. Hansen Incorporator I hereby declare that I am the person who executed the foregoing Articles of Incorporation, which execution is my act and deed. /s/ Loren P. Hansen -------------------------------------- Loren P. Hansen Incorporator -5- EX-3.2 3 AMENDMENT TO ARTICLES OF INCORPORATION CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF BSM BANCORP William A. Hares and William L. Snelling certify that: 1. They are the President and Secretary, respectively, of BSM Bancorp, a California corporation. 2. Paragraphs B., C. and D. are added to Article VIII of the Articles of Incorporation of this Corporation, to read as follows: "B. The remaining provisions of this article shall become effective only when the Corporation becomes a listed corporation within the meaning of Section 301.5 of the Corporations Code, which provision refers to a corporation whose shares are traded on the New York Stock Exchange, American Stock Exchange, or National Market System-NASDAQ. C. CLASSIFIED BOARD. If the authorized number of directors is nine or more, then the board of directors shall be classified into three classes, the members of each class to serve for a term of three years. Notwithstanding the foregoing, the director whose term shall expire at any annual meeting shall continue to serve until such time as his successor shall have been duly elected and shall have qualified unless his position on the board of directors shall have been abolished by action taken to reduce the size of the board of directors prior to said meeting. Should the number of directors of the Corporation be reduced, the directorship(s) eliminated shall be allocated among classes as appropriate so that the number of directors in each class is as nearly as equal as possible. The Board of Directors shall designate, by the name of the incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no decrease in the number of directors shall have the effect of shortening the term of any incumbent director. Should the number of directors of the Corporation be increased, the additional directorships shall be allocated among classes as appropriate so that the number of directors in each class is as nearly as equal as possible. At the first annual meeting of shareholders held after the corporation qualifies as a listed corporation within the meaning of Section 301.5 of the Corporations Code, one-third of the directors shall be elected for a term of three years, 1 of 3 one-third of the directors shall be elected for a term of two years, and one-third of the directors shall be elected for a term of one year. If the number of directors is not divisible by three, the first extra director shall be elected for a term of three years and a second extra director, if any, shall be elected for a term of two years. At subsequent annual meetings of shareholders, a number of directors shall be elected equal to the number of directors with terms expiring at that annual meeting. Directors elected at each such annual meeting shall be elected for a term expiring with the annual meeting of shareholders three years thereafter. D. CUMULATIVE VOTING. The election of directors shall not be by cumulative voting. At each election of directors, each shareholder entitled to vote may vote all the shares held by that shareholder for each of several nominees for director up to the number of directors to be elected. The shareholder may not cast more votes for any single nominee than the number of shares held by that shareholder." 3. The foregoing amendments to the Articles of Incorporation have been duly approved by the Board of Directors. 4. The foregoing amendments to the Articles of Incorporation have been duly approved by the required vote of shareholders of Common Stock in accordance with Section 902 of the Corporations Code. The corporation has 150 shares of Common Stock issued and outstanding and no shares of Series A Preferred Stock issued and outstanding. The number of shares of Common Stock entitled to vote and voting in favor of each of the foregoing Amendments equaled or exceeded the vote required. The percentage vote of Common Stock required for the approval of the Amendments was more than 50% of the outstanding shares. 2 of 3 We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: November 22, 1996 /s/ William A. Hares ----------------------------------- William A. Hares /s/ William L. Snelling ----------------------------------- William L. Snelling 3 of 3 EX-3.3 4 BYLAWS OF THE REGISTRANT BYLAWS FOR THE REGULATION, EXCEPT AS OTHERWISE PROVIDED BY STATUTE OR ITS ARTICLES OF INCORPORATION, OF BSM BANCORP (a California corporation) ARTICLE I OFFICES Section 1.1. PRINCIPAL EXECUTIVE OFFICE. The principal executive office of the corporation is hereby fixed and located at 2739 Santa Maria Way, Santa Maria, California. The board of directors is hereby granted full power and authority to change said principal executive office from one location to another, subject to all regulatory approvals. Any such change shall be noted on the Bylaws by the Secretary, opposite this section, or this section may be amended to state the new location. Section 1.2. OTHER OFFICE. Other business offices may at any time be established by the board of directors at any place or places where the corporation is qualified to do business, subject to all regulatory approvals. ARTICLE II MEETINGS OF SHAREHOLDERS Section 2.1. PLACE OF MEETINGS. All annual or other meetings of shareholders shall be held at the principal executive office of the corporation, or at any other place within the State of California which may be designated either by the board of directors or by the written consent of all persons entitled to vote thereat and not present at the meeting, given either before or after the meeting and filed with the Secretary of the corporation. Section 2.2. ANNUAL MEETINGS. The annual meetings of shareholders shall be held on the 3rd Thursday of each May at 7:30 p.m., local time, provided, however, that should said day fall upon a legal holiday, then any such annual meeting of shareholders shall be held at the same time and place on the next day thereafter ensuing which is a full business day; provided further, that the board of directors may, by resolution adopted prior to the date fixed herein for an annual meeting, change the time and date for any annual meeting of the shareholders to any day which is not a legal holiday and is not more than 15 months or less than 9 months after the date of the preceding annual meeting of shareholders. At such meetings, directors shall be elected, reports of the affairs of the corporation shall be considered, and any other business may be transacted which is within the powers of the shareholders. Written notice of each annual meeting shall be given to each shareholder entitled to vote, either personally or by first class mail or other means of written -1- communication, charges prepaid, addressed to such shareholder at his address appearing on the books of the corporation or given by him to the corporation for the purpose of notice. If any notice or report addressed to the shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice or report to all other shareholders. If a shareholder gives no address, notice shall be deemed to have been given him if sent by mail or other means of written communication addressed to the place where the principal executive office of the corporation is situated, or if published at least once in some newspaper of general circulation in the county in which said principal executive office is located. All such notices shall be given to each shareholder entitled thereto not less than ten (10) days nor more than sixty (60) days before each annual meeting. Any such notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. An affidavit of mailing of any such notice in accordance with the foregoing provisions, executed by the Secretary, Assistant Secretary or any transfer agent of the corporation shall be prima facie evidence of the giving of the notice. Such notices shall specify: (a) the place, the date, and the hour of such meeting; (b) those matters which the board, at the time of the mailing of the notice, intends to present for action by the shareholders; (c) if directors are to be elected, the names of nominees intended at the time of the notice to be presented by management for election and a copy of Section 2.11 of these Bylaws; (d) the general nature of a proposal, if any, to take action with respect to approval of, (i) a contract or other transaction with an interested director, (ii) amendment of the articles of incorporation, (iii) a reorganization of the corporation as defined in Section 181 of the General Corporation Law, (iv) voluntary dissolution of the corporation, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any; and (e) such other matters, if any, as may be expressly required by statute. -2- Any information contained in a proxy statement sent with such notice or other soliciting material sent with the notice shall be deemed to be a part of the notice. Section 2.3. SPECIAL MEETINGS. Special meetings of the shareholders, for the purpose of taking any action permitted by the shareholders under the General Corporation Law and the articles of incorporation of this corporation, may be called at any time by the chairman of the board or the president, or by the board of directors, or by one or more shareholders holding not less than ten percent (10%) of the votes at the meeting. Upon request in writing that a special meeting of shareholders be called for any proper purpose, directed to the chairman of the board, president, vice-president or secretary by any person (other than the board) entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after receipt of the request. Except in special cases where other express provision is made by statute, notice of such special meetings shall be given in the same manner as for annual meetings of shareholders. In addition to the matters required by items (a); (b) if applicable, and (c) of the preceding Section, notice of any special meeting shall specify the general nature of the business to be transacted, and no other business may be transacted at such meeting except such business as properly relates to the procedural conduct of such meeting and is within the powers of the shareholders. Section 2.4. QUORUM. The presence in person or by proxy of the persons entitled to vote a majority of the voting shares at any meeting shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 2.5. ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but in the absence of a quorum no other business may be transacted at such meeting, except as provided in Section 2.4 above. When any shareholders' meeting, either annual or special, is adjourned for forty-five days or more, or if after adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. Except as provided above, it shall not be necessary to give any notice of the time and place of the adjourned meeting or of the business to be transacted thereat, other than by announcement of the time and place thereof at the meeting at which such adjournment is taken. -3- Section 2.6. VOTING. Unless a record date for voting purposes be fixed as provided in Section 5.1 of Article V of these Bylaws, then, subject to the provisions of Sections 702 through 704 of the Corporations Code of California (relating to voting of shares held by a fiduciary, in the name of a corporation, or in joint ownership), only persons in whose names shares entitled to vote stand on the stock records of the corporation at the close of business on the business day next preceding the day on which notice of the meeting is given or if such notice is waived, at the close of business on the business day next preceding the day on which the meeting of shareholders is held, shall be entitled to vote at such meeting, and such day shall be the record date for such meeting. Such vote may be oral or by ballot; provided, however, that all elections for directors must be by ballot upon demand made by a shareholder at any election and before the voting begins. If a quorum is present, except with respect to election of directors, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the General Corporation Law, the articles of incorporation or the Banking Law. Subject to the requirements of the remaining sentences of this section, and except as provided in the Articles of Incorporation, by Statute, or these Bylaws, every shareholder entitled to vote at any election for directors shall have the right to cumulate his votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which his shares are entitled, or to distribute his votes on the same principal among as many candidates as he shall think fit. No shareholder shall be entitled to cumulate votes unless the name of the candidate or candidates for whom such votes would be cast has been placed in nomination prior to the voting and at least one shareholder has given notice at the meeting prior to the voting, of such shareholder's intention to cumulate his votes. The remaining provisions of this section shall become effective only when the Corporation becomes a listed corporation within the meaning of Section 301.5 of the Corporations Code, which provision refers to a corporation whose shares are traded on the New York Stock Exchange, American Stock Exchange, or National Market System-NASDAQ. CLASSIFIED BOARD. The board of directors shall be classified into three classes, the members of each class to serve for a term of three years. Notwithstanding the foregoing, the director whose term shall expire at any annual meeting shall continue to serve until such time as his successor shall have been duly elected and shall have qualified unless his position on the board of directors shall have been abolished by action taken to reduce the size of the board of directors prior to said meeting. Should the number of directors of the Corporation be reduced, the directorship(s) eliminated shall be allocated among classes as appropriate so that the number of directors in each class is as nearly as equal as possible. The Board of Directors shall designate, by the name of the incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no decrease in the number of directors -4- shall have the effect of shortening the term of any incumbent director. Should the number of directors of the Corporation be increased, the additional directorships shall be allocated among classes as appropriate so that the number of directors in each class is as nearly as equal as possible. CUMULATIVE VOTING. The election of directors by the shareholders shall not be by cumulative voting. At each election of directors, each shareholder entitled to vote may vote all the shares held by that shareholder for each of several nominees for director up to the number of directors to be elected. The shareholder may not cast more votes for any single nominee than the number of shares held by that shareholder. At the first annual meeting of shareholders held after the corporation qualifies as a listed corporation within the meaning of Section 301.5 of the Corporations Code, one-third of the directors shall be elected for a term of three years, one-third of the directors shall be elected for a term of two years, and one-third of the directors shall be elected for a term of one year. If the number of directors is not divisible by three, the first extra director shall be elected for a term of three years and a second extra director, if any, shall be elected for a term of two years. At subsequent annual meetings of shareholders, a number of directors shall be elected equal to the number of directors with terms expiring at that annual meeting. Directors elected at each such annual meeting shall be elected for a term expiring with the annual meeting of shareholders three years thereafter. The candidates receiving the highest number of votes of shares entitled to be voted for them, up to the number of directors to be elected, shall be elected. Section 2.7. VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS. The transactions of any meeting of shareholders, either annual or special, however called and noticed, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, or who, though present, has, at the beginning of the meeting, properly objected to the transaction of any business because the meeting was not lawfully called or convened, or to particular matters of business legally required to be included in the notice, but not so included, signs a waiver of notice, or a consent to the holding of such meeting, or an approval of the minutes thereof. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in Section 2.2(d) of Article II, the waiver of notice or consent shall state the general nature of the proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects, at the beginning of the -5- meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice of the meeting if that objection is expressly made at the meeting. Section 2.8. ACTION WITHOUT MEETING. Directors may be elected without a meeting by a consent in writing, setting forth the action so taken, signed by all of the persons who would be entitled to vote for the election of directors; provided that, without notice, a director may be elected at any time to fill a vacancy (other than one created by removal) not filled by the directors, by the written consent of persons holding a majority of the outstanding shares entitled to vote for the election of directors. Any other action which, under any provision of the California General Corporation Law, may be taken at a meeting of the shareholders, may be taken without a meeting, and without notice except as hereinafter set forth, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Unless the consents of all shareholders entitled to vote have been solicited in writing: (a) Notice of any proposed shareholder approval of, (i) a contract or other transaction with an interested director, (ii) indemnification of an agent of the corporation as authorized by Section 3.15, of Article III, of these Bylaws, (iii) a reorganization of the corporation as defined in Section 181 of the General Corporation Law, or (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any, without a meeting by less than unanimous written consent, shall be given at least ten (10) days before the consummation of the action authorized by such approval; and (b) Prompt notice shall be given of the taking of any other corporate action approved by shareholders without a meeting by less than unanimous written consent, to those shareholders entitled to vote who have not consented in writing. Such notices shall be given in the manner and shall be deemed to have been given as provided in Section 2.2 of Article II of these Bylaws. Unless, as provided in Section 5.1 of Article V of these Bylaws, the board of directors has fixed a record date for the determination of shareholders entitled to notice of and to give such written consent, the record date for such determination shall be the day on which the first written consent is given. All such written consents shall be filed with the Secretary of the corporation. Any shareholder giving a written consent, or the shareholder's proxyholders, or a transferee of the shares, or a personal representative of the -6- shareholder, or their respective proxyholders, may revoke the consent by a writing received by the corporation prior to the time that written consents by the number of shares required to authorize the proposed action have been filed with the Secretary of the corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary of the corporation. Section 2.9. PROXIES. Every person entitled to vote shall have the right to do so either in person or by one or more agents authorized by a written proxy executed by such person or his duly authorized agent and filed with the Secretary of the corporation. Any proxy duly executed is not revoked and continues in full force and effect until, (i) an instrument revoking it or a duly executed proxy bearing a later date is filed with the Secretary of the corporation prior to the vote pursuant thereto, (ii) the person executing the proxy attends the meeting and votes in person, or (iii) written notice of the death or incapacity of the maker of such proxy is received by the corporation before the vote pursuant thereto is counted; provided, that no such proxy shall be valid after the expiration of eleven (11) months from the date of its execution, unless the person executing it specifies therein the length of time for which such proxy is to continue in force; provided further, that an irrevocable proxy satisfying the requirements of Section 705(e) of the General Corporations Law shall not be revoked except in accordance with its terms or if it becomes revocable under the provisions of Section 705(e) and (f) of said General Corporations Law. Section 2.10. INSPECTORS OF ELECTION. In advance of any meeting of shareholders, the board of directors may appoint any persons as inspectors of election to act at such meeting or any adjournment thereof. If inspectors of election be not so appointed, the chairman of any such meeting may, and on the request of any shareholder or his proxy shall, make such appointment at the meeting. The number of inspectors shall be either one (1) or three (3). If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one (1) or three (3) inspectors are to be appointed. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may, and on the request of any shareholder or a shareholder's proxy shall, be filled by appointment by the board of directors in advance of the meeting, or at the meeting by the chairman of the meeting. The duties of such inspectors shall be as prescribed in Section 707 of the General Corporation Law and shall include: determining the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining when the polls shall close; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders. In the determination of the validity and effect of proxies, the dates contained on the forms of proxy shall presumptively determine the order of execution of the proxies, regardless of the postmark dates on the envelopes in which they are mailed. In -7- making their determinations, the inspectors may consider whether proxies were solicited in accordance with applicable provisions of law. The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. Section 2.11. NOMINATION OF DIRECTORS. Nominations for election of members of the board of directors may be made by the board of directors or by any shareholder of any outstanding class of capital stock of the corporation entitled to vote for the election of directors. Notice of intention to make any nominations (other than for persons named in the notice of the meeting at which such nomination is to be made) shall be made in writing and shall be delivered or mailed to the president of the corporation by the later of the close of business 21 days prior to any meeting of shareholders called for the election of directors or 10 days after the date of mailing of notice of the meeting to shareholders. Such notification shall contain the following information to the extent known to the notifying shareholder: (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the number of shares of capital stock of the corporation owned by each proposed nominee; (d) the name and residence address of the notifying shareholder; (e) the number of shares of capital stock of the corporation owned by the notifying shareholder; (f) with the written consent of the proposed nominee, a copy of which shall be furnished with the notification, whether the proposed nominee has ever been convicted of or pleaded nolo contendere to any criminal offense involving dishonesty or breach of trust, filed a petition in bankruptcy, or been adjudged bankrupt. The notice shall be signed by the nominating shareholder and by the nominee. Nominations not made in accordance herewith shall be disregarded by the chairman of the meeting, and upon his instructions, the inspectors of election shall disregard all votes cast for each such nominee. The restrictions set forth in this paragraph shall not apply to nomination of a person to replace a proposed nominee who has died or otherwise become incapacitated to serve as a director between the last day for giving notice hereunder and the date of election of directors if the procedure called for in this paragraph was followed with respect to the nomination of the proposed nominee. ARTICLE III DIRECTORS Section 3.1. POWERS. Subject to limitations of the articles of incorporation and of the California General Corporation Law as to action to be authorized or approved by the shareholders, and subject to the duties of directors as prescribed by the Bylaws, all corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be controlled by, the board of directors. Without prejudice to such general powers, but subject to the same -8- limitations, it is hereby expressly declared that the directors shall have the following powers, to wit: First - To select and remove all the officers, agents and employees of the corporation, prescribe such powers and duties for them as may not be inconsistent with law, with the articles of incorporation or the Bylaws, fix their compensation and require from them security for faithful service. Second - To conduct, manage and control the affairs and business of the corporation, and to make such rules and regulations therefor not inconsistent with law, or with the articles of incorporation or the Bylaws, as they may deem best. Third - To change the principal executive office and principal office for the transaction of the business of the corporation from one location to another as provided in Article I, Section 1.1, hereof; to fix and locate from time to time one or more subsidiary offices of the corporation within or without the State of California, as provided in Article I, Section 1.2, hereof; to designate anyplace within the State of California for the holding of any shareholders' meeting or meetings; and to adopt, make and use a corporate seal, and to prescribe the forms of certificates of stock, and to alter the form of such seal and of such certificates from time to time, as in their judgment they may deem best, provided such seal and such certificates shall at all times comply with the provisions of law. Fourth - To authorize the issuance of shares of stock of the corporation from time to time, upon such terms as may be lawful. Fifth - To borrow money and incur indebtedness for the purposes of the corporation, and to cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations or other evidences of debt and securities therefor. Sixth - By resolution adopted by a majority of the authorized number of directors, to designate executive and other committees, each consisting of two or more directors, to serve at the pleasure of the board, and to prescribe the manner in which proceedings of such committees shall be conducted. Unless the board of directors shall otherwise prescribe the manner of proceedings of any such committees, meetings of such committees may be regularly scheduled in advance and may be called at any time by the chairman or any two members thereof; unless the board of directors otherwise prescribes, the other provisions of these Bylaws with respect to notice and conduct of meetings of the board shall govern. Any such committee, to the extent provided in a resolution of the board, shall have all of the authority of the board, except with respect to: (i) the approval of any action for which the General Corporation Law or the articles of incorporation also require shareholder approval; (ii) the filling of vacancies on the board or in any committee; -9- (iii) the fixing of compensation of the directors for serving on the board or on any committee; (iv) the adoption, amendment or repeal of the board; (v) the amendment or repeal of any resolution of Bylaws; (vi) any distribution to the shareholders, except at a rate or in a periodic amount or within a price range determined by the board; (vii) the appointment of other committees of the board or the members thereof; and (viii) taking any action which requires approval of a specified number or portion of the directors under any provision of law or regulation applicable specifically to banks. Section 3.2. NUMBER AND QUALIFICATION OF DIRECTORS. The number of directors of the corporation shall not be less than nine (9) nor more than seventeen (17) until changed by amendment of the articles of incorporation or by a bylaw amending this Section 3.2 duly adopted by the vote of the holders of a majority of the outstanding shares entitled to vote or written consent of the holders of a majority of the outstanding shares entitled to vote, provided that a proposal to reduce the authorized number or the minimum number of directors below five cannot be adopted. The exact number of directors shall be fixed from time to time, within the limits specified in the articles of incorporation or in this Section 3.2 (i) by resolution duly adopted by the board of directors; or (ii) by a bylaw or amendment thereof duly adopted by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by a written consent of the holders of a majority of the outstanding shares entitled to vote, or by the board of directors; or (iii) by approval of the shareholders (as defined in Section 153 of the General Corporation Law). Subject to the foregoing provisions for changing the number of directors, the number of directors of this corporation has been fixed at eleven (11). Section 3.3. ELECTION AND TERM OF OFFICE. Subject to the Articles of Incorporation, Statute or these Bylaws, and subject to Section 2.6 regarding Classified Board, the directors shall be elected at each annual meeting of shareholders but, if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose or by written consent in accordance with Section 2.8 of Article II of these Bylaws. All directors shall hold office until their respective successors are elected, subject to the General Corporation Law and the provisions of these Bylaws with respect to vacancies on the board. -10- Section 3.4. VACANCIES. A vacancy in the board of directors shall be deemed to exist (i) in case of the death, resignation or removal of any director, (ii) if a director has been declared of unsound mind by order of court or convicted of a felony, (iii) if the authorized number of directors be increased, or (iv) if the shareholders fail, at any annual or special meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at that meeting. The number of directors of the Corporation shall be such number, as shall be provided from time to time in the Bylaws; provided, however, that no decrease in the number of directors shall have the effect of shortening the term of any incumbent director, and provided further, that no action shall be taken to decrease or increase the number of directors within the range stated in the Bylaws unless at least two-thirds of the directors then in office shall concur in said action. Vacancies in the board of directors of the Corporation, however caused, and newly created directorships shall be filled by a vote of two-thirds of the directors then in office, whether or not a quorum, and any director so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which the director has been chosen expires and when the director's successor is elected and qualified. Any director may resign effective upon giving written notice to the chairman of the board, the president, the Secretary or the board of directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the board of directors accepts the resignation of a director tendered to take effect at a future time, the board or the shareholders shall have power to elect a successor to take office when the resignation is to become effective, as provided in the previous paragraph. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of his term of office. Section 3.5. PLACE OF MEETING. Regular meetings of the board of directors shall be held at any place within the State of California which has been designated from time to time by resolution of the board or by written consent of all members of the board. In the absence of such designation regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held either at a place so designated, within or without the State of California, or at the principal executive office. Section 3.6. ORGANIZATION MEETING. Immediately following each annual meeting of shareholders, the board of directors shall hold a regular meeting at the place of said annual meeting or at such other place as shall be fixed by the board of directors, for the purpose of organization, election of officers, and the transaction of other business. Call and notice of such meetings are hereby dispensed with. -11- Section 3.7. OTHER REGULAR MEETINGS. Other regular meetings of the board of directors shall be held without call on the 3rd Wednesday of each month, at 9:00 a.m. (unless another date and time is fixed by the board); provided, however, should said day fall upon a legal holiday, then said meeting shall be held at the same time on the next day thereafter ensuing which is a full business day. Notice of all such regular meetings of the board of directors is hereby dispensed with. Section 3.8. SPECIAL MEETINGS. Special meetings of the board of directors for any purpose or purposes shall be called at any time by the chairman of the board, the president, or by any two directors. Written notice of the time and place of special meetings shall be delivered personally to each director or communicated to each director orally, by telephone, or by telegraph or mail, charges prepaid, addressed to him at his address as it is shown upon the records of the corporation or, if it is not so shown on such records or is not readily ascertainable, at the place at which the meetings of the directors are regularly held. In case such notice is mailed or telegraphed, it shall be deposited in the United States mail or delivered to the telegraph company in the place in which the principal executive office of the corporation is located at least forty-eight hours prior to the time of the holding of the meeting. In case such notice is delivered personally or by telephone, as above provided, it shall be so delivered at least twenty-four hours prior to the time of the holding of the meeting. Such mailing, telegraphing or delivery, personally, orally or by telephone, as above provided, shall be due, legal and personal notice to such director. Any notice shall state the date, place and hour of the meeting and may state the general nature of the business to be transacted, and other business may be transacted at the meeting. Section 3.9. ACTION WITHOUT MEETING. Any action by the board of directors may be taken without a meeting if all members of the board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the board and shall have the same force and effect as a unanimous vote of such directors. Section 3.10. ACTION AT A MEETING: QUORUM AND REQUIRED VOTE. Presence of a majority of the authorized number directors at a meeting of the board of directors constitutes a quorum for the transaction of business, except as hereinafter provided., or as provided in the Articles of Incorporation or Statute. Members of the board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in a meeting as permitted in the preceding sentence constitutes presence in person at such meeting. Except as provided in the Articles of Incorporation, Statute or Bylaws, every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the board of directors, unless a greater number, or the same number after disqualifying one or more directors from voting, is required by law, by -12- the articles of incorporation, or by these Bylaws. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of director, provided that any action taken is approved by at least a majority of the required quorum for such meeting. Section 3.11. VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS. The transactions of any meeting of the board of directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum is present and if, either before or after the meeting, each of the directors not present or who, though present, has prior to the meeting or at its commencement, protested the lack of proper notice to him, (i) signs a written waiver of notice or a consent to holding such meeting or an approval of the minutes thereof, or (ii) waives notice and withdraws his objection. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a director at any meeting shall constitute a waiver of notice of such meeting, unless a director attends for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called, noticed, or convened; provided, however, if after stating his objection, the objecting director continues to attend and by his attendance participates in any matters other than those to which he objected, he shall be deemed to have waived notice of such meeting and withdrawn his objections. Section 3.12. ADJOURNMENT. A majority of the directors present at any director's meeting, either regular or special, may adjourn from time to time until the time fixed for the next regular meeting of the board. Section 3.13. NOTICE OF ADJOURNMENT. If the meeting is adjourned for more than 24 hours, notice of any adjournment to another time or place must be given prior to the time of the adjourned meeting to the directors who were not present at the time of adjournment. Otherwise notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place be fixed at the meeting adjourned. Section 3.14. FEES AND COMPENSATION. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the board. Section 3.15. INDEMNIFICATION OF AGENTS OF THE CORPORATION; PURCHASE OF LIABILITY INSURANCE. (a) The corporation shall, to the maximum extent and in the manner permitted by the California Corporations Code (the "Code"), indemnify each of its directors against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection -13- with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 3.15 a "director" of the corporation includes any person (i) who is or was serving at the request of the corporation (ii) as a director of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. (b) The corporation shall have the power, to the extent and in the manner permitted by the Code, to indemnify each of its officers, employees and agents against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an officer, employee or agent of the corporation. For purposes of this Section 3.15, an "officer", "employee" or "agent" of the corporation includes any person (i) who is or was an officers, employee, or agent of the corporation, (ii) who is or was serving at the request of the corporation as an officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an officer, employee or agent of the corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. (c) Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Section 3.15 shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnification party is not entitled to be indemnified as authorized in this Section 3.15. Expenses incurred in defending any civil or criminal action or proceeding for which indemnification s permitted pursuant to Section 3.15 may be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Section 3.15. (d) The indemnification provided by this Section 3.15 shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the Articles of Incorporation. (e) The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was an agent of the corporation against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Section 3.15. -14- (f) No indemnification or advance shall be made under this Section 3.15, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (1) That it would be inconsistent with a provision of the Articles of Incorporation, these Bylaws, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. ARTICLE IV OFFICERS Section 4.1. OFFICERS. The officers of the corporation shall be a president, a vice-president, a Secretary and a cashier. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more additional vice-presidents, one or more assistant secretaries, one or more assistant cashiers, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article. One person may hold two or more offices, except that the offices of president and Secretary shall not be held by the same person. Section 4.2. ELECTION. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 4.3 or Section 4.5 of this Article, shall be chosen annually by the board of directors, and each shall hold his office until he shall resign or shall be removed or otherwise disqualified to serve, or his successor shall be elected and qualified. Section 4.3. SUBORDINATE OFFICERS, ETC. The board of directors may appoint, and may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office, for such period, have such authority and perform such duties as are provided in the Bylaws or as the board of directors may from time to time determine. Section 4.4. REMOVAL AND RESIGNATION. Any officer may be removed, either with or without cause, by the board of directors, at any regular or special meeting thereof, or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors (subject, in each case, to the rights, if any, of an officer under any contract of employment). -15- Any officer may resign at any time by giving written notice to the board of directors or to the president, or to the Secretary of the corporation, without prejudice however, to the rights, if any, of the corporation under any contract to which such officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 4.5. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in the Bylaws for regular appointments to such office. Section 4.6. CHAIRMAN OF THE BOARD. The chairman of the board, if there shall be such a person, shall be an officer of the board only and not of the corporation, and shall, if present, preside at all meetings of the board of directors. He may exercise and perform such other powers and duties as may be from time to time assigned to him by the board of directors or prescribed by the Bylaws, in which case he may be deemed to be an officer of the corporation. Section 4.7. PRESIDENT. Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction and control of the business and officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the chairman of the board, or if there be none, at all meetings of the board of directors. He shall be ex-officio a member of all the standing committees (except the audit committee), including the executive committee, if any, and shall have the general powers, and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or the Bylaws. Section 4.8. VICE-PRESIDENT. In the absence or disability of the president, the vice-presidents in order of their rank as fixed by the board of directors or, if not ranked, the vice-president designated by the board of directors, shall perform all the duties of the president, and when so acting shall have all the powers of, and be subject to all the restrictions upon the president. The vice-presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors or the Bylaws. Section 4.9. SECRETARY. The Secretary shall record or cause to be recorded, and shall keep or cause to be kept, at the principal executive office and such other place as the board of directors may order, a book of minutes of actions taken at all meetings of directors and shareholders, with the time and place of holding, whether regular or special, and, if special, how -16- authorized, the notice thereof given, the names of those present at director's meetings, the number of shares present or represented at shareholder's meetings, and the proceedings thereof. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all the meetings of the shareholders and of the board of directors required by the Bylaws or by law to be given, and he shall keep the seal of the corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by the Bylaws. Section 4.10. CASHIER. The cashier shall be the chief financial officer of the corporation and shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, surplus and shares. The books of account shall at all reasonable times be open to inspection by any director. The cashier shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as cashier and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or the Bylaws. ARTICLE V MISCELLANEOUS Section 5.1. RECORD DATE. The board of directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders or entitled to give consent to corporate action in writing without a meeting, to receive any report, to receive any dividend or distribution, or any allotment of rights, or to exercise rights in respect to any change, conversion, or exchange of shares. The record date so fixed shall be not more than sixty (60) days nor less than ten (10) days prior to the date of any meeting, nor more than sixty (60) days prior to any meeting or any other event for the purpose of which it is fixed. When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at any such meeting, to give consent without a meeting, to receive any report, to receive a dividend, distribution, or allotment of -17- rights, or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the articles of incorporation or Bylaws. Section 5.2. INSPECTION OF CORPORATE RECORDS. The accounting books and records, the record of shareholders, and minutes of proceedings of the shareholders and the board and committees of the board of this corporation and any subsidiary of this corporation shall be open to inspection upon the written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as the holder of such voting trust certificate. Such inspection by a shareholder or holder of a voting trust certificate may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. Section 5.3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the board of directors. Section 5.4. ANNUAL AND OTHER REPORTS. The board of directors of the corporation shall cause an annual report to be sent to the shareholders not later than 120 days after the close of the fiscal or calendar year. The requirement for such annual report is dispensed with so long as this corporation has less than 100 shareholders of record. Such report shall contain a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that such statements were prepared without audit from the books and records of the corporation. A shareholder or shareholders holding at least five percent of the outstanding shares of any class of the corporation may make a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the current fiscal year ended more than 30 days prior to the date of the request and a balance sheet of the corporation as of the end of such period and, in addition, if no annual report for the last fiscal year has been sent to shareholders, the annual report for the last fiscal year. The corporation shall use its best efforts to deliver the statement to the person making the request within 30 days thereafter. A copy of any such statements shall be kept on file in the principal executive office of the corporation for 12 months and they shall be exhibited at all reasonable times to any shareholder demanding an examination of them or a copy shall be mailed to such shareholder. The corporation shall, upon the written request of any shareholder, mail to the shareholder a copy of the last annual income statement which it has prepared -18- and a balance sheet as of the end of the period. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report thereon, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that such financial statements were prepared without audit from the books and records of the corporation. Section 5.5. CONTRACTS, ETC., HOW EXECUTED. The board of directors, except as in the Bylaws otherwise provided, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances; and, unless so authorized by the board of directors, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or to any amount. Section 5.6. CERTIFICATE FOR SHARES. Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the chairman or vice-chairman of the board or the president or a vice-president and by the chief financial officer or the Secretary or any Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. Any such certificate shall also contain such legend or other statement as may be required by Section 418 of the General Corporation Law, the Corporate Securities Law of 1968, the federal securities laws, and any agreement between the corporation and the issuee thereof. No new certificate for shares shall be issued in lieu of an old certificate unless the latter is surrendered and cancelled at the same time; provided, however, that a new certificate will be issued without the surrender and cancellation of the old certificate if (1) the old certificate is lost, apparently destroyed or wrongfully taken; (2) the request for the issuance of the new certificate is made within a reasonable time after the owner of the old certificate has notice of its loss, destruction, or theft; (3) the request for the issuance of a new certificate is made prior to the receipt of notice by the corporation that the old certificate has been acquired by a bona fide purchaser; (4) the owner of the old certificate files a sufficient indemnity bond with or provides other adequate security to the corporation; and (5) the owner satisfies any other reasonable requirements imposed by the corporation. In the event of the issuance of a new certificate, the rights and liabilities of the corporation, and of the holders of the old and new certificates, shall be governed by the provisions of Section 8104 and 8405 of the California Commercial Code. -19- Section 5.7. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The president or vice-president and the Secretary or any Assistant Secretary of this corporation are authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted to said officers to vote or represent on behalf of this corporation any and all shares held by this corporation in any other corporation or corporations may be exercised either by such officers in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officers. Section 5.8. INSPECTION OF BYLAWS. The corporation shall keep in its principal executive office in California, the original or a copy of the Bylaws as amended or otherwise altered to date, certified by the Secretary, which shall be open to inspection by the Shareholders at all reasonable times during office hours. Section 5.9. CONSTRUCTION AND DEFINITIONS. Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the California General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of the foregoing, the masculine gender includes the feminine and neuter, the singular number includes the plural and the plural number includes the singular, and the term "person" includes a corporation as well as a natural person. ARTICLE VI AMENDMENTS Section 6.1. POWER OF SHAREHOLDERS. Except as provided in the Articles of incorporation, Statute, or thee bylaws, new Bylaws may be adopted or these Bylaws may be amended or repealed by the affirmative vote of a majority of the outstanding shares entitled to vote, or by the written assent of shareholders entitled to vote such shares, except as otherwise provided by law or by the articles of incorporation. Section 6.2. POWER OF DIRECTORS. Subject to the right of shareholders as provided in Section 6.1 of this Article VI to adopt, amend or repeal Bylaws, Bylaws may be adopted, amended or repealed by the board of directors provided, however, that the board of directors may adopt a bylaw or amendment thereof changing the authorized number of directors only for the purpose of fixing the exact number of directors within the limits specified in the articles of incorporation or in Section 3.2 of Article III of these Bylaws. -20- CERTIFICATE OF SECRETARY I, the undersigned, do hereby certify: 1. That I am duly elected, qualified, and acting Secretary of the BSM BANCORP, a California corporation; and 2. That the forgoing Bylaws, comprising 18 pages, constitute the Bylaws of the said Corporation as duly adopted by action of the Board of Directors of the Corporation duly taken on November 12, 1996. IN WITNESS HEREOF, I have hereunto subscribed my name and affix the seal of said Corporation this 12th day of November, 1996. /S/ WILLIAM L. SNELLING -------------------------------------------- William L. Snelling, Secretary -21- EX-4.1 5 SPECIMAN CERTIFICATE NUMBER SHARES 100 150 "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED BY THE COMMISSIONER'S RULES. ADDITIONALLY, THIS CERTIFICATE IS TRANSFERABLE ONLY UPON COMPLIANCE WITH PROVISIONS OF A STOCKHOLDER AGREEMENT DATED NOVEMBER 12, 1996." BSM BANCORP Incorporated under the laws of the State of California This certifies that William A. Hares is the record holder of fully paid shares of the Common Stock, no par value of BSM Bancorp, hereinafter designated "the Corporation", transferable on the books of the Corporation in person or by duly authorized attorney upon surrender of this Certificate properly endorsed or assigned. This Certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. Witness the seal of the Corporation and the signatures of its duly authorized officers. Dated: November 12, 1996 [Seal] /s/ William L. Snelling /s/ William A. Hares - ------------------------------- -------------------------------- William L. Snelling William A. Hares, Secretary President -1- A statement of all of the powers, designations, preferences, rights and restrictions granted to or imposed upon the respective classes and/or series of shares of stock of the corporation and upon the holders thereof may be obtained by any shareholder upon request and without charge, at the principal office of the corporation, and the corporation will furnish any shareholder, upon request and without charge, a copy of such statement. This Certificate and the shares represented hereby shall be held subject to all of the provisions of the Certificate of Incorporation and the Bylaws of the Corporation, and any amendments thereto, a copy of each of which is on file at the office of the Corporation, and made a part hereof as fully as though the provisions of said Certificate of Incorporation and Bylaws, and any amendments thereto, were imprinted in full on this Certificate, to all of which the holder of this Certificate, by acceptance hereof, assents and agrees to be bound. The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT-______ Custodian _______ (Cust) (Minor) TEN ENT - as tenants by the entireties Under Uniform Gifts to Minors Act__________ (State) JT TEN - as joint tenants with right of survivorship and not as tenants in common Additional abbreviations may also be used though not in the above list. ASSIGNMENT FOR VALUE received _______________________________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________ ________________________________________________________________________________ (NAME AND ADDRESS OF ASSIGNEE SHOULD BE PRINTED OR TYPEWRITTEN) _____________________________________________________ _____________________________________________________ _____________________________________________________ SHARES to transfer the said stock on the books of the within-named Corporation, with full power of substitution in the premises. Dated: ____________________________ ________________________________________ Signature -2- EX-5.1 6 OPINION OF KNECHT & HANSEN [LETTERHEAD] November 22, 1996 Board of Directors BSM Bancorp 2739 Santa Maria Way Santa Maria, California 93456 Re: BSM BANCORP COMMON STOCK Gentlemen: We are acting as counsel for BSM Bancorp in connection with the Registration under the Securities Act of 1933, as amended (the "Act"), of at least 2,764,261 shares of Common Stock, no par value (the "Shares") of BSM Bancorp, a California corporation. A registration statement on Form S-4 (the "Registration Statement") will be filed under the Act with respect to the offering of the shares. Based upon the examination of such instruments, documents and records as we deem necessary, including the Registration Statement, we are of the opinion that: 1. BSM Bancorp has been duly incorporated and is validly existing under the laws of the State of California. 2. The shares of BSM Bancorp, to be offered by BSM Bancorp, have been duly authorized and, when issued after such time as the Registration Statement becomes effective under the Act, will be legally issued, fully paid, and nonassessable under the laws of the State of California. Consent is hereby given to the filing of this opinion as an Exhibit to the Registration Statement and to the reference to this firm under the caption "Legal Opinions" in the Exhibits to the Registration Statement. Very truly yours, /s/ Loren P. Hansen ---------------------- Loren P. Hansen of Knecht & Hansen LPH/cb EX-8.1 7 TAX OPINION OF VAVRINEK EXHIBIT 8.1 [LETTERHEAD] November 26, 1996 Bank of Santa Maria 2739 Santa Maria Way Santa Maria, California 93456 RE: REGISTRATION STATEMENT ON FORM S-4 BANK OF SANTA MARIA BANCORP FEDERAL INCOME TAX CONSEQUENCES ------------------------------- To whom it may concern: We have acted as accountants to Bank of Santa Maria (the "Company") in connection with the Company's preparation of the Written Consent Statement/Prospectus (the "Prospectus") included within the Company's Registration Statement on Form S-4, filed with the United States Securites and Exchange Commission (the "SEC"). In that capacity, we hereby confirm to you our opinion as set forth under the caption "Bank Holding Company Reorganization - Certain Federal Income Tax Consequences". We hereby consent to the use of our name in the Prospectus under the heading "Bank Holding Company Reorganization - Certain Federal Income Tax Consequences". Sincerely, David L. Dayton for VAVRINEK, TRINE, DAY & CO. DLD/cw -EXHIBIT 8.1- EX-10.1 8 FORM OF INDEMNIFICATION AGREEMENT INDEMNITY AGREEMENT THIS AGREEMENT is made as of the date of ______________, 19__ by and between BSM BANCORP, a California corporation (the "Company"), and __________________ ("Indemnitee"), a director and/or officer of the Company, with reference to the following facts: A. The Company and the Indemnitee recognize the importance of providing the Company's directors and executive officers ("officers") with advance information and guidance with respect to the legal risks and potential liabilities to which they may become personally exposed as a result of performing their duties for the Company; B. The Company and the Indemnitee are aware of the substantial growth in the number of lawsuits filed against corporate officers and directors in connection with their activities in such capacities and by reason of their status as such; C. The Company and the Indemnitee recognize that the cost of defending against such lawsuits, whether or not meritorious, could be beyond the financial resources of most directors and officers of the Company; D. The Company and the Indemnitee recognize that the legal risks and potential liabilities, and the threat thereof, and the resultant substantial time and expense endured in defending against such lawsuits, bear no reasonable or logical relationship to the amount of compensation received by the Company's directors and officers. These factors pose a significant deterrent to, and induce increased reluctance on the part of, experienced and capable individuals to serve as directors and officers of the Company; E. The Company has investigated the availability and deficiency of liability insurance to provide its directors and officers with adequate protection against the foregoing legal risks and potential liabilities It has concluded that such insurance does not provide adequate protection to its directors and officers, is unreasonably expensive, or both. Thus, it would be in the best interests of the Company and its shareholders to contract with its directors and certain officers, including the Indemnitee, to indemnify them to the fullest extent permitted by law (as in effect on the date hereof, or, to the extent any amendment may expand such permitted indemnification, as hereinafter in effect) against personal liability for actions taken in the performance of their duties to the Company; F. The Board of Directors of the Company has concluded that it is not only reasonable and prudent but necessary for the Company to contractually obligate itself to indemnify in a reasonable and adequate manner its directors and officers and -1- to assume for itself maximum liability for expenses and damages in connection with claims lodged against such directors and officers for their line of duty decisions and actions; G. The General Corporation Law of the State of California (the "Code") empowers the Company to indemnify certain persons serving as a director, officer, employee or agent of the Company or a person who serves at the request of the Company as a director, officers, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, and further specifies in Code Section 317(g) that the indemnification provisions set forth in the Code "shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent such additional rights to indemnification are authorized in the articles of the corporation"; thus, Section 317 does not by itself limit the extent to which the Company may indemnify persons serving as its officers and directors; H. In order to give proper effect to the indemnification provisions provided under the Code, the Articles of Incorporation which permit the Company to indemnify its directors and officers to the fullest extent permissible under the Code, subject to the limitations set forth in Section 204(a)(11) of the Code; I. The Board of Directors of the Company has determined, after due consideration and investigation of this Agreement and various other options available in lieu hereof, that this Agreement is reasonable, prudent and necessary to promote and ensure the best interests of the Company and its shareholders. This Agreement is intended to: (1) induce and encourage highly experienced and capable persons such as the Indemnitee to serve as officers and/or directors of the Company; (2) encourage such persons to resist what they consider unjustifiable suits and claims made against them in connection with the good faith performance of their duties to the Company, secure in knowledge that certain expenses, costs and liabilities incurred by them in their defense of such litigation will be borne by the Company and that they will receive the maximum protection against such risks and liabilities legally may be made available to them; and (3) encourage directors to exercise their best business judgment regarding matters which come before the Board of Directors without undue concern for the risk that claims may be made against them on account thereof. J. The Company desires to have the Indemnitee continue to serve as an officer and/or director of the Company free from concern for unpredictable, inappropriate or unreasonable legal risk and personal liabilities by reason of his acting in good faith in the performance of his duty to the Company. The Indemnitee desires to continue to serve as an officer and/or director of the Company, provided, and on the express condition, that he is furnished with the indemnity set forth herein. -2- NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below and based on the premises set forth above, the Company and Indemnitee do hereby agree as follows: 1. DEFINITIONS. For the purposes of this Agreement, the following definitions shall apply: (a) The term "Proceeding" shall include, for the purposes of this Agreement, any threatened, pending or completed action, suit or proceeding, whether brought in the name of the Company or otherwise and whether of a civil, criminal or administrative or investigative nature, including, but not limited to, actions, suits or proceedings brought under and/or predicated upon the Securities Act of 1933, as amended, and/or the Securities Exchange Act of 1934, as amended, and/or their respective state counterparts and/or any rule or regulation promulgated thereunder, in which Indemnitee may be or may have been involved as party or otherwise (other than plaintiff against the Company), by reason of the fact that Indemnitee is or was an Agent of the Company by reason any action taken by him or of any inaction on his part while acting as such Agent. (b) The term "Expenses", includes, without limitation, all direct and indirect costs of any type or nature whatsoever, including, without limitation, expenses of investigations, judicial or administrative proceedings or appeals, court costs, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under law or Paragraph 8 of this Agreement, actually and reasonably incurred by the Indemnitee in connection with the investigation, preparation, defense or appeal of a except that "Expenses" shall not include the amount of any judgment, fine or penalty actually levied against Indemnitee or amounts paid in settlement of a Proceeding. (c) References to "other enterprise" shall include employee benefit plans; reference to "fines" shall include any excise tax assessed with respect to any employee benefit plan; references to "serving at the request of the Company" shall include any service as a director of the Company which imposes duties on, or involves services by, such director with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acts in good faith and in a manner he reasonably believes to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner in the best interests of the Company as referred to in this Agreement. (d) For the purposes of this Agreement, Indemnitee shall be deemed to have been acting as an "Agent" if he was acting in his capacity as an officer of the Company, director of the Company, member of a committee of the Board of Directors of this Company, or agent of the Company, or was serving as a director or officer of another foreign or domestic corporation, partnership, joint venture, trust or any other -3- enterprise at the request of the Company, or was a director and/or officer of the foreign or domestic corporation which was a predecessor corporation to the Company or of another enterprise at the request of such predecessor corporation, whether or not he is serving in such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. (e) The term "Applicable Standard" means that a person acted in good faith and in a manner such person believed to be in the best interests of the Company; except that in a criminal proceeding, such person must also have had no reasonable cause to believe that such person's conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create any presumption, or establish, that the person did not meet the "Applicable Standard." (f) "Independent Legal Counsel" shall include any firm of attorneys selected by the Board of Directors or by the regular corporate counsel for the Company from a list of firms which meet minimum size criteria and other reasonable criteria established by the Board of Directors of the Company, so long as such firm has not represented the Company, Indemnitee or any entity controlled by Indemnity within the proceeding 24 calendar months. 2. AGREEMENT TO SERVE. Indemnitee agrees to serve or continue to serve as a Director and/or officer of the Company to the best of his abilities at the will of the Company or under separate contract, as the case may be, for so long as Indemnitee is duly elected or appointed and qualified until such time as he tenders his resignation in writing. Nothing contained in this Agreement is intended to create in Indemnitee any right to continued employment. 3. INDEMNIFICATION IN THIRD PARTY PROCEEDINGS. Subject to the "Limitations on Indemnification" provided in Paragraph 10 herein, or any other such limitations provided under the Code or any amendment thereto, the Company shall indemnify Indemnitee if Indemnitee is made a party to or threatened to be made a party to, or otherwise involved in, any Proceeding (other than a Proceeding which is an action by or in the right of the Company to procure a judgment in its favor), by reason of the fact that Indemnitee is or was an Agent of the Company. This indemnification shall apply, and be limited, to and against all Expenses, judgments, fines, settlements (if the settlement is approved in advance by the Company) and other amounts actually and reasonably incurred by Indemnitee in connection with the defense or settlement of the Proceeding, so long as it is determined pursuant to Paragraph 8 of this Agreement or by the court before which such action was brought, that Indemnitee met the Applicable Standard. 4. INDEMNIFICATION IN PROCEEDINGS BY OR IN THE NAME OF THE COMPANY. Subject to the "Limitations on Indemnification" provided in Paragraph 10 herein, or any -4- other such limitations provided under the Code or any amendment thereto, the Company shall indemnify Indemnitee if Indemnitee is made a party to, or threatened to be made a party to, or otherwise involved in, any Proceeding which is an action by or in the right of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was an Agent of the Company. This indemnity shall apply, and be limited, to and against all Expenses actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if: (a) Indemnitee met the Applicable Standard (except that the Indemnitee's belief regarding the best interests of the Company need not have been reasonable); and (b) the action is not settled or otherwise disposed of without court approval. No indemnification shall be made under this Section 4 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Company in the performance of such person's duty to the Company, unless, and only to the extent that, the court in which such Proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnification for the Expenses which such court shall determine. 5. EXPENSE OF SUCCESSFUL INDEMNITEE. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits in defense of any Proceeding or in defense of any claim, issue or matter therein, including the dismissal of an action or portion thereof without prejudice, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred in connection therewith. 6. SCOPE. Notwithstanding any other provision of this Agreement but subject to Section 9, the Company shall indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by other provisions of this Agreement, the Company's amended Articles of Incorporation, the Company's Bylaws or by statute. 7. ADVANCEMENT AND REPAYMENT OF EXPENSES. The Expenses incurred by Indemnitee in defending and investigating any Proceeding shall be advanced by the Company prior to the final disposition of such Proceeding after receiving from Indemnitee the copies of invoices presented to Indemnitee for such Expenses, but only if Indemnitee shall undertake in the form attached as Exhibit "A" to repay such advances to the extent that it is ultimately determined that the Indemnitee is not entitled to indemnification. Any advance required hereunder shall be deemed to have been approved by the Board of Directors of the Company to the extent this Agreement was so approved. In determining whether or not to make an advance hereunder, the ability of Indemnitee to repay shall not be a factor. However, in a proceeding brought by the Company directly, in its own right (as distinguished from an action brought derivatively or by any receiver or trustee), the Company shall have discretion whether or not to make the advances called for hereby if independent legal counsel advises in writing that the Company has probable cause to believe, and the Company does -5- believe, that Indemnitee did not act in good faith with regard to the subject matter of the Proceeding or a material portion thereof. In the event that the Company shall be obligated under this Section 7 to pay the Expenses of any Proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such Proceeding, with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Proceeding, provided that (i) Indemnitee shall have the right to employ his counsel in any such Proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, or (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such Proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 8. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION. Any and/or 7 hereof shall be made no later than 45 days after receipt of a written request of Indemnitee in accordance with Paragraph 12 hereof. In all other cases, indemnification shall be made by the Company only if authorized in the specific case, upon a determination that indemnification of the Agent is proper under the circumstances and the terms of this Agreement by: (a) a majority vote of a quorum of the Board of Directors (or a duly constituted committee thereof), consisting of directors who are not parties to such proceeding; (b) if such a quorum of directors is not obtainable, by independent legal counsel in a written opinion, (c) approval of the shareholders (as defined in Section 153 of the California Corporations Code), with the Indemnitee shares not being entitled to vote thereon; or (d) the court in which such proceeding is or was pending upon application made by the Company, the Indemnitee or any person rendering services in connection with Indemnitee's defense, whether or not the Company opposes such application. The right to indemnification or advances as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. The burden of proving that indemnification or advances are not appropriate shall be on the Company. Neither the failure of the Company (including its Board of Directors or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification or advances are proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including its Board of Directors or independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall be a -6- defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct. Indemnitee's Expenses incurred in connection with successfully establishing his right to indemnification or advances, in whole or in part, in any such Proceeding shall also be indemnified by the Company; provided, however, that if Indemnitee is only partially successful, only an equitably allocated portion of such Expenses shall be indemnified. If Indemnitee is deceased and is entitled to indemnification under any provision of this Agreement, the Company shall indemnify Indemnitee's estate and his or her spouse, heirs, administrators and executors against and shall assume all of the Expenses, judgments, penalties and fines actually and reasonably incurred by or for Indemnitee or his estate, in connection with the investigation, defense, settlement or appeal of any such action, suit or proceeding; provided, however, that when requested in writing by the spouse of Indemnitee, and/or the heirs, executors or administrators of Indemnitee's estate, the Company shall provide appropriate evidence of the Agreement set our herein to indemnify Agent against and to itself assume such costs, liabilities and Expenses. If Indemnitee is entitled under any provision of this Agreement or indemnification by the Company for some or a portion of the Expenses, judgments, fines or penalties actually and reasonably incurred by him in the investigation, defense, appeal or settlement of any Proceeding but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion (determined on an equitable basis) of such Expenses, judgments, fines or penalties to which Indemnitee is entitled. Company's obligations to advance or indemnify hereunder shall be deemed satisfied to the extent of any payments made by an insurer on behalf of Company or Indemnitee. 9. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. (a) The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Articles of Incorporation, the Bylaws, any agreement, any vote of shareholders or disinterested directors, the General Corporation Law of the State of California, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a director or officer and shall inure to the benefit of the heirs and personal representatives of Indemnitee. (b) In the event of any changes, after the date of this Agreement, in any applicable law, statute, or rule which expand the right of a California corporation to indemnify its officers and directors, the Indemnitee's rights and the Company's obligations under this Agreement shall be expanded to the full extent permitted by -7- such changes. In the event of any changes in any applicable law, statute or rule, which narrow the right of a California corporation to indemnify a director or officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder. 10. LIMITATIONS ON INDEMNIFICATION. The Company shall not be liable under this Agreement to make any payment in connection with any claim made against the Indemnitee: (a) for which payment is actually made to the Indemnitee under a valid and collectible insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (b) for which the Indemnitee is indemnified by the Company otherwise than pursuant to this Agreement; (c) for an accounting of profits made from the purchase or sale by the Agent of securities for the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; (d) brought about or contributed to by the active and deliberate dishonesty of the Indemnitee; however, notwithstanding the proceeding clause, the Indemnitee shall be protected to the extent otherwise provided under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless a judgment or other final adjudication thereof adverse to the Indemnitee shall establish that he committed (i) acts of active and deliberate dishonesty (ii) with actual dishonest purpose and intent, which acts were material to the cause of action so adjudicated; (e) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; (f) for acts or omissions that the Indemnitee believes to be contrary to the best interests of the Company or its shareholders that involve the absence of good faith on the part of the Indemnitee; (g) for any transaction from which the Indemnitee derived an improper personal benefit; (h) for acts or omissions that show a reckless disregard for the Indemnitee's duty to the Company or its shareholders in circumstances in which the Indemnitee was aware, or should have been aware, in the ordinary course of -8- performing Indemnitee's duties, of a risk of serious injury to the Company or its shareholders; (i) for acts or omissions that constitute unexcused matter of inattention that amounts to abdication of the Indemnitee's duty to the Company or shareholders; (j) under Section 310 of the Code [i.e., for any transaction between the Company and (a) a director, or (b) a corporation, firm, or association in which the director has a material financial interest]; (k) under Section 316 of the Code [i.e., for any distribution to shareholders, and for any loan or guaranty to officers or directors, that violate specified provisions of the Code]; or (l) for any such further acts or omissions delineated under Code Section 204(a)(10) or any successor statute thereto. 11. SAVINGS CLAUSE. If this Agreement or any portion hereof is invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee as to Expenses, judgments, fines and penalties with respect to any Proceeding to the full extent permitted by any applicable portion of this Agreement by any other applicable law. 12. NOTICES. Indemnitee shall, as a condition precedent to his right to be indemnified under this Agreement, give to the Company notice in writing within 30 days after he becomes aware of any claim made against him for which he believes, or should reasonably believe, indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Company's main office, Attention: President (or such other address the Company shall designate in writing to Indemnitee). Failure to 80 notify Company shall not relieve Company of any liability which it may have to Indemnitee otherwise than under this Agreement. All notices, requests, demands and other communications (collectively "notices") provided for under this Agreement shall be in writing (including communications by telephone, telex or telecommunication facilities providing facsimile transmission) and mailed (postage prepaid and return receipt requested), telegraphed, telexed, transmitted or personally served to each party at the address set forth at the end of this Agreement or at such other address as any party affected may designate in a written notice to the other parties in compliance with this section. All such notices shall be effective when received; provided, however, receipt shall be deemed to be effective within three (3) business days of any properly addressed notice having been deposited in the mail, within twenty-four (24) hours from the time electronic -9- transmission was made, or upon actual receipt of electronic delivery, whichever occurs first. No costs, charges or expenses for which indemnity shall be sought hereunder shall be incurred without the Company's consent, which consent shall not be unreasonably withheld. 13. MAINTENANCE OF LIABILITY INSURANCE. (a) The Company hereby agrees that so long as Indemnitee shall continue to serve as a director and/or officer of the Company and thereafter so long as Indemnitee shall be subject to any possible Proceeding, the Company, subject to Section 13(b), shall use its best efforts to obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") which provides Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer. (b) Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines in good faith that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, the coverage provided by such insurance is limited by exclusions 80 as to provide an insufficient benefit or the Indemnitee is covered by similar insurance maintained by a subsidiary or parent of the Company. (c) If, at the time of the receipt of a notice of a claim pursuant to Section 12 hereof, the Company has D&O Insurance in effect, the Company shall give prompt notice of the commencement of such Proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies. 14. CHOICE OF LAW. This Agreement should be interpreted and enforced in accordance with the laws of the State of California, including applicable statutes of limitation and other procedural statutes. 15. AMENDMENTS. Provisions of this Agreement may be waived, altered, amended or repealed in whole or in part only by the written consent of all parties. 16. PARTIES IN INTEREST. Nothing in this Agreement, whether express or implied, is intended to confer any right or remedies under or by reason of this Agreement to any persons other than the parties to it and their respective successors -10- and assigns (including an estate of Indemnitee), nor is anything in this Agreement intended to relieve or discharge the obligation or liability of any third persons to any party hereto. Furthermore, no provision of this Agreement shall give any third persons any right of subrogation or action against any party hereto. 17. SEVERABILITY. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. If any portion of this Agreement shall be deemed by a court of competent jurisdiction to be unenforceable, the remaining portions shall be valid and enforceable only if, after excluding the portion deemed to be unenforceable, the remaining terms shall provide for the consummation of the transaction contemplated herein in substantially the same manner as originally set forth at the date this Agreement was executed. 18. SUCCESSOR AND ASSIGNS. All terms and conditions of this Agreement shall be binding upon and shall inure to the benefit of the parties and their respective transferees, successors and assigns; provided, however, that this Agreement and all rights, privileges, duties and obligations of the parties, may not be assigned or delegated by any party without the prior written consent of the other parties. 19. COUNTERPARTS. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which together shall be deemed an original, but all of which together shall constitute one and the same instrument. 20. ENTIRE AGREEMENT. Except as provided in Section 9 hereof, this Agreement represents and contains the entire agreement and understanding between and among the parties, and all previous statements or understandings, whether express or implied, oral or written, relating to the subject matter hereof are fully and completely extinguished and superseded by this Agreement. This Agreement shall not be altered or varied except by a writing duly signed by all of the parties. 21. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. -11- IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. BSM BANCORP By: ------------------------------- A.J. Diani Chairman of the Board By: ------------------------------- William L. Snelling Secretary "Company" ----------------------------------- Address: -------------------------- -------------------------- "Indemnitee" -12- EXHIBIT A UNDERTAKING THIS UNDERTAKING is made as of the date of _____________, 19__ by ___________________ ("Indemnitee") with reference to the following facts: A. Indemnitee and BSM Bancorp (the "Company") have executed an Indemnity Agreement dated _____________, 19__ permitting Indemnitee indemnification of all direct and indirect costs of Proceedings (as defined in the Indemnity Agreement) by reason of the fact that Indemnitee is an Agent (as defined in the Indemnity Agreement) of the Company and has met the Applicable Standard (as defined in the Indemnity Agreement). B. Paragraph 7 of the Indemnity Agreement allows for the Company to advance Expenses incurred by the Indemnitee in defending and investigating any Proceeding prior to the final disposition of such Proceeding after receiving from Indemnitee copies of invoices presented to Indemnitee for such Expenses, but only if Indemnitee shall undertake to repay such advances to the extent that it is ultimately determined that the Indemnitee is not entitled to indemnification, as well as other requirements contained in the Indemnity Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below and based on the premises set forth above, the Indemnitee does hereby undertake to the Company as follows: 1. The Expenses incurred by Indemnitee in defending and investigating any Proceeding shall be advanced by the Company prior to the final disposition of such Proceeding after receiving from Indemnitee copies of invoices presented to Indemnitee for such Expenses. 2. Indemnitee hereby undertakes to repay such advances to the extent that it is ultimately determined that the Indemnitee is not entitled to indemnification, 3. Any advance required hereunder shall be deemed to have been approved by the Board of Directors of the Company to the extent the Indemnity Agreement was approved. 4. In determining whether or not to make an advance hereunder, the ability of Indemnitee to repay shall not be a factor. 5. In a proceeding brought by the Company directly, in its own right (as distinguished from an action brought derivatively or by any receiver or trustee), the -13- Company shall have discretion whether or not to make the advances called for in the Indemnification Agreement if independent legal counsel advises in writing that the Company has probable cause to believe, and the Company does believe, that Indemnitee did not act in good faith with regard to the subject matter of the Proceeding or a material portion thereof. 6. The remainder of the terms and conditions of the Indemnity Agreement and Paragraph 7 regarding assumption of the defense by the Company shall also remain applicable. IN WITNESS WHEREOF, the undersigned has executed this Undertaking as of the date first above written. ----------------------------- Address: ----------------------------- ----------------------------- "Indemnitee" -14- EX-10.2 9 BSM 1996 STOCK OPTION PLAN BSM BANCORP 1996 STOCK OPTION PLAN Adopted Novmeber 12, 1996 1. PURPOSE The purpose of the BSM Bancorp 1996 Stock Option Plan (the "Plan") is to strengthen BSM Bancorp (the "Corporation") and those corporations which are or hereafter become subsidiary corporations by providing additional means of attracting and retaining competent managerial personnel and by providing to participating directors, officers, and key employees added incentives for high levels of performance and for unusual efforts to increase the earnings of the Corporation and any Subsidiary corporations; and to allow consultants, business associates and others with business relationships with the opportunity to participate in the ownership of the Corporation and thereby have an interest in the success and increased value of the Corporation. The Plan seeks to accomplish these purposes and achieve these results by providing a means whereby such directors, officers, key employees, consultants, business associates and others may purchase shares of Common Stock of the Corporation pursuant to Stock Options granted in accordance with this Plan. Stock Options granted pursuant to this Plan are intended to be Incentive Stock Options or Non-Qualified Stock Options, as shall be determined and designated by the Stock Option Committee upon the grant of each Stock Option hereunder. -1- 2. DEFINITIONS For the purposes of this Plan, the following terms shall have the following meanings: (a) "COMMON STOCK." This term shall mean shares of the Corporation's no par value common stock, subject to adjustment pursuant to Paragraph 14 (Adjustment Upon Changes in Capitalization) hereunder. (b) "CORPORATION." This term shall mean BSM Bancorp, a California corporation. (c) "ELIGIBLE PARTICIPANT." This term shall mean: (i) all directors of the Corporation or any Subsidiary; (ii) all full time officers (whether or not they are also directors) of the Corporation or any Subsidiary; (iii) all full time key employees (as such persons may be determined by the Stock Option Committee from time to time) of the Corporation or any Subsidiary, and (iv) consultants, business associates or others with important business relationships with the Corporation. (d) "FAIR MARKET VALUE." This term shall mean the fair market value of the Corporation's Common Stock as determined in accordance with the Commissioner of Corporations Regulation Section 260.140.50, which generally provides that in determining whether the price is fair, predominant weight will be given to the following: (a) if securities of the same class are publicly traded on an active market of substantial depth, the recent market price of such securities; (b) if the securities of the same class have not been so publicly traded, the price at which securities of reasonable comparable corporations (if any) in the same industry are being traded, -2- subject to appropriate adjustments for the dissimilarities between the corporations being compared; or (c) in the absence of any reliable indicator under subsection (a) or (b), the earnings history, book value and prospects of the issuer in light of market conditions generally. (e) "INCENTIVE STOCK OPTION." This term shall mean a Stock Option which is an "Incentive Stock Option" within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended. (f) "NON-QUALIFIED STOCK OPTION." This term shall mean a Stock Option which is not an Incentive Stock Option. (g) "OPTION SHARES." This term shall mean shares of Common Stock which are covered by and subject to any outstanding unexercised Stock Option granted pursuant to this Plan. (h) "OPTIONEE." This term shall mean any Eligible Participant to whom a stock option has been granted pursuant to this Plan, provided that at least part of the Stock Option is outstanding and unexercised. (i) "PLAN." This term shall mean the BSM Bancorp 1996 Stock Option Plan as embodied herein and as may be amended from time to time in accordance with the terms hereof and applicable law. (j) "STOCK OPTION." This term shall mean the right to purchase from the Corporation a specified number of shares of Common Stock under the Plan at a price and upon terms and conditions determined by the Stock Option Committee. -3- (k) "STOCK OPTION COMMITTEE." The Board of Directors of the Corporation may select and designate a stock option committee consisting of at least three and not more than five persons, at least two of whom are directors, having full authority to act in the matters. Regardless of whether a Stock Option Committee is selected, the Board of Directors may act as the Stock Option Committee and any action taken by the Board of Directors as such shall be deemed to be action taken by the Stock Option Committee. All references in the Plan to the "Stock Option Committee" shall be deemed references to the Board of Directors acting as a stock option committee and to a duly appointed Stock Option Committee, if there be one. In the event of any conflict between any action taken by the Board of Directors acting as a Stock Option Committee and any action taken by a duly appointed Stock Option Committee, the action taken by the Board of Directors shall be controlling and the action taken by the duly appointed Stock Option Committee shall be disregarded. (l) "SUBSIDIARY." This term shall mean any subsidiary corporation of the Corporation as such term is defined in Section 425(f) of the Internal Revenue Code of 1986, as amended. 3. ADMINISTRATION (a) STOCK OPTION COMMITTEE. This Plan shall be administered by the Stock Option Committee. The Board of Directors of the Corporation shall have the right, in its sole and absolute discretion, to remove or replace any person from or on the Stock Option Committee at any time for any reason whatsoever. -4- (b) ADMINISTRATION OF THE PLAN. Any action of the Stock Option Committee with respect to the administration of the Plan shall be taken pursuant to a majority vote, or pursuant to the unanimous written consent, of its members. Any such action taken by the Stock Option Committee in the administration of this Plan shall be valid and binding, so long as the same is in conformity with the terms and conditions of this Plan. Subject to compliance with each of the terms, conditions and restrictions set forth in this Plan, including, but not limited to, those set forth in Section 6(a)(ii) hereof, the Stock Option Committee shall have the exclusive right, in its sole and absolute discretion, to establish the terms and conditions of any Stock Options granted under the Plan, including, without limitation, the power to: (i) establish the number of Stock Options, if any, to be granted hereunder, in the aggregate and with regard to any individual Eligible Participant; (ii) determine the time or times when such Stock Options, or any parts thereof, may be exercised; (iii) determine and designate which Stock Options granted under the Plan shall be Incentive Stock Options and which shall be Non-Qualified Stock Options; (iv) determine the Eligible Participants, if any, to whom Stock Options are granted; (v) determine the duration and purposes, if any, of leaves of absence which may be permitted to holders of unexercised, unexpired Stock Options without such constituting a termination of employment under the Plan; (vi) prescribe and amend the terms, provisions and form of any instrument or agreement setting forth the terms and conditions of every Stock Option granted hereunder; and (vii) make loans to or guarantee any obligations of any Optionees, except directors, in connection with the -5- exercise of Stock Options as specified in Section 8(d) hereof, whenever the Stock Option Committee determines that such loan or guarantee may reasonably be expected to benefit the corporation, subject to the provisions of Section 315(b) of the California General Corporations Law of 1977, as amended and subject to Regulations G, U and T promulgated by the Board of Governors of the Federal Reserve System pursuant to Section 7 of the Securities Exchange Act of 1934, if the Option Shares are listed on a stock exchange or are contained in the list of over-the-counter margin securities published by the Federal Reserve Board. (c) DECISIONS AND DETERMINATIONS. Subject to the express provisions of the Plan, the Stock Option Committee shall have the authority to construe and interpret the Plan, to define the terms used therein, to prescribe, amend, and rescind rules and regulations relating to the administration of the Plan, and to make all other determinations necessary or advisable for administration of the Plan. Determinations of the Stock Option Committee on matters referred to in this Section 3 shall be final and conclusive so long as the same are in conformity with the terms of this Plan. 4. SHARES SUBJECT TO THE PLAN Subject to adjustments as provided in Section 14 hereof, the maximum number of shares of Common Stock which may be issued upon exercise of Stock Options granted under this Plan is limited to 10% of the issued and outstanding shares of the Corporation up to a maximum of _________ shares in the aggregate. If any Stock Option shall be canceled, surrendered, or expire for any reason without having been -6- exercised in full, the unpurchased Option Shares represented thereby shall again be available for grants of Stock Options under this Plan. 5. ELIGIBILITY Only Eligible Participants shall be eligible to receive grants of Stock Options under this Plan. 6. GRANTS OF STOCK OPTIONS (a) GRANT. Subject to the express provisions and limitations of the Plan, the Stock Option Committee, in its sole and absolute discretion, may grant Stock Options to Eligible Participants of the Corporation, for a number of Option Shares, at the price(s) and time(s), on the terms and conditions and to such Eligible Participants as it deems advisable and specifies in the respective grants. Subject to the limitations and restrictions set forth in the Plan, an Eligible Participant who has been granted a Stock Option may, if otherwise eligible, be granted additional Stock Options if the Stock Option Committee shall so determine. The Stock Option Committee shall designate in each grant of a Stock Option whether the Stock Option is an Incentive Stock Option or a Non-Qualified Stock Option. (b) DATE OF GRANT AND RIGHTS OF OPTIONEE. The determination of the Stock Option Committee to grant a Stock Option shall not in any way constitute or be deemed to constitute an obligation of the Corporation, or a right of the Eligible Participant who is the proposed subject of the grant, and shall not constitute or be deemed to constitute the grant of a Stock Option hereunder unless and until both the Corporation and the Eligible Participant have executed and delivered the form of stock -7- option agreement then required by the Stock Option Committee as evidencing the grant of the Stock Option, together with such other instruments as may be required by the Stock Option Committee pursuant to this Plan; provided, however, that the Stock Option Committee may fix the date of grant as any date on or after the date of its final determination to grant the Stock Option (or if no such date is fixed, then the date of grant shall be the date on which the determination was finally made by the Stock Option Committee to grant the Stock Option), and such date shall be set forth in the stock option agreement. The date of grant as so determined shall be deemed the date of grant of the Stock Option for purposes of this Plan. (c) SHAREHOLDER-EMPLOYEES. Notwithstanding anything to the contrary contained elsewhere herein, a Stock Option shall not be granted hereunder to an Eligible Participant who owns, directly or indirectly, at the date of the grant of the Stock Option, more than ten percent (10%) of the total combined voting power of all classes of capital stock of the Corporation or a Subsidiary corporation, unless the purchase price of the Option Shares subject to said Stock Option is at least 110% of the Fair Market Value of the Option Shares, determined as of the date said Stock Option is granted. (d) MAXIMUM VALUE OF STOCK OPTIONS. Except as provided in paragraph (e) of this Section 6, the maximum aggregate Fair Market Value of Option Shares (determined as of the respective Stock Option grant dates) for which an Eligible Participant may be granted Incentive Stock Options in any calendar year shall not exceed $100,000, plus any "unused carryover amount." The unused carryover -8- amount, determined on a yearly basis, shall be equal to one-half (1/2) of the difference between $100,000 and the aggregate Fair Market Value (determined as of the respective Stock Option grant dates) of all of the Option Shares subject to Incentive Stock Options granted to the Optionee during the calendar year under the Plan. The provisions of Section 422A(c)(4) of the Internal Revenue Code of 1986, as amended, are incorporated herein by this reference for the purpose of the determination and application of the unused carryover amount. The aggregate fair market value (determined at the time the option is granted) of the stock with respect to which incentive stock options are exercisable for the first time by such individual under the terms of the Plan during any calendar year is limited to $100,000, but the value of stock for which options may be granted to an employee in a given year may exceed $100,000. (e) NON-QUALIFIED STOCK OPTIONS. All Stock Options granted by the Stock Option Committee which: (i) are designated at the time of grant as Incentive Stock Options but do not so qualify under the provisions of Section 422A of the Code or any regulations or rulings issued by the Internal Revenue Service for any reason; (ii) are in excess of the fair market value limitations set forth in Section 6(d); or (iii) are designated at the time of grant as Non-Qualified Stock Options, shall be deemed Non-Qualified Stock Options under this Plan. Non-Qualified Stock Options granted or substituted hereunder shall be so designated in the stock option agreement entered into between the Corporation and the Optionee. -9- 7. STOCK OPTION EXERCISE PRICE (a) MINIMUM PRICE. The exercise price of any Option Shares shall be determined by the Stock Option Committee, in its sole and absolute discretion, upon the grant of a Stock Option. Except as provided elsewhere herein, said exercise price shall not be less than one hundred percent (100%) of the Fair Market Value of the Common Stock represented by the Option Share on the date of grant of the related Stock Option. (b) EXCHANGED STOCK OPTIONS. Where the outstanding shares of stock of another corporation are changed into or exchanged for shares of Common Stock of the Corporation without monetary consideration to that other corporation, then, subject to the approval of the Board or Directors of the Corporation, Stock Options may be granted in exchange for unexercised, unexpired stock options of the other corporation, and the exercise price of the Option Shares subject to each Stock Option so granted may be fixed at a price less than one hundred percent (100%) of the Fair Market Value of the Common Stock at the time such Stock Option is granted if said exercise price has been computed to be not less than the exercise price set forth in the stock option of the other corporation, with appropriate adjustment to reflect the exchange ratio of the shares of stock of the other corporation into the shares of Common Stock of the Corporation. 8. EXERCISE OF STOCK OPTIONS. (a) EXERCISE. Except as otherwise provided elsewhere herein, each Stock Option shall be exercisable in such increments, which need not be equal, and upon -10- such contingencies as the Stock Option Committee shall determine at the time of grant of the Stock Option; provided, however, (i) that if an Optionee shall not in any given period exercise any part of a Stock Option which has become exercisable during that period, the Optionee's right to exercise such part of the Stock Option shall continue until expiration of the Stock Option or any part thereof as may be provided in the related stock option agreement, and (ii) a minimum of 20% of the Stock Option shall be exercisable in each year over a five year period from the date the option is granted. No Stock Option or part thereof shall be exercisable except with respect to whole shares of Common Stock, and fractional share interests shall be disregarded except that they may be accumulated. (b) PRIOR OUTSTANDING INCENTIVE STOCK OPTIONS. Incentive Stock Options granted to an Optionee may be exercisable while such Optionee has outstanding and unexercised any Incentive Stock Option previously granted (or substituted) to him or her pursuant to this Plan. The Stock Option Committee shall determine if such options shall be exercisable if there are any Incentive Stock Options previously granted (or substituted) to him or her pursuant to this Plan, and such determination shall be evidenced in the Agreement executed by the Optionee and Company. An Incentive Stock Option shall be treated as outstanding until it is exercised in full or expires by reason of lapse of time. (c) NOTICE AND PAYMENT. Stock Options granted hereunder shall be exercised by written notice delivered to the Corporation specifying the number of Option Shares with respect to which the Stock Option is being exercised, together -11- with concurrent payment in full of the exercise price as hereinafter provided in Section 8(d) hereof. If the Stock Option is being exercised by any person or persons other than the Optionee, said notice shall be accompanied by proof, satisfactory to counsel for the Corporation, of the right to such person or persons to exercise the Stock Option. The Corporation's receipt of a notice of exercise without concurrent receipt of the full amount of the exercise price shall not be deemed an exercise of a Stock Option by an Optionee, and the Corporation shall have no obligation to an Optionee for any Option Shares unless and until full payment of the exercise price is received by the Corporation in accordance with Section 8(d) hereof, and all of the terms and provisions of the Plan and the related stock option agreement have been complied with. (d) PAYMENT OF EXERCISE PRICE. The exercise price of any Option Shares purchased upon the proper exercise of a Stock Option shall be paid in full at the time of each exercise of a Stock Option in cash and/or, with the prior written approval of the Stock Option Committee, in Common Stock of the Corporation which, when added to the cash payment, if any, has an aggregate Fair Market Value equal to the full amount of the exercise price of the Stock Option, or part thereof, then being exercised and/or, with the prior written approval of the Stock Option Committee, on a deferred basis evidenced by a promissory note, containing such terms and subject to such security as the Stock Option Committee shall determine to be fair and reasonable from time to time, for the total option price for the number of shares so purchased. In addition, the Optionee shall have the right upon the exercise of a stock Option in the -12- manner set forth above to surrender for cancellation a portion of the Stock Option to the Company for the number of shares (the "Surrendered Shares") specified in the holder's notice of exercise, by delivery to the Company with such notice written instructions from such holder to apply the Appreciated Value (as defined below) of the Surrendered Shares to payment of the exercise price for shares subject to this Stock Option that are being acquired upon such exercise. The term "Appreciated Value" for each share subject to this Stock Option shall mean the excess of the Fair Market Value thereof over the exercise price then in effect. No director, consultant or business associate may purchase any Stock Option on a deferred basis evidenced by a promissory note. Unless payment is on a deferred basis, payment by an Optionee as provided herein shall be made in full concurrently with the Optionee's notification to the Corporation of his intention to exercise all or part of a Stock Option. If all or part of payment is made in shares of Common Stock as heretofore provided, such payment shall be deemed to have been made only upon receipt by the Corporation of all required share certificates, and all stock powers and other required transfer documents necessary to transfer the shares of Common Stock to the Corporation. (e) REORGANIZATION. Notwithstanding any provision in any stock option agreement pertaining to the time of exercise of a Stock Option, or part thereof, upon adoption by the requisite holders of the Corporation's outstanding shares of Common Stock of any plan of dissolution, liquidation, reorganization, merger, consolidation or sale of all or substantially all of the assets of the Corporation to another corporation, or the acquisition of stock representing more than 50% of the voting power of the -13- Corporation then outstanding, by another corporation or person, which would, upon consummation, result in termination of a Stock Option in accordance with Section 15 hereof, the Stock Option shall become immediately exercisable as to all vested Option Shares for such period of time as may be determined by the Stock Option Committee, but in any event not less than 30 days prior to the adoption of the plan of dissolution, liquidation, reorganization, merger, consolidation, sale, or acquisition on the condition that the terminating event described in Section 15 hereof is consummated. Any Option Shares not exercised will be terminated. If such Terminating Event is not consummated, Stock Options granted pursuant to the Plan shall be exercisable in accordance with their respective terms. (f) MINIMUM EXERCISE. Not less than ten (10) Option Shares may be purchased at any one time upon exercise of a Stock Option unless the number of shares purchased is the total number which remains to be purchased under the Stock Option. (g) COMPLIANCE WITH LAW. No shares of Common Stock shall be issued by the Corporation upon exercise of any Stock Option, and an Optionee shall have no rights or claim to such shares, unless and until: (a) payment in full as provided in Section 8(d) hereof has been received by the Corporation; (b) in the opinion of the counsel for the Corporation, all applicable registration requirements of the Securities Act of 1933, all applicable listing requirements of securities exchanges or associations on which the Corporation's Common Stock is then listed or traded, and all other requirements of law and of regulatory bodies having jurisdiction over such issuance -14- and delivery, have been fully complied with; and (c) if required by federal or state law or regulation, the Optionee shall have paid to the Corporation the amount, if any, required to be withheld on the amount deemed to be compensation to the Optionee as a result of the exercise of his or her Stock Option, or made other arrangements satisfactory to the Corporation, in its sole discretion, to satisfy applicable income tax withholding requirements. 9. NONTRANSFERABILITY OF STOCK OPTIONS. Each Stock Option shall, by its terms, be nontransferable by the Optionee other than by will or the laws of descent and distribution, and shall be exercisable during the Optionee's lifetime only by the Optionee or his or her guardian or legal representative. 10. CONTINUATION OF EMPLOYMENT Each Optionee other than directors, consultants and business associates, agree, as part of the acceptance of the option that he/she will remain, within the employ of the Corporation, or any subsidiary corporation, for at least one (1) year from the date the option is granted subject to prior termination, leave of absence or vacation issued by the Board of Directors, subject to any employment agreements to the contrary which shall govern. Nothing contained in the Plan (or in any stock option agreement) shall obligate the Corporation or any Subsidiary corporation to employ or continue to employ or continue the service as a director of any Optionee or any Eligible Participant for any period of time or interfere in any way with the right of the Corporation or a Subsidiary corporation to reduce or increase the Optionee's or Eligible Participant's compensation. -15- 11. CESSATION OF EMPLOYMENT Except as provided in Sections 8(e), 12, 13, 14 or 15 hereof, except if Optionee is granted an option as a consultant, business associate or other person or entity with important business relationships with the Corporation, if, for any reason, an Optionee's status as an Eligible Participant is terminated, the Stock Options granted to such Optionee shall expire on the expiration dates specified for said Stock Options at the time of their initial grant, or three (3) months after the Optionee's status as an Eligible Participant is terminated, whichever is earlier. During such period after Options shall be exercisable only as to those increments, if any, which had become exercisable as of the date on which such Optionee's status as an Eligible Participant terminated, and any Stock Options or increments which had not become exercisable as of such date shall expire and terminate automatically on such date. If Optionee is granted an option as a consultant, business associate or other person or entity with important business relationships with the Corporation, this Stock Option shall not expire as a result of consultant, business associate or other person or entity with important business relationships with the Corporation no longer doing business or otherwise terminating his or its business relationship with the Corporation. 12. DEATH OF OPTIONEE Except if Optionee is granted an option as a consultant, business associate or other person or entity with important business relationships with the Corporation, if an Optionee loses his status as an Eligible Participant by reason of death, or if an Optionee dies during the three-month period referred to in Section 11 hereof, the -16- Stock Options granted to such Optionee shall expire on the expiration dates specified for said Stock Options at the time of their initial grant, or one (l) year after the date of such death, whichever is earlier. If Optionee is granted an option as a consultant, business associate or other person or entity with important business relationships with the Corporation, this Stock Option shall not expire as a result of such Optionee's death. After such death but before such expiration, subject to the terms and provisions of the Plan and the related stock option agreements, the person or persons to whom such Optionee's rights under the Stock Options shall have passed by will or by the applicable laws of descent and distribution, or the executor or administrator of the Optionee's estate, shall have the right to exercise such Stock Options to the extent that increments, if any, had become exercisable as of the date on which the Optionee's status as an Eligible Participant had been lost. 13. DISABILITY OF OPTIONEE Except if Optionee is granted an option as a consultant, business associate or other person or entity with important business relationships with the Corporation, if an Optionee is disabled while employed by or while serving as a director of the Corporation or a Subsidiary or during the three-month period referred to in Section 11 hereof, the Stock Options granted to such Optionee shall expire on the expiration dates specified for said Stock Options at the time of their initial grant, or one (l) year after the date of such disability, whichever is earlier. If Optionee is granted an option as a consultant, business associate or other person or entity with important business relationships with the Corporation, this Stock Option shall not expire as a result of -17- such Optionee's disability. After such disability but before such expiration, the Optionee or a guardian or conservator of the Optionee's estate, as duly appointed by a court of competent jurisdiction, shall have the right to exercise such Stock Options to the extent that increments, if any, had become exercisable as of the date on which the Optionee became disabled or ceased to be employed by the Corporation or a Subsidiary as a result of the disability. For the purpose of this Section 13, an Optionee shall be deemed to have become "disabled" if it shall appear to the Stock Option Committee, upon written certification delivered to the Corporation by a qualified licensed physician, that the Optionee has become permanently and totally unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death, or which has lasted or can be expected to last for a continuous period of not less than 12 months. 14. ADJUSTMENT UPON CHANGES IN CAPITALIZATION If the outstanding shares of Common Stock of the Corporation are increased, decreased, or changed into or exchanged for a different number or kind of shares or securities of the Corporation, through a reorganization, merger, recapitalization, reclassification, stock split, stock dividend, stock consolidation, or otherwise, without consideration to the Corporation, an appropriate and proportionate adjustment shall be made in the number and kind of shares as to which Stock Options may be granted. A corresponding adjustment changing the number or kind of Option Shares and the exercise prices per share allocated to unexercised Stock Options, or portions thereof, -18- which shall have been granted prior to any such change, shall likewise be made. Any such adjustment, however, in an outstanding Stock Option shall be made without change in the total price applicable to the unexercised portion of the Stock Option, but with a corresponding adjustment in the price for each Option Share subject to the Stock Option. Any adjustment under this Section shall be made by the Stock Option Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final and conclusive. No fractional shares of stock shall be issued or made available under the Plan on account of any such adjustment, and fractional share interests shall be disregarded and the fractional share interest shall be rounded down to the nearest whole number. 15. TERMINATING EVENTS Not less than thirty (30) days prior to consummation of a plan of dissolution or liquidation of the Corporation, or consummation of a plan of reorganization, merger or consolidation of the Corporation with one or more corporations, as a result of which the Corporation is not the surviving corporation and the outstanding securities of the class then subject to options hereunder are changed or exchanged for cash or property or securities not of the Corporation's issue, or upon the sale of all or substantially all the assets of the Corporation to another corporation, or the acquisition of stock representing more than fifty percent (50%) of the voting power of the Corporation then outstanding by another corporation or person (the "Terminating Event"), the Stock Option Committee or the Board of Directors shall notify each Optionee of the pendency of the Terminating Event. Upon the effective date of the Terminating Event, -19- the Plan shall automatically terminate and all Stock Options theretofore granted shall terminate, unless provision is made in connection with such transaction for the continuance of the Plan and/or assumption of Stock Options theretofore granted, or substitution for such Stock Options with new stock options covering stock of a successor employer corporation, or a parent or subsidiary corporation thereof, solely at the discretion of such successor corporation, or parent or subsidiary corporation, with appropriate adjustments as to number and kind of shares and prices, in which event the Plan and options theretofore granted shall continue in the manner and under the terms so provided. If the Plan and unexercised options shall terminate pursuant to the foregoing sentence, all persons shall have the right to exercise the vested portions of options then outstanding and not exercised, shall have the right, at such time prior to the consummation of the transaction causing such termination as the Corporation shall designate and for a period of not less than 30 days, to exercise the vested portions of their options. 16. AMENDMENT AND TERMINATION The Board of Directors of the Corporation may at any time and from time-to-time suspend, amend, or terminate the Plan and may, with the consent of Optionee, make such modifications of the terms and conditions of a Stock Option as it shall deem advisable; provided that, except as permitted under the provisions of Section 15 hereof, no amendment or modification may be adopted without the Corporation having first obtained all necessary regulatory approvals and approval of the holders of a majority of the Corporation's shares of Common Stock present, or represented, and -20- entitled to vote at a duly held meeting of shareholders of the Corporation if the amendment or modification would: (a) materially increase the benefits accruing to participants under the Plan; (b) materially increase the number of securities which may be issued under the Plan; (c) materially modify the requirements as to eligibility for participation in the Plan; (d) increase or decrease the exercise price of any Stock Options granted under the Plan; (e) increase the maximum term of Stock Options provided for herein; (f) permit Stock Options to be granted to any person who is not an Eligible Participant; or (g) change any provision of the Plan which would affect the qualification as an Incentive Stock Option under the Plan. No Stock Option may be granted during any suspension of the Plan or after termination of the Plan. Amendment, suspension, or termination of the Plan shall not (except as otherwise provided in Section 16 hereof), without the consent of the Optionee, alter or impair any rights or obligations under any Stock Option theretofore granted. -21- 17. RIGHTS OF ELIGIBLE PARTICIPANTS AND OPTIONEES Neither any Eligible Participant, any Optionee or any other person shall have any claim or right to be granted any Stock Option under this Plan, and neither this Plan nor any action taken hereunder shall be deemed or construed as giving any Eligible Participant, Optionee or any other person any right to be retained in the employ of the Corporation or any subsidiary of the Corporation. Without limiting the generality of the foregoing, there is no vesting of any right in the classification of any person as an Eligible Participant or Optionee, such classification being used solely to define and limit those persons who are eligible for consideration of the grant of Stock Options under the Plan. 18. PRIVILEGES OF STOCK OWNERSHIP; SECURITIES LAW COMPLIANCE; NOTICE OF SALE No Optionee shall be entitled to the privileges of stock ownership as to any Option Shares not actually issued and delivered. No Option Shares may be purchased upon the exercise of a Stock Option unless and until all then applicable requirements of all regulatory agencies having jurisdiction and all applicable requirements of securities exchanges upon which the stock of the Corporation is listed (if any) shall have been fully complied with. The Corporation will diligently endeavor to comply with all applicable securities laws before any options are granted under the Plan and before any stock is issued pursuant to options. The Optionee shall, not more than five (5) days after each sale or other disposition of shares of Common Stock acquired pursuant to the exercise of Stock Options, give the Corporation notice in writing of such sale or other disposition. -22- The Corporation will provide to each Optionee its Annual Report as required by Section 260.140.46 of the regulations of the California Commissioner of Corporations. 19. EFFECTIVE DATE OF THE PLAN The Plan shall be deemed adopted as of November 12, 1996, and shall be effective immediately, subject to approval of the Plan by the holders of at least a majority of the corporation's outstanding shares of Common Stock and approval of the Plan by the California Commissioner of Corporations. 20. TERMINATION Unless previously terminated as aforesaid, the Plan shall terminate ten (10) years from the earliest date of (i) adoption of the Plan by the Board of Directors, (ii) approval of the Plan by holders of at least a majority of the Corporation's outstanding shares of Common Stock, or (iii) approval of the Plan by the California Commissioner of Corporations. No Stock Options shall be granted under the Plan thereafter, but such termination shall not affect any Stock Option theretofore granted. 21. OPTION AGREEMENT Each Stock Option granted under the Plan shall be evidenced by a written stock option agreement executed by the Corporation and the Optionee, and shall contain each of the provisions and agreements herein specifically required to be contained therein, and such other terms and conditions as are deemed desirable by the Stock Option Committee and are not inconsistent with the Plan. -23- 22. STOCK OPTION PERIOD Each Stock Option and all rights and obligations thereunder shall expire on such date as the Stock Option Committee may determine, but not later than ten (10) years from the date such Stock Option is granted, and shall be subject to earlier termination as provided elsewhere in the Plan. 23. EXCULPATION AND INDEMNIFICATION OF STOCK OPTION COMMITTEE In addition to such other rights of indemnification which they may have as directors of the Corporation or as members of the Stock Option Committee, the present and former members of the Stock Option Committee, and each of them, shall be indemnified by the Corporation for and against all costs, judgments, penalties and reasonable expenses, including reasonable attorney's fees, actually and necessarily incurred by them in connection with any action, suit or proceeding, or in connection with any appeal thereof, to which they or any of them may be a party by reason of any act or omission of any member of the Stock Option Committee under or in connection with the Plan or any Stock Option granted thereunder; provided, however, that a member of the Stock Option Committee shall not be entitled to any indemnification whatsoever pursuant to this Section for or as a result of any act or omission of such member which was not taken in good faith and which constituted willful misconduct or gross negligence by such member; provided further, that any amounts paid by any member of the Stock Option Committee in settlement of any action, suit or proceeding for which indemnification may be sought pursuant to this Section shall be first approved in writing by independent legal counsel selected by the -24- Corporation; and, provided further, that within thirty (30) days after institution of any action, suit or proceeding against any member with respect to which such member is entitled to indemnification hereunder, such member shall, in writing, offer the Corporation the opportunity, at its own expense, to handle (including settle) and conduct the defense thereof. The provisions of this Section shall apply to the estate, executor and administrator of each member of the Stock Option Committee. 24. AGREEMENT AND REPRESENTATIONS OF OPTIONEE Unless the shares of Common Stock covered by this Plan have been registered with the Securities and Exchange Commission pursuant to Section 5 of the Securities Act of 1933, each Optionee shall by and upon accepting a Stock Option, represent and agree in writing, for himself or herself and his or her transferees by will or the laws of descent and distribution, that he or she is a bona fide California resident, that all such Option Shares will be acquired for investment purposes and not for resale or distribution and that the optioned stock will not be transferred to a person who is not a California resident. Upon the exercise of a Stock Option, or a part thereof, the person entitled to exercise the same shall, unless waived by the Corporation, furnish evidence satisfactory to the Corporation, including written and signed representations, to the effect that he or she is a California resident, that the Option Shares are being acquired for investment purposes and not for resale or distribution, and that the Option Shares being acquired shall not be sold or otherwise transferred to any individual or entity not a resident of the State of California. Furthermore, the Corporation, at its sole discretion, to assure itself that any sale or distribution by the Optionee complies -25- with this Plan and any applicable federal or state securities laws, may take all reasonable steps, including placing stop transfer instructions with the corporation's transfer agent prohibiting transfers in violation of the Plan and affixing the following legend (and/or such other legend or legends as the Stock Option Committee shall require) on certificates evidencing the shares: "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." and "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THEM UNDER THE ACT OR A DETERMINATION BY BSM Bancorp THAT REGISTRATION IS NOT REQUIRED." At any time that an Optionee contemplated the disposition of any of the Option Shares (whether by sale, exchange, gift or other form of transfer) he or she shall first notify the Corporation of such proposed disposition and shall thereafter cooperate with the Corporation in complying with all applicable requirements of law which, in the opinion of counsel for the Corporation, must be satisfied prior to the making of such disposition. Before consummating such disposition, BSM Bancorp shall determine that such disposition will not result in a violation of any state or federal securities law or regulations. The Corporation shall remove any legend affixed to certificates for -26- Option Shares pursuant to this Section if and when all of the restrictions on the transfer of the Option Shares, whether imposed by this Plan or federal or state law, have terminated. An Optionee who thereafter sells or disposes of his shares of Common Stock will be required to notify the Corporation of such sale or disposition within five (5) days after the sale or disposition. 25. NOTICES All notices and demands of any kind which the Stock Option Committee, any Optionee, Eligible Participant, or any other person may be required or desires to serve under the terms of this Plan shall be in writing and shall be served by personal service upon the respective person or by leaving a copy of such notice or demand at the address of such person as may be reflected in the records of the Corporation, or in the case of the Stock Option Committee, with the Secretary of the Corporation, or by mailing a copy thereof by certified or registered mail, postage prepaid, with return receipt requested. In the case of service by mail, it shall be deemed complete at the expiration of the third day after the day of mailing, except for notice of the exercise of any Stock Option and payment of the Stock Option exercise price, both of which must b1e actually received by the Corporation. 26. LIMITATION OF OBLIGATIONS OF THE CORPORATION Any obligation of the Corporation arising under or as a result of this Plan or any Stock Option granted hereunder shall constitute the general unsecured obligation of the Corporation, and not of the Board of Directors of the Corporation, or any members thereof, the Stock Option Committee, or any member thereof, any officer of the -27- Corporation, or any other person or any Subsidiary, and none of the foregoing, except the Corporation, shall be liable for any debt, obligation, cost or expense hereunder. 27. LIMITATION OF RIGHTS The Stock Option Committee, in its sole and absolute discretion, is entitled to determine who, if anyone, is an Eligible Participant under this Plan, and which, if any, Eligible Participant shall receive any grant of a Stock Option. No oral or written agreement by any person on behalf of the Corporation relating to this Plan or any Stock Option granted hereunder is authorized, and such agreement may not bind the Corporation or the Stock Option Committee to grant any Stock Option to any person. 28. SEVERABILITY If any provision of this Plan as applied to any person or to any circumstances shall be adjudged by a court of competent jurisdiction to be void, invalid, or unenforceable, the same shall in no way effect any other provision hereof, the application of any such provision in any other circumstances, or the validity of enforceability hereof. 29. CONSTRUCTION Where the context or construction requires, all words applied in the plural shall be deemed to have been used in the singular and vice versa, and the masculine gender shall include the feminine and the neuter. -28- 30. HEADINGS The headings of the several paragraphs of this Plan are inserted solely for convenience of reference and are not intended to form a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof. 31. SUCCESSORS This Plan shall be binding upon the respective successors, assigns, heirs, executors, administrators, guardians and personal representatives of the Corporation and any Optionee. 32. GOVERNING LAW This Plan shall be governed by and construed in accordance with the laws of the State of California. 33. CONFLICT In the event of any conflict between the terms and provisions of this Plan, and any other document, agreement or instrument, including, without limitation, any stock option agreement, the terms and provisions of this Plan shall control. -29- SECRETARY'S CERTIFICATE OF ADOPTION I, the undersigned, do hereby certify: 1. That I am the duly elected and acting Secretary of BSM Bancorp; and 2. That the foregoing BSM Bancorp 1996 Stock Option Plan was duly adopted by the Board of Directors of BSM Bancorp as the Stock Option Plan for the Corporation at a meeting duly called as required by law and convened on the 12th day of November, 1996. IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of the Corporation this 12th day of November, 1996. /s/ William L. Snelling ----------------------------------- William L. Snelling, Secretary [SEAL] -30- OPTIONEES TO WHOM INCENTIVE STOCK OPTIONS ARE GRANTED MUST MEET CERTAIN HOLDING PERIOD AND EMPLOYMENT REQUIREMENTS FOR FAVORABLE TAX TREATMENT. UNLESS OTHERWISE STATED, ALL DEFINED TERMS IN THE PLAN SHALL HAVE THE SAME MEANING HEREIN AS SET FORTH IN THE PLAN. BSM BANCORP STOCK OPTION AGREEMENT / / Incentive Stock Option / / Non-Qualified Stock Option THIS AGREEMENT, dated the ____ day of ____________, 19__, by and between BSM Bancorp, a California corporation (the "Corporation"), and _____________________ (the "Optionee"); WHEREAS, pursuant to the Corporation's 1996 Stock Option Plan (the "Plan"), the Stock Option Committee has authorized the grant to Optionee of a Stock Option to purchase all or any part of _____________________ (______) authorized but unissued shares of the Corporation's Common Stock at the price of _________________ Dollars ($_____) per share, such Stock Option to be for the term and upon the terms and conditions hereinafter stated; NOW, THEREFORE, it is hereby agreed: 1. GRANT OF STOCK OPTION. Pursuant to said action of the Stock Option Committee and pursuant to authorizations granted by all appropriate regulatory and governmental agencies, the Corporation hereby grants to Optionee a Stock Option to -1- purchase, upon and subject to the terms and conditions of the Plan, which is incorporated in full herein by this Reference, all or any part of ________________ (_______) Option Shares of the Corporation's Common Stock, at the price of ____________________ Dollars ($_____) per share. For purposes of this Agreement and the Plan, the date of grant shall be _________________, 19__. At the date of grant, Optionee [DOES] [DOES NOT OWN] stock possessing more than 10% of the total combined voting power of all classes of capital stock of the Corporation or any Subsidiary. The Stock Option granted hereunder [IS] [IS NOT] intended to qualify as an Incentive Stock Option within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended. 2. EXERCISABILITY. This Stock Option shall be exercisable as to _________________ Option Shares on ________________, 19__, as to __________________ Option Shares on ________________, 19__, as to __________________ Option Shares on ________________, 19__, as to __________________ Option Shares on ________________, 19__, and as to _________________ Option Shares on ________________, 19__. This Stock Option shall remain exercisable as to all of such Option Shares until _______________, 19__ (but not later than ten (10) years from the date hereof), at which time it shall expire in its entirety, unless this Stock Option has expired or terminated earlier in accordance with the provisions hereof. Option shares as to which this Stock Option becomes exercisable may be purchased at any time prior to expiration of this Stock Option. -2- 3. EXERCISE OF STOCK OPTION. Subject to the provision of Paragraph 4 hereof, this Stock Option may be exercised by written notice delivered to the Corporation stating the number of Option Shares with respect to which this Stock Option is being exercised, together with cash and/or, if permitted at the time of exercise by the Stock Option Committee, shares of Common Stock of the Corporation which, when added to the cash payment, if any, have an aggregate Fair Market Value equal to the full amount of the purchase price of such Option Shares, and/or, if permitted at the time of exercise by the Stock Option Committee, and if Optionee is not also a director, consultant or business advisor of the Corporation or any of its subsidiaries, on a deferred basis evidenced by a promissory note. In addition, the Optionee shall have the right upon the exercise of this Stock Option in the manner set forth above to surrender for cancellation a portion of this Stock Option to the Company for the number of share (the "Surrendered Shares") specified in the holder's notice of exercise, by delivery to the Company with such notice written instructions from such holder to apply the Appreciated Value (as defined below) of the Surrendered Shares to payment of the exercise price for shares subject to this Stock Option that are being acquired upon such exercise. The term "Appreciated Value" for each share subject to this Stock Option shall mean the excess of the Fair Market Value thereof over the exercise price then in effect. Not less than ten (10) Option shares may be purchased at any one time unless the number purchased is the total number which remains to be purchased under this Stock Option and in no event may the Stock Option be exercised with respect to fractional shares. Upon exercise, Optionee shall -3- make appropriate arrangements and shall be responsible for the withholding of any federal and state income taxes then due. 4. PRIOR OUTSTANDING STOCK OPTIONS. Incentive Stock Options granted to an Optionee may be exercisable while such Optionee has outstanding and unexercised any Incentive Stock Option previously granted to him or her pursuant to this Plan. The Stock Option Committee shall determine if such options shall be exercisable if there are any Incentive Stock Options previously granted (or substituted) to him or her pursuant to this Plan, and such determination shall be evidenced in the Agreement executed by the Optionee and the Corporation. An Incentive Stock Option shall be treated as outstanding until it is exercised in full or expires by reason of lapse of time. 5. CESSATION OF EMPLOYMENT. Except as provided in Paragraphs 6, 8 or 10 hereof, except if Optionee is granted an option as a consultant, business associate or other person or entity with important business relationships with the Corporation, if Optionee's status as an Eligible Participant under the Plan is terminated, this Stock Option shall expire three (3) months thereafter or on the date specified in Paragraph 2 hereof, whichever is earlier. During such period after termination of status as an Eligible Participant, except if Optionee is granted an option as a consultant, business associate or other person or entity with important business relationships with the Corporation, this Stock Option shall be exercisable only as to those increments, if any, which had become exercisable as of the date on which the Optionee's status as an Eligible Participant was terminated, and any Stock Options or increments which had not become exercisable as of such date shall expire and terminate automatically on -4- such date. If Optionee is granted an option as a consultant, business associate or other person or entity with important business relationships with the Corporation, this Stock Option shall not expire as a result of consultant, business associate or other person or entity with important business relationships with the Corporation no longer doing business or otherwise terminating his or its business relationship with the Corporation. 6. DISABILITY OR DEATH OF OPTIONEE. Except if Optionee is granted an option as a consultant, business associate or other person or entity with important business relationships with the Corporation, if Optionee loses his or its status as an Eligible Participant under the Plan by reason of death or if Optionee is disabled while employed by the Corporation or a Subsidiary, or if Optionee dies or becomes so disabled during the three-month period referred to in Paragraph 5 hereof, this Stock Option shall automatically expire and terminate one (l) year after the date of Optionee's disability or death or on the day specified in Paragraph 2 hereof, whichever is earlier. If Optionee is granted an option as a consultant, business associate or other person or entity with important business relationships with the Corporation, this Stock Option shall not expire as a result of such Optionee's death or disability. After Optionee's disability or death but before such expiration, the person or persons to whom Optionee's rights under this Stock Option shall have passed by order of a court of competent jurisdiction or by will or the applicable laws of descent and distribution, or the executor, administrator or conservator of Optionee's estate, shall have the right to exercise this Stock Option to the extent that increments, if any, had become -5- exercisable as of the date on which Optionee's status as an Eligible Participant under the Plan had been terminated. For purposes hereof, "disability" shall have the same meaning as set forth in Section 13 of the Plan. 7. NONTRANSFERABILITY. This Stock Option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during Optionee's lifetime only by Optionee or his or her guardian or legal representative. 8. EMPLOYMENT. Optionee, other than directors, consultants or business advisors, agrees to remain in the employ of the Corporation, or any subsidiary for at least one (l) year from the date the option is granted subject to prior termination at the discretion of the Board of Directors. This Agreement shall not obligate the Corporation or a Subsidiary to employ Optionee for any period, nor shall it interfere in any way with the right of the Corporation or a Subsidiary to increase or reduce Optionee's compensation. 9. PRIVILEGES OF STOCK OWNERSHIP. Optionee shall have no rights as a stockholder with respect to the Option Shares unless and until said Option Shares are issued to Optionee as provided in the Plan. Except as provided in Section 15 of the Plan, no adjustment will be made for dividends or other rights in respect of which the record date is prior to the date such stock certificates are issued. 10. MODIFICATION AND TERMINATION BY BOARD OF DIRECTORS. The rights of Optionee are subject to modification and termination upon the occurrence of certain events as provided in Sections 12, 13, 14 and 15 of the Plan. Upon adoption by the requisite holders of the Corporation's outstanding shares of Common Stock of any -6- plan of dissolution, liquidation, reorganization, merger, consolidation or sale of all or substantially all of the assets of the Corporation to, or the acquisition of stock representing more than fifty percent (50%) of the voting power of the Corporation then outstanding by another corporation or person which would, upon consummation, result in termination of this Stock Option in accordance with Section 15 of the Plan, this Stock Option shall become immediately exercisable as to all vested but unexercised Option Shares for a period then specified by the Stock Option Committee, but in any event not less than 30 days, in accordance with Section 8(e) of the Plan, on the condition that the terminating event described in Section 15 of the Plan is consummated. If such terminating event is not consummated, this Stock Option shall be exercisable in accordance with the terms of the Agreement, excepting this Paragraph 10. 11. NOTIFICATION OF SALE. Optionee agrees that Optionee, or any person acquiring Option Shares upon exercise of this Stock Option, will notify the Corporation in writing not more than five (5) days after any sale or other disposition of such Shares. 12. REPRESENTATIONS OF OPTIONEE. No Option Shares issuable upon the exercise of this Stock Option shall be issued and delivered unless and until all requirements of applicable state and federal law and of the Securities and Exchange Commission pertaining to the issuance and sale of such Option Shares, and all applicable listing requirements of the securities exchanges, if any, on which shares of Common Stock of the Corporation of the same class are then listed, shall have been -7- complied with. Without limiting the foregoing, the undersigned Optionee hereby agrees, represents and warrants that unless and until the shares of Common Stock covered by the Plan and issued to Optionee have been registered with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, Optionee will acquire all Option Shares upon exercise of this Stock Option for investment purposes only and not for resale or for distribution, and Optionee hereby agrees to execute and deliver to the Corporation a representation letter in the form and substance of Exhibit "A" attached hereto, and to be bound by the representations, warranties, covenants and promises contained therein. Optionee further agrees, represents and warrants that upon exercise of all or part of this Stock Option, Optionee will not transfer any such Option Shares except in compliance with said registration provisions or an applicable exemption therefrom. Upon each exercise of any portion of this Stock Option, the person entitled to exercise same shall, unless waived by the Corporation, furnish evidence satisfactory to counsel for the Corporation (including written and signed representations in the form attached hereto as Exhibit "B") that the Option Shares are being acquired in good faith for investment purposes only and not for resale or distribution except in compliance with the state and federal requirements described above or applicable exemptions therefrom. Furthermore, the Corporation, may, if it deems appropriate, issue stop transfer instructions against any Option Shares and affix to any certificate representing such Shares the legends of the type described in Section 24 of the Plan. -8- 13. NOTICES. All notices to the Corporation provided for in this Agreement shall be addressed to it in care of its President or Chief Financial Officer at its principal office and all notices to Optionee shall be addressed to Optionee's address on file with the Corporation or a subsidiary corporation, or to such other address as either may designate to the other in writing, all in compliance with the notice provisions set forth in Section 25 of the Plan. 14. INCORPORATION OF PLAN. All of the provisions of the Plan are incorporated herein by reference as if set forth in full hereat. In the event of any conflict between the terms of the Plan and any provision contained herein, the terms of the Plan shall be controlling and the conflicting provisions herein shall be disregarded. IN WITNESS WHEREOF, the parties hereto have executed this Agreement. BSM Bancorp By: ------------------------------- By: ------------------------------- OPTIONEE ----------------------------------- -9- EXHIBIT "A" ____________, 19__ Bank of Santa Maria 2739 Santa Maria Way Santa Maria, California 93456 Gentlemen: On this ___ day of ________ 19__, the undersigned has been granted pursuant to the BSM Bancorp 1993 Stock Option Plan (the "Plan") and the Stock Option Agreement (the "Agreement") by and between BSM Bancorp and the undersigned, dated ________ _, 19__, an option to purchase _____________ (_____) shares of the no par value Common Stock of BSM Bancorp (the "Stock"). In consideration of the grant of such option by BSM Bancorp: 1. I hereby represent, warrant and certify to you that I am a bona fide resident and domiciliary of the State of California and that I maintain my principal residence in the State of California. 2. I hereby represent and warrant to you that the stock to be acquired pursuant to the option will be acquired by me in good faith and for my own personal account, and not with a view to distributing the stock to others or otherwise resell the stock in violation of the Securities Act of 1933, as amended, or the rules and regulations promulgated thereunder. 3. I hereby acknowledge and agree that (l) the stock to be acquired by me pursuant to the Plan has not been registered and that there is no obligation on the part of BSM Bancorp to register such stock under the Securities Act of 1933, as amended, and the rules and regulations thereunder; and (2) that the Stock to be acquired by me will not be freely tradeable unless the Stock is either registered under the Securities Act of 1933, as amended, or BSM Bancorp determines that the transfer will not violate the Federal securities laws. 4. I understand that the corporation is relying upon the truth and accuracy of the representations and agreements contained herein in determining to grant such options to me and upon subsequently issuing any stock pursuant to the Plan without first registering the same under the Securities Act of 1933, as amended. -1- 5. I understand that the certificate evidencing the stock to be issued pursuant to the Plan will contain a legend upon the face thereof to the effect that the stock is not registered under the Securities Act of 1933 and that stop transfer orders will be placed against the shares with BSM Bancorp's transfer agent. 6. I am registered to vote in California: Yes / / No / / 7. I have been a resident of California for ___ years. 8. My permanent residence address is as follows: -------------------------------- -------------------------------- -------------------------------- 9. I hereby agree to inform the Corporation if, during the term of the option, I move my principal residence outside of California. The agreements contained herein shall inure to benefit of and be binding upon the respective legal representatives, successors and assigns of the undersigned and BSM Bancorp. Very truly yours, ---------------------------------------- (Signature) ---------------------------------------- (Type or Print Name) -2- EXHIBIT "B" ________________, 19__ Bank of Santa Maria 2739 Santa Maria Way Santa Maria, California 93456 Gentlemen: On this ____ day of _______________, 19__, the undersigned has acquired, pursuant to the BSM Bancorp 1993 Stock Option Plan (the "Plan") and the Stock Option Agreement (the "Agreement") by and between BSM Bancorp and the undersigned, dated __________, 19__, ___________ (_____) shares of the no par value Common Stock of BSM Bancorp (the "Stock"). In consideration of the issuance of BSM Bancorp to the undersigned said shares of its Common Stock: 1. I hereby represent and warrant to you that the Stock will be acquired by me in good faith for my own personal account, and not with a view to distributing the Stock to others or otherwise reselling the Stock in violation of the Securities Act of 1933, as amended, or the rules and regulations promulgated thereunder. 2. I hereby represent, warrant and certify to you that I am a bona fide resident and domiciliary of the State of California and that I maintain my principal residence in the State of California. 3. I hereby acknowledge and agree that (a) the Stock being acquired by me pursuant to the Plan has not been registered and that there is no obligation on the part of BSM Bancorp to register such stock under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder; and (b) the Stock acquired by me is not freely tradeable and must be held by me unless traded as provided in Paragraph 4 herein or unless the Stock is either registered under the Securities Act of 1933 or transferred pursuant to an exemption from such registration, as accorded by the Securities Act of 1933 or under the rules and regulations promulgated thereunder. I further represent and acknowledge that I have been informed by legal counsel in connection with said Plan of the restrictions on my ability to transfer the Stock to be received by me pursuant to said Plan and Agreement and that I understand the scope and effect of those restrictions. 4. I hereby represent, warrant, and certify to the Corporation that I will not sell or otherwise dispose of all or any part of the shares of the stock being -1- acquired by me pursuant to the Plan or any interest therein to an non-resident individual, corporation, partnership, or other form of business organization of the State of California. 5. I hereby represent, warrant and certify to the Corporation that the information supplied to the Corporation pursuant to Exhibit "l" attached hereto is true and correct and may be relied upon by the Corporation in connection with the issuance of the Corporation's Stock to me. 6. I understand that the effects of the above representations are the following: (i) that the undersigned does not presently intend to sell or otherwise dispose of all or any part of the shares of the Stock to any person or entity not a bona fide resident of the State of California; and (ii) that the Corporation is relying upon the truth and accuracy of the representations and agreements contained herein in issuing said shares of the Stock to me without first registering the same under the Securities Act of 1933, as amended. 7. I hereby agree that the certificate evidencing the Stock may contain the following legend stamped upon the face thereof to the effect that the Stock is not registered under the Securities Act of 1933, as amended, and that the Stock has been acquired pursuant to the representation in this letter and Exhibit "1" hereto, the Plan and the Agreement: "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." and "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THEM UNDER THE ACT OR BY BSM Bancorp, THAT REGISTRATION IS NOT REQUIRED." 8. I hereby agree and understand that the Corporation will place a stop transfer notice with its stock transfer agent to ensure that the restrictions on transfer described herein will be observed. -2- The agreements contained herein shall inure to benefit of and be binding upon the respective legal representatives, successors and assigns of the undersigned and BSM Bancorp. Very truly yours, ---------------------------------------- (Signature) ---------------------------------------- (Type or Print Name) -3- EX-10.3 10 FORM OF WRITTEN CONSENT WRITTEN CONSENT OF SHAREHOLDERS OF BANK OF SANTA MARIA TO APPROVE A PLAN OF REORGANIZATION AND MERGER AGREEMENT DATED NOVEMBER 20, 1996 REGARDING THE FORMATION OF A BANK HOLDING COMPANY FOR THE BANK, AND TO APPROVE THE BSM BANCORP 1996 STOCK OPTION PLAN 1. The undersigned record holder of _______ shares of Common Stock of Bank of Santa Maria, Santa Maria, California (the "Bank"), hereby consents to, and does hereby approve, a proposal to approve the Plan of Reorganization and Merger Agreement ("Merger Agreement"), entered into as of November 20, 1996 by and among the Bank, BSM Bancorp (the "Holding Company") and BSM Merger Company (the "Merger Corp."), providing for the acquisition of the Bank by the Holding Company by means of a merger (the "Merger") of the Merger Corp. with and into the Bank, as a result of which the Holding Company will issue common stock, no par value of the Holding Company ("Holding Company Common Stock"), to each of the Bank shareholders, in exchange for all of the outstanding shares of common stock, no par value of the Bank (the "Bank Common Stock"). These transactions are more fully described in the enclosed Written Consent Statement/Prospectus and in the Merger Agreement attached as Annex I to the Written Consent Statement/Prospectus. / / FOR / / AGAINST / / ABSTAIN 2. The undersigned record holder of ________ shares of Common Stock of Bank of Santa Maria, as prospective shareholder of the Holding Company, hereby consents to, and does hereby approve, the proposed BSM Bancorp 1996 Stock Option Plan (the "1996 Plan"), adopted by the Board of directors of the Holding Company on November 12, 1996 that would reserve ____________ shares of Common Stock of the Holding Company, as described in the Written consent Statement/Prospectus dated _________, 1997, subject to approval of the California Commissioner of Corporations, and any required changes of any regulatory agency. / / FOR / / AGAINST / / ABSTAIN By signing this Written Consent, a shareholder of the Bank shall be deemed to have voted all shares of the Bank's Common Stock which he is entitled to vote in accordance with the specifications made above, with respect to the proposals described above. IF A SHAREHOLDER SIGNS AND RETURNS THIS WRITTEN CONSENT, BUT DOES NOT INDICATE THEREON THE MANNER IN WHICH HE WISHES HIS SHARES TO BE VOTED WITH RESPECT TO THE PROPOSALS DESCRIBED ABOVE, THEN SUCH SHAREHOLDER WILL BE DEEMED TO HAVE GIVEN HIS AFFIRMATIVE WRITTEN CONSENT TO THE PROPOSALS. A Written Consent marked "abstain" will not be voted either for or against such proposals. THIS WRITTEN CONSENT IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE BANK. THIS WRITTEN CONSENT MAY BE REVOKED AT ANY TIME PRIOR TO THE RECEIPT BY THE BANK OF AFFIRMATIVE WRITTEN CONSENTS REPRESENTING A MAJORITY OF THE BANK'S OUTSTANDING SHARES OF COMMON STOCK BY FILING A WRITTEN INSTRUMENT REVOKING THE WRITTEN CONSENT WITH THE BANK'S SECRETARY. 1 of 2 THE BANK'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU GIVE YOUR AFFIRMATIVE WRITTEN CONSENT TO THE PROPOSED FORMATION OF A BANK HOLDING COMPANY AND APPROVAL OF THE MERGER AGREEMENT, APPROVAL OF THE BSM BANCORP 1996 STOCK OPTION PLAN. Dated: __________________, 1997 ----------------------------------- Typed or Printed Name ----------------------------------- Signature ----------------------------------- Typed or Printed Name ----------------------------------- Signature (Please date this Written Consent and sign your name as it appears on your stock certificates. Executors, administrators, trustees, etc., should give their full titles. All joint owners should sign.) 2 of 2 EX-10.4 11 NIPMO BRANCH LAND LEASE RECORDING REQUESTED BY DOC. NO. 44949 OFFICIAL RECORDS SAN LUIS OBISPO CO., CA WHEN RECORDED MAIL TO JUL 05 1990 Kirk Simas & Normanly FRANCIS M. COONEY P.O. Box 1219 County Clerk - Recorder Santa Maria, CA 93456 TIME 11:45 AM - -------------------------------------------------------------------------------- MEMORANDUM OF LEASE THIS MEMORANDUM OF LEASE is made and entered into by and between JOSEPH W. SOARES and LAURA MAE SOARES, husband and wife (hereinafter collectively referred to as "LESSORS") and BANK OF SANTA MARIA, A California Banking Corporation (hereinafter referred to as "LESSEE") to witness that: 1. LESSORS have leased to LESSEE for a term of twenty-five (25) years commencing on March 1, 1990 and ending on February 28, 2015, the property hereinafter described. 2. The lease is on the terms and conditions specified in a certain GROUND LEASE between the parties dated February 12, 1990 as amended by a FIRST AMENDED AND RESTATED GROUND LEASE between the parties dated June 26, 1990, all of which terms and conditions are incorporated herein, including certain terms and conditions calling for the option to extend the lease term beyond the initial twenty-five (25) year term. 3. The property described in the GROUND LEASE is as set forth in the attached Exhibit "A". EXECUTED at Santa Maria, California on June 26, 1990. LESSORS: LESSEE: Signature Present BANK OF SANTA MARIA - ----------------------------- A California Banking Corporation JOSEPH W. SOARES Signature Present By: Signature Present - ----------------------------- ------------------------------ LAURA MAE SOARES WILLIAM A. HARES President By: Signature Present ------------------------------ DONALD W. LEMKE Assistant Secretary VOL 3538 PAGE 722 1 STATE OF CALIFORNIA ) ) ss. COUNTY OF SANTA BARBARA ) On this the 26th day of June, 1990, before me, the undersigned, a Notary Public in and for said County and State, personally appeared JOSEPH W. SOARES and LAURA MAE SOARES, personally known to me or proved to me on the basis of satisfactory evidence to be the persons whose names are subscribed to the within instrument, and acknowledged that they executed it. WITNESS my hand and official seal. Seal OFFICIAL SEAL Signature Present ------------------------------ Here NORA E. THOMPSON Notary Public NOTARY PUBLIC - CALIFORNIA SANTA BARBARA COUNTY My comm. expires FEB 8, 1994 STATE OF CALIFORNIA ) ) ss. COUNTY OF SANTA BARBARA ) On this the 27th day of June, 1990, before me, the undersigned, a Notary Public in and for said County and State, personally appeared WILLIAM A. HARES, personally known to me or proved to me on the basis of satisfactory evidence to be the President of the BANK OF SANTA MARIA, and DONALD W. LEMKE, personally known to me or proved to me on the basis of satisfactory evidence to be the Assistant Secretary of BANK OF SANTA MARIA, the corporation that executed the within instrument on behalf of said corporation, and acknowledged to me that such corporation executed it. WITNESS my hand and official seal. Seal BETTY B. O'DEA Signature Present ------------------------------ Here Notary Public Notary Public Santa Barbara County California My Commission Expires February 28, 1992 VOL 3538 PAGE 723 2 EXHIBIT "A" PROPERTY DESCRIPTION OF LEASED PREMISES BANK PARCEL PARCEL 1: That portion of Lot 11 of Story's Resubdivision of Lot 24 of Ward's Subdivision of the Rancho Nipomo recorded in Book A of Maps at Page 20, San Luis Obispo County official records, all located in San Luis Obispo County, California, being more particularly described as follows: BEGINNING at a point which bears North 34 degrees 30' West 20.00 feet and North 55 degrees 30' East 44.00 feet from the most Southerly corner of said Lot 11; Thence North 34 degrees 30' West 200.00 feet; Thence North 55 degrees 30' East 220.00 feet more or less, to a point on the Northeasterly boundary line of that certain parcel of land described in Book 1601, Page 715 of said County official records; Thence along said Northeasterly boundary line South 34 degrees 30' East 200.00 feet; Thence South 55 degrees 30' West 220.00 feet, more or less to the POINT OF BEGINNING. Containing 1.01 Acres of land more or less. PARCEL 2: An easement for ingress and egress over the residential parcel described as follows: That portion of Lot 11 of Story's Resubdivision of Lot 24 of Ward's Subdivision of the Rancho Nipomo recorded in Book A of Maps at Page 20 of San Luis County official records, all located in San Luis Obispo County, California, being more particularly described as follows: BEGINNING at a point on the Southwesterly boundary line of said Lot 11 which bears North 34 degrees 30' West 20.00 feet from the most Southerly corner of said Lot 11; Thence along said Southwesterly boundary line of Lot 11 North 34 degrees 30' West 200.00 feet; Thence North 55 degrees 30' East 44.00 feet; Thence South 34 degrees 30' East 200.00 feet, more or less to a point 20.00 feet measured at right angles from the Northwesterly right of way line of Tefft Street; Thence along a line 20.00 feet from and parallel to said Northwesterly right of way line South 55 degrees 30' West 44.00 feet, more or less to the POINT OF BEGINNING. Containing 8800 Square Feet of land, more or less. VOL 3538 PAGE 724 3 EXHIBIT "A" - Continuation RESIDENTIAL PARCEL All that part of Lot 11 of the Resubdivisions of the Southwesterly part of Lot 24 of A. C. Ward's Subdivisions of the Nipomo Rancho, San Luis Obispo County, as shown by map of said Resubdivisions made by George Story, County Surveyor, in the year 1887, and which said map was filed on December 10, 1887, in the office of the San Luis Obispo County Recorder, described as follows: Beginning at a post marked X.5 at the Southwesterly corner of said Lot, and running Thence North 55 1/2 degrees East, along the Southerly line of said Lot, 4 chains; Thence North 34 1/2 degrees West, 10 chains to the line between Lots 10 and 11 of said Resubdivision; Thence South 55 1/2 degrees West, along said line, 4 chains to post marked X.13, at the Northwesterly corner of said Lot 11; Thence South 34 1/2 degrees East, along the Westerly line of said Lot, 10 chains to the POINT OF BEGINNING. Excepting therefrom Parcel 1 of the Bank Parcel described above. VOL 3538 PAGE 725 4 FIRST AMENDED AND RESTATED GROUND LEASE BETWEEN JOSEPH W. SOARES AND LAURA MAE SOARES "LESSORS" AND BANK OF SANTA MARIA, A CALIFORNIA BANKING CORPORATION "LESSEE" WEST TEFFT ROAD NIPOMO, CALIFORNIA JUNE 26, 1990 Table of Contents Page No. ----------------- -------- Preamble--Parties and Leasing 1 ARTICLE 1. TERM OF LEASE 1 1.01. Fixed Term 1.02. Option to Extend 1.03. Lessee's Right of First Refusal to Purchase 1.04. Rights to Terminate 1.05. Automatic Termination - Residential Parcel ARTICLE 2. RENT 4 2.01. Apportionment of Basic Rent 2.02. Basic Rent - Bank Parcel 2.03. Cost of Living Adjustment - Bank Parcel 2.04. Basic Rent - Residential Parcel 2.05. Place for Payment of Rent 2.06. Security Deposit 2.07. Late Charges ARTICLE 3. USE OF PREMISES 6 3.01. Principal Use 3.02. Only Lawful Uses Permitted ARTICLE 4. TAXES AND UTILITIES 6 4.01. Lessee to Pay Taxes 4.02. Proration of First and Last Year Taxes 4.03. Separate Assessment of Leased Land 4.04. Payment Before Delinquency 4.05. Contest of Tax 4.06. Tax Returns and Statements 4.07. Utilities ARTICLE 5. CONSTRUCTION BY LESSEE 7 5.01. Right to Construct 5.02. Duty to Subdivide 5.03. Duty to Construct Improvements for Lessors 5.04. No Construction Before Notice - Notice of Nonresponsibility 5.05. Compliance with Law and Quality 5.06. Mechanics' Liens 5.07. Zoning and Use Permits 5.08. Ownership of Building Project i ARTICLE 6. ENCUMBRANCE OF LEASEHOLD 10 6.01. Lessee's Right to Encumber 6.02. Request for Notice of Loan Default 6.03. Notice to and Service on Lender 6.04. No Modification Without Lender's Consent 6.05. Rights of Lender 6.06. Rights of Lender to Cure Defaults 6.07. Foreclosure in Lieu of Curing Default 6.08. Assignment Without Consent on Foreclosure 6.09. New Lease to Lender 6.10. Lender as Assignee of Lease 6.11. Lender as Including Subsequent Security Holders 6.12. Subordination, Attornment, Quiet Enjoyment ARTICLE 7. REPAIRS AND RESTORATION 13 7.01. Maintenance by Lessee 7.02. Requirements of Governmental Agencies 7.03. Option to Terminate Lease for Destruction ARTICLE 8. INDEMNITY AND INSURANCE 14 8.01. Indemnity Agreement 8.02. Liability Insurance 8.03. Deposit of Insurance 8.04. Notice of Cancellation of Insurance ARTICLE 9. CONDEMNATION 15 9.01. Total Condemnation 9.02. Partial Taking - Parking Lot 9.03. Partial Taking - Rental Facilities 9.04. Condemnation Award 9.05. Voluntary Conveyance in Lieu of Eminent Domain ARTICLE 10. DEFAULT AND TERMINATION 17 10.01. Abandonment by Lessee 10.02. Termination for Breach by Lessee 10.03. Cumulative Remedies ARTICLE 11. MISCELLANEOUS 18 11.01. Force Majeure - Delays 11.02. Attorney's Fees 11.03. Notices to Lessors 11.04. Notices to Lessee 11.05. Hazardous Materials ii ARTICLE 11. MISCELLANEOUS (CONT.) 11.06. Interest on Advances 11.07. Governing Law 11.08. Binding on Heirs and Successors 11.09. Partial Invalidity 11.10. Sole and Only Agreement 11.11. Time of Essence 11.12. Memorandum of Lease for Recording EXHIBITS Description of Leased Premises A Preliminary Title Report B iii FIRST AMENDED AND RESTATED GROUND LEASE PREAMBLE - PARTIES AND LEASING This First Amended and Restated Ground Lease is made and entered into by and between JOSEPH W. SOARES and LAURA MAE SOARES (hereinafter collectively referred to as "Lessors") and BANK OF SANTA MARIA, a California Banking Corporation (Hereinafter referred to as "Lessee)" with reference to the following facts: A. Lessors and Lessee are the Lessors and Lessee respectively named in that certain Ground Lease dated February 12, 1990 referencing certain real property therein located on Tefft Road in the unincorporated town of Nipomo, County of San Luis Obispo, State of California. B. The parties wish to amend and restate the terms of the Ground Lease as specified herein including, but not limited to the description of the premises. NOW THEREFORE, the parties hereto amend and restate the Ground Lease as specified herein and Lessors' hereby lease to Lessee the land and premises (hereinafter referred to as the "Premises") described as set forth in the attached Exhibit "A", all on the following terms and conditions: ARTICLE 1. TERM OF LEASE SECTION 1.01. FIXED TERM. The term of this lease shall be a period of twenty-five (25) years, commencing March 1, 1990 and ending February 28, 2015, unless sooner terminated or extended as provided herein. SECTION 1.02. OPTION TO EXTEND. Provided that Lessee is not in default in the terms of this lease, it shall automatically extend for an additional twenty-five (25) years unless Lessee gives Lessors not less than one (1) year notice of Lessee's intent not to extend the lease. SECTION 1.03. LESSEE'S RIGHT OF FIRST REFUSAL TO PURCHASE. Provided that Lessee is not in default of the terms of this lease, Lessee shall have a right of first refusal to purchase the Premises on the following terms and conditions: (1) In the event that the Lessors wish to sell the Premises but do not yet have a bona fide offer to purchase the Premises from a third party then, as a condition precedent to Lessors' right and power to sell: (a) Lessors shall give Lessee notice in writing of their intention to sell the property. 1 (b) Within thirty (30) days thereafter, Lessors shall provide to Lessee a copy of an appraisal of the fair market value of the Premises made by an M.A.I. certified real estate appraiser. Such appraisal shall be of the value of the present worth of the contract for the current term of the lease discounted at an annual rate equal to the discount rate as established by the Federal Reserve Bank of San Francisco on the date of Lessors' notice of intent to sell (hereinafter referred to as the "discount rate"); plus the value of the present worth of the reversion of the land and improvements at the expiration of the current term of the lease discounted at an annual rate equal to the discount rate. In the event that the discount rate is no longer published, then the discount rate shall be such rate as the parties may agree upon, or in the event that they cannot agree, it shall be established by arbitration in accordance with the commercial arbitration rules of the American Arbitration Association. (c) Within fifteen (15) days after receipt of the appraisal by Lessee, Lessee shall notify Lessors in writing of its election to purchase the property or election not to purchase the Premises. Failure of Lessee to notify Lessors of its election within said fifteen (15) day period shall be deemed an election not to purchase the Premises. (d) The purchase price of the Premises shall be the full fair market value of the Premises as determined by the appraisal and the terms of sale shall be all cash; escrow to close within thirty (30) days of Lessee's Notice of Election to Purchase, and all closing costs to be paid by Lessee. (e) If Lessee fails to elect to purchase as provided herein, or elects to purchase and then fails to close escrow as provided herein, then Lessors may thereafter sell the Premises free of any rights of Lessee. (2) In the event that the Lessors wish to sell the Premises and have obtained a bona fide offer to purchase the premises from a third party then, as a condition precedent to Lessors' right and power to sell: (a) Lessors shall first give Lessee notice of Lessors' intent to sell in accordance with Section 11.04 of this Ground Lease (hereinafter referred to as the "Notice of Intent"). Said notice shall be accompanied by an executed counterpart of any proposed purchase and sale agreement with the third party (hereinafter referred to as the "Notice Exhibits") and shall specify: (i) The name, address and telephone number of the proposed purchaser. If the proposed purchaser is not a natural person, the Notice of Intent or the Notice Exhibits shall also specify the name, address and telephone number of each principal owner of the purchaser. (ii) The purchase price and terms of payment thereof. (iii) All other terms and conditions of the purchase. (b) For thirty (30) days following the receipt of the Notice of Intent and the Notice Exhibits, the Lessee shall have the option to purchase the Lessors' interest in the Premises 2 on the terms and conditions specified in the Notice of Intent and Notice Exhibits or on an all cash basis. Said option shall be exercised, if at all, by delivery of a written Notice of Exercise of Option to Lessors in accordance with Section 11.04 within the thirty (30) day period. Failure of Lessee to notify Lessors of its election within said thirty (30) day period shall be deemed an election not to purchase the Premises. (c) Consummation of the sale shall be through the medium of an escrow at an escrowholder to be selected by the parties and the sale shall close in accordance with the terms of the Notice Exhibits but in no event sooner than thirty (30) days after Lessee's election to purchase the Premises. In the event that Lessee elects to purchase the property on an all cash basis, then notwithstanding the terms of the Notice Exhibits, escrow shall close thirty (30) days after the date of Lessee's notice of exercise of option. (d) If Lessee fails to elect to purchase as provided herein, or elects to purchase and then fails to close escrow as provided herein, then Lessors may thereafter sell the Premises to the third party and on the terms specified in the Notice of Intent free of any rights of Lessee. SECTION 1.04. RIGHTS TO TERMINATE. (1) Notwithstanding any other provisions contained in this lease, in the event the Lessee is closed or taken over by the banking authority of the State of California, or other bank supervisory authority, the Lessor may terminate the lease only with the concurrence of such banking authority or other bank supervisory authority, and any such authority shall in any event have the election either to continue or to terminate the lease; provided, that in the event this lease is terminated, the maximum claim of Lessor for damages or indemnity for injury resulting from the rejection or abandonment of the unexpired term of the lease shall in no event by in an amount exceeding the rent reserved by the lease, without acceleration, for the year next succeeding the date of the surrender of the premises to the Lessor, or the date of reentry of the Lessor, whichever first occurs, whether before or after the closing of the bank, plus an amount equal to the unpaid rent accrued, without acceleration up to such date. (2) Notwithstanding any other provisions contained in this lease, Lessee shall have the right to terminate this lease on thirty (30) days written notice: (a) In the event that Lessee is not able to obtain approval by the applicable California state banking authorities of the lease and the construction and operation of a branch bank on the Premises within one (1) year of the date of this lease. (b) In the event that Lessee is not able to obtain all necessary local governmental land use and construction approvals to construct and operate a bank on the Premises within one (1) year of the date of this lease. (c) In the event that Lessee is not able to obtain all necessary governmental approvals to record a Parcel Map in accordance with Section 5.02 of this Lease. 3 In the event of a termination pursuant to this Section 1.04 (2), Lessee shall pay the full amount of the rent accrued pursuant hereto through the expiration of the thirty (30) day notice period. All rights to terminate pursuant to this Section 1.04 (2) shall terminate three (3) years after the date of this lease. (3) Notwithstanding any other provisions contained in this lease, Lessee shall have the right to terminate this lease immediately in the event that Lessors are unable to convey the leasehold interest free and clear of any defects in title other than those approved by Lessee and evidenced by a Leaseholder Owner's policy of title insurance issued by Ticor Title Insurance Company as of the date of recordation of an abstract of this lease and paid for by Lessee. In connection therewith, Lessee has obtained a preliminary title report from Ticor Title Insurance Company dated December 28, 1989 (Title Order #171490) a copy of which is attached hereto as Exhibit "B". Lessee approves the condition of title to the property as specified therein with the exception of exclusion 3. SECTION 1.05. AUTOMATIC TERMINATION - RESIDENTIAL PARCEL. This Lease shall immediately terminate as to the residential parcel described in the attached Exhibit "A" upon recordation of the Parcel Map described in Section 5.02 or five (5) years from the date hereof, whichever occurs first. Thereafter, the "Premises" shall be deemed to constitute only the bank parcel as described on the attached Exhibit "A". ARTICLE 2. RENT SECTION 2.01. APPORTIONMENT OF BASIC RENT. The basic rent on the leased premise shall be apportioned between the bank parcel described in the attached Exhibit "A" and the residential parcel described in the attached Exhibit "A" as set forth in Sections 2.02 and 2.03. SECTION 2.02. BASIC RENT - BANK PARCEL. Lessee agrees to pay to Lessors, as the Rent for the portion of the Premises consisting of the bank parcel, the sum of Eight Hundred Fifty-Five Thousand Dollars ($855,000.00), payable in three hundred (300) equal monthly installments of Two Thousand Eight Hundred Fifty Dollars ($2,850.00), each due and payable on the first day of the month commencing March 1, 1990, and continuing on the first day of each month of the lease term. SECTION 2.03. COST OF LIVING ADJUSTMENT - BANK PARCEL. On March 1, 1992, and every twelve (12) months thereafter, including any extended term, the Rent on the bank parcel for the current lease term and the then current total monthly installments thereof shall be adjusted to an amount that bears the same relationship to the original monthly installment of the Rent which the Consumer Price Index for the immediately preceding month of January bears to the index for January, 1990. However, in no event shall the Rent on the bank parcel for the current lease term and the monthly installments thereof be reduced below the amounts in effect immediately preceding such adjustment. 4 The Consumer Price Index to be used is the Los Angeles-Riverside-Anaheim Consumer Price Index - all urban consumers, published monthly by the U.S. Department of Labor, Bureau of Labor Statistics. If said Consumer Price Index is discontinued, then the parties shall substitute therefor any successor index supplied by the U.S. Department of Labor which reflects consumer price levels for the area encompassing the City of Los Angeles, and if no such successor index exists, then the parties shall select another similar index which reflects consumer price levels and if the parties cannot agree on another index, it shall be determined by binding arbitration. SECTION 2.04. BASIC RENT - RESIDENTIAL PARCEL. Lessee agrees to pay Lessors, as the rent for the portion of the Premises consisting of the residential parcel, all sums collected by its special property manager on the residential parcel plus the sum of One Hundred Dollars ($100.00) per month. In connection therewith, the Lessee hereby irrevocably appoints JOSEPH W. SOARS as its special property manager with full power and exclusive authority to: (1) Lease the residential parcel on such terms and to such persons as he deems fit in his sole and absolute discretion. (2) Collect all rents due on the residential parcel and account for the same to Lessors. (3) Undertake in his own name, any proceedings necessary to evict any tenant on the residential parcel. (4) Enter on and perform at Lessors' expense, any repairs or maintenance necessary on the residential parcel. (5) Insure, at Lessors' expense, the improvements on the residential parcel. (6) Provide for a caretaker for the bank parcel on such terms as he sees fit. SECTION 2.05. PLACE FOR PAYMENT OF RENT. All rent that becomes due and payable under this lease shall be paid to Lessors at 3925 Oakglen Avenue, Nipomo, California 93444-9738, or any other place or places that Lessor may designate by written notice to Lessee. SECTION 2.06. SECURITY DEPOSIT. No deposit has been given as security for the performance of this lease. SECTION 2.07. LATE CHARGES. In the event that any installments of Rent on the bank parcel shall not be received by Lessors within ten (10) days after such amount becomes due, then, without any additional requirement for notice, Lessee shall pay to Lessors a late charge equal to three percent (3%) of such over due amount. In the event more than one (1) month's installment of Rent is delinquent, then any payment of Rent received shall be applied to the oldest rental payment due and unpaid and not to the most recent delinquency. 5 ARTICLE 3. USE OF PREMISES SECTION 3.01. PRINCIPAL USE. The Premises may, during the term of this lease, be used by Lessee for any lawful purpose; provided, however, that it is expressly understood and agreed that unimproved land with the express intention of developing the same, either alone or in conjunction with adjoining lands that may now or hereafter be acquired by Lessee either in fee or in leasehold estate, by constructing, maintaining and operating thereon a bank. SECTION 3.02. ONLY LAWFUL USES PERMITTED. Lessee shall not use or permit the bank parcel or any portion of the same to be improved, developed, used or occupied in any manner or for any purpose that is in any way to violation for any valid law, ordinance or regulation of any federal, state, county or local governmental agency, body or entity. Furthermore, Lessee shall not maintain, commit or permit the maintenance or commission of any nuisance as now or hereafter defined by any statutory or decisional law applicable to the bank parcel on the bank parcel or any part of the bank parcel. ARTICLE 4. TAXES AND UTILITIES SECTION 4.01. LESSEE TO PAY TAXES. In addition to the rents required to be paid under this lease, Lessee shall pay, and Lessee hereby agrees to pay, any and all taxes, assessments and other charges of any description levied or assessed during the term of this lease by any governmental agency or entity on or against the bank parcel, any portion of the bank parcel, any interest in the bank parcel, or any improvements or other property in or on the bank parcel. In connection therewith, Lessee shall use its best efforts to insure that the leased bank parcel and any improvements constructed thereon are separately assessed. SECTION 4.02. PRORATION OF FIRST AND LAST YEAR TAXES. Notwithstanding the provisions of Section 4.01 of this lease, all taxes or assessments levied or assessed on or against the bank parcel during the tax years in which the term of this lease is to commence and the term of this lease is to end shall be prorated between Lessors and Lessee as of 12:01 A.M. on the date the term of this lease is to commence and on the date the term of this lease is to end respectively on the basis of tax years that commence on July 1st and end on June 30th of each year. Lessors shall pay the taxes for the year in which this lease is to commence and Lessee shall promptly, on service of written request by Lessors, reimburse Lessors for Lessee's share of such taxes. Lessee shall pay the taxes for the year in which this lease is to end; and Lessors shall promptly, on service of written request by Lessee, reimburse Lessee for its share of such taxes. SECTION 4.03. SEPARATE ASSESSMENT OF LEASED LAND. Should the bank parcel be assessed and taxed with or as part of other property owned by Lessors prior to commencement of the term of this lease, Lessors agrees to arrange with the taxing authorities to thereafter have the bank parcel taxed and assessed as a separate parcel distinct from any other real or personal property owned by Lessors. Should the bank parcel be assessed and taxed for the year in which this lease is to commence with or as part of other property owned by Lessors, for purposes of determining pursuant to Section 4.02 of this lease the share of such taxes for which Lessee is liable, that portion of such taxes that bears the same ratio to the total of such taxes as the ground 6 area of the bank parcel bears to the ground area of the total taxed property shall be the taxes levied on and assessed against the bank parcel. SECTION 4.04. PAYMENT BEFORE DELINQUENCY. Any and all taxes and assessments and installments of taxes and assessments required to be paid by Lessee under this lease shall be paid by Lessee at least ten (10) days before each such tax, assessment or installment of tax or assessment becomes delinquent. SECTION 4.05. CONTEST OF TAX. Lessee shall have the right to contest, oppose or object to the amount or validity of any tax, assessment or other charge levied on or assessed against the bank parcel or any part of the bank parcel; provided, however, that the contest, opposition or objection must be filed before the tax, assessment or other charge at which it is directed becomes delinquent and written notice of the contest, opposition or objection must be given to Lessors at least ten (10) days before the date the tax, assessment or other charge becomes delinquent. Lessors shall, on written request of Lessee, join in any such contest, opposition or objection if Lessee determines such joinder is necessary or convenient for the proper prosecution of the proceedings but Lessors shall not be liable for any costs or expenses incurred or awarded in the proceeding. SECTION 4.06. TAX RETURNS AND STATEMENTS. Lessee shall, as between Lessor and Lessee, have the duty of attending to, preparing, making and filing any statement, return, report or other instrument required or permitted by law in connection with the determination, equalization, reduction or payment of any taxes, assessments or other charges that are or may be levied on or assessed against the bank parcel, any portion of the bank parcel, any interest in the bank parcel, or any improvements or other property on the bank parcel. SECTION 4.07. UTILITIES. Lessee shall pay or cause to be paid, and hold Lessors and the property of Lessors including the bank parcel free and harmless from, all charges for the furnishing of gas, water, electricity, telephone service, and other public utilities to the bank parcel during the term of this lease and for the removal of garbage and rubbish from the bank parcel during the term of this lease. ARTICLE 5. CONSTRUCTION BY LESSEE SECTION 5.01. RIGHT TO CONSTRUCT. Lessee shall, at Lessee's sole option, cost and expense, construct or cause to be constructed on the bank parcel a commercial bank facility (herein called "the building project"), in the manner and according to the terms and conditions specified in this Article. SECTION 5.02. DUTY TO SUBDIVIDE. Lessee shall immediately undertake and diligently pursue to completion, tentative and final parcel maps to create two legal parcels consisting of the bank parcel and the residential parcel. Lessors agree to cooperate with Lessee in obtaining such governmental approval as may be necessary to achieve recordation of a final parcel map, provided, however, that such cooperation shall be at no cost to Lessors, except for the cost of any improvements required as a condition of the map and which are not located on the bank parcel; which costs shall be borne by Lessors. 7 SECTION 5.03. DUTY TO CONSTRUCT IMPROVEMENTS FOR LESSORS. Lessee, as part of the construction of the improvements on the bank parcel, shall construct the following additional improvements on the residential parcel all at Lessee's expense: (1) Grade the Tefft Road frontage (fifty foot (50') width). (2) Construct a twenty-foot (20') wide asphalt paved road to a depth of two hundred feet (200') from Tefft Road along the Westerly boundary of the residential parcel and grade the slope and cut a twelve foot (12') wide unpaved road from the end of the paved road to the existing residence on the residential parcel. The asphalt paving, base and the like for the paved road shall be in accordance with San Luis Obispo County design standards. (3) Re-route the existing water line on the bank parcel to the residence on the residential parcel and provide appropriate easements for the location, repair and maintenance of the same as well as any other necessary public utilities. The water line shall be of a standard required by all appropriate governmental agencies having jurisdiction and of a size of not less than two inches (2") from the Tefft Road connection to the north boundary of the bank parcel and three quarters of an inch (.75") thereafter. Lessors hereby grant to Lessee a temporary easement to go upon the residential parcel for the purposes of constructing the improvements required by this Lease and as may from time to time be required to construct the bank buildings, parking lots, retaining walls and other facilities and improvements contemplated on the bank parcel. Lessors hereby further grant to Lessee a slope easement on the residential parcel for the purpose of constructing and maintaining slope grades to the bank parcel as may from time to time be required by the governmental authorities having jurisdiction over the same. In connection therewith, Lessee agrees to design and construct a drainage system adequate to handle the flow of water from the higher residential parcel as it currently exists. Lessee hereby further agrees to waive any and all claims for any and all damages or losses which might accrue to the property or property rights of Lessee and to indemnify and hold Lessors harmless from any and all claims for damages to third persons or their property occasioned by the natural flow of water from the residential parcel as it currently exists onto the bank parcel. Nothing herein shall be construed as requiring Lessee to accept storm or other water run off or discharge from the residential parcel created as a result of the construction of improvements or other changes to the residential parcel at a later date and not constructed or consented to by Lessee. SECTION 5.04. NO CONSTRUCTION BEFORE NOTICE - NOTICE OF NONRESPONSIBILITY. No work of any kind shall be commenced on and no building or other materials shall be delivered for said building project, nor shall any other building or land development work be commenced or building materials be delivered on the bank parcel until at least ten (10) days after written notice has been given by Lessee to Lessors of the commencement of such work or the delivery of such materials. Lessors shall, at any and all times during the term of this lease, have the right to post and maintain on the bank parcel and to record as required by law any notice or notices of nonresponsibility provided for by the mechanics' lien laws of the State of California. The work prohibited by this section until 10 days' written notice thereof has been given to Lessors includes 8 as well as actual construction work any site preparation work, installation of utilities, street construction or improvement work or any grading or filling of the bank parcel. SECTION 5.05. COMPLIANCE WITH LAW AND QUALITY. The building project shall be constructed, and all work performed on the bank parcel and all buildings or other improvements erected on the bank parcel shall be in accordance with all valid laws, ordinances, regulations and orders of all federal, state, county or local governmental agencies or entities having jurisdiction over the bank parcel; provided, however, that any structure or other improvement erected on the bank parcel, including said building project, shall be deemed to have been constructed in full compliance with all such valid laws, ordinances, regulations and orders when a valid final Certificate of Occupancy entitling Lessee and tenants of Lessee to occupy and use of the structure or other improvement has been duly issued by proper governmental agencies or entities. All work performed on the bank parcel pursuant to this lease, or authorized by this lease, shall be done in a good workmanlike manner and only with new materials of good quality and high standard. SECTION 5.06. MECHANICS' LIENS. At all times during the term of this lease, Lessee shall keep the bank parcel and all building and improvements now or hereafter located on the bank parcel free and clear of all liens and claims of liens for labor, services, materials, supplies or equipment performed on or furnished to the bank parcel. Should Lessee fail to pay and discharge or cause the bank parcel to be released from any such lien or claim of lien within thirty (30) days after service on Lessee of written request from Lessors to do so, Lessors may pay, adjust, compromise and discharge any such lien or claim of lien on such terms and manner as Lessors may deem appropriate. In such event, Lessee shall, on or before the first day of the next calendar month following any such payment by Lessors, reimburse Lessors for the full amount paid by Lessors in paying, adjusting, compromising and discharging such lien or claim of lien, including any attorney's fees or other costs expended by Lessors. SECTION 5.07. ZONING AND USE PERMITS. Should Lessee deem it necessary or appropriate to obtain any use permit, variance, or rezoning of the Premises in order to construct or operate the building project, Lessors agrees to execute such documents, petitions, applications and authorizations as may be necessary or appropriate in obtaining the same and hereby appoints Lessee their attorney in fact to execute in the name and on behalf of Lessors any such documents, petitions, applications or authorizations; provided, however, that any such permits, variances or rezoning shall be obtained at the sole cost and expense of Lessee and Lessee agrees to protect and save Lessors and the property of Lessors, including the Premises, free and harmless from any such cost and expense. In connection therewith, Lessors shall concurrently with the execution of this lease execute a separate instrument so appointing Lessee for such purposes. SECTION 5.08. OWNERSHIP OF BUILDING PROJECT. Any and all buildings and improvements placed or erected on the bank parcel as part of the building project as well as any and all other alterations, additions, improvements, and fixtures, except furniture and trade fixtures, made or placed in or on the bank parcel by Lessee or any other person shall not be considered part of the real property of the bank parcel until and only in the event of expiration or sooner termination of this lease at which time they shall remain on the bank parcel and become the property of Lessors. 9 ARTICLE 6. ENCUMBRANCE OF LEASEHOLD SECTION 6.01. LESSEE'S RIGHT TO ENCUMBER. Lessee may, at any time after subdivision of the Premises in accordance with Section 5.02 and from time to time during the term of this lease, encumber to any person or entity, herein called "Lender", by deed of trust or mortgage or other security instrument all of Lessee's interest under this lease and the leasehold estate hereby created in Lessee for any purpose or purposes without the consent of Lessors; provided, however, that no encumbrance incurred by Lessee pursuant to this section shall, and Lessee shall not have power to incur any encumbrance that will, constitute in any way a lien or encumbrance on the fee of the Premises or any interest of Lessors in the Premises. SECTION 6.02. REQUEST FOR NOTICE OF LOAN DEFAULT. Immediately after the recording of any deed of trust or mortgage executed by Lessee pursuant to Section 6.01 of this lease and containing a power of sale as defined by California law, Lessee shall at Lessee's own cost and expense record in the office of the County Recorder of San Luis Obispo County, California, a written request executed and acknowledged by Lessors for a copy of any notice of default and a copy of any notice of sale under such deed of trust or mortgage to be mailed to Lessors at the address specified in the request by Lessors. SECTION 6.03. NOTICE TO AND SERVICE ON LENDER. Lessors shall mail to Lender, should Lessee incur any encumbrance pursuant to Section 6.01 of this lease, a duplicate copy of any and all notices Lessors may from time to time give to or serve on Lessee pursuant to or relating to this lease. Lessee shall at all times keep Lessors informed in writing of the name and mailing address of Lender and any changes in Lender's mailing address. Any notices or other communications permitted by this or any other section of this lease or by law to be served on or given to Lender by Lessors shall be deemed duly served on or given to Lender when deposited in the United States mail, first-class postage prepaid, addressed to Lender at the last mailing address for Lender furnished in writing to Lessors by Lessee or Lender. SECTION 6.04. NO MODIFICATION WITHOUT LENDER'S CONSENT. Should Lessee incur any encumbrance pursuant to Section 6.01 of this lease, Lessee and Lessors hereby expressly stipulate and agree that they will not modify this lease in any way nor cancel this lease by mutual agreement without the written consent of Lender having such encumbrance. SECTION 6.05. RIGHTS OF LENDER. Should Lessee incur any encumbrance pursuant to Section 6.01 of this lease, the Lender having such encumbrance shall have the right at any time during the term of this lease and the existence of this encumbrance to: (1) Do any act or thing required of Lessee under this lease, and any such act or thing done and performed by Lender shall be as effective to prevent a forfeiture of Lessee's rights under this lease as if done by lessee himself; (2) Realize on the security afforded by the leasehold estate by exercising foreclosure proceedings or power of sale or other remedy afforded in law or in equity or by the security document, herein called the "Trust Deed", and to: 10 (a) Transfer, convey or assign the title of Lessee to the leasehold estate created by this lease to any purchaser at any foreclosure sale, whether the foreclosure sale be conducted pursuant to court or pursuant to a power of sale contained in the Trust Deed; and (b) Acquire and succeed to the interest of Lessee under this lease by virtue of any foreclosure sale, whether the foreclosure sale be conducted pursuant to a court order or pursuant to a power of sale contained in the Trust Deed. SECTION 6.06. RIGHT OF LENDER TO CURE DEFAULTS. Should Lessee incur an encumbrance pursuant to Section 6.01 of this lease, before Lessors may terminate this lease because of any default under or breach of this lease by Lessee, Lessors must give written notice of the default or breach to Lender and afford Lender the opportunity after service of the notice to: (1) Cure the breach or default within thirty (30) days where the default can be cured by the payment of money (including any late charges, penalties and interest) to Lessors or some other person; (2) Cure the breach or default within ninety (90) days where the breach or default must be cured by something other than the payment of money and can be cured within that time; or (3) Cure the breach or default in such reasonable time as may be required where something other than money is required to cure the breach or default and cannot be performed within ninety (90) days provided that acts to cure the breach or default are commenced within that time period after service of notice of default on Lender by Lessors and are thereafter diligently continued by Lender. SECTION 6.07. FORECLOSURE IN LIEU OF CURING DEFAULT. Notwithstanding any other provision of this lease, a Lender under an encumbrance incurred by Lessee pursuant to Section 6.01 of this lease may forestall termination of this lease by Lessors for a default under or breach of this lease by Lessee by commencing proceedings to foreclose its encumbrance on the leasehold estate created by this lease. The proceedings so commenced may be for foreclosure of the encumbrance by order of court or for foreclosure of the encumbrance under a power of sale contained in the instrument creating the encumbrance. The proceedings shall not, however, forestall termination of this lease by Lessors for the default or breach by Lessee unless: (1) They are commenced within thirty (30) days after service on Lender of the notice described in Section 6.06 of this lease; (2) They are, after having been commenced, diligently pursued in the manner required by law to completion; and (3) Lender keeps and performs all of the terms, covenants and conditions of this lease requiring the payment of expenditure of money by Lessee until the foreclosure proceedings are complete or discharged by redemption, satisfaction, payment or conveyance of the leasehold estate to Lender. 11 SECTION 6.08. ASSIGNMENT WITHOUT CONSENT ON FORECLOSURE. Provided that Lender under any encumbrance incurred by Lessee pursuant to Section 6.01 of this lease gives written notice of transfer to Lessors setting forth the name and address of the transferee as well as the effective date of the transfer, the written consent of Lessors shall not be required for transfer of Lessee's interest under this lease to: (1) A purchaser at a foreclosure sale of the encumbrance whether the foreclosure sale be conducted pursuant to court order or pursuant to a power of sale in the instrument creating the encumbrance; or (2) A purchaser from Lender after foreclosure where Lender was the purchaser of Lessee's interest at the foreclosure sale of the encumbrance and Lender is an established bank, savings and loan association, or insurance company. SECTION 6.09. NEW LEASE TO LENDER. Notwithstanding any other provision of this lease, should this lease terminate because of the insolvency or bankruptcy of Lessee or because of any default under or breach of this lease by Lessee, Lessors will execute a new lease for said premises to the Lender under an encumbrance incurred by Lessee pursuant to Section 6.01 of this lease as Lessee, provided: (1) A written request for the new lease is served on Lessors by Lender within ninety (90) days after service on Lender of the notice described in Section 6.06 of this lease. (2) The new lease is for a term ending on the same date the term of this lease would have ended had not this lease been terminated, provides for the payment of rent at the same rate that would have been payable under this lease during the remaining term of this lease had this lease not been terminated, and contains the same terms, covenants, conditions and provisions as are contained in this lease. (3) Lender, on execution of the new lease by Lessors, shall pay any and all sums that would at the time of the execution of the new lease be due under this lease but for its termination (including but not limited to any accrued rent, taxes, insurance, late charges, penalties or interest) and shall otherwise fully remedy, or agree in writing to remedy, any other defaults under or breaches of this lease committed by Lessee that can be remedied. (4) Lender, on execution of the new lease, shall pay all reasonable costs and expenses, including attorney's fees and court costs, incurred in terminating this lease, recovering possession of said premises from Lessee or the representative of Lessee, and preparing the new lease. (5) The new lease shall be subject to all existing subleases under which the sublessees are not in default and shall be assignable by Lender but not by any assignee of Lender without the consent of Lessors. (6) The new lease shall: 12 (a) Extend the time for performance of any unperformed acts required by Article 5 of this lease for such period as is equal to the delay in performance of the act caused by Lessee's inability or failure to perform the act and the time required to terminate this lease and execute a new lease to Lender; and (b) Excuse the performance of any act required by Article 5 of this lease that has already been performed but Lender, and Lender's assignee as Lessee under the new lease, shall be liable for payment of all costs and expenses incurred in the performance of any act required by Article 5 of this lease, whether performed before or after execution of the new lease, that might be alleged or claimed as a lien against the Premises. SECTION 6.10. LENDER AS ASSIGNEE OF LEASE. No Lender under any encumbrance incurred by Lessee pursuant to Section 6.01 of this lease shall be liable to Lessors as an assignee of this lease unless and until such time as Lender acquires all rights of Lessee under this lease through foreclosure or other proceedings in the nature of foreclosure or as a result of some other action or remedy provided by law or the instrument creating the encumbrance. SECTION 6.11. LENDER AS INCLUDING SUBSEQUENT SECURITY HOLDERS. The term "Lender" as used in this lease shall mean not only the person, persons or entity that loaned money to Lessee and is named as beneficiary, mortgagee, secured party or security holder in the instrument creating any encumbrance incurred by Lessee pursuant to Section 6.01 of this lease, but also all subsequent assignees and holders of the security interest created by such instrument. SECTION 6.12. SUBORDINATION, ATTORNMENT, QUIET ENJOYMENT. At any time Lessors may at their option obtain and place such mortgages or deed of trusts as a lien on or against their fee interest in the Premises as they deem fit. In such event Lessee agrees to complete, execute and deliver to Lessors or the Lessors' lender any and all subordination agreements and/or estoppel certificates reasonably required by Lessors or Lessors' lender. Provided however, that as a condition precedent to any subordination, such lender shall agree in writing for itself and its successors, heirs and assigns that upon Lessee paying the Rent reserved herein and observing and performing all of the provisions hereof on Lessee's part to be performed, Lessee shall have quiet possession of the Premises during the entire term of the lease. It is further provided that in the event of the default of Lessors in connection with any such mortgage or deed of trust, Lessee may, at its sole discretion, pay directly to Lessors' lender any rents due Lessors to cure any such default on the part of Lessors. Lessee shall be entitled to and shall receive credit for all such payments as against any actual or reserved rent due Lessors under the terms of this lease. In the event any proceedings are brought for default or foreclosure under any such mortgage or deed of trust, Lessee may attorn to the purchaser upon any such foreclosure or sale and recognize said purchaser as the Lessor under this lease on the condition that such purchaser expressly agrees in writing to be bound by the terms of this lease. ARTICLE 7. REPAIRS AND RESTORATION SECTION 7.01. MAINTENANCE BY LESSEE. At all times during the term of this lease Lessee shall, at Lessee's own cost and expense, keep and maintain the bank parcel and all improvements 13 now or hereafter on the bank parcel as well as all facilities now or hereafter appurtenant to the bank parcel in good order and repair and in a safe and clean condition. Furthermore, Lessee shall, at Lessee's own cost and expense, maintain at all times during the term of this lease the whole of the bank parcel as well as any improvements, landscaping or facilities thereon in a clean, sanitary, neat, tidy, orderly and attractive condition. SECTION 7.02. REQUIREMENTS OF GOVERNMENTAL AGENCIES. At all times during the term of this lease, Lessee, at Lessee's own cost and expense, shall: (1) Make all alterations, additions or repairs to the bank parcel or the improvements or facilities on the bank parcel required by any valid law, ordinance, statute, order or regulation now or hereafter made or issued by any federal, state, county, local or other governmental agency or entity; (2) Observe and comply with all valid laws, ordinances, statutes, orders and regulations now or hereafter made or issued respecting the bank parcel or the improvements or facilities on the bank parcel by any federal, state, county, local or other governmental agency or entity; (3) Contest if Lessee, in Lessee's sole discretion, desires by appropriate legal proceedings brought in good faith and diligently prosecuted in the name Lessee, or in the names of Lessee and Lessors where appropriate or required, the validity or applicability to the bank parcel of any law, ordinance, statute, order or regulation now or hereafter made or issued by any federal, state, county, local or other governmental agency or entity; provided, however, that any such contest or proceeding, though maintained in the names of Lessee and Lessors, shall be without cost to Lessors, and Lessee shall protect the bank parcel and Lessors from Lessee's failure to observe or comply during the contest with the contested law, ordinance, statute, order or regulation. (4) Indemnify and hold Lessors and the property of Lessors, including the Premises, free and harmless from any and all liability, loss, damages, fines, penalties, claims, and action resulting from Lessee's failure to comply with and perform the requirements of this section. SECTION 7.03. OPTION TO TERMINATE LEASE FOR DESTRUCTION. Lessee shall have the option of terminating this lease on the last calendar day of any month by giving Lessors at least thirty (30) days' prior written notice of Lessee's intent to do so and by removing, at Lessee's own cost and expense, all debris and remains of the damaged improvements from the bank parcel where any buildings or improvements now or hereafter on the bank parcel are so damaged or destroyed by fire, theft, the elements or any cause conducting the business of Lessee is rendered impractical. ARTICLE 8. INDEMNITY AND INSURANCE SECTION 8.01. INDEMNITY AGREEMENT. Lessee shall indemnify and hold Lessors and the property of Lessors, including the Premises and any buildings or improvements now or hereafter on the Premises, free and harmless from any and all liability, claims, loss, damages or expenses 14 resulting from Lessee's occupation and use of the bank parcel, specifically including, without limitation, any liability, claim, loss, damage or expense arising by reason of: (1) The death or injury of any person, including any person who is an employee or agent of Lessee, or by reason of the damage to or destruction of any property, including property owned by Lessee or by any person who is an employee or agent of Lessee, from any cause whatever while such person or property is in or on the bank parcel or in any way connected with the bank parcel or with any of the improvements or personal property on the bank parcel. (2) Any work performed on the bank parcel or materials furnished to the bank parcel at the instance or request of Lessee or any person or entity acting for or on behalf of Lessee; or (3) Lessee's failure to perform any provision of this lease or to comply with any requirement of law or any requirement imposed on Lessee or the bank parcel by any duly authorized governmental agency or political subdivision. SECTION 8.02. LIABILITY INSURANCE. Lessee shall, at Lessee's own cost and expense, secure promptly after execution of this lease and maintain during the entire term of this lease a broad form comprehensive coverage policy of public liability insurance issued by an insurance company authorized to issue liability insurance in California insuring Lessee and Lessors against loss or liability caused by or connected with Lessee's occupation and use of the bank parcel under this lease in a combined single limit of not less than One Million Dollars ($1,000,000.00). SECTION 8.03. DEPOSIT OF INSURANCE. Lessee shall, not later than the commencement date hereof and promptly thereafter when any such policy is replaced, rewritten or renewed deliver to the Lessors a true and correct copy of each insurance policy required by this Article of this lease or a certificate executed by the insurance company or companies or their authorized agent evidencing such policy or policies. SECTION 8.04. NOTICE OF CANCELLATION OF INSURANCE. Lessee shall use its best efforts to assure that each insurance policy required by this Article of this lease shall contain a provision that it cannot be canceled or not renewed for any reason unless thirty (30) days' prior written notice of the cancellation or nonrenewal is given to the Lessors in the manner required by this lease for service of notices on Lessors. ARTICLE 9. CONDEMNATION SECTION 9.01. TOTAL CONDEMNATION. Should, during the term of this lease, title and possession of all of the Premises be taken under the power of eminent domain by any public or quasi-public agency or entity, this lease shall terminate as of 12:01 A.M. of, which ever first occurs, the date legal title of the bank parcel becomes vested in or actual physical possession of the Premises is taken by the agency or entity exercising the power of eminent domain and both Lessors and Lessee shall thereafter be released from all obligations, except those specified in Section 9.04 of this lease, under this lease. 15 SECTION 9.02. PARTIAL TAKING - PARKING LOT. Should, during the term of this lease, title and possession of only a portion of the Premises be taken under the power of eminent domain by any public or quasi-public agency or entity, all compensation and damages payable by reason of any parking facilities on the bank parcel taken by such exercise of the eminent domain power, except for such portion which is allocable to the value of the underlying fee interest of the Lessors, shall be available to and may be used, to the extent reasonably needed, by Lessee in replacing the parking facilities so taken to the extent reasonably practicable under then existing laws and conditions with new parking facilities on the remaining portion of the bank parcel. Provided, however, that should the facilities taken by eminent domain result in a net loss of twenty-five percent (25%) or more of the area of the bank parcel that can, after considering any replacement parking facilities that can be constructed on the remaining portion of the bank parcel by reasonable methods, be devoted to parking facilities as compared with the area devoted to such facilities immediately prior to the taking, Lessee may terminate this lease. SECTION 9.03. PARTIAL TAKING - RENTAL FACILITIES. Should, during the term of this lease, title and possession of only a portion of the Premises be taken under the power of eminent domain by any public or quasi-public agency or entity, all compensation and damages payable by reason of any improvements to the bank parcel other than parking facilities taken by such exercise of the eminent domain power shall be available to and may be used, to the extent reasonably needed, by Lessee to replace the improvements so taken to the extent reasonably practicable under then existing laws and conditions with improvements of the same type on the remaining portion of the bank parcel. Provided, however, that should the improvements taken by eminent domain result in a net loss of twenty-five percent (25%) or more of the total rentable floor space of all buildings on the bank parcel, after taking into consideration additional floor space that could be reasonably constructed on the remaining portion of the bank parcel, immediately prior to the taking, Lessee may terminate this lease. SECTION 9.04. CONDEMNATION AWARD. Any compensation or damages awarded or payable because of the taking of all or any portion of the by eminent domain shall be allocated between Lessor and Lessee as follows: (1) All compensation or damages awarded or payable for the taking by eminent domain of any land that is part of the Premises shall be paid to and be the sole property of Lessors free and clear of any claim of Lessee or any person claiming rights to said premises through or under Lessee. (2) All compensation or damages awarded or payable because of any improvements constructed or located on the portion of the bank parcel taken by eminent domain where only a portion of the bank parcel is taken by eminent domain shall be applied in the manner specified in Section 9.02 or Section 9.03 toward the replacement of such improvements with equivalent new improvements on the remaining portions of the bank parcel. (3) All compensation or damages awarded or payable because of any improvements constructed or located on the portion of the bank parcel taken by eminent domain where this lease is terminated because of the taking by eminent domain, whether all or only a portion of the bank parcel is taken by eminent domain, shall be allocated between Lessee and Lessors as follows: 16 (a) That percentage of the compensation or damages awarded or payable because of the improvements that equals the percentage of the full term of this lease that has, at the time of the taking, not expired shall belong to and be the sole property of Lessee. (b) That percentage of the compensation or damages awarded or payable because of the improvements that equals the percentage of the full term of this lease that has, at the time of taking, expired shall belong to and be the sole property of Lessors. (c) The term "time of taking" as used in this subparagraph shall mean 12:01 A.M. of, whichever shall first occur, the date title or the date physical possession of the portion of the bank parcel on which the improvements are located is taken by the agency or entity exercising the eminent domain power. (4) Any severance damages awarded or payable because only a portion of the bank parcel is taken by eminent domain shall be the sole and separate property of Lessors. SECTION 9.05. VOLUNTARY CONVEYANCE IN LIEU OF EMINENT DOMAIN. A voluntary conveyance by Lessors, with the consent of Lessee, of title to all or a portion of the bank parcel to a public or quasi-public agency or entity in lieu of and under threat by such agency or entity to take the same by eminent domain proceedings shall be considered a taking of title to all or such portion of the Premises under the power of eminent domain subject to the provisions of this Article. ARTICLE 10. DEFAULT AND TERMINATION SECTION 10.01. ABANDONMENT BY LESSEE. Should Lessee breach this lease and abandon the bank parcel prior to the natural expiration of the term of this lease, Lessors may continue this lease in effect by not terminating Lessee's right to possession of the bank parcel, in which event Lessors shall be entitled to enforce all Lessors' rights and remedies under this lease, including the right to recover the rent specified in this lease as it becomes due under this lease. SECTION 10.02. TERMINATION FOR BREACH BY LESSEE. All covenants and agreements contained in this lease are declared to be conditions to this lease and to the term hereby demised to Lessee. Should Lessee default in the performance of any covenant, condition or agreement contained in this lease and the default not be cured within thirty (30) days after written notice of the default is served on Lessee by Lessors, then Lessors may terminate this lease and: (1) Bring an action to recover from Lessee: (a) The worth at the time of award of the unpaid rent on the bank parcel which has been earned at the time of termination of the lease; (b) The worth at the time of award of the amount by which the unpaid rent on the bank parcel which would have been earned after termination of the lease until the time of 17 award exceeds the amount of rental loss on the bank parcel that Lessee proves could have been reasonably avoided; (c) The worth at the time of award of the amount by which the unpaid rent on the bank parcel for the balance of the term after the time of award exceeds the amount of rental loss on the bank parcel that Lessee proves could be reasonably avoided; and (d) Any other amount necessary to compensate Lessors for all detriment proximately caused by Lessee's failure to perform its obligations under this lease; and (2) Bring an action, in addition to or in lieu of the action described in subparagraph (1) of this section, to reenter and regain possession of the Premises in the manner provided by the laws of unlawful detainer of the State of California then in effect. SECTION 10.03. CUMULATIVE REMEDIES. The remedies given to Lessors in this Article shall not be exclusive but shall be cumulative with and in addition to all remedies now or hereafter allowed by law and elsewhere provided in this lease. ARTICLE 11. MISCELLANEOUS SECTION 11.01. FORCE MAJEURE - DELAYS. Except as otherwise expressly provided in this lease, should the performance of any act required by this lease to be performed by either Lessors or Lessee by prevented or delayed by reason of any act of God, strike, lockout, labor trouble, inability to secure materials, restrictive governmental laws or regulations, or any other cause except financial inability not the fault of the party required to perform the act, the time for performance of the act will be extended for a period equivalent to the period of delay and performance of the act during the period of delay will be excused; provided, however, that nothing contained in this section shall excuse the prompt payment of rent by Lessee as required by this lease or the performance of any act rendered difficult or impossible solely because of the financial condition of the party, Lessors or Lessee, required to perform the act. SECTION 11. 02. ATTORNEY'S FEES. Should any litigation be commenced between the parties to this lease concerning the Premises, this lease, or the rights and duties of either in relation thereto, the party, Lessors or Lessee, prevailing in such litigation shall be entitled, in addition to such other relief as may be granted in the litigation, to a reasonable sum as and for his attorney's fees in such litigation which shall be determined by the court in such litigation or in a separate action brought for that purpose. SECTION 11.03. NOTICES TO LESSORS. Except as otherwise expressly provided by law, any and all notices or other communications required or permitted by this lease or by law to be served on or given to Lessors by Lessee or any Lender described in Article 6 of this lease shall be in writing and shall be deemed duly served and given when personally delivered to Lessors; or in lieu of such personal service, when deposited in the United States mail, first-class postage prepaid, addressed to Lessors at 3925 Oakglen Avenue, Nipomo, California 93444-9738 in which case it shall be deemed received on the third business day following mailing. Lessors may 18 change Lessors' dress for the purpose of this section by giving written notice of such change to Lessee in the manner provided in Section 11.04 whereupon Lessee shall transmit a copy of such notice to any Lender described in Article 6 of this lease. SECTION 11.04. NOTICES TO LESSEE. Except as otherwise expressly provided by law, any and all notices or other communications required or permitted by this lease or by law to be served on or given to Lessee by Lessors shall be in writing and shall be deemed duly served and given when personally delivered to Lessee, any managing employee of Lessee, or in lieu of such personal service, when deposited in the United States mail, first-class postage prepaid, addressed to Lessee at P. O. Box 6090, Santa Maria, CA 93456-6090 in which case it shall be deemed received on the third business day following mailing. Lessee may change its address for the purpose of this section by giving written notice of such change to Lessors in the manner provided in Section 11.03 of this lease. SECTION 11.05. HAZARDOUS MATERIALS. As part of the moving consideration herefor, Lessors warrant and represent to Lessee that to the best of Lessors' knowledge there are not now, nor have there ever been any toxic or hazardous materials, as those terms are defined in applicable state and federal legislation, located in, on or under the surface of the Premises. SECTION 11.06. INTEREST ON ADVANCES. In addition to any other remedies available to Lessors, in the event of the default of Lessee in complying with and performing its obligations pursuant to the terms and conditions of this lease, if Lessors shall have paid any monetary obligation of Lessee under the lease; then in addition to the sum of money so advanced, Lessee shall be entitled to interest at the rate of ten percent (10%) per annum on the sum advanced from the date of advance until paid in full. All such advances shall be due and payable forthwith upon notification by Lessors to Lessee of the fact and amount of advance. SECTION 11.07. GOVERNING LAW. This lease, and all matters relating to this lease, shall be governed by the laws of the State of California in force at the time any need for interpretation of this lease or any decision or holding concerning this lease arises. SECTION 11.08. BINDING ON HEIRS AND SUCCESSORS. This lease shall be binding on and shall inure to the benefit of the heirs, executors, administrators, successors and assigns of the parties hereto. SECTION 11.09. PARTIAL INVALIDITY. Should any provision of this lease be held by a court of competent jurisdiction to be either invalid, void or unenforceable, the remaining provisions of this lease shall remain in full force and effect unimpaired by the holding. 19 SECTION 11.10. SOLE AND ONLY AGREEMENT. This instrument supersedes the Ground Lease between the parties date February 12, 1990 and constitutes the sole and only agreement between Lessors and Lessee respecting the Premises, the leasing of the Premises to Lessee, the construction of the building project described in this lease on the Premises, or the lease terms herein specified, and correctly sets forth the obligations of Lessors and Lessee to each other as of its date. Any agreements or representations respecting the Premises, their leasing to Lessee by Lessors or any other matter discussed in this lease not expressly set forth in this instrument are null and void. 19 SECTION 11.11. TIME OF ESSENCE. Time is expressly declared to be the essence of this lease. SECTION 11.12. MEMORANDUM OF LEASE FOR RECORDING. Lessors and Lessee shall execute an amended memorandum or "short form" of this lease for purposes of, and in a form suitable for, being recorded. The memorandum or "short form" of this lease shall describe the parties, Lessor and Lessee, set forth a description of the leased premises, specify the term of this lease, and shall incorporate this lease by reference. EXECUTED on June 26, 1990, at Santa Maria, California. LESSORS: LESSEE: Signature Present BANK OF SANTA MARIA - ----------------- A California Banking Corporation JOSEPH W. SOARES Signature Present By: Signature Present - ----------------- ----------------------------- LAURA MAE SOARES WILLIAM A. HARES President By: Signature Present ----------------------------- DONALD W. LEMKE Assistant Secretary 20 STATE OF CALIFORNIA ) ) ss. COUNTY OF SANTA BARBARA ) On this the 26th day of June, 1990, before me, the undersigned, a Notary Public in and for said County and State, personally appeared JOSEPH W. SOARES and LAURA MAE SOARES, personally known to me or proved to me on the basis of satisfactory evidence to be the persons whose names are subscribed to the within instrument, and acknowledged that they executed it. WITNESS my hand and official seal. Seal OFFICIAL SEAL Signature Present Here NORA E. THOMPSON ----------------- NOTARY PUBLIC - CALIFORNIA Notary Public SANTA BARBARA COUNTY My comm. expires FEB 8, 1994 STATE OF CALIFORNIA ) ) ss. COUNTY OF SANTA BARBARA ) On this the 27th day of June, 1990, before me, the undersigned, a Notary Public in and for said County and State, personally appeared WILLIAM A. HARES, personally known to me or proved to me on the basis of satisfactory evidence to be the President of the BANK OF SANTA MARIA, and DONALD W. LEMKE, personally known to me or proved to me on the basis of satisfactory evidence to be the Assistant Secretary of BANK OF SANTA MARIA, the corporation that executed the within instrument on behalf of said corporation, and acknowledged to me that such corporation executed it. WITNESS my hand and official seal. Seal BETTY B. O'DEA Signature Present Here Notary Public ----------------- Santa Barbara County Notary Public California My Commission Expires February 28, 1992 21 EXHIBIT "A" DESCRIPTION OF LEASED PREMISES BANK PARCEL PARCEL 1: That portion of Lot 11 of Story's Resubdivision of Lot 24 of Ward's Subdivision of the Rancho Nipomo recorded in Book A of Maps at Page 20, San Luis Obispo County official records, all located in San Luis Obispo County, California, being more particularly described as follows: BEGINNING at a point which bears North 34 degrees 30' West 20.00 feet and North 55 degrees 30' East 44.00 feet from the most Southerly corner of said Lot 11; Thence North 34 degrees 30' West 200.00 feet; Thence North 55 degrees 30' East 220.00 feet more or less, to a point on the Northeasterly boundary line of that certain parcel of land described in Book 1601, Page 715 of said County official records; Thence along said Northeasterly boundary line South 34 degrees 30' East 200.00 feet; Thence South 55 degrees 30' West 220.00 feet, more or less to the POINT OF BEGINNING. Containing 1.01 Acres of land more or less. PARCEL 2: An easement for ingress and egress over the residential parcel described as follows: That portion of Lot 11 of Story's Resubdivision of Lot 24 of Ward's Subdivision of the Rancho Nipomo recorded in Book A of Maps at Page 20 of San Luis Obispo County official records, all located in San Luis Obispo County, California, being more particularly described as follows: BEGINNING at a point on the Southwesterly boundary line of said Lot 11 which bears North 34 degrees 30' West 20.00 feet from the most Southerly corner of said Lot 11; Thence along said Southwesterly boundary line of Lot 11 North 34 degrees 30' West 200.00 feet; Thence North 55 degrees 30' East 44.00 feet; Thence South 34 degrees 30' East 200.00 feet, more or less to a point 20.00 feet measured at right angles from the Northwesterly right of way line of Tefft Street; Thence along a line 20.00 feet from a parallel to said Northwesterly right of way line South 55 degrees 30' West 44.00 feet, more or less to the POINT OF BEGINNING. Containing 8800 Square Feet of land, more or less. RESIDENTIAL PARCEL All that part of Lot 11 of the Resubdivisions of the Southwesterly part of Lot 24 of A. C. Ward's Subdivisions of the Nipomo Rancho, San Luis Obispo County, as shown by map of said Resubdivisions made by George Story, County Surveyor, in the year 1887, and which said map was filed on December 10, 1887, in the office of the San Luis Obispo County Recorder, described as follows: Beginning at a post marked X.5 at the Southwesterly corner of said Lot, and running Thence North 55 1/2 degrees East, along the Southerly line of said Lot, 4 chains; Thence North 34 1/2 degrees West, 10 chains to the line between Lots 10 and 11 of said Resubdivision; Thence South A 55 1/2 degrees West, along said line, 4 chains to post marked X.13, at the Northwesterly corner of said Lot 11; Thence South 34 1/2 degrees East, along the Westerly line of said Lot, 10 chains to the POINT OF BEGINNING. Excepting therefrom Parcel 1 of the Bank Parcel described above. A EXHIBIT "B" PRELIMINARY TITLE REPORT FOLLOWS ON NEXT PAGE B EX-10.5 12 LOMPOC BRANCH LEASE SHOPPING CENTER: Central Avenue Plaza Lompoc SUITE: G6-12 TENANT: El Camino National Bank ------------------------ ------------------------ LANDLORD: AEW #33 TRUST SHOPPING CENTER LEASE TABLE OF CONTENTS OF LEASE i LEASE SUMMARY-PROVISIONS iii ARTICLE I PREMISES Section 1.01 Premises Defined. . . . . . . . . . . . . .1 Section 1.02 Shopping Center . . . . . . . . . . . . . .1 Section 1.03 Modifications . . . . . . . . . . . . . . .1 ARTICLE II TERM Section 2.01 Length of Term. . . . . . . . . . . . . . .1 Section 2.02 Rent Commencement Date. . . . . . . . . . .1 Section 2.03 Failure to Open . . . . . . . . . . . . . .1 ARTICLE III RENT Section 3.01 Monthly Minimum Rent. . . . . . . . . . . .1 Section 3.02 Cost of Living Increase . . . . . . . . . .1 Section 3.03 Percentage Rent . . . . . . . . . . . . . .1 Section 3.04 Additional Rent . . . . . . . . . . . . . .1 ARTICLE IV RECORDS Section 4.01 Records . . . . . . . . . . . . . . . . . .1 Section 4.02 Audit . . . . . . . . . . . . . . . . . . .1 ARTICLE V TAXES Section 5.01 Real Estate Taxes . . . . . . . . . . . . .2 Section 5.02 Definitions . . . . . . . . . . . . . . . .2 Section 5.03 Other Taxes . . . . . . . . . . . . . . . .2 ARTICLE VI CONDUCT OF BUSINESS BY TENANT Section 6.01 Use of Premises . . . . . . . . . . . . . .2 Section 6.02 Restrictions on Use . . . . . . . . . . . .2 ARTICLE VII MAINTENANCE, REPAIRS AND ALTERATIONS Section 7.01 Maintenance and Repairs . . . . . . . . . .2 Section 7.02 Alterations, Additions, and Fixtures. . . .3 Section 7.03 Cleanliness; Waste and Nuisance . . . . . .3 ARTICLE VIII INSURANCE; INDEMNITY Section 8.01 Liability Insurance- Premises . . . . . . .3 Section 8.02 Other Insurance . . . . . . . . . . . . . .3 Section 8.03 Insurance Policies. . . . . . . . . . . . .3 Section 8.04 Waiver. . . . . . . . . . . . . . . . . . .3 Section 8.05 Indemnity . . . . . . . . . . . . . . . . .3 Section 8.06 Exemption by Landlord . . . . . . . . . . .4 ARTICLE IX REPAIRS AND RESTORATION Section 9.01 Minor Insured Damage. . . . . . . . . . . .4 Section 9.02 Uninsured Damage or Insured Substantial Damage. . . . . . . . . . . . . . . . . . .4 Section 9.03 Damage Near End of Term . . . . . . . . . .4 Section 9.04 Continued Operation by Tenant . . . . . . .4 Section 9.05 Waiver. . . . . . . . . . . . . . . . . . .4 ARTICLE X ASSIGNMENT AND SUBLETTING Section 10.01 Landlord's Rights. . . . . . . . . . . . .4 Section 10.02 No Release of Tenant . . . . . . . . . . .5 ARTICLE XI EMINENT DOMAIN Section 11.01 Entire or Substantial Taking . . . . . . .5 Section 11.02 Partial Taking . . . . . . . . . . . . . .5 Section 11.03 Awards . . . . . . . . . . . . . . . . . .5 Section 11.04 Sale Under Threat of Condemnation. . . . .5 ARTICLE XII UTILITY SERVICE Section 12.01 Utility Charges. . . . . . . . . . . . . .5 Section 12.02 Furnishing of Services . . . . . . . . . .5 Section 12.03 Interruption of Service. . . . . . . . . .5 Section 12.04 Heating, Ventilation and Air Conditioning. . . . . . . . . . . . . . .5 ARTICLE XIII DEFAULTS; REMEDIES Section 13.01 Defaults . . . . . . . . . . . . . . . . .5 Section 13.02 Remedies . . . . . . . . . . . . . . . . .5 Section 13.03 Determination of Rent. . . . . . . . . . .6 Section 13.04 Default by Landlord. . . . . . . . . . . .6 Section 13.05 Expense of Litigation. . . . . . . . . . .6 ARTICLE XIV COMMON AREAS Section 14.01 Definition . . . . . . . . . . . . . . . .6 Section 14.02 Use of Common Areas. . . . . . . . . . . .6 Section 14.03 Control by Landlord. . . . . . . . . . . .6 Section 14.04 Environmental Protection Expense . . . . .7 Section 14.05 Common Area Charges. . . . . . . . . . . .7 Section 14.06 Proportionate Payment. . . . . . . . . . .7 i ARTICLE XV ESTIMATED CHARGES Section 15.01 Election to Estimate Charges . . . . . . .7 Section 15.02 Statements of Actual Charges . . . . . . .7 Section 15.03 Adjustmen. . . . . . . . . . . . . . . . .7 Section 15.04 No Waiver. . . . . . . . . . . . . . . . .7 ARTICLE XVI SIGNS, LIGHTING AND ADVERTISING Section 16.01 Signage. . . . . . . . . . . . . . . . . .7 Section 16.02 Advertising. . . . . . . . . . . . . . . .7 ARTICLE XVII MISCELLANEOUS Section 17.01 Offset Statement . . . . . . . . . . . . .7 Section 17.02 Financial Statements . . . . . . . . . . .8 Section 17.03 Landlord's Right of Access . . . . . . . .8 Section 17.04 Holding Over . . . . . . . . . . . . . . .8 Section 17.05 Relocation of Premises . . . . . . . . . .8 Section 17.06 Transfer of Landlord's Interest. . . . . .8 Section 17.07 Floor Area . . . . . . . . . . . . . . . .8 Section 17.08 Separability . . . . . . . . . . . . . . .8 Section 17.09 Security Deposit . . . . . . . . . . . . .8 Section 17.10 Late Charges . . . . . . . . . . . . . . .8 Section 17.11 Interest . . . . . . . . . . . . . . . . .8 Section 17.12 Time of Essence. . . . . . . . . . . . . .8 Section 17.13 Headings . . . . . . . . . . . . . . . . .8 Section 17.14 Incorporation of Prior Agreements; Amendments . . . . . . . . . . . . . . . .9 Section 17.15 Notices. . . . . . . . . . . . . . . . . .9 Section 17.16 Brokers. . . . . . . . . . . . . . . . . .9 Section 17.17 Waivers. . . . . . . . . . . . . . . . . .9 Section 17.18 Other Locations. . . . . . . . . . . . . .9 Section 17.19 Merchants' Association . . . . . . . . . .9 Section 17.20 Liens. . . . . . . . . . . . . . . . . . .9 Section 17.21 Subordination. . . . . . . . . . . . . . .9 Section 17.22 Successors in Interest . . . . . . . . . .9 Section 17.23 California Law . . . . . . . . . . . . . .9 Section 17.24 Zoning . . . . . . . . . . . . . . . . . .9 Section 17.25 Delays . . . . . . . . . . . . . . . . . .9 Section 17.26 Financing. . . . . . . . . . . . . . . . .9 Section 17.27 Limitation of Landlord's Liability . . . .9 Section 17.28 Tenant's Performance . . . . . . . . . . 10 Section 17.29 Waiver of Trial by Jury. . . . . . . . . 10 Section 17.30 Tenant's Property and Repair of Property at Termination. . . . . . . . . 10 Section 17.31 No Warranties. . . . . . . . . . . . . . 10 Section 17.32 Recording. . . . . . . . . . . . . . . . 10 Section 17.33 Authority of Tenant. . . . . . . . . . . 10 Section 17.34 No Option to Lease . . . . . . . . . . . 10 ARTICLE XVIII CONDITION OF PREMISES. . . . . . . . . . . . . . . . . . . . 10 SIGNATURES EXHIBITS RIDERS ii JUNE 1987 SUITE G 6-12 -------- SHOPPING CENTER LEASE LEASE SUMMARY PROVISIONS Dated for Indentification Purposes: September 12, 1989 ------------------ Landlord: Thomas G. Eastman, H. Peter Norstrand, and John L. Patillo, as Trustees of AEW #33 Trust, established under Declaration of Trust dated October 3, 1985, but not individually ("Landlord"). Address of Landlord: c/o D.W.A. Smith & Company, Inc. 1300 Quail Street, Suite 106 Newport Beach, CA 92660 Phone No.: 714/851-1244 Tenant: El Camino National Bank ----------------------------------------------------- ("Tenant") ------------------------------------------- Trade Name: El Camino National Bank ----------------------------------------------------- Address of Tenant: P.O. Box 997 ----------------------------------------------------- Lompoc, CA 93438 ----------------------------------------------------- Phone No. -------- ------------------------------------ Shopping Center: Central Avenue Plaza, Lompoc, CA ("Shopping Center") ---------------------------------- Address of Premises: 1325 North H Street Suite E, Lompoc, CA 93436 ----------------------------------------------------- County: Santa Barbara ------------------ --------------------------- ("Premises") which Premises are outlined in red on the site plan of the Shopping Center attached hereto as Exhibit "A" and made a part hereof. Size of Premises: Gross Ground Floor Area of Premises:3.85- square feet Width 77 feet Depth: 50 feet ----------- ------------- (All measurements are approximate) Lease Terms: Five (5) full years beginning November 1, 1989, plus -------- ---------------- Options shown on Rider No. 2 Rent Commencement Date: May 1, 1990 ---------------------------------------------------- Monthly Minimum Rent $4,815.00 ---------------------------------------------------- Monthly Estimated Charges $1.012.00 ---------------------------------------------------- Monthly Minimum rent shall be adjusted at the commencement of the THIRTEENTH month following the Rent Commencement Date and every TWELFTH month thereafter, as provided in Section 3.02. Percentage Rent: N/A ---------------------------------------------------- Permitted Uses: The operation of a branch or main banking office and ---------------------------------------------------- for no other purpose. ---------------------------------------------------- Concurrent Payments: Security Deposit: $5,500.00 PAID TO LESSOR UPON EXECUTION OF LEASE ---------------------------------------------------- First Month's Rent: $5,862.00 (including first month's estimated charges) ---------------------------------------------------- (FIRST MONTHS RENT TO BE PAID TO LESSOR UPON MOVEIN BY LESSEE.) Guarantor: JOHN J. KENNEDY, CLARKE K. MC CUNE, ---------------------------------------------------- CHARLES W. WALKER ---------------------------------------------------- Address of Guarantor: ---------------------------------------------------- ---------------------------------------------------- Phone No. -------- ------------------------------------ Broker(s): Williams Bros. Realty ---------------------------------------------------- ---------------------------------------------------- Late Charge: 10% of unpaid amounts (see Section 17.10) The foregoing Lease Summary Provisions are an integral part of this Lease and each reference in this Lease to any such provision shall be construed to incorporate all of the terms provided under such Lease Summary Provision. In the event of any conflict between any Lease Summary Provision and the balance of the Lease, the latter shall control. Landlord's Initials ----------- Tenant's Initials ------------ Note: Landlords' and Tenant's initials present ----------- JUNE 1987 iii SHOPPING CENTER LEASE This Lease is dated for identification purposes SEPTEMBER 12, 1989 is made by and between Landlord and Tenant, and incorporates the Lease Summary Provisions specified on page iii, Exhibit "A" (Site Plan), Rider No 1, Rider No. 2, Addendum, Guaranty, all of which are attached hereto. ARTICLE I - PREMISES SECTION 1.01 PREMISES DEFINED Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises for the term, at the rent, and upon all the conditions and agreements set forth herein. SECTION 1.02 SHOPPING CENTER The parties hereto acknowledge that Exhibit "A" depicts the Shopping Center before dedication or grant of easements for highways, streets, and public ways, if any: Any site(s) shown on Exhibit "A" as "not a part" are excluded from the Shopping Center. The Shopping Center as set forth in Exhibit "A" is a proposed general layout and Landlord neither warrants not represents that the Shopping Center is or shall be constructed as indicated thereon or that any tenant or occupant designated by name of business shall be tenants in the Shopping Center during the term hereof. SECTION 1.03 MODIFICATIONS Landlord reserves the right, in its sole discretion, at any time, to phase, increase, decrease, or change the number, location, or dimension of the buildings, the premises therein, driving lanes, driveways, wellways, parking spaces, walkways and other improvements including, but not limited to, making additions or alterations to any or all buildings in the Shopping Center. ARTICLE II - TERM SECTION 2.01 LENGTH OF TERM The term of this Lease shall commence as of the date specified in the applicable Lease Summary Provision, and shall continue for the period specified in the applicable Lease Summary Provision measured from and beginning with said date. However, if the term hereof commences on a day other than the first day of the calendar month, the term of this Lease shall continue from the first day of the calendar month next following the date hereof for the period of years set forth in this Section 2.01. SECTION 2.02 RENT COMMENCEMENT DATE Tenant's obligation to pay rent shall commence on the earlier of the following ("Rent Commencement Date"): (note: "a" and "b" are crossed out.) (c) such other date as is agreed to by Landlord and Tenant and is set forth in the applicable Lease Summary Provision. SECTION 2.03 FAILURE TO OPEN If Landlord notifies Tenant in writing that the Premises are ready for occupancy as hereinabove set forth, and Tenant fails to take possession and open the Premises for business, fully fixturized, stocked and staffed within 60 days from the Rent Commencement Date, Landlord shall have, in addition to any and all other remedies hereinafter provided, the right to immediately cancel and terminate this Lease. If the Premises are not completed and possession delivered to Tenant within 36 months from the date of execution hereof, then this Lease shall be deemed null and void and have no further force or effect, and there shall be no liability on the part of either party hereunder. ARTICLE III - RENT SECTION 3.01 MONTHLY MINIMUM RENT From and after the Rent Commencement Date for each full calendar month during the Lease term, Tenant shall pay to Landlord, in advance upon the first day of each calendar month without demand, deduction or offset, the monthly minimum rent specified in the applicable Lease Summary Provision, subject to Section 3.02, plus all applicable excise taxes in lawful money of the United States of America. One full monthly minimum rent payment shall be made by Tenant to Landlord at the time of execution of this Lease. The monthly minimum rent payment shall be made by Tenant to Landlord at the time of execution of this Lease. The monthly minimum rent for any fractional part of a calendar month at the beginning or end of the Lease term shall be a proportionate part of the monthly minimum rent for a full calendar month based upon a 30-day month. Payment shall be made to Landlord at the address set forth in the applicable Lease Summary Provision or at such other place as may be designated from time to time by Landlord. For purposes of venue, performance of this Lease shall be deemed to be made at the address where rent payments are received. SECTION 3.02 COST OF LIVING INCREASE The amount of monthly minimum rent payable for the second and each succeeding lease year of this Lease shall be adjusted as of the expiration of each lease year of this Lease to reflect any change in the prices of goods and services. The adjustment, if any, shall be calculated upon the basis of the United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers, Los Angeles-Anaheim-Riverside, California, All Items, * ("CPI"). The CPI published for the calendar month four months prior to the second and each succeeding lease year of this Lease shall be adjusted by the percentage increase, if any, in the CPI as of the 8th month in the first lease year and the 8th month in each succeeding lease year of this Lease ("adjustment date"); provided, however, that in no event shall the monthly minimum rent be less than the monthly minimum rent for the immediately preceding lease year. When the monthly minimum rent for a lease year is determined, Landlord shall give Tenant written notice stating how the new monthly minimum rent figure was computed. If the * base of the CPI is changed, the new base shall be converted to the * base in accordance with tables issued by said Bureau, and the base so converted shall continue to be used. If on any rental adjustment date there shall not exist the CPI in the same format as recited in this Section 3.02, the parties shall substitute any official index published by existence and most nearly equivalent thereto. If the parties shall be unable to agree upon a successor index, the parties shall refer the choice of the successor index to arbitration in accordance with the rules of the American Arbitration Association. *1982-84 = 100 SECTION 3.03 PERCENTAGE RENT Note: All items under this section have been crossed out. Initials are located on the bottom right hand corner of the page. SECTION 3.04 ADDITIONAL RENT Every payment required to be made by Tenant pursuant to this Lease shall be additional rent due Landlord hereunder, whether or not expressly designated as additional rent, and Tenant's failure to pay such additional rent to Landlord when due shall entitle Landlord to exercise all rights and remedies provided in Article XIII. ARTICLE IV - RECORDS SECTION 4.01 RECORDS Note: All items under this heading have been crossed out. SECTION 4.02 AUDIT Note: All items under this heading have been crossed out. 1 SECTION 5.01 REAL ESTATE TAXES (a) Tenant shall pay to Landlord as additional rent all real estate taxes ( as hereinafter defined) applicable to the Premises, including the improvements thereon. Landlord shall notify Tenant of the amount of Tenant's share of such taxes, and Tenant shall pay to Landlord, Tenant's share of such taxes prior to the due date thereof and no later than ten days after receipt from Landlord of such notice. Landlord may, at its option, give Tenant a written estimate of such taxes applicable to the Premises and Tenant shall pay same in a manner as is provided in Article XV hereinafter stated. (b) If, at any time during the term of this Lease, the methods of taxation shall be altered so as to impose, in lieu of current methods of assessment and taxation in whole or in part, taxes based on other standards, including, but not limited to, a tax or excise on rent or any other tax, however described, or assessed against Landlord on the rent or any portion thereof payable hereunder as a direct substitute for the real property taxes. Tenant covenants to pay to Landlord said tax in a manner and at a time to be determined by Landlord, but in no event later than 10 days after receipt of said notice by Tenant. SECTION 5.02 DEFINITIONS (a) The term "real estate taxes" shall include all taxes, levies, assessments, bonds and governmental charges levied upon or with respect to the real property and improvements within the Shopping Center, other than the portions thereof defined below as "common areas," and any tax or excise on rents or any other tax, however described, levied against Landlord on account of the rent reserved hereunder or on the business of renting space in the Shopping Center; provided, however that the capital levy, net income or excess profits taxes imposed upon Landlord except that if real estate taxes are withdrawn in whole or in part and any substitute tax is made therefore, such tax shall in any event for the purpose of this Lease be considered a real estate tax regardless of how denominated or the source from which it is collected. Landlord and Tenant acknowledge that the adoption of Proposition 13 by the voters of the State of California in the June 1978 election may give rise to the imposition of assessments, taxes, fees, levies and charges imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, refuse removal and other governmental services formerly provided without charge to property owners or occupants (it being the intention of Tenant and Landlord that any and all such new and increased assessments, taxes, fees, levies and charges be included within the definition of real estate taxes for purposes of this Section 5.02). The term "real estate taxes" shall also include all expenses, including attorneys' fees, reasonably incurred by Landlord in seeking reduction by the taxing authorities of real estate taxes applicable to the Shopping Center. (b) The term "real estate taxes applicable to the Premises" shall mean the taxes separately assessed for the Premises or that portion of the real estate taxes such term is hereinabove defined in Section 5.02(a), equal to the product obtained by multiplying such real estate taxes by a fraction, the numerator of which shall be the gross ground floor area of the Premises as defined in the applicable Lease Summary Provision, and the denominator of which shall be the gross ground floor area of all buildings, including the Premises, occupied by tenants and which are then located within the Shopping Center, together with an amount equal to 15% of said taxes to cover Landlord's administrative and overhead expenses; provided, however that if any tenants in such building or buildings pay real estate taxes directly to any taxing authority, their gross ground floor area shall not be included in such denominator. (c) Real estate taxes which are levied on a fiscal year basis shall be deemed to apply 1/12th to each calendar month in such fiscal year and shall be charged to Tenant accordingly. SECTION 5.03 OTHER TAXES Tenant shall be responsible for and shall pay before delinquency all municipal, county or state taxes, levies and fees of every kind and nature, including, but not limited to, general or special assessments assessed during the term of this Lease against any leasehold interest or personal property of any kind, owned by, in, upon or about the Premises of Tenant. If any or all of Tenant's fixtures or other personal property shall be assessed and taxed with the Landlord's real property, Tenant shall pay to Landlord its share of such taxes within 10 days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to such property of a tenant. Additionally, Tenant shall pay to Landlord all applicable excise taxes. ARTICLE VI - CONDUCT OF BUSINESS BY TENANT SECTION 6.01 USE OF PREMISES (a) Tenant is granted the non-exclusive right to use the Premises solely for the purposes and under the trade name specified in the applicable Lease Summary Provisions and for no other purposes or under any other name without the prior written consent of Landlord. Tenant shall devote the entire Premises to such use except for areas reasonably required for restrooms, office or storage space. Tenant shall continuously and without interruption during the term hereof conduct storage space. Tenant shall continuously and without interruption during the term hereof conduct its business activity in the Premises during all business hours usual for Tenant's type of business; however, in no event less than eight hours per day, six days per week, but in any event during those hours, if any, established by Landlord for the operation of the Shopping Center unless Tenant is prevented from doing so by strike, fire or other cause beyond Tenant's reasonable control, and except during reasonable periods for repairing, cleaning and decorating the Premises. Tenant shall at all times carry a full and complete stock of merchandise offered for sale at competitive prices and shall maintain an adequate staff or the service of its customers. Tenant shall employ its best and shall maintain an adequate staff for the service of customers. Tenant shall employ its best judgment, efforts, and abilities to operate the business conducted by it in the Premises in such manner as to produce the maximum profitable volume of sales reasonably obtainable and to enhance the reputation and attractivemenss of the Shopping Center. If any conflict shall develop between Tenant and any other tenant of the Shopping Center regarding what merchandise Tenant may carry or with respect to any other matter governed by or referred to in this Article VI, Landlord shall be the sole arbiter of such conflict and his decision shall be binding on Tenant, and Landlord shall incur no liability to Tenant as a result of any determination made by Landlord hereunder. (b) For the purpose of computing percentage rent, Tenant's gross sales for any period during which Tenant does not continuously conduct its business as required by this Section 6.01 shall be deemed to be the greater of Tenant's gross sales for (i) such period, or (ii) the corresponding period of the last preceding year during which Tenant was continuously open for business. SECTION 6.02 RESTRICTIONS ON USE Tenant shall comply promptly with all applicable statutes, ordinances, rules, regulations, restrictions, orders and requirements relating to the use of the Premises. Tenant shall not use or permit the use of the Premises in any manner that will tend to create a nuisance or tend to disturb other tenants or occupants of the Shopping Center or tend to injure the reputation of the Shopping Center. Tenant shall not sell, exhibit or display any immoral or pornographic materials, goods or services in or on the Premises. Landlord shall, in its sole discretion, determine whether such materials, goods or services are immoral or pornographic in nature. No auction, fire sale, bankruptcy sale, sidewalk sale, going out of business sale or continuous discount operation may be conducted in the Premises without the prior written consent of Landlord, which may be withheld in Landlord's sole discretion. Tenant shall use its best efforts to complete or cause to be completed, all deliveries, loading, unloading, rubbish removal and other services to the Premises prior to 10:00 a.m. of each day. Landlord reserves the right to further regulate the activities of Tenant in regard to deliveries and servicing of the Premises, and Tenant agrees to abide by such further nondiscriminatory regulations of Landlord. Tenant shall not place or cause to be placed any fences, walls, booths, stands, kiosks, racks, structures, divisions or rails outside the Premises in the Shopping Center without the prior written consent of Landlord. Landlord may, without liability therefore or notice to Tenant, remove any item placed, constructed or maintained upon or outside of any roof, wall or window of the building within which the Premises are located, unless such item has been previously consented to in writing by Landlord. Tenant shall keep the display windows and signs on the Premises well-lighted during the hours from sundown to 10:00 p.m. unless prevented by causes beyond the control of Tenant. If Landlord determines any display window to be out of harmony with the business character or architecture of the Premises, or with the balance of the Shopping Center, Tenant shall promptly remove or modify such display as requested by Landlord. Tenant shall comply at all times with such Rules and Regulations and such amendments and modifications thereof and additions thereto as Landlord may from time to time reasonably adopt for the safety, care and cleanliness of the Shopping Center or the preservation of good order therein. Landlord shall not be liable to Tenant for the failure of any tenant or other person to comply with such Rules and Regulations. Tenant shall not use the Premises or any part thereof for any purpose which will increase the existing rate of insurance upon the Premises or any part thereof for any purpose which will increase the existing rate of insurance upon the Premises or the Shopping Center or cause the cancellation of any insurance policy covering the Premises or the Shopping Center, nor shall Tenant sell or permit to be kept, used or sold in or about the Premises any article which may be prohibited by standard fire insurance policies. Tenant shall not place any coin or token-operated amusement machines on or in the Premises without the prior written consent of Landlord. ARTICLE VII - MAINTENANCE, REPAIRS AND ALTERATIONS SECTION 7.01 MAINTENANCE AND REPAIRS (a) Subject to the provisions of Article IX and XII hereof, Tenant shall, at its sole cost and expense during the term of this Lease, keep in first-class order, condition and repair, the Premises and every part thereof, including, without limiting the generality of the foregoing, maintenance, repair and replacement of all plumbing, heating, ventilating, air conditioning, electrical wiring and conduits, lighting facilities and equipment, fixtures, walls, wall covering and paint, 2 ceilings, floors and floor coverings, windows and window casement, doors, plate glass, showcases, sprinkler systems (if any), skylights, entrances and other facilities. (b) Tenant shall not place any rubbish or other matter outside the Premises, except in such containers as are authorized from time to time by Landlord. Tenant shall promptly sweep and clean the sidewalk adjacent to the Premises as needed. (c) If Tenant fails to perform its obligations under this Section 7.01, Landlord may, at its option, after five days written notice to Tenant, except in the event of an emergency in the judgment of Landlord, in which case no notice shall be required, enter upon the Premises and put the same in good order, condition and repair and the cost thereof shall become due and payable as additional rent by Tenant to Landlord upon demand. (d) Tenant expressly waives any right pursuant to any law now existing, or which may be effective during the term hereof, to make repairs at Landlord's expense, including, without limitation, the provisions of Sections 1932(2), 1933(4), 1941 and 1942 of the California Civil Code, and any provisions amendatory thereof or supplemental thereto. (e) Tenant shall reimburse Landlord on demand for Tenant's pro rata share of the cost of repairs made by Landlord to the roof of the building in which the Premises are located, said pro rata share to be based on the proportion that the gross ground floor area of the Premises bears to the gross ground floor area of said building, and said reimbursement may be changed by Landlord pursuant to Section 15.01 of this Lease. SECTION 7.02 ALTERATIONS, ADDITIONS, AND FIXTURES (a) Tenant shall not, without the prior written consent of Landlord, make any alterations, improvements, remodeling or additions to either the interior or exterior of the Premises or to fixtures installed therein in accordance with approved fixture plans, or mark, paint, drill, or in any way deface any portion of the Premises. Landlord may require as a condition and in consideration for such approval that Tenant pay to Landlord a sum equal to Landlord's reasonable expenses incurred in evaluating and approving Tenant's proposed improvements and/or addition, including, but not limited to, attorneys', architectural and engineering fees. (b) Tenant shall maintain the Premises in accordance with all federal, state, county and municipal laws and ordinances and with all rules, orders, ordinances, and regulations at any time issued or in force applicable to the Premises or to Tenant's use and occupation thereof, of the several federal, state, county and city governments and of each and every department, bureau and official thereof, and the Board of Fire Underwriters. If a change in such laws or ordinances or additional development in the Shopping Center makes necessary improvements, modifications, alterations or additions to the Premises (including, without limitaiton, the installation of a fire protection system), such improvements, modifications, alterations or additions shall be made at Tenant's sole cost and expense. (c) Tenant shall repair any damage to the building and/or store adjacent to the Premises caused by Tenant's use or occupancy thereof. Any such repair referred to in this Section 7.02(c) shall be completed by Tenant within 15 days after notice to Tenant by Landlord. The provisions of this Section 7.02(c) shall survive the expiration of the term hereof. SECTION 7.03 CLEANLINESS; WASTE AND NUISANCE Tenant shall at all times keep the Premises in a neat, clean and sanitary condition, shall neither commit nor permit any waste or nuisance thereon, and shall keep the walks, service, and loading areas adjacent thereto free from waste and debris. ARTICLE VIII - INSURANCE; INDEMNITY SECTION 8.01 LIABILITY INSURANCE- PREMISES (a) Tenant shall at all times during the term hereof and at Tenant's sole expense, maintain in effect workers' compensation insurance and personal injury liability and property damage liability insurance adequate to protect Landlord and naming Landlord and Landlord's property management company as insured in the liability contract, against liability for injury to or death or any person or damage to property in connection with the use, operation or condition of the Premises, in an amount not less the $1,000,000 combined single limit coverage. In no event shall the limits of said policies be considered as limiting the liability of Tenant under this Lease. (b) If Tenant fails to perform its obligations under this Section 8.01, Landlord may, at its option, obtain such insurance and the cost thereof shall become due and payable as additional rent by Tenant to Landlord upon demand. SECTION 8.02 OTHER INSURANCE (a) Tenant shall pay as additional rent any and all insurance premiums on the Premises for insurance not hereinabove described including, but not limited to, insurance for fire and extended coverage, vandalism, malicious mischief, sprinkler leakage and such other perils or risks, including earthquake and flood, as Landlord may choose to insure, together with insurance for loss of rental resulting from damage to the Premises by an insured peril and rent guaranty insurance. Tenant shall, within 10 days after presentation of the bill to Tenant by Landlord, reimburse Landlord for such insurance premiums, and in the instance of a claim made by Landlord under any such insurance policy, Tenant shall pay any deductible required thereunder. If insurance premiums paid by Landlord policy, Tenant shall cover more than the Premises, Tenant shall reimburse Landlord for Tenant's pro rata share of such premiums computed in the same manner as is provided in Section 5.02(b) of this Lease relating to computing Tenant's share of real estate taxes, together with an amount equal to 15% of Tenant's share of such premiums to cover Landlord's administrative and overhead expenses. Landlord may, at its option, give Tenant a written estimate of such insurance premiums and Tenant shall pay such estimated premiums as provided in Section XV hereinafter stated. Not withstanding anything to the contrary hereinabove set forth, if Tenant's specific use of the Premises increases the premiums for the insurance hereinabove referred to over that charged for normal retail uses, for example, if Tenant shall also be responsible for additional rent in the full amount of such increase in premiums as such amount shall be determined by Landlord's insurance broker. Tenant shall make, at its sole cost and expense, any improvements or modifications to the Premises, or any part thereof, required by Landlord's insurance carrier within 30 days of notice of such improvements or modifications. (b) Tenant shall at all times during the term hereof, and at its cost and expense, maintain in effect policies of insurance covering (i) its stock in trade, furniture, fixtures and equipment located on the Premises, in an amount not less than 80% of their actual cash value, providing protection against any peril included within the classification "Fire and Extended Coverage"' together with insurance against sprinkler damage, vandalism and malicious mischief and (ii) all plate glass on the Premises. The proceeds of such insurance, so long as this Lease remains in effect, shall be used to repair or replace the stock in trade, furniture, fixtures, equipment and plate glass so insured. SECTION 8.03 INSURANCE POLICIES All insurance required to be carried by Tenant here under shall be with companies, on forms and with loss payable clauses satisfactory to Landlord, and copies of policies of such insurance or certificates evidencing such insurance shall be delivered to Landlord by Tenant. Each policy of public liability insurance required pursuant to this Article VII shall be primary and noncontributing with the insurance carried by Landlord. No such policy shall be subject to cancellation, termination or change except after 10 days written notice to Landlord. SECTION 8.04 WAIVER Except for any cause proved by Tenant to be the proximate result of Landlord's negligence, Tenant hereby waives any and all rights to recovery against Landlord or against any other tenant or occupant of the Shopping Center or against the officers, employees agents, representatives, customers and visitors of Landlord or of such other tenant, or occupant of the Shopping Center, for loss or damage to Tenant, or any person claiming through Tenant or to its property or the property of others under its control, arising from any cause required to be insured against by Tenant under this Lease. Tenant shall obtain and furnish evidence to Landlord of waiver by Tenant's insurance carrier of any such right of subrogation. Tenant hereby waives any right to set-off damages against Landlord pursuant to California Code of Civil Procedure, Section 431.70 or any successor Statute. SECTION 8.05 INDEMNITY Except for claims proved by Tenant to have been proximately caused by Landlord's negligence, Tenant shall indemnify and hold harmless Landlord against and from any and all claims arising from Tenant's use of the Premises or from the conduct of its business or from any activity, work or other things done, permitted or suffered by the Tenant in or about the Premises, and shall further indemnify and hold harmless Landlord against and from any and all claims arising from any breach or default in the performance of an obligation on Tenant's part to be performed under the terms of this Lease, or arising from any act or negligence of the Tenant, or any officer, agent, employee, guest, or invitee of Tenant, and from all costs, attorney's fees, and liabilities incurred in or about the defense of any such claim or any action or proceeding brought thereon and in case any action or proceeding be brought against Landlord by reason of such claim, Tenant upon notice from Landlord shall defend the same at Tenant's expense by councel reasonably satisfactory to Landlord. 3 SECTION 8.06 EXEMPTION OF LANDLORD Unless proximately caused by Landlord's negligence, as proved by Tenant, Landlord shall not be liable for injury or damage which may be sustained by the person, goods, wares, merchandise or property of Tenant, its employees, invitees or customers or any other person in or about the Premises caused by or resulting from any accident or occurrence in, on or about the Shopping Center including, but not limited to, injury or damage caused by or resulting from Landlord's failure to make repairs, or injury or damage from fire, steam, electricity, gas, water or rain which may leak or flow from or into any part of the Premises, or from the breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures of the same, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources. Landlord shall not be liable for any damage arising from any act or neglect of any other tenant in the Shopping Center. ARTICLE IX - REPAIRS AND RESTORATION SECTION 9.01 MINOR INSURED DAMAGE Subject to the provisions of Section 9.03, if at any time during the term hereof the Premises are damaged and such damage is not "substantial", as that term is defined in Section 9.05(a), and such damage was caused by an insured casualty, then Landlord shall promptly repair such damage, and this Lease shall continue in full force and effect, unless such damage was caused by Tenant's negligent or willful act or omission, in which event Tenant shall promptly repair such damage. SECTION 9.02 UNINSURED DAMAGE OR INSURED SUBSTANTIAL DAMAGE Subject to the provisions of Section 9.03, if at any time during the term hereof the Premises are damaged and (i) such damage is "substantial", as that term is defined in Section 9.05(a), and such damage was caused by an insured casualty, or (ii) regardless whether such damage is substantial as so defined, such damage was caused by a casualty not insured against by Landlord, then Landlord may, at its option, either (a) repair such damage and restore the Premises at Landlord's expense, in which event this Lease shall continue in full force and effect, or (b) cancel and terminate this Lease as of the date that Tenant vacates the Premises, unless such damage was caused by Tenant's negligent or willful act or omission, in which event Tenant shall promptly repair such damage. SECTION 9.03 DAMAGE NEAR END OF TERM Notwithstanding anything to the contrary contained in this Article IX, if the Premises are destroyed or damaged during the last two years of the term of this Lease, or any extenuation thereof, Landlord may, at its option, cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Tenant of its election to do so within 30 days after the date of occurrence of such damage. SECTION 9.04 CONTINUED OPERATION BY TENANT If the Premises are destroyed or damaged and Landlord repairs or restores them pursuant to the provisions of this Article IX, Tenant shall continue the operation of its business in the Premises to the extent reasonably practicable from the standpoint of prudent business management. There shall be no abatement of any rent payable hereunder, and Tenant shall have no claim against Landlord for any damage suffered by Tenant by reason of any damage, destruction, repair or restoration of the Premises. Landlord shall not be required to make repairs or replacements to Tenant's leasehold improvements, fixtures or personal property. Upon completion of such repair or restoration, Tenant shall promptly refixture and restock the Premises substantially to the condition prior to the casualty and shall reopen for business if closed by the casualty. SECTION 9.05 DEFINITIONS (a) For the purpose of this Article IX, "substantial" damage to the Premises shall be deemed to be damage to the building of which the Premises are a part or damage to the Shopping Center, wherein the cost of repair as estimated by Landlord exceeds 10% of the estimated replacement cost of such building. (b) The determination in good faith by Landlord of the estimated cost of repair of any damage or of the estimated replacement cost of any building shall be conclusive for the purpose of this Article IX. SECTION 9.06 WAIVER Tenant waives any provision of law allowing termination of a lease for damage or destruction of the leased premises. ARTICLE X - ASSIGNMENT AND SUBLETTING SECTION 10.01 LANDLORDS RIGHTS (a) Tenant shall not, either voluntarily or by operation of law, assign, sell, encumber, pledge or otherwise transfer all or any part of Tenant's leasehold estate hereunder, or permit the Premises to be occupied by anyone other than Tenant or Tenant's employees, or sublet the Premises or any portion thereof, without Landlord's prior written consent in each instance. Landlord's consent shall not be unreasonably withheld. (b) Each of the following conditions shall apply to any proposed assignment or sublease: (i) the occupancy resulting therefrom shall not violate any rights theretofore given to any other tenant of the Shopping Center; (ii) substantially the same or higher type, class nature, quality and volume of merchandise sold or offered for sale, financial soundness and business experience or ownership and management shall be maintained and furnished in a manner compatible with the high standards comtemplated by this Lease; (iii) each and every covenant, condition or obligation imposed upon Tenant by this Lease and each and every right, remedy or benefit afforded Landlord by this Lease, shall not be impaired or diminished; (iv) Tenant shall assign and pay to Landlord one-half of all subrent paid by the sublessees which are in excess of the monthly minimum rent (measured on a per square foot basis) provided to be paid by Tenant hereunder; (v) the monthly minimum rent then payable under this Lease shall be automatically increased by 15% effective on the date of Landlord's consent; and (vi) the form and content of the documentation evidencing such assignment or sublease is subject to Landlord's approval. (c) Landlord may collect rent from the assignee, subtenant, occupant or other transferee, and apply the amount so collected, first to the monthly minimum rent due, then to any additional rent due and refund the balance (if any) to Tenant, but no such assignment, subletting, occupancy, transfer or collection shall be deemed a waiver of Landlord's rights under this Section 10.01 or the acceptance of the proposed assignee, subtenant, occupant or transferee, or a release of Tenant from the further performance of the covenants obligating Tenant under this Lease. (d) Tenant shall not be in default under this Lease as of the effective date of the assignment or sublease. (e) Consent by Landlord to one or more assignments of this Lease or to one or more sublettings of the Premises shall not be deemed to be a consent to any subsequent assignment or subletting. (f) Any assignment or subletting without Landlord's consent shall be void and shall, at the option of Landlord, constitute a default under the terms of this Lease. (g) The voluntary or other surrender of this Lease by Tenant or mutual cancellation hereof shall not work a merger, and shall, at the option of Landlord, terminate all or any existing subleases or subtenacies or shall operate as an assignment to Landlord of such subleases or subtenancies. (h) If Tenant is a corporation which, under the then-current guidelines, is not deemed a public corporation, or is an unincorporated association or partnership in the aggregate in excess of 25% shall be deemed an assignment within the meaning and provisions of this Article. (i) Tenant shall pay to Landlord as additional rent a transfer fee of $200 for Landlord's administrative, accounting and other costs incurred in conjunction with the processing and documentation of any such requested assignments, subletting, transfer, change of ownership or hypothecation of this Lease or Tenant's interest in and to the Premises. (j) Neither this Lease nor any interest in this Lease shall be assignable or transferable by operation of law, and if any proceeding under the Bankruptcy Act, or any amendment thereto or chapter thereunder, be commenced by or against Tenant (or should tenant be a partnership or consist of more than one person, then any partner or such person) or if Tenant be adjudged insolvent, or make an assignment for the benefit of creditors, or if a receiver is appointed in any proceeding or action to which Tenant in a party, with the authority to take possession or control of the Premises or the business conducted on the Premises by Tenant, this Lease, at the option of Landlord, shall immediately terminate and shall not be treated as an asset of Tenant after the exercise of Landlord's option, and Tenant shall have no further rights under this Lease, and Landlord shall have the right, after the exercise of its option, to terminate as provided this subparagraph 10.01, and to forthwith re-enter and repossess itself of the Premises. (k) Tenant agrees to fully defend and indemnify Landlord with respect to all costs, claims (including attorney's fees expended by Landlord in connection with any such claim), and liability for compensation claimed by any broker or agent employed by Tenant in connection with any assignment, subletting or other transfer of Tenant's interest under the Lease. 4 SECTION 10.02 NO RELEASE OF TENANT No subletting or assignment, even with the consent of Landlord, shall relieve Tenant of its obligation to pay the rent and to perform all of the other obligations to be performed by Tenant hereunder. The acceptance of rent by Landlord from any person shall not be deemed to be a waiver by Landlord of any provision of this Lease or to be a consent to any assignment or subletting. ARTICLE XI - EMINENT DOMAIN SECTION 11.01 ENTIRE OR SUBSTANTIAL TAKING If more than 40% of the Premises or more than 40% of the balance of the Shopping Center shall be taken under the power of eminent domain, this Lease shall terminate as of the date on which the condemning authority takes possession. SECTION 11.02 PARTIAL TAKING If any taking under the power of eminent domain does not result in a termination of this Lease pursuant to Section 11.01, Landlord, at its option, may terminate this Lease as of the date on which the condemning authority take possession. If Landlord shall not so terminate this Lease, then the monthly minimum rent payable hereunder shall be reduced, effective as of the date on which the condemning authority takes possession, in the same proportion which the gross ground floor area of the portion of the Premises taken bears to the gross ground floor area of the entire Premises prior to the taking. Landlord shall promptly restore the portion of the Premises not so taken to as near its former condition as is reasonably possible, and this Lease shall continue in full force and effect. SECTION 11.03 AWARDS Any award for taking of all or any part of the Premises under the power of eminent domain shall be the property of Landlord, whether such award shall be made as compensation for diminution in value of the leasehold or for taking of the fee. Nothing contained herein, however, shall be deemed to preclude Tenant from obtaining, or to give Landlord any interest in, any award to Tenant for loss of or damage to Tenant's trade fixtures and removable personal property. SECTION 11.04 SALE UNDER THREAT OF CONDEMNATION A sale by Landlord to an authority having the power of eminent domain, either under threat of condemnation or while condemnation proceedings are pending, shall be deemed a taking under the power of eminent domain for all purposes under this Article XI. ARTICLE XII - UTILITY SERVICE SECTION 12.01 UTILITY CHARGES Tenant shall pay all charges for gas, water, sewer, electricity, telephone and other utility services used in or about the Premises during the term of this Lease. If any such charges are not paid when due, Landlord may pay the same, and any amount so paid by Landlord shall thereupon become due to Landlord from Tenant as additional rent. Any or all utility connection fees and permits or assessments required by Tenant's use of occupancy in, on or from the Premises shall be paid by Tenant at its sole cost and expense. SECTION 12.02 FURNISHING OF SERVICES If Landlord shall elect to furnish any utility services to the Premises, Tenant shall purchase its requirements thereof from Landlord so long as the rates charged therefore by Landlord do not exceed those which Tenant would be required to pay if such services were furnished it directly by a public utility. SECTION 12.03 INTERRUPTION OF SERVICE Landlord shall no be liable in damages or otherwise for any failure, interruption or inadequacy of any utility service being furnished on the Premises and no such failure, interruption or inadequacy shall entitle Tenant to terminate this Lease. SECTION 12.04 HEATING, VENTILATION AND AIR CONDITIONING If the Premises has a separate heating, ventilating and air conditioning unit ("HVAC"), Tenant shall be responsible for the maintenance and service of same. Landlord may, at its sole option, contract for such maintenance and service and Tenant shall reimburse Landlord for the cost of such maintenance and service, together with an amount equal to 15% of such costs to cover Landlord's administrative and overhead expenses. If the Premises has an HVAC which is not separately metered, Tenant shall reimburse Landlord on demand as additional rent or Tenant's proportionate share of Landlord's costs of operation and maintenance of said HVAC, determined in the same manner as is provided by Section 5.02(b) of this Lease relating to computing Tenant's share of real estate taxes, together with an amount equal to 15% of such cost to cover Landlord's administrative and overhead expenses. Landlord may, at its option, give Tenant a written estimate of Tenant's share of the costs set forth above and Tenant shall pay such estimated amount to Landlord in equal monthly installments, in advance, as part of the same check with which Tenant pays the monthly minimum rent. Year end adjustments shall be made in the same manner as set forth in Section 15.02 of this Lease. ARTICLE XIII - DEFAULTS; REMEDIES SECTION 13.01 DEFAULTS The occurrence of any one or more of the following events shall constitute a default hereunder by Tenant: (a) The vacation or abandonment of the Premises by Tenant. (b) Without the giving of any notice by Landlord, the failure by Tenant to make any payment of rent, additional rent or other payment required to be made by Tenant hereunder, as and when due, or the failure by Tenant to be observed or performed by Tenant. (c) (i) The making by Tenant of any assignment or arrangement for the benefit of creditors; (ii) 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; (iii) 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; or (iv) 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. (d) Any attempted or involuntary transfer of Tenant's interest in this lease without Landlord's prior written consent, as set forth more specifically in Section 10.01 of this Lease. (e) If any lease (other than this Lease) made by Tenant for other space in the Shopping Center is terminated or terminable after the commencement of the term of this lease due to any default by Tenant under such other lease. (f) The discovery by Landlord that any warranty, representation or financial statement given to Landlord by Tenant, any assignee of Tenant, any subtenant of Tenant, any successor in interest of Tenant, or any guarantor of Tenant's obligations hereunder, or any of them, was materially false. (g) The violation by Tenant of its restrictions as to use of the Premises, asset forth in Article VI of this Lease. SECTION 13.02 REMEDIES (a) In the event of any default by Tenant as defined herein, Landlord may exercise the following remedies: (i) Landlord shall have the option to continue this Lease in full force and not terminate the Tenant's right to possession or such other rights as are provided for in this Lease and such rights as are permitted by law. (ii) Landlord may terminate this Lease by express written notice to Tenant of its election to do so. In the event of such termination, Landlord shall be entitled to recover from Tenant: (1) the worth at the time of the award of any obligation which has accrued prior to the date of termination; and (2) the worth at the time of the award of the amount by which the unpaid rent and additional charges which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; and (3) the worth at the time of award of the amount by which the unpaid rent and additional charges for the balance of the term after the time of award exceeds the amount of such loss of rent that Tenant proves could be reasonably avoided. 5 (iii) As used in (ii)(1) and (ii)(2) above, the "worth at the time of award" is computed by allowing interest at the lower of 12% per annum or the highest rate permitted by law. As used in (ii)(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 1%. (iv) Landlord may recover from Tenant, and Tenant shall pay to Landlord upon demand, such expenses as Landlord may incur in recovering possession of the Premises, placing the same in good order and condition and altering or repairing the same for reletting, all other expenses, commissions and charges incurred by Landlord in exercising any remedy provided herein or as a result the detriment caused by the Tenant's failure to perform Tenant's obligations under the Lease or which in the ordinary course of things would be likely to result therefrom. (v) Landlord may exercise any other remedy or right now or hereafter available to a landlord against a defaulting tenant under the laws of the governing jurisdiction and not otherwise specifically reserved herein, including self-help, if and as permitted under State law. (b) Landlord shall be under no obligation to observe or perform any covenant of this Lease on its part to be observed or performed which accrues after the date of any default by Tenant hereunder. (c) In any action of unlawful detainer commenced by Landlord against Tenant by reason of any default hereunder, the reasonable rental value of the Premises for the period of the unlawful detainer shall be deemed to be the greater of (i) the amount of monthly minimum rent and percentage rent, or (ii) the fair marker rent, plus (iii) additional rent and other charges reserved in this Lease for such period or the comparable period of the preceding year. (d) Tenant hereby waives any right of redemption of relief from forfeiture under the law of the governing jurisdiction, or under any other present or future law, if Tenant is evicted or Landlord takes possession of the Premises by reason of any default by Tenant hereunder. (e) The various rights and remedies reserved to Landlord herein, including those not specifically described herein, shall be cumulative, and except as otherwise provided by statutory law in force and effect at the time of the execution hereof, Landlord may pursue any or all of such rights and remedies, whether at the same time or otherwise. (f) One or more waivers by Landlord's breach or default shall not be a waiver of any other breach or default of the same or any other provision. Landlord's consent or approval of any act by Tenant requiring Landlord's consent to or approval shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent similar act by Tenant. (g) The receipt by Landlord of any rent or payment with or without knowledge of the breach of any other provision hereof shall not be deemed a waiver of any such breach; provided, however, the receipt and acceptance by Landlord of any delinquent rent and/or other sum which may be due hereunder shall constitute a waiver of said breach of timely payment for the particular payment include (but not as to any other breach), and no waiver by Landlord of any sum due hereunder or any provision hereof shall be deemed to have been made unless expressed in writing and signed by Landlord. (h) No delay or omission in the exercise of any right or remedy accruing to Landlord upon any breach by Tenant under this Lease shall impair such right or remedy or be construed as a waiver of any such breach theretofore or thereafter occurring. (i) In any action commenced by Landlord against Tenant by reason of any default hereunder, each and every person and/or entity executing this Lease as Tenant, appoints as their agent each and any other person and/or entity executing this Lease, for purposes of service of process of any complaint or other moving or responding paper. SECTION 13.03 DETERMINATION OF RENT For the purposes of this Article XIII, the rent due for any calendar month after re-entry by Landlord shall be deemed to be the greater of (i) the contract rent, or (ii) the average monthly rent, including any percentage rent, additional rent and other charges, which shall have been payable pursuant to this Lease for the 12-month period immediately prior to such re-entry or for such shorter period of time as this Lease shall have been in effect. SECTION 13.04 DEFAULT BY LANDLORD Landlord shall not be deemed to be in default in the performance of any obligation required to be performed by it hereunder unless and until it has failed to perform such obligation within 30 days after written notice by Tenant to Landlord specifying wherein Landlord has failed to perform such obligation; provided, however that if the nature of Landlord's obligation is such that more than 30 days are required for its performance, then Landlord shall not be deemed to be in default if it shall commence such performance within such 30-day period and thereafter diligently prosecute the same to completion. This Lease may not be canceled for any default by Landlord. Tenant's sole remedy for any default by Landlord shall be such damages as may be afforded by law. Copies of such notices shall be concurrently sent to any lender who directly or through Landlord so requests in writing. SECTION 13.05 EXPENSE OF LITIGATION If either party incurs any expense, including reasonable attorney's fees, in connection with any action or proceeding, including declaratory relief, instituted by either party by reason of any default or alleged default of the other party hereunder, the party prevailing in such action or proceeding shall be entitled to recover its reasonable expenses from the other party. In addition, should it become necessary for Landlord to utilize legal counsel to enforce any of the provisions herein contained, Tenant agrees to pay all legal fees and other costs incurred, whether or not a suit is instituted or prosecuted to final judgement. ARTICLE XIV - COMMON AREAS SECTION 14.01 DEFINITION All areas within the exterior boundaries of the Shopping Center which are neither (i) areas occupied by buildings (roof overhangs and canopies and any columns supporting them, swinging doors and subsurface foundations shall not be deemed encroachments on common areas) not (ii) areas designated by Landlord for the exclusive use of a particular tenant or tenants, shall be deemed "common areas." Landlord may make changes at any time and from time to time in the size, shape, location, number and extent of the common areas or any of them. SECTION 14.02 USE OF COMMON AREAS Tenant and its employees and invitees shall be entitled to the non-exclusive use of the common areas during the Lease term, in common with Landlord and with other persons authorized by Landlord from time to time to use such areas, subject to such reasonable rules and regulations relating to such use as Landlord may from time to time establish. SECTION 14.03 CONTROL BY LANDLORD (a) Landlord directly or by contract shall operate, manage, equip, light, repair, replace, clean and maintain the common areas in such manner as Landlord may in its sole discretion determine to be appropriate. Landlord may temporarily close any common area for repairs or alterations, to prevent a dedication thereof or the accrual of prescriptive rights therein, or for any other reason deemed sufficient by Landlord. (b) Landlord shall at all times during the term of this Lease have the sole and exclusive control of the automobile parking areas, driveways, entrances and exits, and the sidewalks and pedestrian passageways and other common areas, and may at any time and from time to time during the term hereof restrain any use or occupancy thereof except as authorized by the rules and regulations for the use of such areas established by Landlord from time to time. The rights of Tenant in and to the common areas shall at all times be subject to the rights of Landlord, the other tenants of Landlord and other owners of stores in the Shopping Center to use the same in common with Tenant, and Tenant shall keep said areas free and clear of obstructions created or permitted by Tenant or resulting from Tenant's operation. If in the opinion of Landlord, unauthorized persons are using any of the said areas by reason of the presence of Tenant in the Shopping Center, Tenant, upon demand of Landlord, shall restrain such unauthorized person from the common areas or to prohibit the use of any said areas by unauthorized persons. c) Tenant and its employees shall park their vehicles only in those portions of the parking areas from time to time designated for that purpose by Landlord. Tenant shall furnish Landlord with a list of its employees' vehicle license numbers within 15 days after taking possession of the Premises and Tenant shall thereafter notify Landlord of any change in such list within five days after each such change occurs. Tenant agrees to assume responsibility for compliance by its employees with the parking provisions contained herein. If Tenant or its employees park in other than such designated parking areas, then Landlord may charge Tenant, as additional rent, $10.00 per day for each day or partial day each such vehicle is parked in any part of the common areas other than that designated. Tenant hereby authorizes Landlord to tow away from the Shopping Center any vehicle belonging to Tenant or Tenant's employees parked in violation of these provisions, and/or to attach violation stickers or notices to such vehicle. (d) If Landlord elects to limit or control parking by customers or invitees of the Shopping Center, whether by validation or assessment program under such reasonable rules and regulations as are from time to time established by Landlord with respect thereto. (e) Tenant shall have no right to approve the development or redevelopment of the Shopping Center nor the location of other tenants in the Shopping Center. Tenant acknowledges that Landlord may not now or in the future own the entire property consisting of the Shopping Center and Tenant agrees to waive any violation or breach of this Lease occurring by virtue of any act or omission to act with respect to property not owned by Landlord. In the event of any such violation or breach, Tenant agrees that it shall not attempt to cancel this Lease, reduce or abate its rent or pursue any other potential remedy against Landlord. 6 SECTION 14.04 ENVIRONMENTAL PROTECTION EXPENSE If, prior to or at any time during the term of this Lease, a law, regulation, or rule is adopted by any governmental authority requiring that monitoring equipment measuring air quality be installed in the Shopping Center, Tenant shall pay to Landlord as additional rent upon demand, its pro rata share of the cost, maintenance and operating expense of such equipment, determined in the same manner as is provided in Section 5.02 of this Lease relating to computing Tenant's share of real state taxes. Additionally, if in the same manner there is similarly required extraordinary waste disposal facilities or equipment or modifying existing waste treatment facilities and equipment of the Shopping Center, Tenant shall pay to Landlord as additional rent upon demand its pro rata share of the cost, maintenance, and operating expense thereof calculated in accordance with Section 5.02 of this Lease as hereinabove set forth. Tenant shall extend to Landlord reasonable rights of entry to the Premises for purposes of testing air quality as may be required. Tenant acknowledges that Landlord maybe required from time to time by governmental authority to reduce the energy consumption of the Shopping Center, to impose a parking or similar regulatory charge, to modify or restrict the hours of operation of Tenant's business, to limit access to the Shopping Center or to reduce the number of parking spaces available for Tenant's customers and other limiting actions, all of which shall be binding on Tenant if enacted or enforced by Landlord in accordance with the requirements of a governmental authority. No such action on the part of the Landlord shall be deemed to be a breach by Landlord of its obligations under this Lease. This section shall not in any way limit any right given Landlord under any other section of this Lease. SECTION 14.05 COMMON AREA CHARGES Tenant shall pay to Landlord, as additional rent, in the manner and at the time provided below, Tenant's proportionate share, as defined below, of all costs and expenses incurred by Landlord in the operation, maintenance, replacement and repair of the common areas during the term of this Lease. Such costs and expenses shall include, without limiting the generality of the foregoing, gardening, landscaping, relandscaping, resurfacing, repaving, roofs, maintenance and repair of HVAC, bumpers, directional signs and other markers, cost of public liability, property damage, vandalism and malicious mischief, and other insurance, real estate taxes (as defined in Section 5.02 but applicable to the common areas), personal property taxes, replacements, repairs, painting lighting and other utilities, cleaning trash removal, depreciation of equipment, fire protection, governmentally-imposed parking charges or costs, security, the cost of personnel to implement such services, materials, supplies, utilities, fees to third parties in connection with same, and similar items and an amount equal to 15% of all such costs and expenses to cover Landlord's administrative and overhead expense. (All of such costs, expenses and Landlord's administrative and overhead expense are hereinafter called "common area charges.") Tenant further agrees that, in addition to the foregoing, if Tenant requests, and Landlord consents to and provides lighting of the common area or any portion thereof, or HVAC which is not separately metered, beyond the normal and customary business hours of the Shopping Center, Tenant shall pay to Landlord as further and additional rent, all costs incurred by Landlord with respect thereto. SECTION 15.06 PROPORTIONATE PAYMENT (a) Tenant's proportionate share of such common area charges shall be determined in the same manner as is provided in Section 5.02 of this Lease relating to computing Tenant's share of real estate taxes. (b) Landlord may, at its option, give Tenant a written estimate of Tenant's share of such common area charges and Tenant shall pay such estimated common area charges as provided in Article XV. If Landlord elects not to estimate, Tenant shall pay its share of such common area charges at such intervals as Landlord may elect to bill Tenant. ARTICLE XV - ESTIMATED CHARGES SECTION 15.01 ELECTION TO ESTIMATE CHARGES Landlord may, at its option, elect to estimate Tenant's anticipated costs for real estate taxes applicable to the Premises, insurance premiums and common area charges pursuant to Articles V, VIII, XII, and XIV herein stated (hereinafter collectively referred to as "estimated charges"). If Landlord so estimates, Landlord shall submit a written statement of estimated charges to Tenant for the ensuing year or portion thereof. Tenant shall pay as additional rent such estimated charges to Landlord in equal monthly installments, in advance, as part of the same check with which Tenant pays monthly minimum rent. Tenant shall continue to make such payments until notified by Landlord of a change thereof. Landlord may adjust the estimated charges at any time and from time to time to more accurately reflect the actual charges to be paid by Tenant. In any year in which resurfacing and restriping of any part of the common areas is contemplated, Landlord shall be permitted to include the anticipated cost of same as part of the estimated monthly charges. SECTION 15.02 STATEMENT OF ACTUAL CHARGES Within 90 days after the end of each calendar year, Landlord shall furnish to Tenant a statement showing in reasonable detail the actual real estate taxes, insurance premiums and common area charges and Tenant's proportionate share thereof (hereinafter referred to as "actual charges"). If the actual charges exceeds the actual charges, such excess shall be credited to Tenant's estimated charges for the ensuing year. SECTION 15.03 ADJUSTMENT Upon expiration of the term hereof or any extension or earlier termination hereto, Tenant shall pay on demand any and all sums due for actual charges and any sums due Tenant shall be promptly paid by Landlord. This Section 15.03 shall survive the expiration or earlier termination of the term of this Lease until such time as Landlord has received from or paid to Tenant the difference between actual and estimated charges as provided in Section 15.02 of this Lease. SECTION 15.04 NO WAIVER Failure by Landlord to strictly adhere to the provisions stated hereinabove shall not be deemed a waiver of Tenant's obligations to pay such estimated or actual charges. ARTICLE XVI - SIGNS, LIGHTING, ADVERTISING SECTION 16.01 SIGNAGE Tenant shall not, without Landlord's prior written consent, (a) install or affix any signs, exterior lighting or plumbing fixtures, shades, awnings or exterior decorations (including exterior painting); (b) display or sell merchandise on, or otherwise obstruct, any area outside of the Premises; (c) cause or permit to be used any advertising materials or methods which are objectionable to Landlord or to other tenants of the Shopping Center, including, without limiting the generality of the foregoing, loudspeakers, mechanical or moving display devices, unusually bright, neon or flashing lights and similar devices, the effect of which may be seen or heard outside the Premises; (d) solicit business in the parking or other common areas; or (e) distribute any handbills or other advertising matter in the parking or other common areas. Tenant shall, however, erect one sign in a location designated by Landlord, no later than the date Tenant opens for business in the Premises. If Landlord institutes a program for the installation of under-canopy signs, Tenant shall promptly install one such sign. Said sign(s) shall be in accordance with Landlord sign criteria and approved by Landlord in writing. upon termination of the term hereof, Tenant shall, at its sole cost and expense, remove all signs, installation and devices, and repair all damage caused by the installation, maintenance and removal thereof, except that Tenant's internally illuminated sign enclosure shall remain in place and become the property of Landlord. SECTION 16.02 ADVERTISING Paragraph was crossed out and initials were placed ARTICLE XVII - MISCELLANEOUS SECTION 17.01 OFFSET STATEMENT (a) Tenant shall, at any time, from time to time and within 10 days after receipt of written notice from Landlord, execute, acknowledge and deliver to Landlord a statement in writing in a form provided by Landlord (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the dates to which the monthly minimum rent, percentage rent and additional rent charges are paid in advance, if any, (ii) verifying the commencement and termination dates of this Lease, (iii) acknowledging that there are not, to the best of Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults, if any, as are claimed, and (iv) that 7 Tenant has paid to Landlord the security deposit set forth in this Lease. Any statement stated maybe relied upon by any prospective purchaser or encumbrance of the Premises or of all or any portion of the Shopping Center in which the Premises are situated. (b) Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant (i) that this Lease is in full force and effect, without modification except as may be represented by Landlord, and that not more than one month's monthly minimum rent has been paid in advance, (ii) that the commencement and termination dates of this Lease are as represented by Landlord, (iii) that there are no uncured defaults in Landlord's performance, and (iv) that Tenant has paid to Landlord the security deposit set forth in this Lease. SECTION 17.02 FINANCIAL STATEMENTS Tenant has submitted its current financial statement and application, and Tenant certifies the same to be true and correct. Tenant shall, each year within 30 days after the anniversary of the Rent Commencement Date of this Lease, submit to Landlord a current financial statement. SECTION 17.03 LANDLORD'S RIGHT OF ACCESS (a) Landlord and its agents shall have free access to the Premises for the purpose of examining the same to ascertain if they are in good repair, posting notices of non-responsibility, making repairs or installations which Landlord may be required or permitted to make hereunder, and exhibiting the Premises to prospective purchasers, lenders or tenants. Landlord shall have no liability to Tenant for any exercise of its right of entry hereunder or under any other provision of this Lease. (b) This section has been crossed out and initialed. SECTION 17.04 HOLDING OVER If Tenant remains in possession of the Premises or any part thereof after the expiration of the term hereof without the express written consent of Landlord, such occupancy shall not be deemed a renewal or extension of this Lease for any term whatsoever or for a month to month tenancy. To the extent Tenant occupies the Premises beyond the term of this Lease, Tenant agrees to pay Landlord as rent per day a sum equal to 150% of the monthly minimum rent per day applicable to the last month of the term hereof, adjusted as provided in Section 3.02 above, together with all other charges payable hereunder, and to otherwise abide by all the terms, convenants and conditions of this Lease applicable to such occupancy. If Tenant fails to surrender the Premises upon the termination of this Lease, Tenant shall indemnify and hold harmless Landlord from loss or liability resulting from such failure, including, without limiting the generality of the foregoing, any claims made by the succeeding tenant arising out of such failure to surrender the Premises. SECTION 17.05 RELOCATION OF PREMISES This paragraph has been cross out and initialed. SECTION 17.06 TRANSFER OF LANDLORD'S INTEREST In the event of any transfer of Landlord's interest in the Premises, Landlord shall be automatically relieved of any and all obligations and liabilities on the part of Landlord accruing from and after the date of such transfer. At such time Landlord shall transfer the portion of the security deposit remaining (after any deductions made pursuant to Section 17.09) to Landlord's successor in interest, and thereafter notify Tenant of such transfer, of any claims made against the security deposit, and of the transferee's name and address, after which Landlord shall be relieved of any further liability with respect to the security deposit. SECTION 17.07 FLOOR AREA As used in this Lease, "gross ground floor area" means, with respect to the Premises and with respect to each store area separately leased, the aggregate of (a) the number of square feet of floor space on the ground floor level, measured from the exterior faces of exterior walls and the center line of party walls, and (b) all outside selling areas used for the sale of merchandise by tenants. No deduction or exclusion from floor area shall be made by reason of columns, stairs, elevators, escalators or other interior construction or equipment. SECTION 17.08 SEPARABILITY Any provision of this Lease which shall prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other provision hereof, and such remaining provisions shall remain in full force and effect. SECTION 17.09 SECURITY DEPOSIT Tenant has deposited with Landlord the amount specified in the applicable Lease Summary Provision, as security for the full and faithful performance of every provision of this Lease to be performed by Tenant, and Tenant shall, from time to time upon Landlord's request, augment the security deposit by the amount of any percentage increase in the CPI as computed in accordance with Section 3.02. If Tenant defaults with respect to any provisions of this Lease, Landlord may use, apply or retain all or any part of the security deposit for the payment of any rent or other sum in default, or for the payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default, or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default including, without limitation, Tenant's failure to comply with its obligation pursuant to Section 17.30 herein. If any portion of said security deposit is so use or applied, Tenant shall, within five days after written demand therefore, deposit cash with Landlord in an amount sufficient to restore the security deposit to its original amount plus any CPI increase adjustment, and Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep the security deposit separate from its general funds, and Tenant shall not be entitled to interest on such security deposit. If Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, the security deposit or any balance thereof shall be returned to Tenant (or, at Landlords' option, to the last assignee of Tenant's interest hereunder) within 10 days after the expiration of the Lease term. Nothing contained in this section 17.09 shall in any way diminish or be construed as waiving any of Landlord's other remedies otherwise set forth in this Lease, or by law or equity. SECTION 17.10 LATE CHARGES Tenant hereby acknowledges that late payment by Tenant to Landlord of rent or other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, any mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any sum due from Tenant shall not be received by Landlord's designee within five days after said amount is due, then Tenant shall pay to Landlord a late charge equal to 10% of such overdue amount, plus any attorneys' fees incurred by Landlord by reason of Tenant's failure to pay rent and/or other charges when due hereunder. The parties hereby agree that such late charges represent a fair and reasonable estimate of the cost that Landlord will incur by reason of the late payment by Tenant. Acceptance of such late charges by the Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, not prevent Landlord from exercising any of the other rights and remedies granted hereunder. Landlord may, at its option, include all late charges accrued during any calendar year in Tenant's estimated charges for the ensuing year. SECTION 17.11 INTEREST Unless otherwise specifically provided in this Lease, any sum accruing to Landlord under the terms and provisions of this Lease which shall not be paid when due shall bear interest at the lower of 12% per annum or the highest lawful rate from the date the same becomes due and payable by the terms and provisions of this Lease until paid by Tenant. The highest lawful rate shall be determined as of the 25th day of the month preceding the date when such sum becomes payable. SECTION 17.12 TIME OF ESSENCE Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. SECTION 17.13 HEADINGS The article and section captions and the placement of particular provisions under certain Articles or Sections contained in this Lease are for convenience only and shall not be considered in the construction or interpretation of any provision hereof. 8 SECTION 17.14 INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease, and no agreement or understanding pertaining to any such matter shall be effective for any purpose. No provision 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, and this Lease may not be modified by an oral agreement whether or not supported by new consideration. Tenant acknowledges that in executing this Lease, Tenant is not relying on any representations, oral or written unless such representations are specifically stated in this Lease. SECTION 17.15 NOTICES Any notice or demand required or permitted to be given hereunder, including but not limited to, any "Notice To Pay Rent or Quit," shall be in writing and may be served in any manner consistent in the applicable Lease Summary Provision or mailed to the Premises address. Any notice so given by mail shall be deemed effectively given when deposited in the United States mail, registered or certified, postage prepaid, and addressed as specified above. Either party may, by written notice to the other, specify a different address, but not the address of the Premises, for notice purposes. SECTION 17.16 BROKERS Tenant warrants that it has had no dealings with any real estate broker or agent in connection with the negotiations of this Lease unless specifically stated to the contrary in the applicable Lease Summary Provision. SECTION 17.17 WAIVERS No waiver by Landlord of any provision of this Lease shall be effective unless in writing or shall be deemed to be a waiver of any other provision hereof or of any subsequent breach by Tenant of the same or any other provision. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to render unnecessary the obtaining of Landlord's consent to or approval of any subsequent act by Tenant, whether or not similar to the act so consented to or approved. SECTION 17.18 OTHER LOCATIONS Neither Tenant, nor any affiliate or subsidiary of Tenant, directly or indirectly, shall operate, manage or have any interest in any other competing or similar store or business, including a department or concession in another store, within a five-mile radius outward from the Shopping Center, measured from the nearest outside boundary of the Shopping Center. Without limiting Landlord's remedies, if Tenant should violate this covenant, Landlord may, at its option, include the gross sales of such other store in the gross sales transacted in the Premises for the purpose of computing the percentage rent due hereunder, as though such sales had actually been made from the Premises. If Landlord so elects, all the provisions of Articles III and IV relating to the payment of rent and to accounting shall be applicable to such other store. However, any such store existing as of the date of this Lease may continue to be operated, managed, conducted and owned in the same manner as on the date of this Lease. SECTION 17.19 MERCHANTS' ASSOCIATION Paragraph has been crossed out and initials are present on the right hand side of the page. SECTION 17.20 LIENS Tenant shall keep the Premises, and the Shopping Center in which the Premises are situated, free from any liens arising out of any work performed, materials furnished or obligations incurred by Tenant. Landlord requires that Tenant shall provide to Landlord, at Tenant's sole cost and expense, a lien and completion bond in an amount equal to one and one half time the estimated cost of any improvements, additions, or alterations in the Premises which the Tenant desires to make or has made, to insure Landlord against any liability for mechanics' and materialmen's liens and to insure completion of the work. SECTION 17.21 SUBORDINATION This Lease shall be and remain subordinate to any mortgage, ground lease, or deed or trust that may exist or hereafter be placed upon the Shopping Center or any part thereof and to any and all advances to be made thereunder and to the interest thereon and to all renewals, replacements and extensions thereof. Tenant shall, upon written demand by Landlord, execute such instruments as may be required at any time and from time to time to evidence the subordination of the rights and interest of Tenant under this Lease to the lien of any such ground lease, mortgage or deed of trust; provided, however, that Tenant shall, if any proceedings are brought for default under such ground lease or for the foreclosure of any such mortgage ordered of trust, attorn to the purchaser upon foreclosure sale or sale under power of sale, or to the ground lessor terminating Landlord's rights as ground lessee, and shall recognize such purchaser or ground lessor as Landlord under this Lease, and, so long as Tenant is not in default hereunder, any such event shall not terminate this Lease. SECTION 17.22 SUCCESSORS IN INTEREST The covenants herein contained shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of all the parties hereto, and all the parties hereto shall be jointly and severally liable hereunder. SECTION 17.23 CALIFORNIA LAW This Lease shall be construed and enforced in accordance with the laws of the State of California. SECTION 17.24 ZONING Tenant hereby accepts the Premises subject to all applicable zoning, municipal, county and state laws, ordinances, regulations and any changes thereto, governing and regulating the use and occupancy of the Premises. SECTION 17.25 DELAYS Whenever a period of time is provided in this Lease or in any exhibit or rider hereto for Landlord to do or perform any act or thing, Landlord shall not be liable or responsible for nor shall Tenant be excused from performing any obligation hereunder as result of any delay due to strikes, lockouts, casualties, acts of God, or governmental regulations or control, or other causes beyond the reasonable control of Landlord, and the time for performance specified herein shall be extended for the amount of time Landlord is so delayed. The provisions of this Section 17.25 shall not operate to excuse Tenant from the prompt payment of monthly minimum rent, additional rent or other payments required by the terms of this Lease. SECTION 17.26 FINANCING Tenant understands and acknowledges that Landlord may, from time to time, finance the construction of and improvements within the Shopping Center, and that a lender or lenders may have to approve this Lease. In order to receive such approval, this Lease may have to be amended or modified. Provided that neither the term hereof, nor the size and location of the Premises is altered, nor the amount or share of rent, taxes, insurance or other charges be increased thereby, Tenant agrees to immediately execute any such amendment or modification of this Lease as maybe requested by said lender or lenders. It is agreed, however, that no such amendment or modification shall be required of Tenant after the Rent Commencement Date. If Tenant fails to consent to any such amendment or modification, Landlord, at its option, may cancel and terminate this Lease on 30 days' written notice to Tenant, without liability to Landlord or Tenant. For purposes of this Section 17.26, lender or lenders shall include any financial institution holding a mortgage, deed of trust or ground lease, insurance company, pension fund or other lending institution. SECTION 17.27 LIMITATION OF LANDLORD'S LIABILITY Anything in this Lease to the contrary notwithstanding, Tenant agrees that it shall look solely to the estate and property of Landlord in the land and buildings comprising the Shopping Center and/or building within which the Premises are located, and subject to prior rights of the holder of any mortgage or deed of trust of the Premises, for the collection of any judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default or 9 breach by Landlord with respect to any of the terms, covenants and conditions of this Lease to be observed and/or performed by Landlord, and no other assets of Landlord shall be subject to levy, execution or any procedures for the satisfaction of Tenant's remedies. SECTION 17.28 TENANT'S PERFORMANCE If Tenant shall fail within anytime limits which maybe provided herein, or in any exhibit hereto, to complete any work or perform any of the requirements provided to be performed by Tenant prior to the Rent Commencement Date, or if Tenant shall cause a delay in the completion of any work, then Landlord shall have the option of terminating this Lease by a written notice of termination and upon forwarding of said notice to Tenant, this Lease shall cease and terminate and all improvements which Tenant may have annexed to the realty to the date of such termination shall become the property of Landlord. SECTION 17.29 WAIVER OF TRIAL BY JURY To the extent legally possible, the parties hereto waive their right to trial by jury in any action arising out of this Lease. SECTION 17.30 TENANT'S PROPERTY AND REPAIR OF PREMISES AT TERMINATION (a) Upon the expiration of the term of this Lease, or upon any earlier termination thereof, Tenant shall deliver to Landlord all keys for the Premises, the combination of all locks and safes, if any, on the Premises, and surrender the Premises in the same condition as when received, broom clean, and provided that Tenant is not in default, Tenant shall remove, at its own expense, all trade fixtures, equipment, merchandise and other personal property ("Tenant's property") which were installed by Tenant or any subtenant, concessionaire or licensee, in or on the Premises. Additionally, Tenant shall remove any of Landlord's property that Landlord so designates in writing. Lighting fixtures, electrical panels, heat and air conditioning units, wiring and duct work shall be considered property of Landlord, and not Tenant's, unless specifically stated otherwise by Landlord in a written document. (b) All alterations, improvements, remodeling, additions, or fixtures, other than trade fixtures not permanently affixed to the Premises, which may be made or installed in the Premises and which are attached to the floor, wall or ceiling to the Premises, which may be made or installed in the Premises and which are attached to the floor, wall or ceiling of the Premises and any floor covering which is cemented or otherwise affixed to the floor of the Premises, shall likewise be the property of Landlord. (c) If any injury or damage to the building in which the Premises are located (including any adjacent store(s) or building (s)) or any portion of the Premises results from the removal of Tenant's property or any designated Landlord's property, Tenant shall immediately repair and/or pay to Landlord the cost of repairing said injury or damage caused by the installation, maintenance and removal thereof, including the potential loss of revenue to Landlord due to the time needed to repair such injury or damage. Tenant shall complete such removal, repair and/or payment upon the expiration of the term of this Lease or upon any earlier termination thereof. (d) If Tenant fails to remove its property upon the expiration of the term of this Lease, or upon any earlier termination thereof, or if Tenant is in default, Tenant shall not remove its property unless notified by Landlord to do so, and title thereto shall immediately vest in Landlord without the execution of documents of sale or conveyance by Tenant. Landlord shall have the right, at its option, to take the exclusive possession of Tenant's property and to use it rent or charge free, or Landlord may remove any or all items of Tenant's property from the Premises and dispose of them in any manner Landlord sees fit. Tenant shall pay to Landlord, upon demand, the actual expense of such clean-up, removal, disposition and/or repair, together with interest thereon at the lesser of 12% per annum or the prevailing legal rate from the date of payment by Landlord for such expense until repayment by Tenant plus any consequential damages which may be suffered by Landlord (including, but not limited to, loss of revenue from the Premises) as the result of Tenant's failure to comply with its obligations under this Section 17.30. (e) In addition to the above-described rights of Landlord in Tenant's property upon default, expiration of Lease term, or termination of Lease, Tenant hereby grants Landlord a security interest in all of Tenant's personal property located on the Premises, to secure full performance by Tenant of all obligations under this Lease. However, while Tenant is not in default in the payment of rent or any of its obligations under this Lease, it may trade in or replace any of said items free of this security interest and the security shall them apply to the newly-acquired items. This security interest shall be deemed perfected, by possession, on the first date that Tenant's property is located on the Premises. Landlord shall, within 15 business days after written demand from Tenant, provided that Tenant is not in default of its obligations under this Lease, execute and deliver in a form and content satisfactory to Landlord, a document required by any supplier, lessor, or lender in connection with the installation in the Premises of Tenant's personal property or Tenant's trade fixture, in which Landlord waives any security interest it may have or acquire with respect to that property, if the supplier, lessor, or lender agrees in writing that: (i) it will remove such property from the Premises before expiration of the term or within five days after termination of the term, and if it does not remove such property within said five days after termination of the term, and if it does not remove such property within said five days, it shall have waived any rights it may have had to such property, and (ii) it shall make whatever restorations to the Premises are necessitated by the installation, maintenance, or removal of Tenant's property, or pay to Landlord the cost for such restoration. If Landlord executes such waiver documentation, Tenant shall pay to Landlord a fee of $200.00 for Landlord's administrative and other costs incurred in conjunction with the processing, documentation and administration of such waiver documentation. SECTION 17.31 NO WARRANTIES Tenant acknowledges that neither Landlord nor Landlord's agents or employees have made any representation or warranty as to the suitability of the Premises for the conduct of Tenant's business. SECTION 17.32 RECORDING Tenant shall not record this Lease or any memorandum or short form thereof without the prior written consent of the other party. Promptly following the expiration or earlier termination of the term of this Lease, if requested by Landlord, Tenant shall execute, acknowledge and deliver to Landlord a recordable written instrument releasing and quitclaiming to Landlord all right, title and interest in the Premises by reason of this Lease or otherwise. SECTION 17.33 AUTHORITY OF TENANT If Tenant is a corporation, each individual executing this Lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation, in accordance with its terms. If a corporation executes this Lease as Tenant, Tenant shall promptly furnish to Landlord certified corporate resolutions attesting to the authority of the officers to execute the Lease of such corporation. SECTION 17.34 NO OPTION TO LEASE The submission by Tenant of this Lease to Landlord does not constitute a reservation of or option to lease the Premises, and this Lease becomes effective only upon execution by Tenant and Landlord. See Addendum ARTICLE XVIII - CONDITION OF PREMISES Tenant takes and accepts the Premises in its present "AS IS" condition. All tenant improvements, additions and alterations shall be at Tenant's sole cost and expense and Landlord shall have no responsibilities therefore. Landlord shall arrange to have existing kitchen equipment removed prior to commencement of Lease. Landlord approves installation of window. Landlord has made no representations or warranties as to the physical condition of the Premises or any other matter concerning the Premises. Tenant has inspected the Premises, is familiar with the condition of the Premises, and is not relying upon any representations or warranties of Landlord. IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the dates indicated below. Landlord: Tenant: EL CAMINO NATIONAL BANK Signature present, By- Signature present - --------------------------- ------------------------------ Thomas G. Eastman, its Chairman H. Peter Norstrand and John L. Patillo as Trustees of AEW #33 Trust, By- Signature present under Declaration ------------------------------ of Trust dated October 3, 1985, its President but not individually Dated: 10-20-89 Dated: Sept. 26, 1989 ---------------------- ----------------------- Note: Right hand side of paper indicates the following: to receipt of drawings for approval of tenant work and approval of same. JUNE 1987 10 El Camino National Bank Lompoc, CA AMENDMENT NO. 1 TO LEASE THIS AMENDMENT NO. 1 TO LEASE is dated for identification purposes June 10, 1994, and is made by and between GRANT MONAHAN, REID SAMUELSON & JAMES S. KEAGY, as Trustees of AEW #33, TRUST, established under Declaration of Trust dated October 3, 1985, but not individually ("Landlord"), whose address is c/o D.W.A. Smith & Company, Inc., 1300 Quail Street, Suite 106, Newport Beach, California 92660-2711, and El Camino National Bank ("Tenant") whose address is P. O. Box 1149, Lompoc, CA 93438. RECITALS A. Tenant entered into that certain Shopping Center Lease dated September 12, 1989 ("Lease") whereby that portion of the shopping center located at 1325 North "H" Street, Lompoc, California, as more particularly described in the Lease ("Premises") was leased from Landlord. B. Landlord and Tenant desire to further amend said Lease. NOW THEREFORE, in consideration of the Premises, the covenants and agreements herein contained and other good and valuable consideration, Landlord, Tenant and Assignee agree as follows: AGREEMENT 1. TERM: Section 2.01 of said Lease is hereby amended to extend the Term of said Lease to October 31, 1999, plus the Option to Renew shown on Rider No. 1 attached hereto and made a part hereof. 2. MONTHLY MINIMUM RENT: Section 3.01 of said Lease is hereby amended to reflect a Monthly Minimum Rent from November 1, 1994 through October 31, 1999 of Four Thousand Eight Hundred Fifteen and no/100 Dollar ($4,815.00). 3. FIRST RIGHT OF REFUSAL: Provided Tenant is not in default under the Lease, Tenant shall have a First Right of Refusal to lease the approximately 2, 150 square foot space adjacent to the leasehold premises (the "Expansion Space"). During such period each time the Expansion Space becomes available and Landlord has finalized terms and conditions by which Landlord and a third party tenant are prepared to enter into a lease of the expansion space, Tenant shall have a first and prior right to enter into a lease for such space on the terms and conditions accepted by Landlord. Tenant shall have 48 hours in which to respond with a written offer to enter into a lease for said space. Should Tenant decline to enter into this lease, Landlord's obligation to give a First Right of Refusal has been fulfilled. This First Right of Refusal is granted only to Tenant and may not be assigned to any subsequent tenant, whether by assignment or sublease. 4. TENANT IMPROVEMENT ALLOWANCE: Landlord grants to Tenant a Tenant Improvement Allowance of Seven Thousand Seven Hundred and no/100 Dollars ($7,700.00) which shall be paid to Tenant's contractor upon the receipt of invoices and mechanic and/or materialmen's Lien Releases. 5. TENANT REPRESENTATIONS AND WARRANTIES: Tenant hereby represents and warrants that, with respect to following corporations or entities, the Tenant or the officers or directors of Tenant; a. could not be included in a consolidated federal income tax return with any such corporation or entity; b. are not fiduciary or any qualified retirement plan established for the benefit of employees of any such corporation or entity or the employees of any corporation which files a consolidated federal income tax return with any of these corporations; c. are not an officer or director of any of the companies or any company that could be included in a consolidated federal income tax return with any such company; and d. neither own, directly nor indirectly, more than fifty percent (50%) of the value of the outstanding stock of any such corporation nor is the brother, sister, spouse, ancestor or lineal descendant of a person having such an ownership interest; HONEYWELL, INC. STATE OF MINNESOTA INTERNATIONAL PAPER COMPANY TEKTRONIX, INC. MARS, INC. WEST PUBLISHING CO. STATE OF CONNECTICUT WISCONSIN ELECTRIC CO. STATE STREET BANK RETIREMENT PLAN 6. TERMS AND CONDITIONS: Except as specifically amended herein, all terms and conditions of said Lease shall remain in full force and effect. 7. ATTORNEYS' FEES: If any party commences an action against any of the parties arising out of or in connection with this Amendment of Lease, the prevailing party or parties shall be entitled to recover from the losing party or parties reasonably attorneys' fees and costs of the suit. THIS AMENDMENT NO. 1 TO LEASE is hereby reviewed, approved and accepted by the parties hereto and shall become a part of the Lease. "LANDLORD" GRANT MONAHAN, REID SAMUELSON & JAMES S. KEAGY, as Trustees of AEW #33 TRUST, established under Declaration of Trust dated October 3, 1985, but not individually. By: Signature Present 6/24/94 ------------------------ --------------- Date "TENANT" EL CAMINO NATIONAL BANK By: Signature Present 6/13/94 ------------------------ --------------- Date Its: President ------------------------ By: Signature Present 6/13/94 ------------------------ --------------- Date Its: President ------------------------ Page 2 of 2 Pages OPTION TO RENEW OPTION TO RENEW Provided Tenant is not then in default with respect to the Lease to which this OPTION TO RENEW is attached and has kept and performed all of its obligations under said Lease, Tenant shall have the right and option at any time, at least six (6) months before the expiration of said Lease, to extend the term thereof for one (1) additional term of five (5) years from the date of expiration of said Lease, which notice of exercise of option shall only be effective if in writing and sent to the Landlord as provided in the Lease for the mailing of notices. Provided, however, that Tenant may not exercise this right if the Tenant has received three (3) or more notices of default throughout the initial term of this Lease, whether or not those defaults were cured, or at any time when Tenant has breached and not cured or is in default under this Lease. Should Tenant breach or default under this Lease at any time after giving notice of extension and prior to the first day of the extended term, Landlord shall have the right to declare Tenant's notice void and of no effect, and the term of this Lease shall expire as if notice had not been given. Such Lease extension shall be upon the identical terms and conditions as set forth in the Lease, except that the rental to be paid by Tenant hereunder shall be increased as of the commencement of the extended term to the greater of: (a) the rent for the period immediately preceding the option period, increased as provided in and subject tot the provisions of Section 3.02 of the Lease, or (b) market rent for like space in the area, as determined by negotiation between Landlord and Tenant. If Landlord and Tenant cannot agree, each party will appoint a qualified appraiser (MAI or equivalent) to do a market analysis. If the two appraisers cannot agree, they will appoint a third similarly qualified appraiser and the decision of the majority of the appraisers shall be binding on all parties. However, regardless of the findings of the appraisers, the minimum rent for the next period shall not be less than the rent prescribed in (a) above. Rent for the second and each subsequent year during the option term shall be increased as provided in and subject to the provisions of Section 3.02 of the Lease. Any security deposit held by Landlord shall be increased in the ratio as the rent is increased in the first year of the option period divided by the rent for the first year of the initial term. Upon default in payment of the full increase in rental provided for above, Landlord shall have the same rights and remedies as upon default in the rent otherwise provided for in the Lease. This OPTION TO RENEW or extend may be exercised only by the original Tenant while physically occupying the Premises and any consent by Landlord to assignment or sublease of the Premises shall not be construed as a waiver of this prohibition. Landlord's Initials Initials Present ---------------- Tenant's Initials Initials Present ---------------- Initials Present ---------------- Rider No. 2 Page 3 of 2 Pages EX-10.6 13 UNISYS LICENSE UNISYS LICENSE AND SERVICE AGREEMENT AGREEMENT NUMBER 90110417 CUSTOMER NAME & MAILING ADDRESS Bank of Santa Maria 2739 Santa Maria Way Santa Maria, CA 93455 1 Unisys will license Software and provide Software Support and Equipment Maintenance Services, and Customer agrees to accept the Software and Services under the following terms and conditions: 1. DEFINITIONS 1.1 Software means the object code version of computer programs and any related documentation, excluding maintenance diagnostics. Software also means the source code version, where provided by Unisys. 1.2 Products means equipment, Software and documentation, including manuals and education materials. 1.3 Software Processing Unit ("SPU") means equipment which controls and executes Software. 1.4 Services means all forms of maintenance, support and education for Products. 1.5 Proprietary Information means Software, documentation, including manuals, and any other information confidential to Unisys or its licensors. 1. 6 Installation Date means the date Unisys completes installation (as determined by Unisys) or, if equipment or Software is to be installed by Customer, the tenth day following shipment. 2. EFFECTIVE DATE This Agreement will become effective when signed by duly authorized representatives of both parties and will continue in effect so long as Customer continues to use the equipment at the site where originally installed or until terminated according to its terms. 3. SCHEDULES - ORDERING PROCEDURE 3.1 Unisys will furnish to Customer and Customer will accept and pay for the Products and Services itemized on the following Schedules which, together with the terms on the Schedules, are an integral part of this Agreement. A. Equipment Maintenance Services B. Software Licenses and Support Services C. Systems Services All references to Software and Services in this Agreement are to the Software and Services listed on the Schedules and on any Supplemental Schedules submitted to and accepted by Unisys pursuant to Section 3.2 and to any Products and Services supplied by Unisys with such listed Products and Services. 3.2 Customer may order additional Software and Services under this Agreement by submitting properly completed Unisys Schedules. All Schedules will refer to this Agreement by number and will be signed by Customer. All education lecture courses must be ordered on a Customer Course Enrollment Application. 3.3 All orders are subject to acceptance by Unisys and the Unisys policies and charges in effect on the date of acceptance will apply. By Acceptance Unisys will be effective when communicated in writing to Customer. The receipt or deposit by Unisys of Customer down payment will not constitute acceptance of an order. Any down payment received from Customer will be returned if the order is not accepted by Unisys. 4. INSTALLATION 4.1 Customer will install all items of equipment with the designation "Y" in the Customer-Installable column, when there is no charge listed in the Installation Charge column of Schedule A. Unisys will install all other items of equipment. 4.2 Customer will install all Software in accordance with specifications provided by Unisys. Unisys will install all items of Software for which a fixed installation charge is indicated on Schedule C. 4.3 Customer may arrange for installation by Unisys of Customer-Installable Products, subject to the then current standard Unisys charges and conditions. 4.4 If additional labor and rigging is required for installation due to Customer's special site requirements, Customer will pay those costs including costs to meet union or local law requirements. 5. PAYMENT 5.1 Charges for Products will be invoiced upon shipment. 2 5.2 Charges for Equipment Maintenance Services and Software Support Services will be invoiced in advance, monthly or annually, or at other periodic intervals indicated in the applicable Schedule following the Installation Date; otherwise, charges will be invoiced after the services are performed. 5.3 Charges for Systems Services will be invoiced after the services are performed. 5.4 All charges must be paid no later than 30 days from invoice date except for Equipment Maintenance Services charges which are due on the commencement date of the services. Unisys may impose a late payment charge equal to the lesser of (a) 1 1/2% per month or (b) the maximum rate allowed by law. 6. TAXES 6.1 Customer will pay any tax Unisys becomes obligated to pay by virtue of this Agreement, exclusive of taxes based on the net income of Unisys. 6.2 All personal property and similar taxes assessed after shipment will be paid by Customer. 7. PRICE PROTECTION 7.1 The charges for Products in any accepted order will remain firm through delivery, unless through no fault of Unisys shipment takes place more than one year after the date of the order. If Unisys notifies Customer that an increase in charges will apply to its order, Customer may terminate the affected part of its order by giving written notice to Unisys within ten days of the date of notification of the increase. 7.2 Equipment Maintenance Services charges will not be increased during the initial one-year term, but may be increased thereafter upon 30 days' prior written notice to Customer. 7.3 Charges for Software Licenses, Software Support Services and Systems Services will not be increased during any one-year term, but may be increased prior to any subsequent term upon 30 days' prior written notice to Customer. If the services are contracted on a month-to-month basis, the charges may be increased at any time following 30 days' notice. 8. CUSTOMER'S OPERATIONAL RESPONSIBILITIES 8.1 Customer acknowledges it had independently determined that the Products and Services ordered under this Agreement meet its requirements. 8.2 Customer has sole responsibility for use of the Products, including operating procedures, audit controls, accuracy and security of input and output data, restart and recovery routines, and other procedures necessary for Customer's intended use of the Products. 8.3 Customer will ensure that its personnel are, at all times, educated and trained in the proper use and operation of the Products and that the Products are used in accordance with applicable Unisys manuals and instructions. 8.4 Customer will maintain back-up data necessary to replace critical Customer data in the event of loss or damage to such data from any cause. 9. PROTECTION OF PROPRIETARY INFORMATION 9.1 Customer will keep in confidence and protect Proprietary Information from disclosure to third parties and restrict its use as provided in this Agreement. Customer acknowledges that unauthorized disclosure of Proprietary Information may cause substantial economic loss to Unisys or its licensors. All materials containing Proprietary Information will be marked with "Proprietary", "Confidential" or in a manner which gives notice of its proprietary nature. Proprietary Information will not be copied, in whole or in part, except when essential for correcting, generating or modifying Proprietary Information for Customer's authorized use. Each copy, including its storage media, will be marked by Customer with all notices which appear on the original. 9.2 Upon termination or cancellation of any license granted under this Agreement, Customer will destroy (and, in writing, certify destruction) or return to Unisys all copies of the Software, the license for which has been so terminated or canceled, and any other related Proprietary Information in Customer's possession (including Proprietary Information incorporated in other software or writings). 9.3 Customer will inform its employees of their obligations under this Section and instruct them so as to insure such obligations are met. 3 9.4 This Section will survive termination or cancellation of this Agreement. 10. LICENSE 10.1 Unisys grants to Customer a personal, non-exclusive and non-transferable license to use Software and related documentation according to the terms and conditions of this Agreement, including Schedule B, solely for Customer's internal data processing requirements on a single Unisys SPU in the United States on which the Software is initially installed. Customer's use of Software will be governed by additional conditions which Unisys may provide on or prior to delivery of Software. 10.2 Customer may modify any Unisys application Software and may combine such with other programs or material to form an updated work, provided that upon discontinuance or termination of the license, the Unisys application Software will be removed from the updated work and returned to Unisys. 10.3 Customer will not decompile or disassemble any Software provided under this Agreement or modify Software which bears a copyright notice of any third party. Customer will make and maintain no more than one archival copy of each item of Software, and each copy will contain all legends and notices and will be subject to the same conditions and restrictions as the original. 10.4 If the SPU on which any item of Software is licensed becomes temporarily unavailable, use of such Software may be temporarily transferred to an alternative system. 10.5 If Customer desires to use Software in a service bureau mode, or at another location, or for more than one SPU, Customer shall request prior permission in writing from Unisys. Unisys will then advise Customer whether, and under what terms and conditions, Unisys will license the Software as requested. 10.6 This Agreement does not transfer to Customer title to any intellectual property contained in any Software, documentation or Proprietary Information. 11. EQUIPMENT MAINTENANCE SERVICES 11.1 Equipment Maintenance Services are the provision of replacement parts (excluding removable media and consumable supplies), parts installation, and field installation of necessary engineering changes to maintain equipment in good working order. 11.2 To enable Unisys properly to provide Equipment Maintenance Services, Customer will (a) maintain the operating environment in accordance with Unisys specifications, (b) provide adequate working and storage space for use by Unisys personnel near the equipment, (c) provide Unisys full access to the equipment, subject only to Customer's security rules, (d) follow Unisys procedures for determining if remedial service is required, and (e) follow Unisys instructions for obtaining off-site maintenance, if applicable. 11.3 Equipment parts which are removed for replacement by Unisys becomes the property of Unisys. 11.4 Customer acknowledges that maintenance support materials for equipment and Software located at Customer's facility, including, without limitation, diagnostic software, are the property of and include Proprietary Information of Unisys. Customer assures that such materials will be used only by Unisys maintenance personnel, and that Unisys has the right to remove such materials from Customer's facility at any time. 11.5 To determine eligibility and prerequisites for Equipment Maintenance Services, Unisys may require inspection, at Customer expense, of equipment which (a) has not been maintained continuously by Unisys from the date of purchase by Customer or (b) has been relocated. 11.6 All system components and peripherals which are located at the same site and interconnected with Unisys signal and power cables or their equivalent and which are subject to Equipment Maintenance Services hereunder are required to be subject to the same designated remedial maintenance hours, as identified in the maintenance services schedule. 12. SOFTWARE SUPPORT SERVICES 12.1 Unisys offers Software Support Services for all Software warranted by Unisys, and for some unwarranted Software. 12.2 When Unisys issues a revision level for an item of Software, it will continue to support the previous level for a period of not less than six months. 4 12.3 Unisys may eliminate Software Support Services or change the levels of support available for an item of Software upon six months' written notice or at the expiration of the then current term for Software Support Services, whichever occurs earlier. 13. SYSTEMS SERVICES 13.1 Unisys will endeavor to provide Systems Services on a timely basis subject to availability of qualified personnel and the difficulty and scope of the services to be provided. 13.2 Unisys may assign, reassign and substitute personnel at any time and may provide the same or similar services and materials to other customers. 13.3 Systems Services supplied by Unisys under this Agreement are provided to assist Customer. Customer, not Unisys, will be responsible for determining objectives and obtaining the desired results. 13.4 Any ideas, concepts, know-how or data-processing techniques, Software or documentation developed by Unisys personnel (alone or jointly with Customer) in connection with Systems Services provided to Customer will be the exclusive property of Unisys. Unisys grants to Customer a non-exclusive, royalty-free license to use the Software in accordance with the terms of this Agreement. 14. WARRANTIES AND DISCLAIMERS 14.1 EXCEPT AS EXPRESSLY STATED IN THIS AGREEMENT, THERE ARE NO WARRANTIES, EXPRESS OR IMPLIED, BY OPERATION OF LAW OR OTHERWISE. UNISYS DISCLAIMS THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AS TO BOTH UNISYS AND NON-UNISYS PRODUCTS. UNISYS WARRANTIES EXTEND SOLELY TO CUSTOMER. 14.2 Maintenance Warranty and Disclaimers Unisys warrants that the equipment will be maintained in good working order provided that it is continuously subject to Unisys Equipment Maintenance Services and under normal use. Unisys sole and exclusive obligations under this warranty will be to repair such equipment. Maintenance services do no cover repair or damage attributable to (i) non-Unisys products and services, (ii) accidents, misuse, negligence or failure of Customer to follow instructions for proper use, care and cleaning of equipment, (iii) external factors (e.g. failure or fluctuation of electrical power or air conditioning), or (iv) failure by Customer to comply with Unisys environmental specifications. 14.3 Software Warranty and Disclaimers (a) Each item of Software with the designation "W" on Schedule B is, in its unaltered form, warranted for 90 days from its Installation Date to conform substantially to the then current published functional specifications, provided such Software is used in a manner consistent with any applicable Unisys minimum equipment and Software configuration specifications. Unisys will satisfy this warranty if it makes reasonable efforts to correct such errors reflecting significant deviations from the functional specifications as are reported by Customer to Unisys during such warranty period. (b) Because not all errors in Software can or need be corrected, Unisys does not warrant that all Software defects will be corrected. Similarly, Unisys does not warrant that the functions contained in the Software will meet Customer's requirements or that the Software will operate in combinations selected for use by Customer. (c) All other Software delivered by Unisys, including non-Unisys Software, is licensed "AS IS". In the case of non-Unisys Software, Customer agrees to look solely to the warranties and remedies, if any, provided by the Unisys licensor or vendor. 15. ALTERATIONS AND ATTACHMENTS 15.1 If Unisys is providing Equipment Maintenance or Software Services, Customer will give Unisys prior written notice of any proposed alterations or attachments to equipment. Unisys has no obligation to provide Equipment Maintenance Services for non-Unisys attachments or altered equipment or to provide Software Support Services or modified Software. Should Unisys agree to maintain, support or correct altered Products, Unisys may impose additional charges. 15.2 Unisys is not responsible for any malfunction, non-performance or degradation of performance of Products, supplies or maintenance support materials 5 caused by or resulting directly or indirectly from any alteration or attachment. 15.3 Unisys warranties will not apply if attachment of non-Unisys equipment or alteration of Products directly or indirectly results in any malfunction, non-performance or degradation of performance of Unisys Products; in addition, Customer will be solely responsible for resulting infringement, personal injury or damage to property and Products. 15.4 For purposes of this Agreement, "alterations" includes, but is not limited to , the incorporation of non-Unisys components, boards and subassemblies into equipment, as well as modifications to Software. "Attachments" includes, but is not limited to, any non-Unisys equipment, components or devices which are connected to Unisys Products. 16. LIMITATION OF LIABILITY 16.1 Unless further limited elsewhere in this Agreement, the entire liability of Unisys and Customer's exclusive remedy for damages from any cause related to or arising out of this Agreement, regardless of the form of action, whether in contract or in tort, will not exceed the greater of (a) $100,000 or (b) the charges paid to Unisys during the 24-months period immediately prior to Customer's notice pursuant to Section 19 for the Software or Services which are the subject matter of or directly related to the causes of action asserted. This Section 16.1 does not apply to claims covered by Section 17. 16.2 In no event will Unisys be liable for (a) any incidental, indirect, special or consequential damages, including, but not limited to, loss of use, revenues, profits or savings, even if Unisys knew or should have known of the possibility of such damages, (b) claims, demands or actions against Customer by any person, except as provided in Section 17, or (c) loss of or damage to Customer data from any cause. 16.3 The entire liability of Unisys and Customer's exclusive remedy for any defective non-Unisys Products provided under this Agreement, is limited to their return to Unisys within 90 days after shipment for refund of the amount paid to Unisys for such Products (not including any amounts paid for related Services). 16.4 Unisys may direct Customer to third parties having products or services which may be of interest to Customer for use in conjunction with the Products. Notwithstanding any Unisys recommendation, referral or introduction, Customer will independently investigate and test third-party products and services and will have sole responsibility for determining suitability for use of third-party products and services. Unisys has no liability with respect to claims relating to or arising from use of third-party products and services. 17. PATENT, COPYRIGHT AND TRADE SECRET INDEMNIFICATION FOR SOFTWARE 17.1 Unisys, at its own expense, will defend and indemnify Customer against claims that Unisys Software furnished under this Agreement infringes a United States patent or copyright or misappropriates trade secrets protected under United States law, provided Customer (a) gives Unisys prompt written notice of such claims pursuant to Section 19, (b) permits Unisys to defend or settle the claims, and (c) provides all reasonable assistance to Unisys in defending or settling the claims. 17.2 As to any Software which is or, in the opinion of Unisys, may become subject to a claim of infringement or misappropriation, Unisys may elect to (a) obtain the right of continued use of such Software for Customer or (b) replace or modify such Software to avoid such claim. If neither alternative is available on commercially reasonable terms, then, at the request of Unisys, Customer will discontinue use and return such Software including all copies and documentation, and Unisys will grant a credit for the price paid to Unisys, less a reasonable offset for use and obsolescence. 17.3 Unisys will not defend or indemnify Customer if any claim of infringement or misappropriation (a) is asserted by a parent, subsidiary or affiliate of Customer, (b) results from Customer's design or alteration of any Product, or (c) results from use of any Software in combination with any non-Unisys Product. 17.4 This Section states the entire liability of Unisys and Customer's sole and exclusive remedies for patent or copyright infringement and trade secret misappropriation. 18. TERMINATION AND CANCELLATION 18.1 Unisys may suspend Equipment Maintenance Services or Software Support Services if any 6 payment under this Agreement is past due more than 30 days. 18.2 In addition to the Unisys rights under Section 12.3, either party may terminate (a) any license for Software, (b) Software Support Services for any item of Software, or (c) Equipment Maintenance Services for any item of equipment, upon expiration of the applicable term by providing 30 days' prior written notice. Failure to give such notice will result in a renewal or extension of the license or service in accordance with the provisions of the applicable Schedule. The licenses of any Software automatically terminate upon Customer's discontinuance of use of the SPU on which the Software was licensed, at which time Customer must either destroy or return the Software to Unisys. 18.3 Without prejudice to other remedies, Unisys may cancel this Agreement or any order placed under it for default and repossess Software if, upon written notice, Customer fails to (i) make any payment identified as delinquent (including payment of charges for Services) within ten days or (ii) cure any default relating to Sections 9 or 10 within 30 days. 18.4 Unisys may terminate Software Support Services on 30 days' prior written notice if Unisys determines that any Customer Software modification or failure to install a revision or stability update will interfere with the provision of such services. 18.5 Termination or cancellation of this Agreement, or any order under it, will not affect any rights or duties arising under it with respect to Proprietary Information or security interest. 19. NOTICES 19.1 All notices required by this Agreement to be given to Customer will be sent to its address on the cover page of this Agreement. 19.2 All notices required by Sections 17 and 20.5 to be given to Customer will be sent to its address on the cover page of this Agreement. 19.2 All notices required by Sections 17 and 20 to be given to Unisys will be addressed to : Law Department Unisys Corporation Township Line & Union Meetings Roads Blue Bell, PA 19424 cc: Regional Vice President All other notices to Unisys will be sent to the Unisys office which has been servicing Customer. 19.3 All notices required by Sections 17 and 20.5 will be sent by certified or registered mail. 20. ARBITRATION 20.1 Subject to Sections 20.2 through 20.5 hereafter, any controversy or claim arising out of or relating to this Agreement or the breach thereof will be settled by arbitration before three arbitrators in accordance with the Rules of the American Arbitration Association ("AAA") then in effect, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction. Any such arbitration will be conducted in the city nearest Customer's main U.S. office having an AAA regional office. The arbitrators will be selected from a panel of persons having experience with the knowledge of electronic computers and the computer business, and at least one of the arbitrators selected will be an attorney. 20.2 The arbitrators will have no authority to award punitive damages nor any other damages not measured by the prevailing party's actual damages, and may not, in any event, make any ruling, finding or award that does not conform to the terms and conditions of this Agreement. 20.3 Either party, before or during any arbitration, may apply to a court having jurisdiction for a temporary restraining order or preliminary injunction for a temporary restraining order or preliminary injunction where such relief is necessary to protect its interests pending completion of the arbitration proceedings. Arbitration will not be required for actions for recovery of specific property, such as actions for replevin. 20.4 Neither party nor the arbitrators may disclose the existence or results of any arbitration hereunder without the prior written consent of both parties. 20.5 Prior to initiation of arbitration or any other form of legal or equitable proceeding, the aggrieved party will give the other party written notice in accordance with Section 19 describing the claim and amount as to which it intends to initiate action. 7 21. OTHER PROVISIONS 21.1 All risk of loss or damage to Software will pass to Customer upon delivery to Customer's location. 21.2 Neither party will be liable for failure to fulfill its obligations when due causes beyond its reasonable control. 21.3 Any failure or delay by either party in exercising any right or remedy will not constitute a waiver. 21.4 This Agreement will be governed by the local law of the Commonwealth of Pennsylvania. 21.5 This Agreement constitutes the entire agreement between the parties with respect to the subject matter described in this Agreement and supersedes all prior proposals and agreements, both written and oral, and all other written and oral communications between the parties. The terms and conditions of this Agreement will supersede all other terms and conditions submitted by Customer. 22.6 Unisys may assign this Agreement or its interest in any equipment, or assign the right to receive payments, without Customer's consent. Any such assignment, however, will not change the obligations of Unisys to Customer. Customer will not assign or transfer its rights or obligations under this Agreement without prior written consent of Unisys. Any assignment or transfer prohibited by this provision will be void. 22.7 This Agreement may be modified only by a writing signed by a duly authorized representative of each party. 22.8 No arbitration proceeding or legal action, regardless of its form, related to or arising out of this Agreement, may be brought by either party more than two years after the cause of action first accrued. 22.9 Each paragraph and provision of this Agreement is severable, and if one or more paragraphs or provisions are declared invalid, the remaining provisions of this Agreement will remain in full force and effect. 8 Customer acknowledges it has read and understands this Agreement (including all attached schedules) and is not entering into this Agreement on the basis of any representations not expressly set forth in it. AGREED AND ACCEPTED Unisys Corporation Customer: Bank of Santa Maria Signature Present 11-3-90 - ----------------------------------- ---------------------------------------- Signature Date Signature Date - ----------------------------------- ---------------------------------------- Name (Printed) Name (Printed) - ----------------------------------- ---------------------------------------- Title Title 9 Agreement Number UNISYS 90110417 SUPPLEMENTAL SCHEDULE ORDER Client - -------------------------------------------------------------------------------- BANK OF SANTA MARIA Description of Products/Services - -------------------------------------------------------------------------------- Conversion to Surety 2000 with Premium Access THIS ORDER CONSISTS OF THE PRODUCTS AND/OR SERVICES DESCRIBED ON THE SUPPLEMENTAL SCHEDULES CHECKED BELOW: Check if Number Total dollars Description applicable of pages Equipment Sale Supplemental - --------- -------- --------- Schedule X 3 4838.62 SURETY Support Services - --------- -------- --------- Supplemental Schedule Software Licenses Supplemental - --------- -------- --------- Schedule Information Services Supplemental - --------- -------- --------- Schedule X 2 N/A Unisys SURETY 2000 Addendum for - --------- -------- --------- Unisys SURETY Support Services - -------------------------------------------------------------------------------- This Supplemental Schedule Order is an amendment to the Agreement identified by the Agreement Number above and is governed by the terms and conditions of said Agreement, and will become effective when accepted by Unisys. Agreed and Accepted Unisys Corporation Signature Present 1/15/96 Signature Present 12/20/95 - ------------------------------------- -------------------------------------- (Signature) (Date) (Signature) (Date) Larry Vandoren Cheryl Dunshee - ------------------------------------- -------------------------------------- (Printed/typed name) (Printed/typed name) Contracts Manager Unisys Corporation Senior Vice President - ------------------------------------- -------------------------------------- (Title) (Title) 10 Agreement Number UNISYS 90110417 SURETY Support Services Addendum This Addendum amends the agreement referenced above by Agreement Number (the "Agreement"), and applies to: (a) all orders for SURETY Support Services under the Agreement upon duration of the then-current term. Only definitions, descriptions and levels of this Addendum will apply to these Services. A. DEFINITIONS PRINCIPAL PERIOD OF MAINTENANCE ("PPM") means 8:00 AM to 5:00 PM, Client's local time, Monday through Friday, excluding Unisys designated holidays. OFF HOURS means all hours other than the PPM. CLIENT OPERATIONAL HOURS ("COH") means all times when Client uses the Products. FAILED UNIT means a unit of equipment enrolled under SURETY Support Services, which is deemed eligible by Unisys for exchange, that is identified by Client as not in working order. EXCHANGE UNIT means new, repaired, or previously used equipment in working order that Unisys conveys to Client as a replacement for a Failed Unit. The Failed Unit shall become the property of Unisys upon Client's receipt of the Exchange Unit or, if later, upon receipt of the Failed Unit by Unisys. Client warrants that title to the Failed Unit, and Unisys warrants that title to the Exchange Unit, shall be free and clear of all claims, liens, and encumbrances including security interests. SAME DAY SERVICE means Unisys will make every reasonable effort to respond to Client's request for on-site SURETY service within four (4) hours provided the request is received no later than four (4) hours prior to the end of Client's hours of coverage. NEXT DAY SERVICE means Unisys will make every reasonable effort to respond to Client's request for on-site SURETY service received during PPM no later than the next PPM. B. SERVICE DESCRIPTIONS Unless specified on the Schedule or in this Section, the Initial Term for SURETY Support Services will be 12 months and will commence on the later of the Installation Date of the applicable Products or the date Unisys accepts the Services. Unless specified on the Schedule, the Initial Term of SURETY Support Services for Products added to a system already enrolled under SURETY Support Services will be coterminous with the applicable term of the Services on that system and, for purposes of changes to SURETY Support Service charges, will be deemed to have the same commencement date as the applicable term of the Services on that system. Following the Initial Term, SURETY Support Services will continue on an annual renewal basis at Unisys then-current prices until terminated or canceled according to the terms of this Agreement. The specific services for each Service Level are identified on the next page. 1. SUPPORT CENTER SERVICES provides assistance by electronic or voice communication during the PPM on operating the Products, identifying Product errors or malfunctions and advising on known detours, reporting software problems via a User Communication Form (UCF), and determining the need for on-call remedial service. Support Center Services during Off Hours consist of expediting response to network down and system emergencies. Some multivendor products are not included in this service. 2. USER COMMUNICATION SERVICES provides for reporting of suspected Product errors or malfunctions or suggested new feature changes. Unisys will make reasonable efforts to provide detours or corrections for Unisys Products or multivendor Products if available to Unisys at no additional charge from the vendor. Client will install all error corrections. 3. ESSENTIAL ENGINEERING CHANGES are changes released by Unisys for safety purposes or changes Unisys determines are essential to the performance of equipment. Changes will be installed at a mutually acceptable time during the applicable hours of coverage. For multivendor equipment, Unisys will 11 install Essential Engineering Changes based upon the availability of required materials at no cost to Unisys and additional labor charges will apply for Service Levels other than Comprehensive Gold and Platinum. 4. EQUIPMENT MAINTENANCE PARTS are parts required for repairs made by Unisys personnel. 5. MAIL-IN SERVICE allows Client, at its expense and risk, to ship or bring a Failed Unit to the Unisys designated location. Within 7 business days of receipt, Unisys repairs the Failed Unit or gives Client an Exchange Unit. 6. SOFTWARE MAINTENANCE RELEASES include error corrections and maintenance releases that have been developed or provided by Unisys. These releases shall be licensed only for use on the designated computer system(s) under the applicable license agreement. Client will install all error corrections and maintenance realeases. 7. ELECTRONIC SELF SERVICES provides Client with 1-800 telephone access by a dial-up connection to place Client Assistance Requests (CARs) and to get information on Unisys Products and services. 8. ADVANCE EXCHANGE SERVICE allows Client to notify the Unisys designated point of contact of a Failed Unit enrolled in the Service. Upon notification, Unisys will ship an Exchange Unit to the Client using a next day delivery service. Client will install the Exchange Unit and, at its expense and risk, ship the Failed Unit to Unisys within 14 days after Client's receipt of the Exchange Unit. Advance Exchange Service is limited to selected equipment. 9. EQUIPMENT ON-CALL REMEDIAL MAINTENANCE includes on-site repair or Exchange Unit service, at Unisys option, of equipment, if a problem remains unresolved after Client has utilized Support Center Services as prescribed. 10. ELECTRONIC ON-SITE SERVICES allows the Support Centers to receive system data from Client and perform remote failure analysis. Client shall supply the equipment, software, and communication facilities to use the electronic support service capabilities of the Products as outlined in the Unisys product support plan. 11. EQUIPMENT PREVENTIVE MAINTENANCE, including the installation of engineering changes deemed appropriate by Unisys, will be performed at Client's location according to the manufacturer's recommendations at a mutually acceptable time during the applicable hours of coverage. 12. SYSTEMS OPERATIONS REVIEW provides that Unisys will meet with Client's personnel once annually, at a mutually acceptable location and time, to conduct computer systems operation reviews with respect to the Products. Client is responsible for scheduling the meeting. This service applies to systems designated by Unisys as enterprise servers or mainframes. 13. SOFTWARE ON-CALL SUPPORT includes on-site service if Unisys determines that a Software problem remains unresolved after Client has utilized Support Center Services as prescribed. Desktop products are not included in this service. 14. EQUIPMENT ON-CALL REMEDIAL MAINTENANCE GUARANTEED RESPONSE means that for clients located within a 60 mile radius from the center of a Unisys concentration city, Unisys commits to have a client service representative arrive at the Client's site within two (2) hours during PPM and within three (3) hours outside of PPM. Response is measured from the time that Unisys receives the request for service from Client until Unisys arrives at Client's site. If Unisys moves its concentration city or the Client relocates its site so that the Client's site is no longer within a 60 mile radius from the center of a Unisys concentration city, Unisys reserves the right to adjust or eliminate the Service Level. 15. SUPPORT CENTER GUARANTEED RESPONSE (available only during the PPM) provides that Unisys will respond to Client's declared emergencies no later than one (1) hour after receipt of Client's request at the Client Support Center designated by Unisys. C. DESCRIPTIONS OF SERVICE ACCESS STANDARD ACCESS to Support Center Services provides the Client with unlimited use of Electronic Self Services. Voice contacts a chargeable on a per call basis at Unisys then-current rates. PREMIUM ACCESS to Support Center Services provides the Client with unlimited use of Electronic Self Services and an unlimited number of voice contacts with the Unisys Support Centers. D. DESCRIPTIONS OF RESPONSE TO ON-CALL SERVICE REQUESTS 12 PERFORMANCE SILVER provides Next Day Service for Equipment On-Call Remedial Maintenance. PERFORMANCE GOLD AND COMPREHENSIVE GOLD provide Same Day Service for Equipment On-Call Remedial Maintenance. COMPREHENSIVE PLATINUM provides Equipment On-Call Remedial Maintenance Guaranteed Response. Unisys SURETY Support Service Levels - -------------------------------------------------------------------------------- The Service Levels as described below are cumulative (e.g., the services defined under Performance are in addition to those defined under Partner). NOT ALL SERVICES AND SERVICE LEVELS ARE AVAILABLE ON ALL PRODUCTS; PLEASE SEE THE SERVICE DESCRIPTIONS FOR ADDITIONAL DETAILS. The hours of coverage for Partner and Performance Service Levels are during the PPM. The hours of coverage for Comprehensive Service Levels are during the COH, unless designated PPM only. Individual Unisys SURETY Support Services contained in a higher Service Level than contracted are provided at Client request, as available, at then-current Unisys conditions and charges. Unisys may terminate SURETY Support Services or change support available to a Product upon six months written notice or at the expiration of the then-current term for SURETY Support Services, whichever comes earlier. - -------------------------------------------------------------------------------- SERVICE LEVELS COMPREHENSIVE - PLATINUM Equipment On-Call Remedial Maintenance Guaranteed Response Support Center Guaranteed Response (PPM only) COMPREHENSIVE - GOLD Systems Operations Review Software On-Call Support PERFORMANCE - SILVER/GOLD Equipment On-Call Remedial Maintenance Electronic On-Site Services Equipment Preventive Maintenance PARTNER - SILVER Advance Exchange Service PARTNER - BRONZE Support Center Services User Communication Services Essential Engineering Changes Equipment Maintenance Parts 13 Mail-In Service Software Maintenance Releases Electronic Self Services 14 Agreement Number UNISYS 90110417 SURETY Support Services Supplemental Schedule
Equipment Location 407310-0064 Bill To Location 407310-0098 Service Level - ------------------------------ ---------------------------- ------------- BANK OF SANTA MARIA BANK OF SANTA MARIA (C) Comprehensive Platinum CHERYL DUNSHEE CHERYL DUNSHEE (G) Comprehensive Gold 2739 SANTA MARIA WAY 2739 SANTA MARIA WAY (P) Performance Gold SANTA MARIA, CA 93455 SANTA MARIA, CA 93455 (S) Performance Silver (A) Partner Silver - ------------------------------- -------------------------------(B) Partner Bronze Administrator Telephone number Administrator Telephone number - -------------------------------------------------------------------------------------------------------------------------------- Initial term Annual rate increase cap SURETY Support Services Commencement Date (Check if more than one year) (3-year initial term or longer) 2 years X - 3 years Other: years % 01-01-96 - -------------------------------------------------------------------------------------------------------------------------------- Service Access (Check one) Billing Period (Check one) Standard X - Premium Monthly Annual X - Other: Prepay - -------------------------------------------------------------------------------------------------------------------------------- LIST OF PRODUCTS APPLICABLE TO THIS AGREEMENT - -------------------------------------------------------------------------------------------------------------------------------- Level Style Description (Include vendor name Quanity Monthly Warranty Upgrade Total Monthly SURETY Total and model if multivendor product) Service Unit Charge Charge Unit Charge Charge P A11011 -A SYS:A11 MODEL E11 1 924.72 924.72 A1101-SYS PROC:A11 SYSTEM E SINGLE 1 P A11-CP1 INST: A11 COMP PKG1(SINGLE) 1 INCL. A1103-SCP PROC:SYSTEM CONTROL 1 CA301-SCI ADPTR:SNGL ENDED SCSI CH 1 RM5-CA4 INSTL:CHANNEL ADPTR MOD 1 RM3-PR3 INSTL: PERIPHERAL RACK 1 A1101-AUX PROC:SINGLE AUX CP 1 UT200-2 DISPLAY:POLL/SELECT TERM 1 KB27 KEYBD:UT200-2, UT200 - 2M 1 INCL. P RM36-0 CABINET:36U OPEN FRONT 1 INCL. P RM36-02 CABINET:36U OPEN ADD-ON 1 67.10 67.10 P MLI11-PK1 INSTL:INIT ORDER MLI PKG 1 RM9-IO3 INST:MLI I/O BASE 1 CA301-MLE ADPTR:MLI CHANNEL 1 CBL15-MLI CABLE:15FT MLI 1 86.90 86.90 P X310-92 CTRL:SCSI INTERNAL DLP 1 INCL. P X310-RFI I/F:NON-FCC DLP TO FCC 1 26.40 26.40 P CA312-SCI ADPTR:DIFFERENTIAL SCSI2 1 83.60 83.60 P A11-SE1 O/S:SSF FOR MODEL E11 1 INCL. P A11-MCM O/S:A11 SYS S/W CORE MED 1 76.00 76.00 P A11-DCS COM SW:DATA COMMUNICATN 1 INCL. P A11-PCM O/S:PROTOCOLS CORE MEDIA 1 INCL. P A9100-SL2 DRIVER:SCSI - 2 DISK 2 INCL. P A5100-SL2 DRIVER: O-R TAPE 1 134.20 134.20 P X602-ICP CTRL:ICP10 - A3,5,9,10,11 1 X600-ICP CTRL:ICP10 A BASE 1 93.50 93.50 P A11-HLC LAN SW:HOST CONNECTION 1 A11-HL1 LAN SW:HOST COMPONENT 1 A11-LPS LAN SW:LOCAL PORT SUBSYS 1 For Clients ordering SURETY Support Services for equipment which also has a Service Total Upgrade Charges Total Monthly Charges Warranty period, the following applies. During the Service Warranty period, or any $ $ 1492.42 portion of this period, the equipment receives the SURETY Support Services ordered. --------------------- --------------------- The Monthly SURETY charge for equipment will not apply during the Service Warranty Other Other period: however, the Monthly Service Warranty Upgrade charge will apply. $ $ --------------------- --------------------- Upgrade Grand Total Grand Total $ $ --------------------- ---------------------
15 Agreement Number UNISYS 90110417 SURETY Support Services Supplemental Schedule
Equipment Location 407310-0064 Bill To Location 407310-0098 Service Level - ------------------------------ ---------------------------- ------------- BANK OF SANTA MARIA BANK OF SANTA MARIA (C) Comprehensive Platinum CHERYL DUNSHEE CHERYL DUNSHEE (G) Comprehensive Gold 2739 SANTA MARIA WAY 2739 SANTA MARIA WAY (P) Performance Gold SANTA MARIA, CA 93455 SANTA MARIA, CA 93455 (S) Performance Silver (A) Partner Silver - ------------------------------- ------------------------------- (B) Partner Bronze Administrator Telephone number Administrator Telephone number - -------------------------------------------------------------------------------------------------------------------------------- Initial term Annual rate increase cap SURETY Support Services Commencement Date (Check if more than one year) (3-year initial term or longer) 2 years X - 3 years Other: years % 01-01-96 - -------------------------------------------------------------------------------------------------------------------------------- Service Access (Check one) Billing Period (Check one) Standard X - Premium Monthly Annual X - Other: Prepay - -------------------------------------------------------------------------------------------------------------------------------- List of Products Applicable to This Agreement - -------------------------------------------------------------------------------------------------------------------------------- Level Style Description (Include vendor name Quanity Monthly Warranty Upgrade Total Monthly SURETY Total and model if multivendor product) Service Unit Charge Charge Unit Charge Charge P X378-30 CTRL:ENHANCED DATE COMM 1 60.50 60.50 P A1003-MOD COM HW:REMOTE SPRT MODEM 1 INCL. P USR4262-D22 DISK:PKG DP 2X1545-16 MB 1 14.30 14.30 110.00 110.00 USR4000-SM2 DISK:SDM2 WITH AC/AIR MOD 1 SDM1000-F50 UPGRD:SDM 50P FEED THRU 4 SDM1000-T50 UPGRD:SDM 50P TERMINATOR 2 SDM1000-RPC UPGRD:SDM 2ND AC/AIR MOD 1 SDM1000-SBS UPGRD:SDM STATUS BUS SLV 1 USD2000-C23 DISK:DEV CAGE 1.5GBX16MB 2 P USR32112-PDU POWER:PKG 3U PDU IHUB 2 1 17.60 17.60 USR3000-PDU PWR:3U RACK MOUNT PDU 1 PDU1000-RPU UPGRD:PDU RESILNT PS/FAN 1 PDU1000-SBM UPGRD:PDU STATUS BUS MAS 1 PDU1000-PNL UPGRD:PDU OPERATOR PANEL 1 PDU1000-PCN I/F:PDU POWER NET CNTRL 1 ITEMS THAT ARE DESIGNATED WITH ***" IN THE NCM COLUMN ARE ENTITLED TO A 18 MONTH SERVICE WARRANTY. P X378-30 CTRL:ENHANCED DATA COMM 2 60.50 121.00 P X310-91 CTRL:SCSI EXTERNAL DLP 1 93.50 93.50 P DP1000-31 SORTER:4 PKT MOD UPGRADE 1 171.60 171.60 P SNS12 SURENET - 12 HOURS 1 INCL. P PWM100-MON DISPLAY:TERMINAL MONITOR 1 INCL. P X310-90 CTRL:SCSI DLP INTERNAL 2 93.50 187.00 P X399-20 CTRL:READER/SORTER DLP 2 1 58.30 58.30 P T27-K5 KEYBD:T 27 1 INCL. P B25-LC PWR CORD:LINE CORD 2 INCL. - -------------------------------------------------------------------------------------------------------------------------------- For Clients ordering SURETY Support Services for equipment Total Upgrade Charges Total Monthly Charges which also has a Service Warranty period, the following applies. $ 14.30 $ 819.50 During the Service Warranty period, or any portion of this period, ----------------------------------------------------- the equipment receives the SURETY Support Services ordered. The Other Other Monthly SURETY charge for equipment will not apply during the $ $ Service Warranty period: however, the Monthly Service Warranty ----------------------------------------------------- Upgrade charge will apply. Upgrade Grand Total Grand Total $ $ -----------------------------------------------------
16 Agreement Number UNISYS 90110417 SURETY Support Services Supplemental Schedule
Equipment Location 407310-0064 Bill To Location 407310-0098 Service Level - ------------------------------ ---------------------------- ------------- BANK OF SANTA MARIA BANK OF SANTA MARIA (C) Comprehensive Platinum CHERYL DUNSHEE CHERYL DUNSHEE (G) Comprehensive Gold 2739 SANTA MARIA WAY 2739 SANTA MARIA WAY (P) Performance Gold SANTA MARIA, CA 93455 SANTA MARIA, CA 93455 (S) Performance Silver (A) Partner Silver - ------------------------------- -------------------------------(B) Partner Bronze Administrator Telephone number Administrator Telephone number - -------------------------------------------------------------------------------------------------------------------------------- Initial term Annual rate increase cap SURETY Support Services Commencement Date (Check if more than one year) (3-year initial term or longer) 2 years X - 3 years Other: years % 01-01-96 - -------------------------------------------------------------------------------------------------------------------------------- Service Access (Check one) Billing Period (Check one) Standard X - Premium Monthly Annual X - Other: Prepay - -------------------------------------------------------------------------------------------------------------------------------- LIST OF PRODUCTS APPLICABLE TO THIS AGREEMENT - -------------------------------------------------------------------------------------------------------------------------------- Level Style Description (Include vendor name Quantity Monthly Warranty Upgrade Total Monthly SURETY Total and model if multivendor product) Service Unit Charge Charge Unit Charge Charge P DP1000-A SORTER:BASIC UNIT 1.7MB 1 1219.90 1219.90 P DP1000-8T SORTER:12 POC CONFG1-12 1 514.80 514.80 P DP1000-21 READER:DOUBLE READ E13B 1 188.10 188.10 P DP1800-91 I/F:DATA COMM 1 84.70 84.70 P DP1000-50 ENDORSER:REAR STMP&MTRX 1 191.40 191.40 P DP1000-60 M/FILM:CINEMODE MICROFIL 1 327.80 327.80 P DP1000-SSA A SERIES HOST TAPE 1 INCL. P DP1000-SS1 DP1000 SYS SW DISK 1 INCL. YEAR ONE $4821.02 X 12 = $57852.24 + 171.60 (UPGRADE CHARGES) =$58,023.84 YEAR TWO $4821.02 X 6 = $28926.12 + 4838.62 X 6 = $29031.72+ 85.80 (UPGRADE CHARGES) = $58043.64 YEAR THREE $4838.62 X 12 = $58063.44 TOTAL = $174,130.92 LESS 10% $17,413.09 GRAND TOTAL $156,717.83 - -------------------------------------------------------------------------------------------------------------------------------- For Clients ordering SURETY Support Services for equipment Total Upgrade Charges Total Monthly Charges which also has a Service Warranty period, the following applies. $ $ 2526.70 During the Service Warranty period, or any portion of this period, ----------------------------------------------------- the equipment receives the SURETY Support Services ordered. The Other Other Monthly SURETY charge for equipment will not apply during the $ $ Service Warranty period: however, the Monthly Service Warranty ----------------------------------------------------- Upgrade charge will apply. Upgrade Grand Total Grand Total $ $ -----------------------------------------------------
17 EX-10.7 14 INFORMATION TECHNOLOGY, INC. (Graphics Logo) INFORMATION TECHNOLOGY INC. SOFTWARE LICENSE AGREEMENT Agreement made between Information Technology, Inc. (the Vendor"), and the "Customer" identified below. 1. LICENSED SOFTWARE 1.1 LICENSE. Vendor grants to Customer and Customer accepts from Vendor a nonexclusive and nontransferable license to use the software identified in Appendix A (the "Software") under the terms set forth in this agreement. 1.2 PROPRIETARY NATURE OF SOFTWARE AND TITLE. The Software and any operations manuals, instructions, and other documents or written materials provided to Customer as instruction in the use of the Software (the "Documentation") are acknowledged by Customer to be and contain Vendor's propriety information and trade secrets, whether or not any portion thereof is or may be validly copyrighted or patented, acknowledged to be protected by civil and criminal law, and acknowledged to be of great value to Vendor. Except as specifically licensed under this agreement, title and all ownership rights to the Software and the Documentation remain with Vendor. Customer shall retain or affix such evidences of ownership and proprietary notices as Vendor may reasonably request. This paragraph shall survive the term or termination of this agreement. 1.3 USE OF SOFTWARE. The Software may be used only for, by and on behalf of Customer and only in connection with Customer's business operations. This license is granted only for use at a single location identified in Appendix A and upon a single computer system (CPU) identified in Appendix A and may not be used upon any other computer or at any other location except as provided under Paragraph 1.4. 1.4 BACKUP AND EMERGENCY USE. In the event Customer is unable to use the Software at the location identified in Appendix A due to an emergency, or to test emergency procedures, Vendor grants to Customer the right to use the Software at a location other than the location defined in Appendix A. Any such use shall be subject to all other restrictions of this agreement and shall continue only so long as the condition giving rise to such use continues. Prior to commencing such use, if possible, and in any event within forty eight (48) hours of such use, Customer shall give Vendor written notice of the circumstance, location and the expected length of such use. Failure to give notice shall nullify Customer's right of emergency use, as herein granted. 1.5 ASSIGNMENT. Customer rights under this agreement and in and to the Software may not be assigned, licensed, sublicensed, pledged, or otherwise transferred voluntarily, by operation of law or otherwise without Vendor's prior written consent, and any such prohibited assignment shall be null and void. II. CONSIDERATION 2.1 LICENSE FEE. In consideration of the license of the Software granted under this agreement, Customer shall pay to Vendor the license fee specified in Appendix A. Such license fee does not include, except as expressly provided in this agreement or Appendix A hereto, installation or maintenance of the Software, data base conversion, media, transportation charges, or taxes, all of which costs and taxes shall be the obligation of Customer. 2.2 MANNER OF PAYMENT. The license fee listed in Appendix A shall be payable in the following manner: (A) A percentage of the license fee, as specified in Appendix A, upon execution of this license agreement by Customer. (B) The balance, including any applicable taxes, upon delivery of the Software by Vendor to Customer. Invoices respecting the license fee shall be rendered in accordance with the above payment schedule and are payable to Vendor at Vendor's address set forth below within ten (10) days of receipt. 2.3 TAXES. In addition to the license fee payable hereunder, Customer shall pay all taxes (including, without limitation, sales, use, privilege, ad valorem or excise taxes) and customs duties paid or payable, however designated, levied or based on amounts payable to Vendor hereunder or on Customer's use or possession of the Software under this agreement, but exclusive of federal, state and local taxes based on Vendor's net income. Customer shall not deduct from payments to Vendor any amounts paid or payable to third parties for customs duties or taxes, however designated. 2.4 CURRENCY. The purchase price and any other charges arising under this agreement shall be invoiced and be payable in U.S. Dollars. 2.5 SECURITY. Vendor reserves and Customer grants to Vendor a security interest in the rights of Customer for use of the Software and in the Documentation as security for the performance by Customer of its obligations hereunder including, but not limited to, payment of the license fee set forth in Appendix A. A copy of this agreement may be filed in appropriate filing offices at any time after signature by Customer as a financing statement or Vendor may require and Customer shall execute a separate financing statement for purposes of perfecting Vendor's security interest granted pursuant to the provisions of this paragraph. III. DELIVERY, TRAINING AND OPERATION 3.1 DELIVERY. Vendor shall deliver the Software and Customer shall accept delivery of the Software at Customer's address set forth below. Unless delayed, as hereinafter provided for, delivery shall be completed within one (1) year of the date accepted by Vendor. 3.2 DELIVERY DELAYS. In the event Customer requests delay of delivery, Vendor shall not be obligated to effect delivery of the Software except upon thirty (30) days written notice by Customer to Vendor. If delay in delivery is due to any cause beyond the control of Vendor, the date upon which delivery is to be completed shall be extended by the number of days of such delay. 3.3 TRAINING. Classes in the operation of the Software are available at the offices of Vendor on a regularly scheduled basis at Vendor's normal rates with respect thereto. All travel, meal and lodging expenses of Customer in connection with such training shall be borne by Customer. On-site training or assistance will be available solely at Vendor's discretion and will be charged to Customer at Vendor's normal rates together with reasonable expenses for travel, meals, lodging and local transportation. 3.4 ASSISTANCE BY CUSTOMER. Customer shall provide reasonable assistance and cooperation to Vendor in Preparation of the Software and the delivery or installation thereof. Such assistance and cooperation shall include, as appropriate, reasonable access to Customer's facility and to Customer's records, as necessary. 3.5 DOCUMENTATION. Operations manuals in respect to the Software will be delivered to Customer prior to or contemporaneously with the delivery of the Software. 3.6 RISK OF LOSS. If the Software or the Documentation is lost or damaged, in whole or in part, during shipment, Vendor will replace said Software or Documentation at no additional charge to Customer. Upon delivery in good condition of the Software and the Documentation, Customer shall be responsible therefor and bear the risk of loss for said Software Documentation. 3.7 CONVERSION ASSISTANCE. Vendor may, at its sole discretion, assist Customer in the conversion of Customer's files from a computer processor or in-house computer system at Vendor's normal charges for such assistance. Expenses, including but not limited to computer time, travel, meals, lodging and local transportation incurred in connection therewith, shall be borne by Customer. In no event shall Vendor be liable to Customer for loss of profits, consequential, incidental, indirect or special damages arising from Vendor's efforts to assist in the conversion of Customer's files. Vendor agrees to treat Customer's confidential business with the same security as it would its own. 3.8 OPERATION. Customer acknowledges and agrees that it is exclusively responsible for the operation, supervision, management and control of the Software, including but not limited to, providing adequate training for its personnel, instituting appropriate security procedures, and implementing reasonable procedures to examine and verify all output before use. Vendor shall have no responsibility or liability for Customer's selection or use of the Software or any associated equipment. 3.9 CUSTOMER OBLIGATIONS. In order to maintain the continuing integrity and proper operation of the Software, Customer agrees to implement, in the manner instructed by Vendor, each error correction and each enhancement and improvement provided to Customer by Vendor. Customer's failure to do so shall relieve Vendor of any responsibility or liability whatsoever for any failure or malfunction of the Software as modified by a subsequent correction or improvement, but in no such event shall Customer be relieved of the responsibility for payment of fees and charges otherwise properly invoiced during the term hereof. If requested by Vendor, Customer agrees to provide written documentation and details to Vendor to substantiate problems and to assist Vendor in the identification and detection of problems, errors and malfunctions; and Customer agrees that Vendor shall have no obligation or liability for said problems until it has received such documentation and details from Customer. IV. VENDOR'S PROPRIETARY RIGHTS 4.1 NON-DISCLOSURE. Customer shall take all reasonable steps necessary to ensure that neither the Software nor the Documentation, nor any portion thereof, on magnetic tape or disk or in any other form, is made available or disclosed by Customer or any of its agents or employees to any other person, firm or corporation. Customer may disclose relevant aspects of the Software and Documentation to its employees and agents to the extent such disclosure is reasonably necessary to Customer's use of the Software, provided, however, Customer agrees that it will cause all persons permitted such access to the Software and the Documentation to observe and perform the foregoing non-disclosure covenant, and that it will advise Vendor of the procedures employed for this purpose. Customer shall hold Vendor harmless against any loss, cost, expense, claim or liability, including reasonable attorney's fees, resulting from Customer's breach of this non-disclosure obligation. This paragraph shall survive the term or termination of this agreement. 4.2 COPIES. Customer agrees that while the Software and the Documentation are in its custody and possession, it will not(a) copy or duplicate or permit anyone else to copy or duplicate any of the Software, Documentation or information furnished by Vendor, or (b) create or attempt to create, or permit others to create or attempt to create, by reverse engineering or otherwise, the source programs or any part thereof from the object program for the Software, the Documentation or other information made available under this agreement or otherwise, (whether oral, written, tangible or in-tangible). Notwithstanding the foregoing, Customer may make and retain two (2) copies of the Software, including all enhancements and changes hereto, only for use in emergencies or to test emergency procedures and may copy for its own use and at its own expense the Documentation, but shall advise Vendor of the specific item copied, the number of copies made and their distribution. The original and any copies in whole or in part of the Software or Documentation which are made pursuant to this provision shall be the exclusive property of Vendor and shall be fully subject to the provisions of this agreement. Customer agrees to retain or place Vendor's proprietary notice on any copies or partial copies made pursuant to this provision. 4.3 UNAUTHORIZED ACTS. Customer agrees to notify Vendor immediately of the unauthorized possession, use, or knowledge of the Software, Documentation or any information made available to Customer pursuant to this agreement, by any person or organization not authorized by this agreement to have such possession, use or knowledge. Customer will, thereafter, fully cooperate with Vendor in the protection and redress of Vendor's proprietary rights. Customer's compliance with this paragraph shall not, however, be construed in any way as a waiver of Vendor's rights against Customer for Customer's negligent of intentional harm to Vendor's proprietary rights, or for breach of Vendor's contractual rights. 4.4 INSPECTION. To assist Vendor in the protection of its proprietary rights, Customer shall permit representatives of Vendor to inspect the Software and Documentation and their use, including inspection of any location in which they are being used or kept at all reasonable times. 4.5 INJUNCTIVE RELIEF. If Customer attempts to use, copy, license, sublicense, sell or otherwise convey or to disclose the Software or Documentation, in any manner contrary to the terms of this agreement or in the derogation of Vendor's proprietary rights, whether such rights are explicitly herein stated, determined by law or otherwise, Vendor shall have, in addition to any other remedies available to it, the right to injunctive relief enjoining such actions. Customer hereby acknowledging that other remedies are inadequate. 4.6 ACCESS TO SOURCE CODE. Vendor has deposited the Software in source code form and Documentation sufficient to facilitate maintenance, modification or correction of the Software with the custodial agent named in Appendix A. Vendor reserves the right to change said custodial agent at any time with written notification to Customer within sixty (60) days of said change. If Vendor, its successors or assigns shall cease to conduct business for any period in excess of thirty (30) days, Customer shall have the right to obtain, for its own and sole use only, a single copy of the then current version of the source code form of the Software supplied under this agreement, and a single copy of the Documentation associated therewith, upon payment to the person in control of the said source code form of the Software of the reasonable cost of making each copy. The source code form of the Software supplied to Customer under this paragraph shall be subject to each and every restriction on use set forth in this agreement. Customer acknowledges that the source code form of the Software and the associated Documentation are extraordinarily valuable proprietary property of Vendor and will be guarded against unauthorized use or disclosure with great care. V. MAINTENANCE, ENHANCEMENTS AND WARRANTIES 5.1 SOFTWARE WARRANTY. Vendor warrants that at delivery of the Software, the Software will perform in accordance with the then current Documentation provided Customer, and further warrants that it has the right to authorize the use of the Software under this agreement. Vendor's obligation and liability under this paragraph shall, however, be limited to the replacement and correction of the Software so that it will so perform, or to obtaining any authorization necessary to make effective the grant of license to Customer of the use of the Software. 5.2 PATENT INFRINGEMENTS. Vendor shall hold harmless and defend Customer from any claim or any suit based on any claim that the use of the Software by Customer under this agreement infringes on any patent, copyright, trademark, or other proprietary right of any third party, provided that Customer gives Vendor prompt and written notice of any such claim or suit and permits Vendor to control the defense thereof. 5.3 WARRANTY DISCLAIMER. THE FOREGOING WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES AND NO OTHER WARRANTY IS EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO , THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 5.4 RENEWAL OF WARRANTIES. Unless sooner terminated pursuant to the provisions of paragraph 5.6, the warranties granted by paragraphs 5.1 and 5.2 (subject, however, to all limitations and disclaimers contained within this agreement) and the right to any enhancements or corrections developed by Vendor under paragraph 5.5 shall be subject to extension for successive one year warranty periods commencing on the date of the delivery of the Software. Each one year extension (the "Warranty Period") shall be deemed to automatically occur unless notice is given by either Customer or Vendor of an election not to so extend, such notice to be given on or prior to the sixtieth (60th) day preceding the Warranty Period. Any such extension shall in no event be effective unless Customer shall have paid to Vendor on or prior to the beginning of the Warranty Period its then current annual maintenance fee. 5.5 ENHANCEMENTS AND CHANGES. Vendor shall provide Customer with all enhancements and changes to the Software designed or developed by Vendor and released to its other customers during the Warranty Period. Any change or enhancement to the Software, whether developed or designed by Vendor or by Customer shall be and remain the property of Vendor, provided, however, that Customer shall be entitled to a perpetual license without additional license fee of any enhancements or corrections developed by Customer. Vendor reserves the right to make changes in operating procedures, program language, file structures, access techniques, general purpose programs, data storage requirements, input and output formats, types of hardware supported, throughput, and other related programming and documentation improvements required to maintain the Software current. As part of these services, Vendor will provide Customer the changes with written instructions concerning implementation. It is understood and agreed that Vendor provision of improvements and enhancements under this paragraph does not include providing to Customer a new set of software which may result from rewriting the Software. Vendor alone shall determine whether the work product of Vendor constitutes new software as a result of a complete rewrite (which is not provided to Customer hereunder) or an improvement or enhancement of the Software (which will be provided to Customer). 5.6 TERMINATION OF WARRANTIES. The warranties expressed in paragraphs 5.1 and 5.2 and Customer's rights under paragraph 5.5 shall immediately terminate if the Software is revised, changed, enhanced, modified or maintained by any one other that Vendor without the prior specific direction or written approval of Vendor. 5.7 LIMITATION OF LIABILITY. Customer expressly agrees that Vendor's responsibilities in the event of its breach of the warranties contained in paragraphs 5.1 and 5.2 are as set forth in said paragraphs. Vendor's liability for damages, including but not limited to liability for patent or copyright infringement, regardless of the form of action, shall not exceed the license fee set forth in Appendix A to this agreement and shall arise only if the remedies provided in paragraphs 5.1 and 5.2 are not fulfilled by Vendor. Customer further agrees that Vendor will not be liable for any lost profits, or for any claim or demand against Customer by any other party, except a claim for patent or copyright infringement as provided herein. IN NO EVENT WILL VENDOR BE LIABLE FOR CONSEQUENTIAL DAMAGES EVEN IF VENDOR HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. No action, regardless of form, arising out of this agreement, may be brought by either party more than one (1) year after the cause of action has accrued, except that an action for non-payment may be brought within one (1) year after the date of last payment. No action by Vendor for wrongful disclosure or use of the Software or Documentation shall be deemed to have accrued until Vendor receives actual notice of such wrongful disclosure or use. THE CUSTOMER'S REMEDIES SET FORTH IN THIS AGREEMENT ARE EXCLUSIVE. VI. DEFAULT 6.1 TERMINATION. Vendor may terminate this agreement in the event of a default by Customer unless Customer shall have cured the event of default, as hereinafter defined, within twenty (20) days after notice of such event of default given by Vendor to Customer. Upon any termination of this agreement, Customer shall deliver to Vendor the Software, the Documentation and all copies thereof and shall also warrant in writing that all copies have returned to Vendor or destroyed. 6.2 EVENTS OF DEFAULT. An event of default is defined as any of the following: (A) Customer's failure to pay any amounts required to be paid to Vendor under this agreement on a timely basis; (B) Any attempt to assign, sell mortgage, sublease, sublicense or otherwise convey or to disclose, except as herein expressly permitted, the Software or the Documentation; (C) Causing or permitting any encumbrance, of any nature whatsoever to attach to Customer's interest in the Software in favor of any person or entity other than Vendor' (D) The entry of any order for relief under any provision of the federal bankruptcy code in any bankruptcy proceedings initiated by or against Customer; or (E) Customer's breach of any of the terms of conditions of this agreement. 6.3 DAMAGES. Upon the occurrence of an event of default without cure within the period of time above-provided, all license or other fees payable to Vendor under this agreement shall without notice or demand by Vendor become immediately due and payable as liquidated damages. This provision for liquidated damages shall not be regarded as a waiver by Vendor of any other rights to which it may be entitled in the event of Customer's default, but rather, such remedy shall be an addition to any other remedy lawfully available to Vendor. VII. GENERAL 7.1 TITLES. Titles and paragraph headings are for reference purposes only and are not to be considered a part of this agreement. 7.2 FORCE MAJEURE. No party shall be liable for delay in performance hereunder due to causes beyond its control, including but not limited to acts of God, fires, strikes, delinquencies of suppliers, acts of war or intervention by any governmental authority, and each party shall take steps to minimize any such delay. 7.3 WAIVER. No waiver of any breach of any provision of this agreement shall constitute a waiver of any prior, concurrent or subsequent breach of the same or any other provisions hereof and no waiver shall be effective unless made in writing and signed by an authorized representative of the party to be charged therewith. 7.4 SEVERABILITY. In the event that any provision of this agreement shall be illegal or otherwise unenforceable, such provision shall be severed from this agreement and the entire agreement shall not fail on account thereof, the balance of the agreement continuing in full force and effect. 7.5 NOTICES. Any notice which either party hereto is required or permitted to give hereunder shall be addressed to the party to be charged therewith at the address set forth below and shall be given by certified or registered mail. Any such notice shall be deemed given on the date of deposit in the mail. 7.6 ENTIRE AGREEMENT. THE PARTIES HERETO ACKNOWLEDGE THAT EACH HAS READ THIS AGREEMENT, UNDERSTANDS IT, AND AGREES TO BE BOUND BY ITS TERMS. THE PARTIES FURTHER AGREE THAT THIS AGREEMENT AND ANY MODIFICATIONS MADE PURSUANT TO IT CONSTITUTE THE COMPLETE AND EXCLUSIVE WRITTEN EXPRESSION OF THE TERMS OF THE AGREEMENT BETWEEN THE PARTIES, AND SUPERSEDE ALL PRIOR OR CONTEMPORANEOUS PROPOSALS, ORAL OR WRITTEN, UNDERSTANDINGS, REPRESENTATIONS, CONDITIONS, WARRANTIES, COVENANTS, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT. THE PARTIES FURTHER AGREE THAT THIS AGREEMENT MAY NOT IN ANY WAY BE EXPLAINED OR SUPPLEMENTED BY A PRIOR OR EXISTING COURSE OF DEALINGS BETWEEN THE PARTIES, BY ANY USAGE OF TRADE OR CUSTOM, OR BY ANY PRIOR PERFORMANCE BETWEEN THE PARTIES PURSUANT TO THIS AGREEMENT OR OTHERWISE. IN THE EVENT CUSTOMER ISSUES A PURCHASE ORDER OR OTHER INSTRUMENT COVERING THE SOFTWARE HEREIN SPECIFIED, IT IS UNDERSTOOD AND AGREED THAT SUCH PURCHASE ORDER OR OTHER INSTRUMENT IS FOR CUSTOMER'S INTERNAL USE AND PURPOSES ONLY AND SHALL IN NO WAY AFFECT ANY OF THE TERMS AND CONDITIONS OF THIS AGREEMENT. 7.7 GOVERNING LAW. This agreement is accepted in the State of Nebraska, and shall be enforced in accordance with and governed by the laws of the State of Nebraska. 7.8 CHOICE OF FORUM. Any action arising out of or related to this agreement or the transaction herein described, whether at law or in equity, may be instituted in and litigated in the state or federal courts of the State of Nebraska. In accordance herewith, the parties hereto submit to the jurisdiction of the courts of said state. Any party being not a resident of Nebraska at the time of suit hereby appoints the Secretary of State of Nebraska as its agent for receipt of service of process. 7.9 ATTORNEY'S FEES. In the event that any action or proceeding is brought in connection with this agreement the prevailing party therein shall be entitled to recover its costs and reasonable attorney's fees. 7.10 EFFECTIVE DATE. This agreement shall be effective on the date accepted and executed by an authorized representative. CUSTOMER: VENDOR: BANK OF SANTA MARIA INFORMATION TECHNOLOGY, INC. Signature: Signature Present Signature: Signature Present Name: Cheryl Dunshee Name: Donald F. Dillon Title: Senior Vice President Title: President Address: 2739 Santa Maria Way Address: 1345 Old Cheney Road Santa Maria, CA 93455 Lincoln, NE 68512 Date: 5-11-94 Date: May 12, 1994
APPENDIX A DUE UPON EXECUTION: Thirty Percent (30%) LOCATION WHERE THE SOFTWARE PRODUCT(S) (Under 50,000 accounts) WILL BE USED: COMPUTER SYSTEM (CPU): A-11 Model E11 (A96) Bank of Santa Maria 2739 Santa Maria Way Santa Maria, CA 93455 CUSTODIAL AGENT: West Gate Bank 1204 West O Street Lincoln, NE 68528
PRODUCT(S) AND LICENSE FEE(S)
101-000 Central Information System 102-000 Demand Deposit Accounting System 103-000 Savings Accounting System 104-000 Certificate of Deposit Accounting System 105-000 Loan Accounting System 106-000 Item Entry System 151-000 General Ledger Accounting System Package Price $81,000 102-103 "Express" Exception Item Processing Module 3,355 105-101 Automated Credit Reporting Module 4,027 107-000 On-Line Teller Terminal Module 6,414 107-124 TTM Interface To: B20 FSA Commercial Bank 1,638 108-101 Bulk Filing Module 6,711 152-001 Asset Liability Management System (Single Institution) 6,711 153-001 Bond Accounting System (Single Institution) 5,369 202-002 Diebold 960/9500 Controller Based Handler 2,458 203-001 ATM FIS Host Interface (Standard) 4,915 206-001 ATM PIN Encryption Interface - Atalla 2,458 211-000 ATM On-Line System 9,830 215-120 ATM Intercept Processing Network Interface 25,920 Deluxe Data Systems, Inc. Brown Deer, WI 221-000 Data Communication File Transfer Module 5,369 SUBTOTAL: $166,175 LESS: Prior System Credit (131,029) --------- TOTAL: $ 35,146
(Graphics Logo) INFORMATION TECHNOLOGY INC. SOFTWARE LICENSE AGREEMENT Agreement made between Information Technology, Inc. (the Vendor"), and the "Customer" identified below. 1. LICENSED SOFTWARE 1.1 LICENSE. Vendor grants to Customer and Customer accepts from Vendor a nonexclusive and nontransferable license to use the software identified in Appendix A (the "Software") under the terms set forth in this agreement. 1.2 PROPRIETARY NATURE OF SOFTWARE AND TITLE. The Software and any operations manuals, instructions, and other documents or written materials provided to Customer as instruction in the use of the Software (the "Documentation") are acknowledged by Customer to be and contain Vendor's propriety information and trade secrets, whether or not any portion thereof is or may be validly copyrighted or patented, acknowledged to be protected by civil and criminal law, and acknowledged to be of great value to Vendor. Except as specifically licensed under this agreement, title and all ownership rights to the Software and the Documentation remain with Vendor. Customer shall retain or affix such evidences of ownership and proprietary notices as Vendor may reasonably request. This paragraph shall survive the term or termination of this agreement. 1.3 USE OF SOFTWARE. The Software may be used only for, by and on behalf of Customer and only in connection with Customer's business operations. This license is granted only for use at a single location identified in Appendix A and upon a single computer system (CPU) identified in Appendix A and may not be used upon any other computer or at any other location except as provided under Paragraph 1.4. 1.4 BACKUP AND EMERGENCY USE. In the event Customer is unable to use the Software at the location identified in Appendix A due to an emergency, or to test emergency procedures, Vendor grants to Customer the right to use the Software at a location other than the location defined in Appendix A. Any such use shall be subject to all other restrictions of this agreement and shall continue only so long as the condition giving rise to such use continues. Prior to commencing such use, if possible, and in any event within forty eight (48) hours of such use, Customer shall give Vendor written notice of the circumstance, location and the expected length of such use. Failure to give notice shall nullify Customer's right of emergency use, as herein granted. 1.5 ASSIGNMENT. Customer rights under this agreement and in and to the Software may not be assigned, licensed, sublicensed, pledged, or otherwise transferred voluntarily, by operation of law or otherwise without Vendor's prior written consent, and any such prohibited assignment shall be null and void. II. CONSIDERATION 2.1 LICENSE FEE. In consideration of the license of the Software granted under this agreement, Customer shall pay to Vendor the license fee specified in Appendix A. Such license fee does not include, except as expressly provided in this agreement or Appendix A hereto, installation or maintenance of the Software, data base conversion, media, transportation charges, or taxes, all of which costs and taxes shall be the obligation of Customer. 2.2 MANNER OF PAYMENT. The license fee listed in Appendix A shall be payable in the following manner: (A) A percentage of the license fee, as specified in Appendix A, upon execution of this license agreement by Customer. (B) The balance, including any applicable taxes, upon delivery of the Software by Vendor to Customer. Invoices respecting the license fee shall be rendered in accordance with the above payment schedule and are payable to Vendor at Vendor's address set forth below within ten (10) days of receipt. 2.3 TAXES. In addition to the license fee payable hereunder, Customer shall pay all taxes (including, without limitation, sales, use, privilege, ad valorem or excise taxes) and customs duties paid or payable, however designated, levied or based on amounts payable to Vendor hereunder or on Customer's use or possession of the Software under this agreement, but exclusive of federal, state and local taxes based on Vendor's net income. Customer shall not deduct from payments to Vendor any amounts paid or payable to third parties for customs duties or taxes, however designated. 2.4 CURRENCY. The purchase price and any other charges arising under this agreement shall be invoiced and be payable in U.S. Dollars. 2.5 SECURITY. Vendor reserves and Customer grants to Vendor a security interest in the rights of Customer for use of the Software and in the Documentation as security for the performance by Customer of its obligations hereunder including, but not limited to, payment of the license fee set forth in Appendix A. A copy of this agreement may be filed in appropriate filing offices at any time after signature by Customer as a financing statement or Vendor may require and Customer shall execute a separate financing statement for purposes of perfecting Vendor's security interest granted pursuant to the provisions of this paragraph. III. DELIVERY, TRAINING AND OPERATION 3.1 DELIVERY. Vendor shall deliver the Software and Customer shall accept delivery of the Software at Customer's address set forth below. Unless delayed, as hereinafter provided for, delivery shall be completed within one (1) year of the date accepted by Vendor. 3.2 DELIVERY DELAYS. In the event Customer requests delay of delivery, Vendor shall not be obligated to effect delivery of the Software except upon thirty (30) days written notice by Customer to Vendor. If delay in delivery is due to any cause beyond the control of Vendor, the date upon which delivery is to be completed shall be extended by the number of days of such delay. 3.3 TRAINING. Classes in the operation of the Software are available at the offices of Vendor on a regularly scheduled basis at Vendor's normal rates with respect thereto. All travel, meal and lodging expenses of Customer in connection with such training shall be borne by Customer. On-site training or assistance will be available solely at Vendor's discretion and will be charged to Customer at Vendor's normal rates together with reasonable expenses for travel, meals, lodging and local transportation. 3.4 ASSISTANCE BY CUSTOMER. Customer shall provide reasonable assistance and cooperation to Vendor in Preparation of the Software and the delivery or installation thereof. Such assistance and cooperation shall include, as appropriate, reasonable access to Customer's facility and to Customer's records, as necessary. 3.5 DOCUMENTATION. Operations manuals in respect to the Software will be delivered to Customer prior to or contemporaneously with the delivery of the Software. 3.6 RISK OF LOSS. If the Software or the Documentation is lost or damaged, in whole or in part, during shipment, Vendor will replace said Software or Documentation at no additional charge to Customer. Upon delivery in good condition of the Software and the Documentation, Customer shall be responsible therefor and bear the risk of loss for said Software Documentation. 3.7 CONVERSION ASSISTANCE. Vendor may, at its sole discretion, assist Customer in the conversion of Customer's files from a computer processor or in-house computer system at Vendor's normal charges for such assistance. Expenses, including but not limited to computer time, travel, meals, lodging and local transportation incurred in connection therewith, shall be borne by Customer. In no event shall Vendor be liable to Customer for loss of profits, consequential, incidental, indirect or special damages arising from Vendor's efforts to assist in the conversion of Customer's files. Vendor agrees to treat Customer's confidential business with the same security as it would its own. 3.8 OPERATION. Customer acknowledges and agrees that it is exclusively responsible for the operation, supervision, management and control of the Software, including but not limited to, providing adequate training for its personnel, instituting appropriate security procedures, and implementing reasonable procedures to examine and verify all output before use. Vendor shall have no responsibility or liability for Customer's selection or use of the Software or any associated equipment. 3.9 CUSTOMER OBLIGATIONS. In order to maintain the continuing integrity and proper operation of the Software, Customer agrees to implement, in the manner instructed by Vendor, each error correction and each enhancement and improvement provided to Customer by Vendor. Customer's failure to do so shall relieve Vendor of any responsibility or liability whatsoever for any failure or malfunction of the Software as modified by a subsequent correction or improvement, but in no such event shall Customer be relieved of the responsibility for payment of fees and charges otherwise properly invoiced during the term hereof. If requested by Vendor, Customer agrees to provide written documentation and details to Vendor to substantiate problems and to assist Vendor in the identification and detection of problems, errors and malfunctions; and Customer agrees that Vendor shall have no obligation or liability for said problems until it has received such documentation and details from Customer. IV. VENDOR'S PROPRIETARY RIGHTS 4.1 NON-DISCLOSURE. Customer shall take all reasonable steps necessary to ensure that neither the Software nor the Documentation, nor any portion thereof, on magnetic tape or disk or in any other form, is made available or disclosed by Customer or any of its agents or employees to any other person, firm or corporation. Customer may disclose relevant aspects of the Software and Documentation to its employees and agents to the extent such disclosure is reasonably necessary to Customer's use of the Software, provided, however, Customer agrees that it will cause all persons permitted such access to the Software and the Documentation to observe and perform the foregoing non-disclosure covenant, and that it will advise Vendor of the procedures employed for this purpose. Customer shall hold Vendor harmless against any loss, cost, expense, claim or liability, including reasonable attorney's fees, resulting from Customer's breach of this non-disclosure obligation. This paragraph shall survive the term or termination of this agreement. 4.2 COPIES. Customer agrees that while the Software and the Documentation are in its custody and possession, it will not(a) copy or duplicate or permit anyone else to copy or duplicate any of the Software, Documentation or information furnished by Vendor, or (b) create or attempt to create, or permit others to create or attempt to create, by reverse engineering or otherwise, the source programs or any part thereof from the object program for the Software, the Documentation or other information made available under this agreement or otherwise, (whether oral, written, tangible or in-tangible). Notwithstanding the foregoing, Customer may make and retain two (2) copies of the Software, including all enhancements and changes hereto, only for use in emergencies or to test emergency procedures and may copy for its own use and at its own expense the Documentation, but shall advise Vendor of the specific item copied, the number of copies made and their distribution. The original and any copies in whole or in part of the Software or Documentation which are made pursuant to this provision shall be the exclusive property of Vendor and shall be fully subject to the provisions of this agreement. Customer agrees to retain or place Vendor's proprietary notice on any copies or partial copies made pursuant to this provision. 4.3 UNAUTHORIZED ACTS. Customer agrees to notify Vendor immediately of the unauthorized possession, use, or knowledge of the Software, Documentation or any information made available to Customer pursuant to this agreement, by any person or organization not authorized by this agreement to have such possession, use or knowledge. Customer will, thereafter, fully cooperate with Vendor in the protection and redress of Vendor's proprietary rights. Customer's compliance with this paragraph shall not, however, be construed in any way as a waiver of Vendor's rights against Customer for Customer's negligent of intentional harm to Vendor's proprietary rights, or for breach of Vendor's contractual rights. 4.4 INSPECTION. To assist Vendor in the protection of its proprietary rights, Customer shall permit representatives of Vendor to inspect the Software and Documentation and their use, including inspection of any location in which they are being used or kept at all reasonable times. 4.5 INJUNCTIVE RELIEF. If Customer attempts to use, copy, license, sublicense, sell or otherwise convey or to disclose the Software or Documentation, in any manner contrary to the terms of this agreement or in the derogation of Vendor's proprietary rights, whether such rights are explicitly herein stated, determined by law or otherwise, Vendor shall have, in addition to any other remedies available to it, the right to injunctive relief enjoining such actions. Customer hereby acknowledging that other remedies are inadequate. 4.6 ACCESS TO SOURCE CODE. Vendor has deposited the Software in source code form and Documentation sufficient to facilitate maintenance, modification or correction of the Software with the custodial agent named in Appendix A. Vendor reserves the right to change said custodial agent at any time with written notification to Customer within sixty (60) days of said change. If Vendor, its successors or assigns shall cease to conduct business for any period in excess of thirty (30) days, Customer shall have the right to obtain, for its own and sole use only, a single copy of the then current version of the source code form of the Software supplied under this agreement, and a single copy of the Documentation associated therewith, upon payment to the person in control of the said source code form of the Software of the reasonable cost of making each copy. The source code form of the Software supplied to Customer under this paragraph shall be subject to each and every restriction on use set forth in this agreement. Customer acknowledges that the source code form of the Software and the associated Documentation are extraordinarily valuable proprietary property of Vendor and will be guarded against unauthorized use or disclosure with great care. V. MAINTENANCE, ENHANCEMENTS AND WARRANTIES 5.1 SOFTWARE WARRANTY. Vendor warrants that at delivery of the Software, the Software will perform in accordance with the then current Documentation provided Customer, and further warrants that it has the right to authorize the use of the Software under this agreement. Vendor's obligation and liability under this paragraph shall, however, be limited to the replacement and correction of the Software so that it will so perform, or to obtaining any authorization necessary to make effective the grant of license to Customer of the use of the Software. 5.2 PATENT INFRINGEMENTS. Vendor shall hold harmless and defend Customer from any claim or any suit based on any claim that the use of the Software by Customer under this agreement infringes on any patent, copyright, trademark, or other proprietary right of any third party, provided that Customer gives Vendor prompt and written notice of any such claim or suit and permits Vendor to control the defense thereof. 5.3 WARRANTY DISCLAIMER. THE FOREGOING WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES AND NO OTHER WARRANTY IS EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO , THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 5.4 RENEWAL OF WARRANTIES. Unless sooner terminated pursuant to the provisions of paragraph 5.6, the warranties granted by paragraphs 5.1 and 5.2 (subject, however, to all limitations and disclaimers contained within this agreement) and the right to any enhancements or corrections developed by Vendor under paragraph 5.5 shall be subject to extension for successive one year warranty periods commencing on the date of the delivery of the Software. Each one year extension (the "Warranty Period") shall be deemed to automatically occur unless notice is given by either Customer or Vendor of an election not to so extend, such notice to be given on or prior to the sixtieth (60th) day preceding the Warranty Period. Any such extension shall in no event be effective unless Customer shall have paid to Vendor on or prior to the beginning of the Warranty Period its then current annual maintenance fee. 5.5 ENHANCEMENTS AND CHANGES. Vendor shall provide Customer with all enhancements and changes to the Software designed or developed by Vendor and released to its other customers during the Warranty Period. Any change or enhancement to the Software, whether developed or designed by Vendor or by Customer shall be and remain the property of Vendor, provided, however, that Customer shall be entitled to a perpetual license without additional license fee of any enhancements or corrections developed by Customer. Vendor reserves the right to make changes in operating procedures, program language, file structures, access techniques, general purpose programs, data storage requirements, input and output formats, types of hardware supported, throughput, and other related programming and documentation improvements required to maintain the Software current. As part of these services, Vendor will provide Customer the changes with written instructions concerning implementation. It is understood and agreed that Vendor provision of improvements and enhancements under this paragraph does not include providing to Customer a new set of software which may result from rewriting the Software. Vendor alone shall determine whether the work product of Vendor constitutes new software as a result of a complete rewrite (which is not provided to Customer hereunder) or an improvement or enhancement of the Software (which will be provided to Customer). 5.6 TERMINATION OF WARRANTIES. The warranties expressed in paragraphs 5.1 and 5.2 and Customer's rights under paragraph 5.5 shall immediately terminate if the Software is revised, changed, enhanced, modified or maintained by any one other that Vendor without the prior specific direction or written approval of Vendor. 5.7 LIMITATION OF LIABILITY. Customer expressly agrees that Vendor's responsibilities in the event of its breach of the warranties contained in paragraphs 5.1 and 5.2 are as set forth in said paragraphs. Vendor's liability for damages, including but not limited to liability for patent or copyright infringement, regardless of the form of action, shall not exceed the license fee set forth in Appendix A to this agreement and shall arise only if the remedies provided in paragraphs 5.1 and 5.2 are not fulfilled by Vendor. Customer further agrees that Vendor will not be liable for any lost profits, or for any claim or demand against Customer by any other party, except a claim for patent or copyright infringement as provided herein. IN NO EVENT WILL VENDOR BE LIABLE FOR CONSEQUENTIAL DAMAGES EVEN IF VENDOR HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. No action, regardless of form, arising out of this agreement, may be brought by either party more than one (1) year after the cause of action has accrued, except that an action for non-payment may be brought within one (1) year after the date of last payment. No action by Vendor for wrongful disclosure or use of the Software or Documentation shall be deemed to have accrued until Vendor receives actual notice of such wrongful disclosure or use. THE CUSTOMER'S REMEDIES SET FORTH IN THIS AGREEMENT ARE EXCLUSIVE. VI. DEFAULT 6.1 TERMINATION. Vendor may terminate this agreement in the event of a default by Customer unless Customer shall have cured the event of default, as hereinafter defined, within twenty (20) days after notice of such event of default given by Vendor to Customer. Upon any termination of this agreement, Customer shall deliver to Vendor the Software, the Documentation and all copies thereof and shall also warrant in writing that all copies have returned to Vendor or destroyed. 6.2 EVENTS OF DEFAULT. An event of default is defined as any of the following: (A) Customer's failure to pay any amounts required to be paid to Vendor under this agreement on a timely basis; (B) Any attempt to assign, sell mortgage, sublease, sublicense or otherwise convey or to disclose, except as herein expressly permitted, the Software or the Documentation; (C) Causing or permitting any encumbrance, of any nature whatsoever to attach to Customer's interest in the Software in favor of any person or entity other than Vendor' (D) The entry of any order for relief under any provision of the federal bankruptcy code in any bankruptcy proceedings initiated by or against Customer; or (E) Customer's breach of any of the terms of conditions of this agreement. 6.3 DAMAGES. Upon the occurrence of an event of default without cure within the period of time above-provided, all license or other fees payable to Vendor under this agreement shall without notice or demand by Vendor become immediately due and payable as liquidated damages. This provision for liquidated damages shall not be regarded as a waiver by Vendor of any other rights to which it may be entitled in the event of Customer's default, but rather, such remedy shall be an addition to any other remedy lawfully available to Vendor. VII. GENERAL 7.1 TITLES. Titles and paragraph headings are for reference purposes only and are not to be considered a part of this agreement. 7.2 FORCE MAJEURE. No party shall be liable for delay in performance hereunder due to causes beyond its control, including but not limited to acts of God, fires, strikes, delinquencies of suppliers, acts of war or intervention by any governmental authority, and each party shall take steps to minimize any such delay. 7.3 WAIVER. No waiver of any breach of any provision of this agreement shall constitute a waiver of any prior, concurrent or subsequent breach of the same or any other provisions hereof and no waiver shall be effective unless made in writing and signed by an authorized representative of the party to be charged therewith. 7.4 SEVERABILITY. In the event that any provision of this agreement shall be illegal or otherwise unenforceable, such provision shall be severed from this agreement and the entire agreement shall not fail on account thereof, the balance of the agreement continuing in full force and effect. 7.5 NOTICES. Any notice which either party hereto is required or permitted to give hereunder shall be addressed to the party to be charged therewith at the address set forth below and shall be given by certified or registered mail. Any such notice shall be deemed given on the date of deposit in the mail. 7.6 ENTIRE AGREEMENT. THE PARTIES HERETO ACKNOWLEDGE THAT EACH HAS READ THIS AGREEMENT, UNDERSTANDS IT, AND AGREES TO BE BOUND BY ITS TERMS. THE PARTIES FURTHER AGREE THAT THIS AGREEMENT AND ANY MODIFICATIONS MADE PURSUANT TO IT CONSTITUTE THE COMPLETE AND EXCLUSIVE WRITTEN EXPRESSION OF THE TERMS OF THE AGREEMENT BETWEEN THE PARTIES, AND SUPERSEDE ALL PRIOR OR CONTEMPORANEOUS PROPOSALS, ORAL OR WRITTEN, UNDERSTANDINGS, REPRESENTATIONS, CONDITIONS, WARRANTIES, COVENANTS, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT. THE PARTIES FURTHER AGREE THAT THIS AGREEMENT MAY NOT IN ANY WAY BE EXPLAINED OR SUPPLEMENTED BY A PRIOR OR EXISTING COURSE OF DEALINGS BETWEEN THE PARTIES, BY ANY USAGE OF TRADE OR CUSTOM, OR BY ANY PRIOR PERFORMANCE BETWEEN THE PARTIES PURSUANT TO THIS AGREEMENT OR OTHERWISE. IN THE EVENT CUSTOMER ISSUES A PURCHASE ORDER OR OTHER INSTRUMENT COVERING THE SOFTWARE HEREIN SPECIFIED, IT IS UNDERSTOOD AND AGREED THAT SUCH PURCHASE ORDER OR OTHER INSTRUMENT IS FOR CUSTOMER'S INTERNAL USE AND PURPOSES ONLY AND SHALL IN NO WAY AFFECT ANY OF THE TERMS AND CONDITIONS OF THIS AGREEMENT. 7.7 GOVERNING LAW. This agreement is accepted in the State of Nebraska, and shall be enforced in accordance with and governed by the laws of the State of Nebraska. 7.8 CHOICE OF FORUM. Any action arising out of or related to this agreement or the transaction herein described, whether at law or in equity, may be instituted in and litigated in the state or federal courts of the State of Nebraska. In accordance herewith, the parties hereto submit to the jurisdiction of the courts of said state. Any party being not a resident of Nebraska at the time of suit hereby appoints the Secretary of State of Nebraska as its agent for receipt of service of process. 7.9 ATTORNEY'S FEES. In the event that any action or proceeding is brought in connection with this agreement the prevailing party therein shall be entitled to recover its costs and reasonable attorney's fees. 7.10 EFFECTIVE DATE. This agreement shall be effective on the date accepted and executed by an authorized representative. CUSTOMER: VENDOR: BANK OF SANTA MARIA INFORMATION TECHNOLOGY, INC. Signature: Signature Present Signature: Signature Present Name: Cheryl Dunshee Name: Donald F. Dillon Title: Senior Vice President Title: President Address: 2739 Santa Maria Way Address: 1345 Old Cheney Road Santa Maria, CA 93455 Lincoln, NE 68512 Date: 5-11-94 Date: May 12, 1994 APPENDIX A DUE UPON EXECUTION: Thirty Percent (30%) LOCATION WHERE THE SOFTWARE (Under 50,000 accounts) PRODUCT(S) WILL BE USED: COMPUTER SYSTEM (CPU): A-11 Model E11 (A96) Bank of Santa Maria 2739 Santa Maria Way Santa Maria, CA 93455 CUSTODIAL AGENT: West Gate Bank 1204 West O Street Lincoln, NE 68528 SOFTWARE PRODUCT(S) AND LICENSE FEE(S): 320-000 Currency Transaction System $2,517 350-000 Check Reconciliation System 6,711 391-001 Federal Call Reporting System (Single Institution) 3,146 400-000 Fixed Assets System 5,369 702-000 Accounts Payable System 4,404 -------- SUBTOTAL: 22,147 LESS: Prior System Credit (13,659) -------- TOTAL: $ 8,488 (Graphics Logo) INFORMATION TECHNOLOGY INC. SOFTWARE LICENSE AGREEMENT Agreement made between Information Technology, Inc. (the Vendor"), and the "Customer" identified below. 1. LICENSED SOFTWARE 1.1 LICENSE. Vendor grants to Customer and Customer accepts from Vendor a nonexclusive and nontransferable license to use the software identified in Appendix A (the "Software") under the terms set forth in this agreement. 1.2 PROPRIETARY NATURE OF SOFTWARE AND TITLE. The Software and any operations manuals, instructions, and other documents or written materials provided to Customer as instruction in the use of the Software (the "Documentation") are acknowledged by Customer to be and contain Vendor's propriety information and trade secrets, whether or not any portion thereof is or may be validly copyrighted or patented, acknowledged to be protected by civil and criminal law, and acknowledged to be of great value to Vendor. Except as specifically licensed under this agreement, title and all ownership rights to the Software and the Documentation remain with Vendor. Customer shall retain or affix such evidences of ownership and proprietary notices as Vendor may reasonably request. This paragraph shall survive the term or termination of this agreement. 1.3 USE OF SOFTWARE. The Software may be used only for, by and on behalf of Customer and only in connection with Customer's business operations. This license is granted only for use at a single location identified in Appendix A and upon a single computer system (CPU) identified in Appendix A and may not be used upon any other computer or at any other location except as provided under Paragraph 1.4. 1.4 BACKUP AND EMERGENCY USE. In the event Customer is unable to use the Software at the location identified in Appendix A due to an emergency, or to test emergency procedures, Vendor grants to Customer the right to use the Software at a location other than the location defined in Appendix A. Any such use shall be subject to all other restrictions of this agreement and shall continue only so long as the condition giving rise to such use continues. Prior to commencing such use, if possible, and in any event within forty eight (48) hours of such use, Customer shall give Vendor written notice of the circumstance, location and the expected length of such use. Failure to give notice shall nullify Customer's right of emergency use, as herein granted. 1.5 ASSIGNMENT. Customer rights under this agreement and in and to the Software may not be assigned, licensed, sublicensed, pledged, or otherwise transferred voluntarily, by operation of law or otherwise without Vendor's prior written consent, and any such prohibited assignment shall be null and void. II. CONSIDERATION 2.1 LICENSE FEE. In consideration of the license of the Software granted under this agreement, Customer shall pay to Vendor the license fee specified in Appendix A. Such license fee does not include, except as expressly provided in this agreement or Appendix A hereto, installation or maintenance of the Software, data base conversion, media, transportation charges, or taxes, all of which costs and taxes shall be the obligation of Customer. 2.2 MANNER OF PAYMENT. The license fee listed in Appendix A shall be payable in the following manner: (A) A percentage of the license fee, as specified in Appendix A, upon execution of this license agreement by Customer. (B) The balance, including any applicable taxes, upon delivery of the Software by Vendor to Customer. Invoices respecting the license fee shall be rendered in accordance with the above payment schedule and are payable to Vendor at Vendor's address set forth below within ten (10) days of receipt. 2.3 TAXES. In addition to the license fee payable hereunder, Customer shall pay all taxes (including, without limitation, sales, use, privilege, ad valorem or excise taxes) and customs duties paid or payable, however designated, levied or based on amounts payable to Vendor hereunder or on Customer's use or possession of the Software under this agreement, but exclusive of federal, state and local taxes based on Vendor's net income. Customer shall not deduct from payments to Vendor any amounts paid or payable to third parties for customs duties or taxes, however designated. 2.4 CURRENCY. The purchase price and any other charges arising under this agreement shall be invoiced and be payable in U.S. Dollars. 2.5 SECURITY. Vendor reserves and Customer grants to Vendor a security interest in the rights of Customer for use of the Software and in the Documentation as security for the performance by Customer of its obligations hereunder including, but not limited to, payment of the license fee set forth in Appendix A. A copy of this agreement may be filed in appropriate filing offices at any time after signature by Customer as a financing statement or Vendor may require and Customer shall execute a separate financing statement for purposes of perfecting Vendor's security interest granted pursuant to the provisions of this paragraph. III. DELIVERY, TRAINING AND OPERATION 3.1 DELIVERY. Vendor shall deliver the Software and Customer shall accept delivery of the Software at Customer's address set forth below. Unless delayed, as hereinafter provided for, delivery shall be completed within one (1) year of the date accepted by Vendor. 3.2 DELIVERY DELAYS. In the event Customer requests delay of delivery, Vendor shall not be obligated to effect delivery of the Software except upon thirty (30) days written notice by Customer to Vendor. If delay in delivery is due to any cause beyond the control of Vendor, the date upon which delivery is to be completed shall be extended by the number of days of such delay. 3.3 TRAINING. Classes in the operation of the Software are available at the offices of Vendor on a regularly scheduled basis at Vendor's normal rates with respect thereto. All travel, meal and lodging expenses of Customer in connection with such training shall be borne by Customer. On-site training or assistance will be available solely at Vendor's discretion and will be charged to Customer at Vendor's normal rates together with reasonable expenses for travel, meals, lodging and local transportation. 3.4 ASSISTANCE BY CUSTOMER. Customer shall provide reasonable assistance and cooperation to Vendor in Preparation of the Software and the delivery or installation thereof. Such assistance and cooperation shall include, as appropriate, reasonable access to Customer's facility and to Customer's records, as necessary. 3.5 DOCUMENTATION. Operations manuals in respect to the Software will be delivered to Customer prior to or contemporaneously with the delivery of the Software. 3.6 RISK OF LOSS. If the Software or the Documentation is lost or damaged, in whole or in part, during shipment, Vendor will replace said Software or Documentation at no additional charge to Customer. Upon delivery in good condition of the Software and the Documentation, Customer shall be responsible therefor and bear the risk of loss for said Software Documentation. 3.7 CONVERSION ASSISTANCE. Vendor may, at its sole discretion, assist Customer in the conversion of Customer's files from a computer processor or in-house computer system at Vendor's normal charges for such assistance. Expenses, including but not limited to computer time, travel, meals, lodging and local transportation incurred in connection therewith, shall be borne by Customer. In no event shall Vendor be liable to Customer for loss of profits, consequential, incidental, indirect or special damages arising from Vendor's efforts to assist in the conversion of Customer's files. Vendor agrees to treat Customer's confidential business with the same security as it would its own. 3.8 OPERATION. Customer acknowledges and agrees that it is exclusively responsible for the operation, supervision, management and control of the Software, including but not limited to, providing adequate training for its personnel, instituting appropriate security procedures, and implementing reasonable procedures to examine and verify all output before use. Vendor shall have no responsibility or liability for Customer's selection or use of the Software or any associated equipment. 3.9 CUSTOMER OBLIGATIONS. In order to maintain the continuing integrity and proper operation of the Software, Customer agrees to implement, in the manner instructed by Vendor, each error correction and each enhancement and improvement provided to Customer by Vendor. Customer's failure to do so shall relieve Vendor of any responsibility or liability whatsoever for any failure or malfunction of the Software as modified by a subsequent correction or improvement, but in no such event shall Customer be relieved of the responsibility for payment of fees and charges otherwise properly invoiced during the term hereof. If requested by Vendor, Customer agrees to provide written documentation and details to Vendor to substantiate problems and to assist Vendor in the identification and detection of problems, errors and malfunctions; and Customer agrees that Vendor shall have no obligation or liability for said problems until it has received such documentation and details from Customer. IV. VENDOR'S PROPRIETARY RIGHTS 4.1 NON-DISCLOSURE. Customer shall take all reasonable steps necessary to ensure that neither the Software nor the Documentation, nor any portion thereof, on magnetic tape or disk or in any other form, is made available or disclosed by Customer or any of its agents or employees to any other person, firm or corporation. Customer may disclose relevant aspects of the Software and Documentation to its employees and agents to the extent such disclosure is reasonably necessary to Customer's use of the Software, provided, however, Customer agrees that it will cause all persons permitted such access to the Software and the Documentation to observe and perform the foregoing non-disclosure covenant, and that it will advise Vendor of the procedures employed for this purpose. Customer shall hold Vendor harmless against any loss, cost, expense, claim or liability, including reasonable attorney's fees, resulting from Customer's breach of this non-disclosure obligation. This paragraph shall survive the term or termination of this agreement. 4.2 COPIES. Customer agrees that while the Software and the Documentation are in its custody and possession, it will not(a) copy or duplicate or permit anyone else to copy or duplicate any of the Software, Documentation or information furnished by Vendor, or (b) create or attempt to create, or permit others to create or attempt to create, by reverse engineering or otherwise, the source programs or any part thereof from the object program for the Software, the Documentation or other information made available under this agreement or otherwise, (whether oral, written, tangible or in-tangible). Notwithstanding the foregoing, Customer may make and retain two (2) copies of the Software, including all enhancements and changes hereto, only for use in emergencies or to test emergency procedures and may copy for its own use and at its own expense the Documentation, but shall advise Vendor of the specific item copied, the number of copies made and their distribution. The original and any copies in whole or in part of the Software or Documentation which are made pursuant to this provision shall be the exclusive property of Vendor and shall be fully subject to the provisions of this agreement. Customer agrees to retain or place Vendor's proprietary notice on any copies or partial copies made pursuant to this provision. 4.3 UNAUTHORIZED ACTS. Customer agrees to notify Vendor immediately of the unauthorized possession, use, or knowledge of the Software, Documentation or any information made available to Customer pursuant to this agreement, by any person or organization not authorized by this agreement to have such possession, use or knowledge. Customer will, thereafter, fully cooperate with Vendor in the protection and redress of Vendor's proprietary rights. Customer's compliance with this paragraph shall not, however, be construed in any way as a waiver of Vendor's rights against Customer for Customer's negligent of intentional harm to Vendor's proprietary rights, or for breach of Vendor's contractual rights. 4.4 INSPECTION. To assist Vendor in the protection of its proprietary rights, Customer shall permit representatives of Vendor to inspect the Software and Documentation and their use, including inspection of any location in which they are being used or kept at all reasonable times. 4.5 INJUNCTIVE RELIEF. If Customer attempts to use, copy, license, sublicense, sell or otherwise convey or to disclose the Software or Documentation, in any manner contrary to the terms of this agreement or in the derogation of Vendor's proprietary rights, whether such rights are explicitly herein stated, determined by law or otherwise, Vendor shall have, in addition to any other remedies available to it, the right to injunctive relief enjoining such actions. Customer hereby acknowledging that other remedies are inadequate. 4.6 ACCESS TO SOURCE CODE. Vendor has deposited the Software in source code form and Documentation sufficient to facilitate maintenance, modification or correction of the Software with the custodial agent named in Appendix A. Vendor reserves the right to change said custodial agent at any time with written notification to Customer within sixty (60) days of said change. If Vendor, its successors or assigns shall cease to conduct business for any period in excess of thirty (30) days, Customer shall have the right to obtain, for its own and sole use only, a single copy of the then current version of the source code form of the Software supplied under this agreement, and a single copy of the Documentation associated therewith, upon payment to the person in control of the said source code form of the Software of the reasonable cost of making each copy. The source code form of the Software supplied to Customer under this paragraph shall be subject to each and every restriction on use set forth in this agreement. Customer acknowledges that the source code form of the Software and the associated Documentation are extraordinarily valuable proprietary property of Vendor and will be guarded against unauthorized use or disclosure with great care. V. MAINTENANCE, ENHANCEMENTS AND WARRANTIES 5.1 SOFTWARE WARRANTY. Vendor warrants that at delivery of the Software, the Software will perform in accordance with the then current Documentation provided Customer, and further warrants that it has the right to authorize the use of the Software under this agreement. Vendor's obligation and liability under this paragraph shall, however, be limited to the replacement and correction of the Software so that it will so perform, or to obtaining any authorization necessary to make effective the grant of license to Customer of the use of the Software. 5.2 PATENT INFRINGEMENTS. Vendor shall hold harmless and defend Customer from any claim or any suit based on any claim that the use of the Software by Customer under this agreement infringes on any patent, copyright, trademark, or other proprietary right of any third party, provided that Customer gives Vendor prompt and written notice of any such claim or suit and permits Vendor to control the defense thereof. 5.3 WARRANTY DISCLAIMER. THE FOREGOING WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES AND NO OTHER WARRANTY IS EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO , THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 5.4 RENEWAL OF WARRANTIES. Unless sooner terminated pursuant to the provisions of paragraph 5.6, the warranties granted by paragraphs 5.1 and 5.2 (subject, however, to all limitations and disclaimers contained within this agreement) and the right to any enhancements or corrections developed by Vendor under paragraph 5.5 shall be subject to extension for successive one year warranty periods commencing on the date of the delivery of the Software. Each one year extension (the "Warranty Period") shall be deemed to automatically occur unless notice is given by either Customer or Vendor of an election not to so extend, such notice to be given on or prior to the sixtieth (60th) day preceding the Warranty Period. Any such extension shall in no event be effective unless Customer shall have paid to Vendor on or prior to the beginning of the Warranty Period its then current annual maintenance fee. 5.5 ENHANCEMENTS AND CHANGES. Vendor shall provide Customer with all enhancements and changes to the Software designed or developed by Vendor and released to its other customers during the Warranty Period. Any change or enhancement to the Software, whether developed or designed by Vendor or by Customer shall be and remain the property of Vendor, provided, however, that Customer shall be entitled to a perpetual license without additional license fee of any enhancements or corrections developed by Customer. Vendor reserves the right to make changes in operating procedures, program language, file structures, access techniques, general purpose programs, data storage requirements, input and output formats, types of hardware supported, throughput, and other related programming and documentation improvements required to maintain the Software current. As part of these services, Vendor will provide Customer the changes with written instructions concerning implementation. It is understood and agreed that Vendor provision of improvements and enhancements under this paragraph does not include providing to Customer a new set of software which may result from rewriting the Software. Vendor alone shall determine whether the work product of Vendor constitutes new software as a result of a complete rewrite (which is not provided to Customer hereunder) or an improvement or enhancement of the Software (which will be provided to Customer). 5.6 TERMINATION OF WARRANTIES. The warranties expressed in paragraphs 5.1 and 5.2 and Customer's rights under paragraph 5.5 shall immediately terminate if the Software is revised, changed, enhanced, modified or maintained by any one other that Vendor without the prior specific direction or written approval of Vendor. 5.7 LIMITATION OF LIABILITY. Customer expressly agrees that Vendor's responsibilities in the event of its breach of the warranties contained in paragraphs 5.1 and 5.2 are as set forth in said paragraphs. Vendor's liability for damages, including but not limited to liability for patent or copyright infringement, regardless of the form of action, shall not exceed the license fee set forth in Appendix A to this agreement and shall arise only if the remedies provided in paragraphs 5.1 and 5.2 are not fulfilled by Vendor. Customer further agrees that Vendor will not be liable for any lost profits, or for any claim or demand against Customer by any other party, except a claim for patent or copyright infringement as provided herein. IN NO EVENT WILL VENDOR BE LIABLE FOR CONSEQUENTIAL DAMAGES EVEN IF VENDOR HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. No action, regardless of form, arising out of this agreement, may be brought by either party more than one (1) year after the cause of action has accrued, except that an action for non-payment may be brought within one (1) year after the date of last payment. No action by Vendor for wrongful disclosure or use of the Software or Documentation shall be deemed to have accrued until Vendor receives actual notice of such wrongful disclosure or use. THE CUSTOMER'S REMEDIES SET FORTH IN THIS AGREEMENT ARE EXCLUSIVE. VI. DEFAULT 6.1 TERMINATION. Vendor may terminate this agreement in the event of a default by Customer unless Customer shall have cured the event of default, as hereinafter defined, within twenty (20) days after notice of such event of default given by Vendor to Customer. Upon any termination of this agreement, Customer shall deliver to Vendor the Software, the Documentation and all copies thereof and shall also warrant in writing that all copies have returned to Vendor or destroyed. 6.2 EVENTS OF DEFAULT. An event of default is defined as any of the following: (A) Customer's failure to pay any amounts required to be paid to Vendor under this agreement on a timely basis; (B) Any attempt to assign, sell mortgage, sublease, sublicense or otherwise convey or to disclose, except as herein expressly permitted, the Software or the Documentation; (C) Causing or permitting any encumbrance, of any nature whatsoever to attach to Customer's interest in the Software in favor of any person or entity other than Vendor' (D) The entry of any order for relief under any provision of the federal bankruptcy code in any bankruptcy proceedings initiated by or against Customer; or (E) Customer's breach of any of the terms of conditions of this agreement. 6.3 DAMAGES. Upon the occurrence of an event of default without cure within the period of time above-provided, all license or other fees payable to Vendor under this agreement shall without notice or demand by Vendor become immediately due and payable as liquidated damages. This provision for liquidated damages shall not be regarded as a waiver by Vendor of any other rights to which it may be entitled in the event of Customer's default, but rather, such remedy shall be an addition to any other remedy lawfully available to Vendor. VII. GENERAL 7.1 TITLES. Titles and paragraph headings are for reference purposes only and are not to be considered a part of this agreement. 7.2 FORCE MAJEURE. No party shall be liable for delay in performance hereunder due to causes beyond its control, including but not limited to acts of God, fires, strikes, delinquencies of suppliers, acts of war or intervention by any governmental authority, and each party shall take steps to minimize any such delay. 7.3 WAIVER. No waiver of any breach of any provision of this agreement shall constitute a waiver of any prior, concurrent or subsequent breach of the same or any other provisions hereof and no waiver shall be effective unless made in writing and signed by an authorized representative of the party to be charged therewith. 7.4 SEVERABILITY. In the event that any provision of this agreement shall be illegal or otherwise unenforceable, such provision shall be severed from this agreement and the entire agreement shall not fail on account thereof, the balance of the agreement continuing in full force and effect. 7.5 NOTICES. Any notice which either party hereto is required or permitted to give hereunder shall be addressed to the party to be charged therewith at the address set forth below and shall be given by certified or registered mail. Any such notice shall be deemed given on the date of deposit in the mail. 7.6 ENTIRE AGREEMENT. THE PARTIES HERETO ACKNOWLEDGE THAT EACH HAS READ THIS AGREEMENT, UNDERSTANDS IT, AND AGREES TO BE BOUND BY ITS TERMS. THE PARTIES FURTHER AGREE THAT THIS AGREEMENT AND ANY MODIFICATIONS MADE PURSUANT TO IT CONSTITUTE THE COMPLETE AND EXCLUSIVE WRITTEN EXPRESSION OF THE TERMS OF THE AGREEMENT BETWEEN THE PARTIES, AND SUPERSEDE ALL PRIOR OR CONTEMPORANEOUS PROPOSALS, ORAL OR WRITTEN, UNDERSTANDINGS, REPRESENTATIONS, CONDITIONS, WARRANTIES, COVENANTS, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT. THE PARTIES FURTHER AGREE THAT THIS AGREEMENT MAY NOT IN ANY WAY BE EXPLAINED OR SUPPLEMENTED BY A PRIOR OR EXISTING COURSE OF DEALINGS BETWEEN THE PARTIES, BY ANY USAGE OF TRADE OR CUSTOM, OR BY ANY PRIOR PERFORMANCE BETWEEN THE PARTIES PURSUANT TO THIS AGREEMENT OR OTHERWISE. IN THE EVENT CUSTOMER ISSUES A PURCHASE ORDER OR OTHER INSTRUMENT COVERING THE SOFTWARE HEREIN SPECIFIED, IT IS UNDERSTOOD AND AGREED THAT SUCH PURCHASE ORDER OR OTHER INSTRUMENT IS FOR CUSTOMER'S INTERNAL USE AND PURPOSES ONLY AND SHALL IN NO WAY AFFECT ANY OF THE TERMS AND CONDITIONS OF THIS AGREEMENT. 7.7 GOVERNING LAW. This agreement is accepted in the State of Nebraska, and shall be enforced in accordance with and governed by the laws of the State of Nebraska. 7.8 CHOICE OF FORUM. Any action arising out of or related to this agreement or the transaction herein described, whether at law or in equity, may be instituted in and litigated in the state or federal courts of the State of Nebraska. In accordance herewith, the parties hereto submit to the jurisdiction of the courts of said state. Any party being not a resident of Nebraska at the time of suit hereby appoints the Secretary of State of Nebraska as its agent for receipt of service of process. 7.9 ATTORNEY'S FEES. In the event that any action or proceeding is brought in connection with this agreement the prevailing party therein shall be entitled to recover its costs and reasonable attorney's fees. 7.10 EFFECTIVE DATE. This agreement shall be effective on the date accepted and executed by an authorized representative. CUSTOMER: VENDOR: BANK OF SANTA MARIA INFORMATION TECHNOLOGY, INC. Signature: Signature Present Signature: Signature Present Name: Cheryl Dunshee Name: Donald F. Dillon Title: Senior Vice President Title: President Address: 2739 Santa Maria Way Address: 1345 Old Cheney Road Santa Maria, CA 93455 Lincoln, NE 68512 Date: 5-11-94 Date: May 12, 1994 APPENDIX A DUE UPON EXECUTION: Thirty Percent (30%) LOCATION WHERE THE SOFTWARE PRODUCT(S) (Under 50,000 accounts) WILL BE USED: COMPUTER SYSTEM (CPU): A-11 Model E11 (A96) Bank of Santa Maria 2739 Santa Maria Way Santa Maria, CA 93455 CUSTODIAL AGENT: West Gate Bank 1204 West O Street Lincoln, NE 68528 PRODUCT(S) AND LICENSE FEE(S): 106-102 DP1000/1800 Item Processing Module $9,667 108-108 DP1000/1800 Bulk Filing Module Interface 4,770 109-001 DP1000/1800 Directed Fine Sort Module 6,750 107-109 B20 FSA Commercial Bank Transaction Set (Level 2.X) 5,243 509-155 FSA Per Workstation Fee (155 @ $440) 68,200 SUBTOTAL: 94,630 LESS: Prior System Credit (74,348) TOTAL: $20,282 EX-21.1 15 SUBSIDIARY OF BSM BANCORP EXHIBIT 21.1 Subsidiary of BSM Bancorp The current wholly-owned subsidiary of BSM Bancorp is BSM Merger Company. Pursuant to the Plan of Reorganization and Merger Agreement (the "Plan") dated November 20, 1996, attached as Annex I to the Written Consent Statement/Prospectus, upon consummation of the Plan, BSM Merger Company will merge into Bank of Santa Maria, which will then become a wholly-owned subsidiary of BSM Bancorp. EX-23.1 16 CONSENT OF VAVRINEK, TRINE, DAY & CO. [LETTERHEAD] CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent, as successor accountants of Dayton & Associates (said firm being merged with and into Vavrinek, Trine, Day & Co. on September 1, 1996) to the inclusion of their Independent Auditor's Report dated January 3, 1996 regarding the statements of condition of Bank of Santa Maria as of December 31, 1995 and December 31, 1994, and the related statements of income, changes in capital, and cash flows for each of the three years in the period ended December 31, 1995, and the reference to our firm as "experts", in the Form S-4 filed with the Securities and Exchange Commission. November 26, 1996 Laguna Hills, California -EXHIBIT 23.1- -----END PRIVACY-ENHANCED MESSAGE-----