-----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, KkeGKba0slWGefwl14e/bYVYpj0uhVZJW6Gr6yq2Oijn4I3xYF6ukLZVg4IsYMGr Rzjp2Ze3t4tws+AcB7KwTQ== 0001019056-03-000300.txt : 20030402 0001019056-03-000300.hdr.sgml : 20030402 20030402093946 ACCESSION NUMBER: 0001019056-03-000300 CONFORMED SUBMISSION TYPE: S-4EF PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 20030401 EFFECTIVENESS DATE: 20030421 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERVICE IST BANCORP CENTRAL INDEX KEY: 0001225078 IRS NUMBER: 320061893 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4EF SEC ACT: 1933 Act SEC FILE NUMBER: 333-104244 FILM NUMBER: 03635466 BUSINESS ADDRESS: STREET 1: 2800 W MARCH LANE SUITE 120 CITY: STOCKTON STATE: CA ZIP: 95219 BUSINESS PHONE: 2099567800 MAIL ADDRESS: STREET 1: 2800 W MARCH LANE SUITE 120 CITY: STOCKTON STATE: CA ZIP: 95219 S-4EF 1 form_s4ef.txt FORM S-4EF As filed with the Securities and Exchange Commission on April 1, 2003 Registration No. 333-_______ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------------- FORM S-4EF REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------------------- SERVICE 1ST BANCORP ------------------------------------------------------ (Exact name of registrant as specified in its charter) California 6711 32-0061893 - ---------------------------- ------------------------- ------------------- (State or other jurisdiction (Primary Standard (I.R.S. Employer of incorporation or Industrial Classification Identification No.) organization) Code No.) -------------------------------------- 2800 W. March Lane, Suite 120, Stockton, California 95219, (209) 956-7800 (Address, including zip code, and telephone number, including area code of registrant's principal executive offices) -------------------------------------- JOHN O. BROOKS Copy to: Chairman and Chief Executive Officer GLENN T. DODD, ESQ. Service 1st Bancorp Dodd - Mason - George LLP 2800 W. March Lane, Suite 120 303 Almaden Blvd., 5th Floor Stockton, California 95219 San Jose, California 95110 (209) 956-7800 (408) 367-2031 - -------------------------------------- (Name, address, including zip code and telephone number, including area code, of agent for service of process) -------------------------------------- Approximate date of commencement of the proposed sale to the public: The date of mailing the enclosed Proxy Statement-Prospectus to the shareholders of Service 1st Bank. 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. [X] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] --------------------------------------
Calculation of Registration Fee - ------------------------------------------------------------------------------------------------------------ Title of each class of Amount to be Proposed maximum Proposed maximum Amount of securities to be registered (1) offering price per aggregate offering registration registered share price fee(2) - ------------------------------------------------------------------------------------------------------------ Common Stock 1,271,100 shares $10.00 $12,711,000 $1,028.32 - ------------------------------------------------------------------------------------------------------------
(1) This Registration Statement relates to securities of the Registrant issuable to holders of common stock of Service 1st Bank in the proposed merger. Represents the approximate number of shares of common stock of the Registrant to be issued upon the consummation of the merger, based upon the number of shares of Service 1st Bank common stock outstanding on March 31, 2003 (including shares issuable upon the exercise of options pursuant to Service 1st Bank's stock option plan), as provided in the plan of reorganization and merger agreement dated March 11, 2003, attached as Annex A to the proxy statement-prospectus. (2) Under Rule 457(f), the registration fee was computed on the basis of $10.00, the market value of the common stock of Service 1st Bank to be exchanged in the merger, computed in accordance with Rule 457(c) on the basis of the average of the bid and asked price per share of such stock as quoted on the OTC Bulletin Board on March 31, 2003, and 1,271,100 shares of common stock of Service 1st Bank which may be received by the Registrant under the merger described herein. SERVICE 1ST BANK 2800 W. March Lane, Suite 120 Stockton, California 95219 Dear Shareholder: April 21, 2003 The annual meeting of shareholders of Service 1st Bank will be held at the Tracy office of Service 1st Bank, 60 West 10th Street, Tracy, California, at 6:00 p.m. on Thursday, May 29, 2003. You are cordially invited to attend this year's annual meeting in person; however, a form of proxy and pre-addressed envelope are enclosed for your convenience in voting by proxy. The board of directors of Service 1st Bank has approved a plan of reorganization and merger agreement under which Service 1st Bank would become a wholly-owned subsidiary of a newly formed California corporation, Service 1st Bancorp. At the annual meeting, Service 1st Bank shareholders will be asked to consider and vote on a proposal to approve the plan of reorganization and merger agreement and proposed merger and the proposals to elect directors and ratify the appointment of independent public accountants for the year 2003. These proposals are described in the accompanying notice of annual meeting and proxy statement-prospectus. The plan of reorganization and merger agreement is attached as Annex A to the proxy statement-prospectus. If the plan of reorganization and merger agreement is approved, each share of Service 1st Bank common stock outstanding at the effective time of the merger described in the plan of reorganization and merger agreement will be converted into one share of common stock of Service 1st Bancorp on a share-for-share basis. Service 1st Bank common stock is currently quoted on the OTC Bulletin Board under the symbol "SRVF". Service 1st Bancorp common stock will be quoted on the OTC Bulletin Board following the effective date of the merger. Your board of directors has determined that the plan of reorganization and merger agreement and the proposed merger are in the best interests of Service 1st Bank and its shareholders and recommends that you vote to approve the plan of reorganization and merger agreement and the merger. We suggest you read carefully the accompanying notice of annual meeting and proxy statement-prospectus which describes these matters in detail. You should also carefully consider the matters discussed under "Risk Factors" commencing on page 7 in the accompanying proxy statement-prospectus. We urge you to complete and return your proxy, whether or not you plan to attend the annual meeting. This will ensure the voting of your shares if you are unable to attend. If you do attend the annual meeting, you may, if you choose, withdraw your proxy and vote in person. Your continuing interest in the business of Service 1st Bank is appreciated. Sincerely yours, /s/JOHN O. BROOKS - ---------------------------------------------------- John O. Brooks, Chairman and Chief Executive Officer - -------------------------------------------------------------------------------- Neither the Securities and Exchange Commission nor any state securities regulators have approved this transaction or the shares of Service 1st Bancorp common stock to be issued under the accompanying document or determined if the document is accurate or adequate. Any representation to the contrary is a criminal offense. The shares of Service 1st Bancorp common stock offered by this document are not savings accounts, deposits or other obligations of Service 1st Bank and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency. - -------------------------------------------------------------------------------- The date of the accompanying document is April 21, 2003, and is first being mailed to Service 1st Bank shareholders on or about April 28, 2003. SERVICE 1ST BANK 2800 W. March Lane, Suite 120 Stockton, California 95219 NOTICE OF 2003 ANNUAL MEETING OF SHAREHOLDERS NOTICE IS HEREBY GIVEN TO SHAREHOLDERS that the 2003 annual meeting of shareholders of Service 1st Bank will be held Thursday, May 29, 2003, at its Tracy office, 60 West 10th Street, Tracy, California, at 6:00 p.m. for the following purposes: 1. To elect twelve (12) directors of Service 1st Bank for the ensuing year. See "PROPOSAL ONE: ELECTION OF DIRECTORS OF SERVICE 1ST BANK." 2. To consider and vote on a proposal to approve a plan of reorganization and merger agreement, dated as of March 11, 2003, among Service 1st Bank, Service 1st Bancorp, a newly formed bank holding company, and Service 1st Merger Corporation, a wholly-owned subsidiary of Service 1st Bancorp, which provides for the merger of Service 1st Merger Corporation into Service 1st Bank with Service 1st Bank surviving the merger to become a wholly-owned subsidiary of Service 1st Bancorp. See "PROPOSAL TWO: APPROVAL OF PLAN OF REORGANIZATION AND MERGER AGREEMENT." The directors of Service 1st Bancorp are the same as the directors of Service 1st Bank. All of these directors of Service 1st Bancorp have held office since shortly after its incorporation. They will hold office until the next annual meeting of shareholders of Service 1st Bancorp or until their successors are duly elected and qualified. See "SERVICE 1ST BANCORP - Management of Service 1st Bancorp." 3. To ratify the appointment of Vavrinek, Trine, Day & Co., LLP as independent public accountants for the year 2003. 4. To transact any other business which may properly come before the annual meeting and any and all postponements or adjournments of the annual meeting. Article III, Section 3 of the Bylaws of Service 1st Bank provides for the nomination of directors in the following manner: "Nomination of Directors. Nominations for election of members of the board may be made by the board or by any holder of any outstanding class of capital stock of the bank 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 called for the election of directors) shall be made in writing and shall be delivered or mailed to the president of the bank by the later of: (i) the close of business twenty-one (21) days prior to any meeting of shareholders called for the election of directors; or (ii) seven (7) 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 bank 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 bank owned by the notifying shareholder; (f) the number of shares of capital stock of any bank, bank holding company, savings and loan association or other depository institution owned beneficially by the nominee or by the notifying shareholder and the identities and locations of any such institutions; and (g) 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 notification shall be signed by the nominating shareholder and by each nominee, and shall be accompanied by a written consent to be named as a nominee for election as a director from each proposed nominee. Nominations not made in accordance with these procedures 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." Only those shareholders of record at the close of business on April 11, 2003, will be entitled to notice of and to vote at the annual meeting. Dated: April 21, 2003 By Order of the board of directors /s/BRYAN R. HYZDU -------------------------------------------- Bryan R. Hyzdu, Corporate Secretary - -------------------------------------------------------------------------------- Whether or not you plan to attend the annual meeting in person, please complete, date, sign and return the enclosed proxy card in the enclosed postage-paid envelope. If you attend the annual meeting, you may vote in person if you wish, even if you have previously returned your proxy card. - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS Page PROXY STATEMENT-PROSPECTUS...................................................1 SUMMARY......................................................................3 The Parties............................................................3 Meeting Information....................................................3 Date, Time and Place.............................................3 Purposes.........................................................3 Record Date......................................................4 Vote Required; Security Ownership................................4 The Merger.............................................................4 The Merger.......................................................4 Recommendations and Reasons......................................4 Required Regulatory Approvals....................................5 Conditions and Effective Date....................................5 Expenses.........................................................5 Federal Income Tax Consequences..................................5 No Dissenters' Rights............................................5 Regulation and Supervision.......................................5 Certain Changes in Shareholders' Rights..........................6 RISK FACTORS.................................................................7 FORWARD LOOKING STATEMENTS...................................................7 SELECTED FINANCIAL DATA......................................................9 MARKET INFORMATION CONCERNING SERVICE 1ST BANK'S AND SERVICE 1ST BANCORP'S COMMON STOCK...................................................10 Market Quotations.....................................................10 Dividends and Dividend Policy.........................................11 Service 1st Bank................................................11 Service 1st Bancorp.............................................11 GENERAL INFORMATION.........................................................12 Annual Report to Shareholders and Financial Data......................12 Revocability of Proxies...............................................12 Solicitation of Proxies...............................................12 Voting Securities; Record Date; Cumulative Voting.....................12 PROPOSAL ONE: ELECTION OF DIRECTORS OF SERVICE 1ST BANK.....................13 Security Ownership of Certain Benenfical Owners and Management........15 The Board of Directors and Committees.................................17 AUDIT COMMITTEE REPORT......................................................18 i Page COMPENSATION AND CERTAIN TRANSACTIONS.......................................19 Executive Officers....................................................19 Executive Compensation................................................20 Aggregated Option/SAR Exercises and FY-End Option/SAR Values..........21 Equity Compensation Plan Information..................................22 Director Compensation.................................................22 1999 Stock Option Plan................................................22 Employment Contracts and Termination of Employment and Change-in-Control Arrangements.....................................23 Section 16(a) Beneficial Ownership Reporting Compliance...............24 Certain Relationships and Related Transactions........................24 PROPOSAL TWO: APPROVAL OF PLAN OF REORGANIZATION AND MERGER AGREEMENT AND THE MERGER.................................................25 THE MERGER..................................................................25 General .............................................................25 Conversion of Options.................................................25 Recommendation and Reasons............................................26 Conversion of Shares and Exchange of Certificates.....................27 Required Approvals....................................................28 Conditions and Effective Date; Amendment; Termination.................28 Federal Income Tax Consequences.......................................29 No Dissenters' Rights.................................................31 No Insider Interests in the Proposed Transaction......................31 Restrictions on Sale of Service 1st Bank and Service 1st Bancorp common stock by Affiliates.................................31 CAPITALIZATION..............................................................33 BOOK VALUE OF SERVICE 1ST BANK'S COMMON STOCK...............................33 INFORMATION ABOUT SERVICE 1ST BANK..........................................34 General .............................................................34 Markets and Competition...............................................35 Intellectual Property and Other Rights................................35 Employees.............................................................36 Management............................................................36 Properties............................................................36 Legal Proceedings.....................................................36 MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.....................37 Business Organization.................................................37 Earnings Overview.....................................................37 ii Page Net Interest Income and Net Interest Margin...........................37 Other Income..........................................................40 Other Expenses........................................................40 Salaries and employee benefits..................................40 Occupancy expense...............................................40 Equipment expense...............................................40 Data processing and other professional services.................40 Office supplies and equipment...................................41 Advertising and promotional expense.............................41 Courier expense.................................................41 Other operating expense.........................................41 Provision for income taxes......................................41 Provision and Allowance for Loan Losses.........................41 Summary of Loan Loss Experience.................................42 Balance Sheet Analysis................................................42 Loans...........................................................42 Risk Elements...................................................44 Nonaccrual Loans, Loans Past Due 90 Days and OREO ..............44 Off-Balance Sheet Items.........................................45 Investment Securities...........................................45 Deposits........................................................47 Capital Resources.....................................................48 Liquidity.............................................................50 Inflation ............................................................50 Critical Accounting Policies..........................................50 Use of Estimates in Preparation of Financial Statements.........50 Allowance for Loan Losses.......................................51 Stock-Based Compensation........................................51 Other Matters.........................................................51 Effects of Terrorism............................................51 INFORMATION ABOUT SERVICE 1ST BANCORP.......................................52 General .............................................................52 Management of Service 1st Bancorp.....................................52 SUPERVISION AND REGULATION..................................................53 General .............................................................53 Service 1st Bancorp.............................................53 Service 1st Bank................................................54 iii Page Capital Adequacy......................................................54 Prompt Corrective Action..............................................56 Safety and Soundness Regulations......................................57 Interest Rate Risk....................................................58 Community Reinvestment Act............................................58 Deposit Insurance Assessments.........................................58 Limitations on Dividends..............................................58 Service 1st Bancorp.............................................58 Service 1st Bank................................................59 Impact of Monetary Policies...........................................59 Recent Legislation and Other Changes..................................60 California Assembly Bill 1432...................................60 Gramm-Leach-Bliley Act..........................................60 USA Patriot Act.................................................61 Sarbanes-Oxley Act of 2002......................................62 California Corporate Disclosure Act.............................64 CAPITAL STOCK OF SERVICE 1ST BANK AND SERVICE 1ST BANCORP...................65 Authorized Capital....................................................65 Voting Rights.........................................................65 Assessment of Shares..................................................66 Repurchase of Shares..................................................66 Bylaws................................................................66 Articles of Incorporation.............................................66 Applicability of Securities Laws......................................66 Dividends.............................................................67 Preemptive Rights.....................................................67 Liquidation Rights....................................................67 Deregistration of Service 1st Bank Common Stock.......................67 INDEMNIFICATION.............................................................68 California Legislation................................................68 Directors' and Officers' Liability Insurance..........................69 Commission Position on Indemnification................................69 PROPOSAL THREE: RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS..............70 Audit Fees............................................................70 Financial Information System Design and Implementation Fees...........70 All Other Fees........................................................70 EXPERTS ....................................................................71 iv Page LEGAL MATTERS ..............................................................71 ANNUAL REPORT ON FORM 10-KSB................................................71 ANNUAL REPORT...............................................................71 ANNUAL DISCLOSURE STATEMENT.................................................71 SHAREHOLDERS' PROPOSALS.....................................................72 OTHER MATTERS...............................................................72 WHERE TO FIND MORE INFORMATION .............................................72 ANNEX A: PLAN OF REORGANIZATION AND MERGER AGREEMENT ANNEX B: FINANCIAL STATEMENTS v Mailed to shareholders on or about April 28, 2003 SERVICE 1ST BANK PROXY STATEMENT SERVICE 1ST BANCORP PROSPECTUS 2800 W. March Lane Stockton, California 95219 Telephone (209) 956-7800 INFORMATION CONCERNING THE SOLICITATION Service 1st Bank is providing this proxy statement-prospectus to solicit proxies for use at the 2003 annual meeting of shareholders to be held on Thursday, May 29, 2003, at 6:00 p.m. at 60 West 10th Street, Tracy, California, and at any and all postponements or adjournments of the annual meeting. Only shareholders of record on April 11, 2003, will be entitled to notice of and to vote at the meeting. At the close of business on that record date, Service 1st Bank had outstanding and entitled to be voted 1,100,100 shares of its no par value common stock. The matters to be considered and voted upon at the annual meeting will be: 1. Election of Directors. Election of twelve (12) directors to serve until the next annual meeting of shareholders and until their successors are elected and qualified. See "PROPOSAL ONE: ELECTION OF DIRECTORS." 2. Approval of Plan of Reorganization and Merger Agreement. A proposal to approve a plan of reorganization and merger agreement, dated as of March 11, 2003, among Service 1st Bank, Service 1st Bancorp, a newly formed bank holding company, and Service 1st Merger Corporation, a wholly-owned subsidiary of Service 1st Bancorp, which provides for the merger of Service 1st Merger Corporation into Service 1st Bank with Service 1st Bank surviving the merger to become a wholly-owned subsidiary of Service 1st Bancorp. See "PROPOSAL TWO: APPROVAL OF PLAN OF REORGANIZATION AND PLAN OF REORGANIZATION AND MERGER AGREEMENT. The directors of Service 1st Bancorp are the same as the directors of Service 1st Bank. All of these directors of Service 1st Bancorp have held office since shortly after its incorporation. They will hold office until the next annual meeting of shareholders of Service 1st Bancorp or until their successors are duly elected and qualified. See "SERVICE 1ST BANCORP - Management of Service 1st Bancorp." 3. Ratification of Accountants. Ratification of the appointment of Vavrinek, Trine, Day & Co., LLP as independent public accountants for the year 2003. 4. Other Matters. Such other matters as may properly come before the annual meeting and any and all postponements or adjournments of the annual meeting. This proxy statement-prospectus also constitutes a prospectus of Service 1st Bancorp with respect to up to 1,271,100 shares of common stock of Service 1st Bancorp, which will be issued in connection with the merger. This number includes 1,100,100 shares issuable to holders of the 1,100,100 shares of Service 1st Bank common stock presently issued and outstanding and 171,000 shares issuable to the holders of outstanding options under the Service 1st Bank 1999 Stock Option Plan. After the merger, each outstanding share of Service 1st Bank common stock (including shares acquired by the exercise of stock options prior to the effective date of the merger) will be converted into one share of Service 1st Bancorp common stock. See "THE MERGER." - -------------------------------------------------------------------------------- No persons have been authorized to give any information or to make any representations other than those contained in the proxy statement-prospectus in connection with the solicitation of proxies or the offering of securities made hereby and, if given or made, such information or representations must not be relied upon as having been authorized by Service 1st Bank, Service 1st Bancorp or Service 1st Merger Corporation. This proxy statement-prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is not lawful to make any such offer or solicitation in such jurisdiction. Neither the delivery of the proxy statement-prospectus nor any distribution of securities made hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of Service 1st Bank, Service 1st Bancorp or Service 1st Merger Corporation since the date hereof or that the information herein is correct as of any time subsequent to such date. - -------------------------------------------------------------------------------- The date of this proxy statement-prospectus is April 21, 2003 2 SUMMARY This summary highlights selected information in this proxy-statement prospectus and may not contain all of the information that you consider important. For a more complete description of the terms of the plan of reorganization and merger agreement, you should carefully read this entire proxy statement-prospectus and the other information to which it refers. See, "Where You Can Find More Information" on Page 72. The plan of reorganization and merger agreement is attached to this proxy statement-prospectus as Annex A. We encourage you to read the plan of reorganization and merger agreement, since it is the legal document that governs the proposed merger transaction. This proxy statement-prospectus includes forward-looking statements within the meaning of the Securities Exchange Act of 1934. These statements are based on management's beliefs and assumptions and information currently available. Forward-looking statements include principally the information concerning the anticipated effect of the plan of reorganization and merger agreement on Service 1st Bank and its shareholders. Forward-looking statements also include statements in which words such as "expect," "anticipate," "intend," "plan," "believe," "estimate," "consider" or similar expressions are used. Service 1st Bank's actual future results and shareholder values may differ materially from those anticipated and expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond Service 1st Bank's ability to control or predict. Shareholders are cautioned not to put undue reliance on any forward-looking statements. The Parties Service 1st Bank is a state chartered bank organized on May 14, 1999 and opened for business on November 10, 1999. As of December 31, 2002, the Bank operated two full-service offices in the cities of Stockton and Tracy in San Joaquin County. Service 1st Bank offers a full range of commercial banking services to individuals, small and medium sized businesses and professionals in San Joaquin County and the surrounding communities. See "INFORMATION ABOUT SERVICE 1ST BANK - General." Service 1st Bancorp was incorporated on January 23, 2003 for the principal purpose of engaging in activities permitted for a bank holding company. Service 1st Bancorp has not yet commenced active operations. After the merger, Service 1st Bancorp will act as a holding company for Service 1st Bank and will be a legal entity separate and distinct from Service 1st Bank. See "INFORMATION ABOUT SERVICE 1ST BANCORP - General." Service 1st Merger Corporation was incorporated on February 21, 2003 for the purpose of facilitating the merger. Service 1st Merger Corporation was organized as a wholly-owned subsidiary of Service 1st Bancorp and will merge with and into Service 1st Bank, at which time it will cease to exist as a separate entity and Service 1st Bank will become the wholly-owned subsidiary of Service 1st Bancorp. Meeting Information Date, Time and Place. May 29, 2003, at 6:00 p.m. at Service 1st Bank's Tracy office located at 60 West 10th Street, Tracy, California. Purposes. The matters to be considered and voted upon at the annual meeting will be: 3 1. Election of Directors. Election of twelve directors to serve until the next annual meeting of Service 1st Bank shareholders and until their successors are elected and qualified. 2. Approval of Plan of Reorganization and Merger Agreement. A proposal to approve the plan of reorganization and merger agreement, dated March 11, 2003, among Service 1st Bank, Service 1st Bancorp and Service 1st Merger Corporation, which provides for the merger of Service 1st Merger Corporation into Service 1st Bank with Service 1st Bank surviving the merger to become a wholly-owned subsidiary of Service 1st Bancorp. 3. Ratification of Accountants. Ratification of the appointment of Vavrinek, Trine, Day & Co., LLP as independent public accountants for the year 2003. 4. Other Matters. Such other matters as may properly come before the annual meeting and any and all postponements or adjournments of the annual meeting. Record Date. Only shareholders of record at the close of business on April 11, 2003, will be entitled to vote at the annual meeting. Vote Required; Security Ownership. The affirmative vote at the annual meeting of the holders of at least a majority of the total outstanding shares of Service 1st Bank common stock is required to approve the plan of reorganization and merger agreement and the merger. In connection with the election of directors of Service 1st Bank, shareholders are entitled to cumulate their votes. See "GENERAL INFORMATION - Voting Securities; Record Date; Cumulative Voting." The Merger The Merger. The plan of reorganization and merger agreement provides that Service 1st Merger Corporation will merge with and into Service 1st Bank, so that Service 1st Bank will become a wholly-owned subsidiary of Service 1st Bancorp. At the effective date of the merger, each outstanding share of Service 1st Bank common stock will be converted into, and may be exchanged for, one share of Service 1st Bancorp common stock. The currently outstanding options to purchase up to an aggregate of 171,000 shares of Service 1st Bank's common stock will be converted into Service 1st Bancorp options to purchase the same number of shares of Service 1st Bancorp common stock on the same terms and conditions as currently are in effect. See "THE MERGER - Conversion of Options." The merger is planned to occur as soon as possible after all necessary conditions, including shareholder and regulatory approvals, have been obtained. A copy of the plan of reorganization and merger agreement is attached as Annex A to this proxy statement-prospectus and is incorporated by this reference. No change in the management of Service 1st Bank will result from the merger, and the directors and executive officers of Service 1st Bank also will serve as the directors and executive officers of Service 1st Bancorp. See "THE MERGER - General." Recommendations and Reasons. Service 1st Bank's board of directors has unanimously approved the plan of reorganization and merger agreement and the merger and recommends their approval by the shareholders of Service 1st Bank. The board of directors believes that a bank holding company structure offers greater flexibility in the conduct of business activities in comparison to Service 1st Bank's present corporate structure. The advantages include additional flexibility: o in the expansion of Service 1st Bank's business through the acquisition of other financial institutions; 4 o in the raising of additional capital through alternatives to equity such as trust preferred securities and other debt instruments; o in the ability to repurchase its securities (subject to applicable regulatory requirements); and o in acquiring or establishing other businesses related to banking as holding company subsidiary corporations with a separate legal existence from that of Service 1st Bank. The board of directors does not believe that there are any significant disadvantages to implementing a holding company structure for Service 1st Bank, and believes that the incremental additional costs, if any, of operating under such a structure will not be material. See "THE MERGER - Recommendations and Reasons." Required Regulatory Approvals. The merger must be approved by the California Commissioner of Financial Institutions (the "Commissioner"), the Federal Deposit Insurance Corporation (the "FDIC") and the Board of Governors of the Federal Reserve System (the "FRB"). Applications for these approvals either have been filed and are pending or will soon be filed. Service 1st Bancorp and Service 1st Bank believe that all such approvals will be obtained. See "THE MERGER - Required Approvals." Conditions and Effective Date. In addition to required regulatory approvals and approval by Service 1st Bank's shareholders, the merger is also subject to other conditions set forth in the plan of reorganization and merger agreement. See "THE MERGER - Conditions and Effective Date; Amendment; Termination" and Annex A. Expenses. The expenses of the merger are estimated to be approximately $75,000. These expenses will be apportioned between Service 1st Bancorp and Service 1st Bank in accordance with applicable laws, regulations and principles of accounting. See "THE MERGER - Conditions and Effective Date; Amendment; Termination." Federal Income Tax Consequences. It is intended that the merger and the conversion of the outstanding shares of Service 1st Bank common stock into shares of Service 1st Bancorp common stock qualify as a tax-free reorganization for federal income tax purposes, with no gain or loss being recognized by Service 1st Bank's shareholders whose shares of Service 1st Bank common stock are converted into and exchanged for shares of Service 1st Bancorp common stock. Service 1st Bank expects to receive an opinion from its independent public accountants substantially to that effect. See "THE MERGER - Federal Income Tax Consequences." No Dissenters' Rights. Shareholders of Service 1st Bank will not have any dissenters' rights in connection with the merger. See "THE MERGER - No Dissenters' Rights." Regulation and Supervision. After the merger, Service 1st Bancorp will be regulated as a bank holding company by the FRB and will be subject to its rules and regulations. See "SUPERVISION AND REGULATION." Service 1st Bank will continue to exist as a California banking corporation subject to regulation by the Commissioner and the FRB; Service 1st Bank's deposits will continue to be insured by the FDIC to the maximum amount permitted by law; and Service 1st Bank will continue to engage in substantially the same business and activities in which it is presently engaged. See "SEE INFORMATION ABOUT SERVICE 1ST BANK - General." 5 Certain Changes in Shareholders' Rights. Shareholders of Service 1st Bank will become shareholders of Service 1st Bancorp. There are certain differences under California law between the rights of shareholders of Service 1st Bancorp as opposed to Service 1st Bank. See "CAPITAL STOCK OF SERVICE 1ST BANCORP AND SERVICE 1ST BANK." 6 RISK FACTORS In deciding whether to vote in favor of the merger, the shareholders of Service 1st Bank should consider carefully the following factors, in addition to the other information set forth in this proxy statement-prospectus. o Service 1st Bancorp has no operating history Service 1st Bancorp was recently incorporated, on January 23, 2003, and has no history of operations or financial performance which shareholders may consider in connection with their decision whether to approve the plan of reorganization and merger agreement and the merger. o Service 1st Bancorp profitability is dependent upon Service 1st Bank Service 1st Bancorp's principal business activity for the foreseeable future will be to act as the holding company of Service 1st Bank. The profitability of Service 1st Bancorp will therefore be dependent on the profitability of Service 1st Bank. Consequently, Service 1st Bancorp will be subject to the same risks as Service 1st Bank, which operates in an extremely competitive banking environment, competing with a number of banks and other financial institutions which possess greater financial resources than those available to Service 1st Bank. In addition, the banking business is affected by general economic and political conditions, both domestic and international, and by government monetary and fiscal policies. Conditions such as inflation, recession, unemployment, high interest rates, short money supply, scarce natural resources, international terrorism and other disorders as well as other factors beyond the control of Service 1st Bank and Service 1st Bancorp may adversely affect their profitability. Banks and bank holding companies are also subject to extensive governmental supervision, regulation and control, and future legislation and government policy could adversely affect the banking industry and in turn the operations of Service 1st Bank and Service 1st Bancorp by, among other matters, increasing their regulatory compliance costs. FORWARD-LOOKING STATEMENTS Statements in this proxy statement-prospectus and in the documents attached to this proxy statement-prospectus are or may be forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those expressed in the statements, depending on a variety of factors. You should carefully review all information, including the financial statements attached as Annex B and the notes to the financial statements. Forward-looking statements regarding each of Service 1st Bancorp and Service 1st Bank and the combined company following the merger, include statements relating to the financial condition, results of operations and business of Service 1st Bancorp and Service 1st Bank following completion of the merger. These forward-looking statements involve risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by the forward-looking statements include, among others, the following possibilities: o competitive pressures among depository and other financial services companies increase significantly; 7 o changes in the interest rate environment reduce interest margins, cause an increase in the prepayment rate on mortgages and other loans or reduce the demand for new loans; o general economic or business conditions, either internationally, nationally or in the State of California, are less favorable than expected, resulting in, among other things, a deterioration in credit quality and increased loan losses or a reduced demand for credit; o acts of terrorism such as the events of September 11, 2001, and the threat of military conflicts; o legislation or regulatory requirements or changes adversely affect the businesses in which the combined company would be engaged; o changes in the securities markets, or a decline in the trading price of Service 1st Bancorp common stock; and o other factors referenced in this proxy statement-prospectus. The management of Service 1st Bank and Service 1st Bancorp believe these forward-looking statements are reasonable; however, undue reliance should not be placed on the forward-looking statements, which are based on current expectations. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. The future results and shareholder values of Service 1st Bancorp and Service 1st Bank following completion of the merger may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the ability of Service 1st Bancorp and Service 1st Bank to control or predict. 8 SELECTED FINANCIAL DATA The Selected Financial Data set forth below for the two years ended December 31, 2002, have been derived from Service 1st Bank's audited financial statements. The information set forth below should be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION" and Service 1st Bank's audited financial statements and notes thereto, included in Annex B attached to this proxy statement-prospectus.
FOR THE YEARS ENDED DECEMBER 31, 2002 2001 ------------ ------------ Interest Income $ 3,996,122 $ 2,738,039 Interest Expense 1,234,322 847,917 ------------ ------------ Net interest Income 2,761,800 1,890,122 Provision for loan loss 193,000 315,000 ------------ ------------ Net Interest Income After Provision for Loan Losses 2,568,800 1,575,122 Non-interest Income 392,179 113,037 Non-interest Expense 2,741,026 2,329,689 Income (Loss) before Provision for Taxes 219,953 (641,530) Tax Expense 800 800 ------------ ------------ Net Income (Net Loss) $ 219,153 $ (642,330) ============ ============ Net Income (Loss) Per Share - Basic $ .20 $ (0.58) Net Income (Loss) Per Share - Diluted .20 (0.58) Weighted Average Shares for per Share Calculation 1,100,100 1,100,100 Return on Average Assets .31% (1.60%) Return on Average Equity 2.77% (7.87%) Average Equity to Average Assets 11.16% 20.31% Average Loans to Average Deposits 64.21% 71.74% Total Assets as of December 31, $ 83,306,327 $ 56,196,919 Total Deposits as of December 31, $ 74,721,424 $ 45,640,890 Net Interest Margin 4.22% 5.20%
9 MARKET INFORMATION CONCERNING SERVICE 1ST BANK'S AND SERVICE 1ST BANCORP'S COMMON STOCK Market Quotations There is limited trading in and no established public trading market for Service 1st Bank's common stock. Service 1st Bank's common stock is not listed on any exchange and is not quoted by The Nasdaq Stock Market. Service 1st Bank's common stock is quoted on the OTC Bulletin Board under the symbol "SRVF." The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. As of April 11, 2003, there were 1,100,100 shares of Service 1st Bank's common stock outstanding. Service 1st Bank's common stock was registered under Section 12(g) of the Securities Exchange Act of 1934, by the filing of its registration statement on Form 10-SB with the FDIC on April 27, 2000. Vanguard Capital and Wells Fargo Van Kasper have facilitated trades in the Service 1st Bank's common stock. The high and low bid quotations for Service 1st Bank's common stock for each full quarterly period of Service 1st Bank's operations for the last two years is listed in the chart below. Calendar Year High Low ------------- ---- --- 2002 First Quarter $ 9.50 $ 8.50 Second Quarter $10.00 $ 8.43 Third Quarter $ 9.50 $ 8.25 Fourth Quarter $10.00 $ 9.50 2001 First Quarter $10.00 $ 9.50 Second Quarter $ 9.50 $ 9.50 Third Quarter $ 9.50 $ 9.50 Fourth Quarter $10.00 $ 9.50 The high and low bid quotations for Service 1st Bank's common stock were $10.00 and $9.50 as of March 31, 2003. As of April 11, 2003, there were approximately 667 shareholders of Service 1st Bank's common stock. There are no other classes of common equity outstanding. Service 1st Bancorp was formed by Service 1st Bank for the sole purpose of becoming Service 1st Bank's parent bank holding company. Consequently, there is no established market for Service 1st Bancorp common stock that will be issued in connection with the merger. It is expected that Service 1st Bancorp common stock will be traded on the OTC Bulletin Board as Service 1st Bank's common stock is now traded. After the merger, all shares of Service 1st Bank's common stock will be owned by Service 1st Bancorp, and trading in Service 1st Bank's common stock will cease. Service 1st Bancorp common stock will be quoted on the OTC Bulletin Board following the effective date of the merger. 10 Dividends and Dividend Policy Service 1st Bank. Service 1st Bank's shareholders are entitled to receive dividends when and as declared by its board of directors, out of funds legally available therefor, subject to the restrictions set forth in the California Financial Code. The California Financial Code provides that a bank may not make a cash distribution within any one calendar year to its shareholders in excess of the lesser of (a) the bank's retained earnings; or (b) the bank's net income for its last three fiscal years, less the amount of any distributions made by the bank or by any majority-owned subsidiary of the bank to the shareholders of the bank during such period. However, a bank may, with the approval of the Commissioner, make a distribution to its shareholders in an amount not exceeding the greater of (a) its retained earnings; (b) its net income for its last fiscal year; or (c) its net income for its current fiscal year. In the event that the Commissioner determines that the shareholders' equity of a bank is inadequate or that the making of a distribution by the bank would be unsafe or unsound, the Commissioner may order the bank to refrain from making a proposed distribution. The FDIC may also restrict the payment of dividends if such payment would be deemed unsafe or unsound or if after the payment of such dividends, the bank would be included in one of the "undercapitalized" categories for capital adequacy purposes pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991. Service 1st Bank has not paid dividends since it commenced operations and does not anticipate the payment of dividends in the near future. Payment of dividends in the future will be determined by the board of directors after consideration of various factors including the profitability and capital adequacy of Service 1st Bank. In addition, Service 1st Bank has deficit retained earnings of $2,902,979 at December 31, 2002. Under the California Financial Code requirements for the payment of dividends described above, Service 1st Bank is restricted from paying dividends without the prior consent of the Commissioner until the deficit retained earnings are eliminated. Service 1st Bancorp. Under California law, shareholders of Service 1st Bancorp may receive dividends when and as declared by its board of directors out of funds legally available therefor. With certain exceptions, a California corporation may not pay a dividend to its shareholders unless its retained earnings equal at least the amount of the proposed dividend. California law further provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if it meets the following two generally stated conditions: (i) the corporation's assets equal at least 1 1/4 times its liabilities; and (ii) the corporation's current assets equal at least its current liabilities or, if the average of the corporation's earnings before taxes on income and before interest expense for the two preceding fiscal years was less than the average of the corporation's interest expense for such fiscal years, then the corporation's current assets must equal at least 1 1/4 times its current liabilities. FRB policy prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowings or other arrangements that might adversely affect the holding company's financial position. The policy further declares that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. Other FRB policies forbid the payment by the bank subsidiaries to their parent companies of management fees which are unreasonable in amount or exceed the fair market value of the services rendered (or, if no market exists, actual cost plus a reasonable profit). 11 GENERAL INFORMATION Annual Report to Shareholders and Financial Data Service 1st Bank's 2002 Annual Report to Shareholders is being mailed to shareholders along with this proxy statement-prospectus. Service 1st Bank's report of independent public accountants on audited balance sheets as of December 31, 2002 and 2001, related audited statements of operations, shareholders' equity and cash flows for each of the two years ended December 31, 2002, and notes to financial statements, included in the 2002 Annual Report to Shareholders is also separately attached to this proxy statement-prospectus as Annex B. No historical financial information is available for Service 1st Bancorp since it is a newly formed California corporation. Revocability of Proxies Any person giving a proxy in the form accompanying this proxy statement-prospectus has the power to revoke that proxy prior to its exercise. The proxy may be revoked prior to the annual meeting by delivering to the Secretary of Service 1st Bank either a written instrument revoking the proxy or a duly executed proxy bearing a later date. The proxy may also be revoked by the shareholder by attending and voting at the annual meeting. The proxy will be voted as directed by the shareholder giving the proxy and if no directions are given on the proxy, the proxy will be voted "FOR" the nominees of the board of directors as described in this proxy statement-prospectus, "FOR" approval of the plan of reorganization and merger agreement and the merger, "FOR" the ratification of the appointment of Vavrinek, Trine, Day & Co., LLP as independent public accountants for the year 2003, and, at the proxy holders' discretion, on such other matters, if any, which may come before the annual meeting and any and all postponements or adjournments of the annual meeting. Solicitation of Proxies The solicitation of proxies is being made by the board of directors of Service 1st Bank. The expense of preparing, assembling, printing, and mailing this proxy statement and the materials used in the solicitation of proxies for the annual meeting will be borne by Service 1st Bank. It is contemplated that proxies will be solicited principally through the use of the mail, but officers, directors, and employees of Service 1st Bank may solicit proxies personally or by telephone, without receiving special compensation therefore. Service 1st Bank will reimburse banks, brokerage houses and other custodians, nominees and fiduciaries for their reasonable expenses in forwarding the proxy statement-prospectus to shareholders whose stock in Service 1st Bank is held of record by such entities. In addition, Service 1st Bank may use the services of individuals or companies it does not regularly employ in connection with this solicitation of proxies, if management determines it to be advisable. Voting Securities; Record Date; Cumulative Voting There were issued and outstanding 1,100,100 shares of Service 1st Bank's common stock on April 11, 2003, which has been fixed as the record date for the purpose of determining shareholders entitled to notice of, and to vote at, the annual meeting (the "Record Date"). On any matter submitted to the vote of the shareholders, each holder of Service 1st Bank common stock will be entitled to one vote, in person or by proxy, for each share of common stock he or she held of record on the books of Service 1st Bank as of the 12 Record Date. Shares represented by proxies that reflect abstentions are treated as shares present and entitled to vote for purposes of determining a quorum, but have the same effect as a vote "AGAINST" a proposal. "Broker non-votes" (shares held by brokers or nominees as to which instructions have not been received from the beneficial owners or persons entitled to vote and the broker or nominee does not have discretionary voting power under applicable rules of the stock exchange or other self regulatory organization of which the broker or nominee is a member) are treated as shares present and entitled to vote for purposes of a quorum, but also have the same effect as a vote "AGAINST" a proposal. In connection with the election of directors, shares may be voted cumulatively if a shareholder present at the annual meeting gives notice at the annual meeting, prior to the voting for election of directors, of his or her intention to vote cumulatively. If any shareholder of Service 1st Bank gives such notice, then all shareholders eligible to vote will be entitled to cumulate their shares in voting for election of directors. Cumulative voting allows a shareholder to cast a number of shares held in his or her name as of the Record Date multiplied by the number of directors to be elected. These votes may be cast for any one nominee, or may be distributed among as many nominees as the shareholder sees fit. PROPOSAL ONE ELECTION OF DIRECTORS OF SERVICE 1ST BANK Service 1st Bank's bylaws provide that the number of directors of Service 1st Bank shall not be less than nine (9) nor more than seventeen (17) until changed by an amendment to the bylaws adopted by Service 1st Bank's shareholders. The bylaws further provide that the exact number of directors is set at twelve (12) until changed by a bylaw amendment duly adopted by Service 1st Bank's shareholders or board of directors. The persons named below, all of whom are currently members of the board of directors, will be nominated for election as directors at the annual meeting to serve until the 2004 annual meeting of shareholders and until their successors are elected and qualified. Unless otherwise directed, votes will be cast by the proxy holders in such a way to effect, if possible, the election of the twelve (12) nominees named herein including, in the event of cumulative voting, the authority of the proxy holders to cumulate votes represented by the shares covered by proxies in the election of directors. The twelve (12) nominees for director receiving the most votes will be elected as directors. In the event that any of the nominees should be unable to serve as a director, it is intended that the proxy will be voted for the election of such substitute nominee, if any, as shall be designated by the board of directors. The board of directors has no reason to believe that any of the nominees named below will be unable to serve if elected. 13 The following table sets forth the names of and certain information, as of April 11, 2003, concerning the persons nominated by the board of directors for election as directors of Service 1st Bank.
Year First Name and Title Appointed Principal Occupation Other Than Director Age Director During the Past Five Years - ------------------------- --- ---------- ------------------------------------------------ John O. Brooks, Chairman 62 2000 Prior to joining Service 1st Bank on November of the Board and Chief 1, 2000, he was a Director and President and Executive Officer Chief Executive Officer of Tracy Federal Savings Bank, Tracy, California, from 1998 to 2000, and Bay Area Bank, Redwood City, California, from 1992 to 1998. Eugene C. Gini 65 1999 President and Chief Executive Officer of Collins Electric Company, Inc., an electrical contracting firm, Stockton, California, since 1987. Bryan R. Hyzdu, President 44 1999 Prior to joining Service 1st Bank on November 10, 1999, he was a Regional Vice President and Central Valley Portfolio Manager with Union Bank of California, since 1992. Robert D. Lawrence, M.D. 62 1999 Pathologist and owner of Delta Pathology Associates Medical Group, Inc., Stockton, California, since 1973. Frances C. Mizuno 46 1999 Civil Engineer and Assistant Executive Director of the San Luis and Delta Mendota Water Authority, Byron, California, since 1992. Richard R. Paulsen 44 1999 Life insurance agent for New York Life Insurance Company and a partner in Resource Management Group, a securities and financial planning firm, Stockton, California, since 1983. Gary A. Podesto 61 1999 Mayor of the City of Stockton, since 1997. Formerly, owner of Food 4 Less grocery stores, Stockton and Lodi, California, from 1994 to 1997. Toni Marie Raymus 46 1999 President of Destiny Homes, a custom home building company, Manteca, California, since 1997. Vice President of Raymus Development and Sales, Inc., a developer of new homes, Manteca, California, since 1980.
14
Year First Name and Title Appointed Principal Occupation Other Than Director Age Director During the Past Five Years - ------------------------- --- ---------- ------------------------------------------------ Michael K. Repetto 41 1999 Chief Executive Officer of Tracy Material Recovery Facility, a disposal and waste recycling company, Tracy, California, since 1995. Co-owner and Operations Manager of Tracy Delta Solid Waste Management, a waste management company, Tracy, California, since 1987. Anthony F. Souza 62 1999 Owner of Souza Realty and Development, a real estate sales, development and consulting company, Tracy, California, since 1985. Albert Van Veldhuizen 74 1999 Commercial real estate sales with Pan Pacific Financial, a real estate income property lender, Lodi, California, since 1994. Donald L. Walters 47 1999 Managing member of Grower Direct Marketing, a fresh produce sales and worldwide shipping company, Stockton, California, since 1998. President and Chief Executive Officer of Walters Carpet One, Stockton, California, from 1982 until 1997 when the business was sold.
None of the directors were selected pursuant to any arrangement or understanding other than with the directors and officers of Service 1st Bank acting within their capacities as such. There are no family relationships between any two or more of the directors, officers or persons nominated or chosen by the board of directors to become a director or officer, except that Bryan R. Hyzdu and Donald L. Walters are brothers-in-law. No director or officer of Service 1st Bank serves as a director 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 of any company registered as an investment company under the Investment Company Act of 1940. None of the nominees were subject to any legal proceedings involving violations of securities laws, convictions in a criminal proceeding (excluding traffic violations and minor offenses) or had a petition under bankruptcy laws filed against themselves or an affiliate within the last five years. Security Ownership of Certain Beneficial Owners and Management Management of Service 1st Bank knows of no person who owns, beneficially or of record, either individually or together with associates, 5 percent or more of the outstanding shares of Service 1st Bank common stock, except as set forth in the table below. The following table sets forth, as of April 11, 2003, the number and percentage of shares of Service 1st Bank common stock beneficially owned, directly or indirectly, by each of Service 1st Bank's directors, principal shareholders, the executive officers(1) named in the Summary Compensation Table, and the directors and named executive officers as a group. In general, beneficial ownership includes shares over which a director, principal shareholder, or executive officer has sole or shared voting or investment power and shares which such person has the right to acquire within 60 15 days of April 11, 2003. Unless otherwise indicated, the persons listed below have sole voting and investment powers respecting the shares beneficially owned. Management is not aware of an arrangement which may, at a subsequent date, result in a change of control of Service 1st Bank.
Amount and Nature Name and Address of of Beneficial Percent Title of Class Beneficial Owner(2) Ownership of Class - ------------------------------ ----------------------- --------------------- ------------ Common Stock, No Par Value John O. Brooks 21,667 (3) 1.94% Common Stock, No Par Value Robert E. Bloch 11,320 (4) 1.02% Common Stock, No Par Value Patrick Carman 10,277 (5) 0.93% Common Stock, No Par Value Eugene C. Gini 31,818 (6) 2.88% Common Stock, No Par Value Bryan R. Hyzdu 33,500 (7) 2.99% Common Stock, No Par Value Robert D. Lawrence 32,461 (8) 2.94% Common Stock, No Par Value Frances C. Mizuno 15,503 (9) 1.40% Common Stock, No Par Value Richard R. Paulsen 16,000(10) 1.45% Common Stock, No Par Value Gary A. Podesto 14,998(11) 1.36% Common Stock, No Par Value Toni Marie Raymus 16,791(12) 1.52% Common Stock, No Par Value Michael K. Repetto 15,000(13) 1.36% Common Stock, No Par Value Anthony F. Souza 17,325(14) 1.57% Common Stock, No Par Value Albert Van Veldhuizen 15,250(15) 1.38% Common Stock, No Par Value Donald L. Walters 16,040(16) 1.45% All directors and executive officers as a group (14 persons) 267,950(17) 22.27%
- ------------------------------ (1) As used in this proxy statement, the term "executive officer" of Service 1st Bank includes the Chief Executive Officer, President, Executive Vice President and Chief Financial Officer, and Executive Vice President and Chief Credit Officer. (2) The address for beneficial owners is c/o Service 1st Bank, 2800 W. March Lane, Suite 120, Stockton, California 95219. (3) Mr. Brooks has shared voting and investment powers as to 21,667 shares. Includes 16,667 shares subject to stock options exercisable within 60 days of the Record Date. (4) Mr. Bloch has shared voting and investment powers as to 11,320 shares. Includes 10,000 shares subject to stock options exercisable within 60 days of the Record Date. (5) Mr. Carman has shared voting and investment powers as to 10,277 shares. Includes 6,667 shares subject to stock options exercisable within 60 days of the Record Date. (6) Mr. Gini has shared voting and investment powers as to 31,818 shares. Includes 5,000 shares subject to stock options exercisable within 60 days of the Record Date. (7) Mr. Hyzdu has shared voting and investment powers as to 33,500 shares. Includes 20,000 shares subject to stock options exercisable within 60 days of the Record Date. (8) Dr. Lawrence has shared voting and investment powers as to 32,461 shares. Includes 5,000 shares subject to stock options exercisable within 60 days of the Record Date. 16 (9) Ms. Mizuno has shared voting and investment powers as to 15,503 shares. Includes 5,000 shares subject to stock options exercisable within 60 days of the Record Date. (10) Mr. Paulsen has shared voting and investment powers as to 16,000 shares. Includes 5,000 shares subject to stock options exercisable within 60 days of the Record Date. (11) Mr. Podesto has shared voting and investment powers as to 14,998 shares. Includes 5,000 shares subject to stock options exercisable within 60 days of the Record Date. (12) Ms. Raymus has shared voting and investment powers as to 16,791 shares. Includes 5,000 shares subject to stock options exercisable within 60 days of the Record Date. (13) Mr. Repetto has shared voting and investment powers as to 15,000 shares. Includes 5,000 shares subject to stock options exercisable within 60 days of the Record Date. (14) Mr. Souza has shared voting and investment powers as to 17,325 shares. Includes 5,000 shares subject to stock options exercisable within 60 days of the Record Date. (15) Mr. Van Veldhuizen has shared voting and investment powers as to 15,250 shares. Includes 5,000 shares subject to stock options exercisable within 60 days of the Record Date. (16) Mr. Walters has shared voting and investment powers as to 16,040 shares. Includes 5,000 shares subject to stock options exercisable within 60 days of the Record Date. (17) Includes 103,334 shares subject to stock options exercisable within 60 days of the Record Date. The Board of Directors and Committees Service 1st Bank's board of directors held 13 meetings during 2002. In addition to meeting as a group to review Service 1st Bank's business, members of the board of directors served on certain standing committees. During 2002, no director attended less than 75% of the aggregate of the number of meetings held by the board of directors and of all committee meetings on which such director served, except director Repetto who attended 70.45%. Service 1st Bank does not have a nominating committee. The board of directors performs the functions of a nominating committee. The executive committee held 4 meetings during 2002. The committee consists of directors Brooks, Gini, Paulsen, Souza and Walters. The executive committee reviews compensation and employee benefit plans and determines the compensation of Service 1st Bank's executive officers. The audit committee held 4 meetings in 2002. The committee consists of directors Mizuno, Podesto, Raymus, and Repetto. The audit committee generally recommends the appointment of and oversees Service 1st Bank's independent public accountants, monitors and reviews all audit and examining reports, financial and accounting organization and financial planning, and internal controls. See the audit committee report below for additional information regarding the functions of the audit committee. 17 AUDIT COMMITTEE REPORT NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF SERVICE 1ST BANK'S PREVIOUS OR FUTURE FILINGS UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 THAT MIGHT INCORPORATE THIS PROXY STATEMENT OR FUTURE FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE FEDERAL DEPOSIT INSURANCE CORPORATION, IN WHOLE OR IN PART, THE FOLLOWING REPORT SHALL NOT BE DEEMED TO BE INCORPORATED BY REFERENCE INTO ANY SUCH FILING. The Audit Committee consists of the following members of the Service 1st Bank's board of directors: Frances Mizuno, Toni Marie Raymus, Michael Repetto and Gary Podesto. Each of the members of the committee is independent as defined under the National Association of Securities Dealers' listing standards. The committee operates under policies established by the board of directors. The committee's responsibilities include providing advice with respect to Service 1st Bank's financial matters and assisting the board of directors in discharging its responsibilities regarding finance, accounting, tax and legal compliance. The committee's primary responsibilities are to: (1) serve as an independent and objective party to monitor Service 1st Bank's financial reporting process and internal control system; (2) review and evaluate the audit efforts of Service 1st Bank's independent accountants and internal audit procedures; (3) evaluate Service 1st Bank's quarterly financial performance as well as its compliance with laws and regulations; (4) oversee management's establishment and enforcement of financial policies and business practices; and (5) facilitate communication among the independent accountants, financial and senior management, counsel, the internal audit function and the board of directors. The committee has reviewed and discussed the audited financial statements of Service 1st Bank for the fiscal year ended December 31, 2002 with Service 1st Bank's management. The committee has discussed with Vavrinek, Trine, Day & Co., LLP, Service 1st Bank's independent public accountants, the matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees). The committee has also received the written disclosures and the letter from Vavrinek, Trine, Day & Co., LLP required by Independence Standards Board Standard No. 1 (Independence Discussion with Audit Committees) and the committee has discussed the independence of Vavrinek, Trine, Day & Co., LLP with that firm. Based on the committee's review and discussions noted above, the committee recommended to the board of directors that Service 1st Bank's audited financial statements be included in Service 1st Bank's annual report on Form 10-KSB for the fiscal year ended December 31, 2002 for filing with the Federal Deposit Insurance Corporation. Submitted by: /s/ FRANCES MIZUNO /s/GARY PODESTO /s/TONI MARIE RAYMUS /s/MICHAEL REPETTO 18 COMPENSATION AND CERTAIN TRANSACTIONS Executive Officers The following table sets forth as of April 11, 2003, information concerning executive officers of Service 1st Bank, excluding John O. Brooks, Chief Executive Officer, and Bryan R. Hyzdu, President, as to whom the same information has been previously disclosed above in connection with their nomination for election as directors of Service 1st Bank.
Executive Officer Principal Occupation Name Age Since During the Past Five Years - -------------- --- ----------------- ----------------------------------------------- Patrick Carman 53 2000 Executive Vice President and Chief Credit Officer of Service 1st Bank. Prior to joining Service 1st Bank on August 7, 2000, he held positions as Senior Vice President and Senior Credit Officer from 1999 to 2000, Credit Administrator from 1998 to 1999, and as SBA portfolio manager from 1995 to 1998, at East County Bank, Antioch, California. Robert E. Bloch 55 2001 Executive Vice President and Chief Financial Officer of Service 1st Bank. Prior to joining Service 1st Bank on March 26, 2001, he was Executive Vice President and Chief Financial Officer for Mission Community Bank, N.A., San Luis Obispo, California, from 1999 to 2001, and Executive Vice President and Chief Financial Officer of Heritage Oaks Bank, Paso Robles, California, from 1992 to 1999.
19 Executive Compensation The following table shows the compensation paid to Service 1st Bank's executive officers for the three fiscal years ended December 31, 2002.
Summary Compensation Table - ------------------------------------------------------------------------------------------------------------ Long Term Compensation - ------------------------------------------------------------------------------------------------------------ Annual Compensation Awards Payouts - ---------------------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) (h) (i) - ---------------------------------------------------------------------------------------------------------------------------- Securities Other Underlying Annual Restricted Options/ LTIP All Other Name and Principal Salary Bonus Compensation Stock SARs Payouts Compensation Position Year ($)(1) ($)(2) ($)(3) Award(s)($) (#)(4) ($) ($)(5) - ---------------------------------------------------------------------------------------------------------------------------- John O. Brooks (6) 2002 $121,800 $ 12,166 -0- $ 6,000 Chief Executive ------------------------------------------------------------------------------------------------------ Officer 2001 $120,000 $ -0- -0- $ 6,000 ------------------------------------------------------------------------------------------------------ 2000 $ 25,000 $ -0- 25,000 $ 1,000 - ---------------------------------------------------------------------------------------------------------------------------- Bryan R. Hyzdu (7) 2002 $111,650 $ 21,152 -0- $ 9,542 President ------------------------------------------------------------------------------------------------------ 2001 $110,000 $ -0- -0- $ 9,383 ------------------------------------------------------------------------------------------------------ 2000 $110,000 $ -0- -0- $ 9,230 - ---------------------------------------------------------------------------------------------------------------------------- Robert E. Bloch (8) 2002 $ 96,425 $ 9,631 -0- $ 4,800 Executive Vice ------------------------------------------------------------------------------------------------------ President & Chief 2001 $ 73,077 $ 5,000 15,000 $ 3,600 Financial Officer ------------------------------------------------------------------------------------------------------ 2000 $ -0- $ -0- -0- $ -0- - ---------------------------------------------------------------------------------------------------------------------------- Patrick Carman (9) 2002 $ 87,500 $ 8,740 -0- $ 4,800 Executive Vice ------------------------------------------------------------------------------------------------------ President and Chief 2001 $ 85,000 $ -0- -0- $ 4,800 Credit Officer ------------------------------------------------------------------------------------------------------ 2000 $ 34,163 $ -0- 10,000 $ 400 - ----------------------------------------------------------------------------------------------------------------------------
(1) Amounts shown include cash and non-cash compensation earned and received by executive officers as well as amounts earned but deferred at the election of those officers under the 401(k) Plan. (2) Amounts shown as bonus payments were earned or accrued during the year indicated and paid in the immediately following year. Mr. Bloch's bonus shown in 2001 was included in his employment offer letter dated February 26, 2001 and paid in 2002. (3) No executive officer received perquisites or other personal benefits in excess of the lesser of $50,000 or 10% of each such officer's total annual salary and bonus during 2002, 2001 and 2000. (4) Amounts shown represent the number of shares granted in the year indicated. Incentive options were granted to the named executive officers under the 1999 Stock Option Plan (the "1999 Plan") at grant prices of $9.50 for Mr. Bloch and $10.00 for Messrs. Brooks, Hyzdu and Carman on the respective grant dates. Under the 1999 Plan, options may be granted to non-employee directors, officers and employees of Service 1st Bank. Options 20 granted under the 1999 Plan may be either incentive options or nonstatutory options, however, only nonstatutory options may be granted to non-employee directors. Options granted become exercisable in accordance with a vesting schedule established at the time of grant. Vesting may not extend beyond ten years from the date of grant. Upon a change in control of Service 1st Bank, options do not become fully vested and exercisable, but may be assumed or equivalent options may be substituted by a successor corporation. Options are adjusted to protect against dilution in the event of certain changes in Service 1st Bank's capitalization, including stock splits and stock dividends. All options granted to the named executive officers are incentive stock options and have an exercise price equal to the fair market value of Service 1st Bank's common stock on the date of grant. (5) Amounts shown for each named executive officer include any life/disability insurance premiums and automobile allowance, for the year indicated. Service 1st Bank has a 401(k) Plan which was adopted in 2000. Generally, all Service 1st Bank employees are eligible to participate in the 401(k) Plan. Participating employees may defer a portion of their compensation in the 401(k) Plan and Service 1st Bank, at its option, may make matching contributions on participant's deferrals. Service 1st Bank did not make any matching contributions to the 401(k) Plan in the years 2002, 2001 and 2000. (6) Mr. Brook's employment with Service 1st Bank commenced November 1, 2000. Mr. Brooks voluntarily reduced his salary during 2002 and 2001, from $150,000 as provided under the terms of his employment agreement to $121,800 and $120,000 respectively, to reflect the comparable reduction in his availability due to illness. (7) Mr. Hyzdu's bonus in 2002 includes a $10,000 bonus under his severance agreement dated November 1, 2002, which replaced his expired prior employment agreement. (8) Mr. Bloch's employment with Service 1st Bank commenced March 26, 2001. (9) Mr. Carman's employment with Service 1st Bank commenced August 7, 2000. (10) No stock options were granted during 2002 to the named executive officers as indicated in the table. Aggregated Option/SAR Exercises and FY-End Option/SAR Values The following table sets forth, with respect to the executive officers named in the Summary Compensation Table, information concerning options exercised during 2002 and Fiscal Year-End Values (1).
- ---------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) - ---------------------------------------------------------------------------------------------------------------- Number of Securities Underlying Unexercised Value of Unexercised Shares Options/SARs at In-the-Money Options/SARs at Acquired on Value FY-End (#) FY-End ($) Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable(2) - ---------------------------------------------------------------------------------------------------------------- John O. Brooks -0- $-0- 16,667/8,333 $ -0-/$ -0- - ---------------------------------------------------------------------------------------------------------------- Bryan R. Hyzdu -0- $-0- 20,000 $ -0-/$ -0- - ---------------------------------------------------------------------------------------------------------------- Robert E. Bloch -0- $-0- 10,000/5,000 $ -0-/$ -0- - ---------------------------------------------------------------------------------------------------------------- Patrick Carman -0- $-0- 6,667/3,333 $ -0-/$ -0- - ----------------------------------------------------------------------------------------------------------------
21 (1) The aggregate value has been determined based upon the fair market value of Service 1st Bank's common stock, at year-end, minus the exercise price. (2) The exercisable and unexercisable values reflect the fact that the fair market value of Service 1st Bank's common stock at the fiscal year-end was equal to or less than the option grant prices of $9.50 and $10.00. The fair market value of Service 1st Bank's common stock as of April 11, 2003 was $10.00. Equity Compensation Plan Information The chart below lists information regarding Service 1st Bank common stock issuable upon the exercise of stock options, the weighted average exercise price of those options and the number of shares available for issuance under the Service 1st Bank 1999 Stock Option Plan. Service 1st Bank has no other equity compensation plan and there are no warrants or other rights outstanding that would result in the issuance of shares of Service 1st Bank common stock.
- ---------------------------------------------------------------------------------------------------------------- Plan Category Number of securities to be Weighted-average exercise Number of securities issued upon exercise of price of outstanding remaining available for outstanding options, options, warrants and future issuance under warrants and rights rights equity compensation plans (excluding securities reflected in column (a)) (a) (b) (c) - ---------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders 171,000 9.91 69,000 - ---------------------------------------------------------------------------------------------------------------- Equity compensation plans not approved by security holders 0 0 0 - ---------------------------------------------------------------------------------------------------------------- Total 171,000 9.91 69,000 - ----------------------------------------------------------------------------------------------------------------
Director Compensation Non-employee members of the board of directors of Service 1st Bank were not paid director fees for serving on the board of directors and their respective committees during 2002. Directors may participate in the 1999 Stock Option Plan, discussed below. 1999 Stock Option Plan The Service 1st Bank 1999 Stock Option Plan was adopted by the board of directors on November 15, 1999, and approved by shareholders at the 1999 annual meeting of shareholders held on May 11, 2000 (the "1999 Plan"). The 1999 Plan set aside 240,000 shares of no par value common stock of Service 1st Bank for the grant of incentive and nonstatutory stock options to key, full-time salaried employees and officers of Service 1st Bank, and to the non-employee directors of Service 1st Bank. Only nonstatutory options may be granted to non-employee directors. Service 1st Bank's non-employee directors were granted nonstatutory options under the 1999 Plan to acquire 5,000 shares each of Service 1st Bank's common stock on the date of adoption of the 1999 Plan, at a grant price of $10.00 per share, which reflected the fair market value of Service 1st Bank's common stock on such date. The option grants were made subject to the 22 approval of the 1999 Plan by the shareholders of Service 1st Bank. See footnote number 4 to the Summary Compensation Table for further information regarding the 1999 Plan. Employment Contracts and Termination of Employment and Change-in-Control Arrangements Service 1st Bank and John O. Brooks entered into an employment agreement dated November 1, 2000, pursuant to which Mr. Brooks serves as the Chairman of the Board of Directors and Chief Executive Officer of Service 1st Bank. The employment agreement is for a three (3) year term, subject to termination rights of Service 1st Bank and Mr. Brooks. The employment agreement includes (i) an annual base salary of one hundred fifty thousand dollars ($150,000), subject to annual adjustment during the term in the discretion of the board of directors; (ii) an annual bonus payment based upon his achievement of various financial and Service 1st Bank stock performance goals established by the board of directors, which payment is to be distributed from a bonus pool limited to ten percent (10%) of the increase in net profits over budget goals for a given year established by the board of directors; (iii) a grant of incentive stock options to purchase twenty-five thousand (25,000) shares of Service 1st Bank's common stock under Service 1st Bank's 1999 Stock Option Plan; (iv) an automobile allowance of five hundred dollars ($500) per month; (v) four (4) weeks annual vacation; (vi) group life, health and disability insurance benefits; (vii) reimbursement of business expenses incurred on behalf of Service 1st Bank; (viii) severance payments upon termination without cause equal to six (6) months base salary and payable within thirty (30) days of termination; and (ix) severance payments upon the occurrence of certain events including termination of employment within eighteen (18) months following a change-in-control equal to one (1) year of base salary and payable within thirty (30) days of such event. Service 1st Bank and Bryan R. Hyzdu entered into a severance agreement dated November 1, 2002, which replaced an expired employment agreement dated January 7, 1999. Mr. Hyzdu currently serves as the President of Service 1st Bank. The term of the severance agreement commences November 1, 2002 and continues until terminated by Service 1st Bank or Mr. Hyzdu in accordance with its provisions. The severance agreement includes (i) an annual base salary of one hundred thirteen thousand dollars ($113,300), subject to annual adjustment increase during the term in the discretion of the chief executive officer and/or the board of directors; (ii) an annual bonus payment in an amount to be determined in the discretion of the board of directors based upon Service 1st Bank's profitability and implementation of strategic plans; (iii) a non-recurring bonus payment of ten thousand dollars ($10,000); (iii) an automobile allowance of seven hundred fifty dollars ($750) per month; (v) four (4) weeks annual vacation; (vi) group life, health and disability insurance benefits; (vii) reimbursement of business expenses incurred on behalf of Service 1st Bank; (viii) severance payments upon termination without cause equal to six (6) months base salary; and (ix) severance payments upon the occurrence of certain events including termination of employment following events constituting a change-in-control equal to six (6) months of base salary. Service 1st Bank and Robert E. Bloch signed an offer of employment letter dated February 26, 2001, pursuant to which Mr. Bloch was offered the position of Executive Vice President and Chief Financial Officer of Service 1st Bank. The letter included (i) an annual base salary of ninety-five thousand dollars ($95,000) per year; (ii) a bonus payment of five thousand dollars ($5,000) payable one year following commencement of employment; (iii) a grant of stock options to purchase fifteen thousand (15,000) shares of Service 1st Bank's common stock under Service 1st Bank's 1999 Stock Option Plan; (iv) an auto allowance of four hundred dollars ($400) per month; (v) moving expense allowance of three thousand dollars ($3,000); (vi) four (4) weeks annual vacation; and (vii) group life and medical insurance benefits. Service 1st Bank and Patrick Carman signed an offer of employment letter dated May 26, 2000, pursuant to which Mr. Carman was offered the position of Senior Vice President and Chief Credit Officer of 23 Service 1st Bank. The letter included (i) an annual base salary of eighty-five thousand dollars ($85,000) per year; (ii) a bonus payment up to a maximum of twelve thousand seven hundred fifty dollars ($12,750) based on an assessment of overall performance; (iii) a grant of stock options to purchase ten thousand (10,000) shares of Service 1st Bank's common stock under Service 1st Bank's 1999 Stock Option Plan; (iv) four (4) weeks annual vacation; (v) group life and medical insurance benefits; and (vi) severance payments upon termination without cause equal to six (6) months base salary for a termination occurring within eighteen (18) months of the date of his commencement of employment with Service 1st Bank or within twelve (12) months of the date of the commencement of employment of Mr. John Brooks, whichever event occurs first. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires Service 1st Bank's executive officers and directors, and persons who own more than ten percent of a registered class of Service 1st Bank's equity securities, to file reports of ownership and changes in ownership with the FDIC. Such persons are required by FDIC regulation to furnish Service 1st Bank with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons, Service 1st Bank believes that during 2002 its executive officers, directors and more than ten-percent beneficial owners complied with all filing requirements applicable to them. Certain Relationships and Related Transactions Some of the directors and officers of Service 1st Bank and the companies with which those directors and officers are associated are customers of, and have had banking transactions with, Service 1st Bank in the ordinary course of Service 1st Bank's business, and Service 1st Bank expects to have banking transactions with such persons in the future. In the opinion of Service 1st Bank's management, all loans and commitments to lend in such transactions were made in compliance with applicable laws and 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. The maximum aggregate amount of loans and credit extensions to all Service 1st Bank directors, officers and principal shareholders and their associates during the period commencing January 1, 2002 and ending December 31, 2002 was three million six hundred twenty thousand four hundred twenty-six dollars ($3,620,426), which amount constituted forty-six percent (46%) of the equity capital accounts of Service 1st Bank at that time. As of March 13, 2003, the total aggregate amount of loans and credit extensions was one million nine hundred six thousand seven hundred thirty-two dollars ($1,906,732), representing twenty-three (23%) of the equity capital accounts of Service 1st Bank at that time. 24 PROPOSAL TWO APPROVAL OF PLAN OF REORGANIZATION AND MERGER AGREEMENT AND THE MERGER THE MERGER General Shareholders of Service 1st Bank are being asked to consider and vote upon a proposal to approve a plan of reorganization and merger agreement, dated as of March 11, 2003, under which the business of Service 1st Bank will be conducted as a wholly-owned subsidiary of Service 1st Bancorp. Service 1st Bancorp is a California corporation formed by Service 1st Bank and at the direction of Service 1st Bank's board of directors for the specific purpose of becoming the bank holding company for Service 1st Bank. Service 1st Bank also formed Service 1st Merger Corporation as a California corporation. Service 1st Bancorp owns all of the issued and outstanding shares of capital stock of Service 1st Merger Corporation. Assuming all requisite approvals are obtained and certain other conditions are satisfied or waived, upon consummation of the merger, Service 1st Merger Corporation will be merged with and into Service 1st Bank, all outstanding shares of Service 1st Bank common stock held by Service 1st Bank's shareholders will be converted into and exchanged for shares of Service 1st Bancorp common stock on a share-for-share basis, Service 1st Bank's shareholders will become the shareholders of Service 1st Bancorp, and Service 1st Bancorp will become the sole shareholder and parent holding company of Service 1st Bank. Following the merger: o Service 1st Bank will continue to exist as a California banking corporation and to be regulated by the California Commissioner of Financial Institutions (the "Commissioner") and the Board of Governors of the Federal Reserve System (the "FRB"); o Service 1st Bank's deposits will continue to be insured by the Federal Deposit Insurance Corporation ("FDIC") to the maximum amount permitted by law; o Service 1st Bank will continue to be managed by its current board of directors and management; and o Service 1st Bank will continue to engage in substantially the same business and activities in which it is presently engaged at its presently established branch offices. See "SERVICE 1ST BANK -- General." The board of directors of Service 1st Bank has unanimously approved the plan of reorganization and merger agreement and the merger and recommends that the shareholders vote "FOR" the proposal. The terms of the merger are set forth in the plan of reorganization and merger agreement, a copy of which is attached as Annex A to this proxy statement-prospectus. Conversion of Options There currently are outstanding under Service 1st Bank's 1999 Stock Option Plan options to purchase an aggregate of 171,000 shares of Service 1st Bank's authorized but unissued common stock at 25 prices ranging between $9.50 and $10.00 per share which expire ten years from the date of grant. In accordance with the terms of the plan of reorganization and merger agreement, upon consummation of the merger, the 1999 Plan will be administered in an appropriate manner to reflect the merger and any outstanding options to purchase shares of common stock of Service 1st Bank will be converted into options to purchase the same numbers of shares of Service 1st Bancorp common stock on the same terms and conditions as currently are in effect. Recommendation and Reasons Service 1st Bank's board of directors has unanimously approved the plan of reorganization and merger agreement and the merger and recommends their approval by the shareholders of Service 1st Bank. The board of directors believes that a bank holding company structure offers greater flexibility in the conduct of business activities in comparison to Service 1st Bank's present corporate structure. The advantages include additional flexibility: o in the expansion of Service 1st Bank's business through the acquisition of other financial institutions; o in the raising of additional capital through alternatives to equity such as trust preferred securities and other debt instruments; o in the ability to repurchase its securities (subject to applicable regulatory requirements); and o in acquiring or establishing other businesses related to banking as holding company subsidiary corporations with a separate legal existence from that of Service 1st Bank. The board of directors does not believe that there are any significant disadvantages to implementing a holding company structure for Service 1st Bank, and believes that the incremental additional costs, if any, of operating under such a structure will not be material. For example, Service 1st Bank currently files periodic reports with the FDIC under the Securities Exchange Act of 1934 on Forms 10-KSB, 10-QSB and 8-K in compliance with the requirements of those forms and the rules and regulations of the Securities and Exchange Commission as adopted by the FDIC. After the merger, Service 1st Bancorp will assume the responsibility for the preparation and filing of those reports in the same manner and on the same forms as before the merger; however, Service 1st Bancorp will file those reports with the Securities and Exchange Commission rather than the FDIC. Service 1st Bancorp will also file reports with the FRB, however, much of the data to be reported is contained in other reports filed by Service 1st Bank with the Commissioner and FDIC. Recent legislation, economic conditions and actions by financial institution regulators have combined to result in a period of consolidation in the bank and thrift industry, and the board of directors believes Service 1st Bank may have opportunities to expand its business and geographic markets through the acquisition of other financial institutions or of branch offices of other institutions. A bank holding company form of organization will provide Service 1st Bank with the greatest amount of flexibility in responding quickly to expansion opportunities. For instance, Service 1st Bank is not permitted to own a separate bank or thrift institution. In a holding company structure, on the other hand, a financial institution could be acquired and operated as a separate entity if it was desirable to do so. While Service 1st Bank and Service 1st Bancorp might in the future consider making acquisitions, neither Service 1st Bank nor Service 1st Bancorp is presently conducting discussions with any potential candidate for acquisition. 26 A bank holding company structure may provide more alternatives in the raising of funds required by Service 1st Bank, or other subsidiaries of the holding company, particularly under changing conditions in financial and monetary markets. Indeed, if a subsidiary of the holding company required additional capital, the holding company might raise that capital by relying on its own borrowing capacity reflecting all of its subsidiaries, thereby eliminating the need to sell additional equity capital. While there currently are no plans for Service 1st Bancorp to borrow funds for the use of or to contribute to the capital of Service 1st Bank (nor is Service 1st Bank presently in need of additional capital funds to meet the capital adequacy requirements of federal and state regulatory authorities), management believes that the added borrowing flexibility provided by a holding company structure is desirable. In addition, many bank holding companies have recently relied upon tax advantaged debt instruments like trust preferred securities to raise capital for acquisitions and other corporate purposes. Trust preferred securities are not available to banks as an alternative financing vehicle. There can be no assurance, however, as to the method or type of financing arrangements that will be available to Service 1st Bancorp if the plan of reorganization and merger agreement and the merger are approved. Service 1st Bank may not repurchase shares of its own capital stock except after application and receipt of specific approval by the Commissioner. Consequently, if situations arose where the board of directors considered a repurchase of shares to be in Service 1st Bank's best interests, Service 1st Bank's ability to respond would be subject to such conditions. Assuming that Service 1st Bank continues to be well-capitalized, however (see "SUPERVISION AND REGULATION - Capital Adequacy" below), Service 1st Bancorp under current regulations of the FRB would probably qualify to repurchase its shares without FRB or other regulatory approval, provided that Service 1st Bancorp's capital exceeds the standards for a "well-capitalized" bank both before and after any such repurchases, its FRB examination results in a rating of "1" or "2," and there are no unresolved supervisory issues with respect to Service 1st Bancorp. A holding company structure also will provide flexibility in engaging in other financial services activities through newly formed subsidiaries or through the acquisition of existing companies. It should be noted that banks may generally engage through operating subsidiaries in business activities that are permissible for national banks, subject to prior regulatory approval. In some cases, however, it may be desirable to conduct business through a separately capitalized subsidiary corporation of a holding company to mitigate perceived risks to its banking and other subsidiaries. Service 1st Bancorp does not expect to engage in any activities other than the operation of Service 1st Bank in the reasonably foreseeable future. Under a holding company structure, however, Service 1st Bancorp will be positioned to do so (subject to required regulatory approvals) in the event that, in the future, such a course of action would be considered to be in Service 1st Bancorp's best interests. See "SUPERVISION AND REGULATION." Conversion of Shares and Exchange of Certificates Upon consummation of the merger, the shares of common stock of the respective corporate parties to the plan of reorganization and merger agreement shall be converted as follows: o Each share of Service 1st Bank common stock held of record by Service 1st Bank's shareholders automatically will be converted into one share of Service 1st Bancorp common stock (each share of Service 1st Bancorp common stock having the equivalent number of votes per share as the shares of Service 1st Bank common stock being surrendered). o Service 1st Bank's shareholders will be entitled to receive, upon the surrender by them to Service 1st Bancorp of all certificates representing shares of Service 1st Bank common stock 27 held by them on the effective date, a certificate or certificates representing the number of shares of Service 1st Bancorp common stock to which they are entitled; and, until so surrendered, each Service 1st Bank certificate will be deemed for all corporate purposes to evidence the ownership of the same number of shares of Service 1st Bancorp common stock. o Shareholders whose certificates for Service 1st Bank common stock have been lost or are missing may be required to make certain special arrangements in order to receive their certificates representing Service 1st Bancorp common stock, including the furnishing to Service 1st Bancorp or its stock transfer agent of certain affidavits and/or a bond or other form of indemnification. o Service 1st Merger Corporation will disappear and the shares of Service 1st Merger Corporation's common stock outstanding immediately prior to the effective date of the merger will be converted into shares of Service 1st Bank, with all outstanding shares of Service 1st Bank common stock then owned by Service 1st Bancorp. o The shares of Service 1st Bancorp common stock outstanding immediately prior to the effective date of the merger will be repurchased by Service 1st Bancorp for the amount paid for those shares and those shares will be canceled. Required Approvals The affirmative vote at the annual meeting of the holders of at least a majority of the total outstanding shares of Service 1st Bank common stock is required to approve the merger. All proxies will be voted "FOR" the proposal to approve the merger, unless a vote against the merger or an abstention is noted. Shares represented by proxies that reflect abstentions are treated as shares present and entitled to vote for purposes of determining a quorum, but have the same effect as a vote "AGAINST" a proposal. "Broker non-votes" (shares held by brokers or nominees as to which instructions have not been received from the beneficial owners or persons entitled to vote and the broker or nominee does not have discretionary voting power under applicable rules of the stock exchange or other self regulatory organization of which the broker or nominee is a member) are treated as shares present and entitled to vote for purposes of a quorum, but also have the same effect as a vote "AGAINST" a proposal. In addition, the merger is subject to the approval of the Commissioner, the FDIC and the FRB. Applications for all such required regulatory approvals either have been filed and currently are pending or will soon be filed. Although no assurances are or can be given, Service 1st Bancorp and Service 1st Bank have no reason to believe that such regulatory approvals will not be obtained. After final regulatory approvals are received, a waiting period up to thirty days is required prior to consummation of the merger to allow the United States Department of Justice to review the transaction for antitrust considerations. Receipt and continued effectiveness of all necessary regulatory approvals are conditions of the merger. Conditions and Effective Date; Amendment; Termination The merger is subject to various conditions described in the plan of reorganization and merger agreement, including, without limitation: 28 o approval of the plan of reorganization and merger agreement and the merger by the shareholders of Service 1st Bank; o receipt of required regulatory approvals; and o receipt (unless waived by Service 1st Bank, Service 1st Bancorp and Service 1st Merger Corporation) of the favorable opinion of Service 1st Bank's independent certified public accountants with respect to federal income tax consequences of the merger. Subject to the fulfillment of all conditions described in the plan of reorganization and merger agreement, the merger will become effective on the date on which the plan of reorganization and merger agreement is filed with the California Secretary of State. The plan of reorganization and merger agreement may be amended, modified or supplemented by Service 1st Bank and Service 1st Bancorp at any time prior to consummation of the merger, and whether before or after approval by Service 1st Bank's shareholders. Following approval of the plan of reorganization and merger agreement by Service 1st Bank's shareholders, however, no such amendment may change the ratio of conversion of Service 1st Bank common stock into Service 1st Bancorp common stock without shareholder approval of such change. The plan of reorganization and merger agreement may be terminated, whether before or after shareholder approval, upon the mutual consent of Service 1st Bank and Service 1st Bancorp, or by either Service 1st Bank or Service 1st Bancorp if, among other things: o any suit or proceeding is instituted or threatened in which it is sought to restrain or prohibit the merger; o the merger is not approved by Service 1st Bank's shareholders at the annual meeting; or o either party determines that consummation of the merger is not in the best interests of Service 1st Bank or its shareholders. The expenses of the merger are estimated to be approximately $75,000. Such expenses will be apportioned and adjusted between Service 1st Bank and Service 1st Bancorp as required by applicable law, regulation or rules of accounting. Service 1st Bancorp currently pays its expenses out of the proceeds of a loan made by a correspondent bank. Some or all of the funds used by Service 1st Bancorp to repay this loan will be paid from dividends received by Service 1st Bancorp from Service 1st Bank following consummation of the merger, subject to approval of the Commissioner. Federal Income Tax Consequences The following discussion summarizes certain of the federal income tax consequences of the merger pursuant to the Internal Revenue Code, as set forth in a tax opinion that Service 1st Bancorp and Service 1st Bank expect to obtain from their independent public accountants, and is included for general information only. The following discussion assumes that shares of Service 1st Bank common stock converted into shares of Service 1st Bancorp common stock pursuant to the merger will not be subject to any liability at the time they are so converted and that no liabilities of any shareholder of Service 1st Bank will be assumed by Service 1st Bank in connection with the merger. The discussion does not cover the consequences of the 29 merger under state, local or other tax laws, or special tax consequences to particular shareholders having special situations. In addition, the Internal Revenue Service is not being asked to provide a tax ruling as to the federal income tax consequences of the merger, and is not obligated to accept the position set forth herein in the event that the matter were placed at issue. Accordingly, shareholders are urged to consult with their own tax advisors regarding the effect of the merger on them personally. Also, this discussion does not cover the tax consequences of the conversion of the outstanding options to purchase shares of Service 1st Bank common stock into Service 1st Bancorp options. Holders of Service 1st Bank's outstanding options should consult with their own tax advisors regarding the effect of the merger and conversion. Subject to the foregoing assumptions, and based on certain representations made by Service 1st Bank and Service 1st Bancorp, Service 1st Bancorp and Service 1st Bank are advised that, for federal income tax purposes: o The merger of Service 1st Merger Corporation into Service 1st Bank and the issuance of Service 1st Bancorp common stock in connection with the merger will constitute a tax-free reorganization under Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code; o No gain or loss will be recognized by the holders of Service 1st Bank common stock upon the conversion of such stock into shares of Service 1st Bancorp common stock in connection with the merger; o The tax basis of Service 1st Bancorp common stock received by the shareholders of Service 1st Bank pursuant to the merger will be the same as the tax basis of the shares of Service 1st Bank common stock converted; and o The holding period of the shares of Service 1st Bancorp common stock received by the shareholders of Service 1st Bank will include the holding period of the shares of Service 1st Bank common stock converted into the Service 1st Bancorp shares, provided that Service 1st Bank common stock is held by the shareholder as a capital asset on the date of consummation of the merger. Shareholders are advised to consult their own tax advisers in order to make a personal evaluation of the federal income tax consequences, and any state or local tax consequences, of the merger. 30 No Dissenters' Rights Under California law, no shareholder of Service 1st Bank will have any dissenter's rights in connection with the merger. The dissenter's rights of shareholders of Service 1st Bank and Service 1st Bancorp are identical under California law. No Insider Interests in the Proposed Transaction No consideration, monetary or otherwise, has been given or offered to any shareholder, officer, or director, or any member of their immediate families, of Service 1st Bank, Service 1st Merger Corporation or Service 1st Bancorp in connection with the merger. The directors and executive officers of Service 1st Bank are also the directors and executive officers of Service 1st Bancorp. Restrictions on Sale of Service 1st Bank and Service 1st Bancorp common stock by Affiliates The shares of Service 1st Bancorp common stock proposed to be issued to Service 1st Bank's shareholders in the merger have been registered under the Securities Act of 1933, as amended. However, some restrictions will apply to the resale of shares issued to persons who are "affiliates" under federal securities laws. Any person who is an "affiliate" of Service 1st Bank at the time the merger is submitted to a vote of Service 1st Bank's shareholders may not resell or transfer shares of Service 1st Bancorp common stock received by him or her during a period of three years following the date of consummation of the merger unless: o that person's offer and sale of those shares has been registered under the Securities Act of 1933; o that person's offer and resale is made in compliance with Rule 145 promulgated under the Securities Act of 1933 (which permits limited sales under prescribed circumstances); or o another exemption from registration is available. Persons who are considered "affiliates" of Service 1st Bancorp following the merger also will be subject to applicable restrictions on sales by them of any shares of Service 1st Bancorp common stock. Any such sale by a Service 1st Bancorp affiliate will require: o the registration under the Securities Act of 1933 of the shares to be sold; o compliance with Rule 144 promulgated under the Securities Act of 1933 (which permits limited sales under prescribed circumstances); or o the availability of another exemption from registration. An "affiliate" of Service 1st Bank or Service 1st Bancorp, as defined by the rules promulgated under the Securities Act of 1933, is a person who directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with Service 1st Bank or Service 1st Bancorp. The above restrictions are expected to apply to the directors and executive officers of Service 1st Bank and Service 1st Bancorp (and to any relative or spouse of any such person or any relative of any such spouse, any of whom live in the same home as such person, and any trusts, estates, corporations or other entities in which such persons have a 10% or greater beneficial or equity interest), and may apply to any current shareholder of Service 1st Bank (or, following the merger, any shareholder of Service 1st Bancorp) that owns 31 an amount of stock sufficient to be considered to "control" Service 1st Bank or Service 1st Bancorp or that otherwise is an "affiliate" of Service 1st Bank or Service 1st Bancorp. Stock transfer instructions will be given by Service 1st Bancorp to its stock transfer agent with respect to Service 1st Bancorp common stock to be received by persons deemed by Service 1st Bancorp to be subject to these restrictions, and the certificates for that stock may be appropriately legended. However, individual shareholders should consult with their own counsel regarding the application of the above restrictions to their Service 1st Bancorp common stock. This proxy statement-prospectus does not apply to any resales of Service 1st Bancorp common stock received by any person in connection with the merger, and no person is authorized to make use of this proxy statement-prospectus in connection with any such resale. 32 CAPITALIZATION Set forth below is unaudited information concerning the capitalization of Service 1st Bank at December 31, 2002, the capitalization of Service 1st Bancorp and Service 1st Merger Corporation immediately prior to the merger and the pro forma capitalization of Service 1st Bancorp after giving effect to the merger, assuming that no stock options are exercised prior to the merger.
- ------------------------------------------------------------------------------------------------ Service 1st Pro Forma Merger Service 1st (Service 1st Service 1st Bank Corporation(1) Bancorp(2) Bancorp)(3) - ------------------------------------------------------------------------------------------------ Common Stock $10,915,069 $100 $100 $10,915,069 Accumulated Deficit ($2,902,979) -0- -0- ($2,902,979) Accumulated Other Comprehensive Income, Net of Tax $ 108,307 -0- -0- $ 108,307 ----------- ---- ---- ----------- Total $ 8,120,397 $100 $100 $ 8,120,397 =========== ==== ==== =========== Common Stock: Authorized 20,000,000 20,000,000 20,000,000 20,000,000 Outstanding 1,100,100 100 100 1,100,100 - ------------------------------------------------------------------------------------------------
(1) Funds to capitalize Service 1st Merger Corporation were obtained by issuing 100 shares of its common stock to Service 1st Bancorp for a total of $100. At the effective date of the merger, the shares of Service 1st Merger Corporation will be converted into shares of Service 1st Bank. (2) In order to organize Service 1st Bancorp, 100 shares of its common stock were issued to John O. Brooks, Chairman and Chief Executive Officer of Service 1st Bank, for a total of $100. On the effective date of the merger, those shares will be repurchased and canceled by Service 1st Bancorp at a cash price equal to that paid by Mr. Brooks. (3) Estimated total expenses of the merger, including legal and accounting fees, of $75,000 are not reflected in the table. BOOK VALUE OF SERVICE 1ST BANK'S COMMON STOCK The table below shows the per share book value of Service 1st Bank's common stock on an undiluted basis as of December 31, 2002 and 2001. Book Value ---------- December 31, 2002 $7.38 December 31, 2001 $7.12 33 INFORMATION ABOUT SERVICE 1ST BANK General Service 1st Bank is a California state chartered bank that opened for business on November 10, 1999. Service 1st Bank is locally owned and operated and serves the individuals, small and medium-sized businesses, and professionals located in and adjacent to the cities of Stockton and Tracy and adjacent communities in San Joaquin County. On February 27, 2003, the Bank received approval from the California Department of Financial Institutions to open a Loan Production Office in Castro Valley, California. It is anticipated that the office will open at the beginning of the second quarter of 2003. Service 1st Bank operates out of its main office at 2800 W. March Lane, Suite 120, Stockton, California 95219, and its branch office at 60 W. 10th Street, Tracy, California 95376. The offices are open from 9:00 a.m. to 5:00 p.m., Monday through Thursday and from 9:00 a.m. to 6:00 p.m. on Friday. Service 1st Bank offers a full range of commercial banking services including acceptance of demand, savings and time deposits, and the making of commercial, real estate (including residential mortgage), and consumer loans. Service 1st Bank sells cashier's checks, traveler's checks and money orders. Service 1st Bank also offers night depository, notary services, telephone and wire transfers, and federal tax depository services. Service 1st Bank does not offer trust or international banking services, but will arrange for such services through a correspondent bank. Service 1st Bank's data processing operations are provided through an outside vendor, Jack Henry, Associates, Inc., located in Sun Valley, California, which provides processing of Service 1st Bank's deposits, loans and financial accounting. Service 1st Bank obtains market penetration from the services referred to above and by the personal solicitation of Service 1st Bank's officers, directors and shareholders. Service 1st Bank's deposits are attracted primarily from individuals, small and medium-sized businesses and professionals in its market area. Service 1st Bank's deposits are not received from a single depositor or group of affiliated depositors the loss of any one of which would have a materially adverse effect on the business of Service 1st Bank, nor is a material portion of the Service 1st Bank's deposits concentrated within a single industry or group of related industries. As of December 31, 2002, Service 1st Bank had total loans of $45,034,040 net of allowance for loan losses of $598,000 and deferred fees of $142,432. Of the loan total, $10,868,411 were commercial loans, $20,949,123 were real estate loans, $8,404,271 were construction and land development loans, $2,978,028 were agriculture loans and $1,834,207 were consumer loans. Total deposits at December 31, 2002 were $74,721,424. Of the deposit total, $22,208,821 were noninterest-bearing demand deposits, $32,197,496 were interest-bearing demand, money market and savings deposits, and $20,315,107 were interest-bearing time deposits. The principal source of Service 1st Bank's revenues are from interest and fees on loans, interest on Federal Funds sold; interest on investments, and service charges and other fees, which accounted for 71%, 1%, 23% and 5%, respectively, of such revenues. 34 Markets and Competition Commercial banks compete with savings and loan associations, credit unions, other financial institutions and other entities for funds. For instance, yields on corporate and government debt securities and other commercial paper affect the ability of commercial banks to attract and hold deposits. Commercial banks also compete for loans with savings and loan associations, credit unions, consumer finance companies, mortgage companies and other lending institutions. Larger banks may have a competitive advantage because of higher lending limits and major advertising and marketing campaigns. They also perform services, such as trust services, international banking, discount brokerage and insurance services which Service 1st Bank is not authorized or prepared to offer currently. Service 1st Bank has made arrangements with correspondent banks and with others to provide such services for its customers. For borrowers requiring loans in excess of Service 1st Bank's legal lending limits, Service 1st Bank has offered, and intends to offer in the future, these loans on a participating basis with its correspondent banks and with other independent banks, retaining the portion of the loans which is within its lending limits. As of December 31, 2002, Service 1st Bank's aggregate legal lending limits to a single borrower and such borrower's related parties was $1,291,335 on an unsecured basis and $2,152,224 on a fully secured basis based on regulatory capital of $8,610,000. Service 1st Bank's business is concentrated in its service area, which primarily encompasses San Joaquin County. The economy of Service 1st Bank's service area is primarily dependent upon the government, services, retail trade and manufacturing industries. Consequently, Service 1st Bank competes with other financial institutions for deposits from and loans to individuals and companies who are also dependent upon these industries. At December 31, 2002, there were 69 branch offices of commercial and savings banks in the cities of Stockton and Tracy. Additionally, Service 1st Bank competes with savings and loan associations and, to a lesser extent, credit unions, finance companies and other financial service providers for deposit and loan customers. In order to compete with the major financial institutions in its primary service areas, Service 1st Bank uses to the fullest extent possible the flexibility which is afforded by its independent status. This includes an emphasis on specialized services, local promotional activity, and personal contacts by Service 1st Bank's officers, directors and employees. In the event there are customers whose loan demands exceed Service 1st Bank's lending limits, Service 1st Bank seeks to arrange for such loans on a participation basis with other financial institutions. Service 1st Bank also assists those customers requiring services not offered by Service 1st Bank to obtain such services from correspondent banks. Based upon data as of the most recent practicable date of June 30, 2002, extracted from the "Data Book Summary of All Deposits in all FDIC Insured Commercial and Savings Banks", there were 106 operating commercial and savings bank branch offices in San Joaquin County with total deposits of $12,783,826,000. Service 1st Bank held a total of $69,756,000 in deposits, representing approximately 0.55% of total commercial and savings banks deposits in San Joaquin County as of June 30, 2002. Intellectual Property and Other Rights Service 1st Bank holds no patents, registered trademarks, licenses (other than licenses required to be obtained from appropriate banking regulatory agencies or other governmental entities for the conduct of its 35 business), franchises or concessions. Service 1st Bank has registered a service mark for its name in the State of California. Employees Service 1st Bank employed 25 full time employees as of December 31, 2002. None of Service 1st Bank's employees is presently represented by a union or covered under a collective bargaining agreement. Management of Service 1st Bank believes that its employee relations are excellent. Management For information regarding Service 1st Bank's management, including share ownership of management and executive compensation, see "PROPOSAL ONE: ELECTION OF DIRECTORS OF SERVICE 1ST BANK" and "COMPENSATION AND CERTAIN TRANSACTIONS." Properties Service 1st Bank conducts operations at its main office at 2800 W. March Lane, Suite 120, Stockton, California 95219, and at its branch office at 60 W. 10th Street, Tracy, California 95376. The main office consists of approximately 4,715 square feet on the ground floor of an office building located adjacent to Interstate Highway 5 and is leased from October 1, 2002 to September 30, 2009. There are two five year options to extend the lease term. The current monthly lease rate is $8,864 plus $500 per month for signage on the building and $899 a month for common area maintenance. The Tracy office consists of approximately 12,188 square feet on the ground floor of a two story building located in downtown Tracy and is leased from February 15, 2000 to February 28, 2007, with two five year options to extend the lease term. The current monthly lease rate is $6,534, subject to CPI adjustment on each anniversary of the commencement date. The monthly rate during the extended term is the greater of the existing rent, as adjusted by the CPI, or the fair market rental value of the premises at the commencement of the extended term. Management believes that the facilities are appropriate and adequate for the operation of the business as it is currently structured. Legal Proceedings Service 1st Bank is not a party to any pending legal or administrative proceedings other than ordinary routine litigation incidental to Service 1st Bank's business involving Service 1st Bank or any of its property, and no such proceedings are known to be contemplated. 36 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Business Organization Service 1st Bank is a state chartered bank organized on May 14, 1999 and opened for business on November 10, 1999. As of December 31, 2002, Service 1st Bank operated two full-service offices in the cities of Stockton and Tracy in San Joaquin County. Service 1st Bank offers a full range of commercial banking services to individuals, small and medium sized businesses and professionals in San Joaquin County and the surrounding communities. The following analysis is designed to enhance the reader's understanding of Service 1st Bank's financial condition and the results of its operations as reported in the financial statements included in Annex B attached to this proxy statement-prospectus. Earnings Overview Service 1st Bank had net income of $219,153 for the year ended December 31, 2002, representing an improvement of $861,483 compared to the net loss of $642,330 in 2001. The net loss for 2000 was $1,297,616. Basic earnings (losses) per share were $.20, ($.58) and ($1.18) at December 31, 2002, 2001 and 2000, respectively. Fully diluted earnings (losses) per share were $.20, ($.58) and ($1.18) for December 31, 2002 and 2001, respectively. Net Interest Income And Net Interest Margin Net interest income refers to the difference between the interest paid on deposits and borrowings, and the interest earned on loans and investments. It is the primary component of the net earnings of a financial institution. The primary factors to consider in analyzing the net interest income are the composition and volume of earning assets and interest bearing liabilities, the amount of noninterest bearing liabilities and nonaccrual loans, and changes in market interest rates. Beginning in January 2001 and continuing through December 2001, actions by the FRB to cut interest rates resulted in the prime rate literally being cut in half from 9.50% to 4.75%. Historically, the largest source of income for banks is that which is created by net interest income. On November 7, 2002, the FRB lowered interest rates an additional .50%. The prime rate was reduced to 4.25%. This reduction in rates, specifically as it relates to earning assets that adjust with the prime rate, made it very difficult to maintain the level of the net interest margin for 2002 that Service 1st Bank had experienced in the past. Despite the adverse interest rate environment, Service 1st Bank was able to exceed prior years' results of operations. Net interest income before provision for loan loss for 2002 was $2,761,800 representing an increase of $871,678 or 46.1% from $1,890,122 in 2001. The increase in net interest income for 2002 was primarily attributable to an increase of $29,099,409 in average interest-earning assets from 2001 to 2002. The average rate earned on interest earning assets declined from 7.53% in 2001 to 6.11% in 2002. The decline in yields was due to the numerous rate reductions enacted by the FRB. Interest income in 2002 was $3,996,122 or $1,258,083 greater than 2001. The growth in average interest bearing liabilities was $25,374,013. Interest expense for 2002, was $1,234,322 or $386,405 greater than 2001. Net interest income in 2001 was $1,890,122 or $893,100 greater than the $997,022 in 2000. 37 The following table sets forth average balance sheet information, interest income and expense, average yields and rates, and net interest income and margin for years ended December 31, 2002 and 2001.
December 31, 2002 December 31, 2001 ---------------------------------------- ---------------------------------------- Average Average Average Income/ Yield or Average Income/ Yield or Balance Expense Rate Paid Balance Expense Rate Paid ---------------------------------------- ---------------------------------------- Interest-earning assets: Interest-bearing deposits $ -- $ -- 0.00% $ 258,756 $ 14,212 5.49% Investment securities 23,105,042 952,008 4.12% 11,045,048 752,880 6.82% Federal funds sold 2,223,679 36,921 1.66% 2,428,781 103,865 4.28% Loans (1) (2) 40,112,096 3,007,193 7.50% 22,608,823 1,867,082 8.26% ----------- ----------- ----------- ----------- Total interest-earning assets 65,440,817 3,996,122 6.11% 36,341,408 2,738,039 7.53% Allowance for possible loan losses (489,521) (269,548) Cash and due from banks 4,541,458 2,717,334 Bank premises and equipment 803,584 984,772 Accrued interest receivable 333,029 228,102 Other assets 311,710 188,058 ----------- ----------- Total assets $70,941,077 $40,190,126 =========== =========== Interest Bearing Liabilities: Demand deposits $18,040,311 492,661 2.73% $ 2,423,342 59,705 2.46% Savings & money market accounts 12,559,128 202,842 1.62% 10,550,411 325,525 3.09% Time Deposits 16,396,602 531,736 3.24% 8,707,086 456,824 5.25% Other borrowings 348,921 7,083 2.03% 290,110 5,863 2.02% ----------- ----------- ----------- ----------- Total interest-bearing liabilities 47,344,962 1,234,322 2.61% 21,970,949 847,917 3.86% ----------- ----------- Non-interest bearing demand deposits 15,473,913 9,835,644 Other Liabilities 202,468 220,752 ----------- ----------- Total liabilities 63,021,343 32,027,345 Shareholders' equity 7,919,734 8,162,781 ----------- ----------- Total liabilities and shareholders' equity $70,941,077 $40,190,126 =========== =========== ----------- ----------- Net interest income $ 2,761,800 $ 1,890,122 =========== =========== Net interest margin on average interest earning assets (3) 4.22% 5.20%
1. Average loan balances include average deferred loan fees of $102,521 and $30,360 for the periods ending December 31, 2002 and 2001. 2. Interest on loans includes fees (costs) of $86,129 and $44,795, for the periods ending December 31, 2002 and 2001, respectively. 3. Net interest margin is computed by dividing net interest income by total average earning assets. All average balances have been computed using daily balances. 38
Rate/Volume Analysis 2002 over 2001 2001 over 2000 Increase (decrease) due to change in: Increase (decrease) due to change in: ----------------------------------------- ----------------------------------------- Volume Rate Total Volume Rate Total ----------- ----------- ----------- ----------- ----------- ----------- Increase (Decrease) in: Interest Income: Interest-bearing deposits in banks $ (7,106) $ (7,106) $ (14,212) $ 7,178 $ (1,707) $ 5,471 Investment securities 583,376 (384,248) 199,128 (100,731) (6,334) (107,065) Federal funds sold (8,120) (58,824) (66,944) (46,299) (57,621) (103,920) Loans 1,326,392 (186,281) 1,140,111 1,647,226 (30,335) 1,616,891 ----------- ----------- ----------- ----------- ----------- ----------- Total 1,894,542 (636,459) 1,258,083 1,507,374 (95,997) 1,411,377 Interest Expense: Demand, interest-bearing 425,792 7,164 432,956 46,623 8,380 55,003 Savings 53,546 (172,229) (122,683) 186,963 (45,084) 141,879 Time 295,879 (220,967) 74,912 331,515 (15,983) 315,532 Borrowings 1,194 26 1,220 5,863 -- 5,863 ----------- ----------- ----------- ----------- ----------- ----------- Total 776,411 (390,006) 386,404 570,964 (52,687) 518,277 ----------- ----------- ----------- ----------- ----------- ----------- Increase (Decrease) in Net Interest Income $ 1,118,131 $ (246,453) $ 871,678 $ 936,410 $ (43,310) $ 893,100 =========== =========== =========== =========== =========== ===========
Average balances of all categories in each period were included in the volume computations. Average yields and rates in each period were used in rate computations. The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the dollar amounts of the change in each. 39 Other Income Total other income was $392,179 for 2002 and $113,037 for 2001. During 2002, service charges and fees increased $93,234 more than 2001. The increase was a result of the growth in the total deposits of Service 1st Bank. During 2002, Service 1st Bank established a Small Business Administration ("SBA") Department. The Government guarantees a portion of each SBA loan. The guaranteed portion of each SBA loan can be sold in the secondary market and Service 1st Bank receives a premium on these sales. Gains on loan sales during 2002 were $175,839. There were no gains in 2001. Gains and losses on the sales of investments were $48,391, $38,322 and $(2,398) for the years ended December 31, 2002 and 2001, respectively. Other Expenses Other expenses consist of salary and other compensation, occupancy and equipment and other expense. The major components of other expense for the years ended December 31, 2002 and 2001 are listed in the table below. 2002 2001 ---------- ---------- Other expenses: Salaries & employee benefits $1,546,360 $1,208,615 Occupancy expense 237,297 229,490 Equipment expense 280,598 283,234 Data Processing and other professional services 295,554 293,305 Office supplies and equipment 124,148 95,490 Advertising and promotion 92,930 57,977 Courier 38,511 32,444 Other operating expenses 125,628 129,134 ---------- ---------- Total other expenses $2,741,026 $2,329,689 ========== ========== Salaries and Employee Benefits. Salaries and employee benefits expense for 2002 was $1,546,360, an increase of $337,745 from $1,208,615 in 2001. Total employees in 2002 were 25 compared to 23 in 2001. The increase in 2002 compared to 2001 was from the addition to staff of a SBA lender and a real estate lender. There was also a bonus accrual of $92,644 for employees in 2002, which was the first year bonuses have been accrued. Occupancy Expense. Occupancy expense was $237,297 in 2002 and $229,490 in 2001. The modest increase in expense for 2002 compared to 2001 was from a 3% cost of living adjustment at the Tracy Branch. The lease for the Stockton Branch was renewed effective October 1, 2002. The rent for this location increased by approximately $3,900 per month. Equipment Expense. Equipment expense in 2002 was $280,598 compared to $283,234 in 2001. Data Processing and Other Professional Services. Data processing and other professional services for 2002 was $295,554 compared to $293,305 in 2001. 40 Office Supplies and Equipment. Office supplies and equipment expenses increased to $124,148 in 2002, an increase of $28,658 from 2001. The increase in expense was for additional supplies and equipment in connection with the 48% growth in total assets. Advertising and Promotional Expense. Advertising and promotional expense in 2002 was $92,930 compared to $57,977 in 2001. Service 1st Bank expanded its marketing program during 2002 to include television and Service 1st Bank increased the number of newspaper advertisements. Courier Expense. Courier expense in 2002 was $38,511 compared to $32,444 in 2001. Since Service 1st Bank only has two branch locations, the use of couriers has become a part of the marketing to attract new customers. As new customers are added the cost associated with the courier service has increased. Other Operating Expense. Other operating expenses in 2002 were $125,628 compared to $129,134 in 2001. Provision for Income Taxes. Service 1st Bank's provision for income taxes reflected on the financial statements consists of the $800 minimum state tax expense in 2002 and 2001. There was no additional provision for income taxes since Service 1st Bank has net operating loss carryforwards of approximately $2,100,000 for federal and $2,600,000 for state income tax purposes. Net operating loss carryforwards will expire in 2021 for federal income tax purposes and in 2013 for state income tax purposes, if not previously utilized. Provision and Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal in unlikely. The allowance is an amount that management believes will be adequate to absorb losses inherent in existing loans and commitments to extend credit, based on evaluations of collectibility and prior loss experience of loans and commitments to extend credit. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, loan concentration, specific problem loans, commitments, and current economic conditions that may affect the borrowers' ability to pay. 41 Summary of Loan Loss Experience. The table below summarizes the allowance for loan losses. 2002 2001 ----------- ----------- Allowance for loan losses at beginning of period $ 405,000 $ 90,000 Losses charged to allowance -- -- Recoveries -- -- ----------- ----------- Net loans charged off -- -- Additions to allowance charged to operating expenses 193,000 315,000 ----------- ----------- Allowance for loan losses at end of period $ 598,000 $ 405,000 =========== =========== Gross loans outstanding at end of year $45,034,040 $31,620,857 Ratio of reserves to gross loans 1.33% 1.28% Service 1st Bank's current policy is to cease accruing interest when a loan becomes 90 days past due as to principal or interest, when the full timely collection of interest or principal becomes uncertain or when a portion of the principal balance has been charged off, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, the accrued and uncollected interest receivable is reversed and the loan is accounted for on the cash or cost recovery method thereafter, until qualifying for return to accrual status. Generally, a loan may be returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan agreement or when the loan is both well secured and in the process of collection. Service 1st Bank had no impaired or restructured loans during the years ended December 31, 2002 and 2001. Balance Sheet Analysis Total assets of Service 1st Bank at December 31, 2002 were $83,306,327 compared to $56,196,919 in 2001, representing an increase of 48.2%. The growth of Service 1st Bank was a result of an aggressive action plan to gain market share and from increased market recognition. Loans. A significant portion of Service 1st Bank's assets is the loan portfolio. Gross loans were $45,034,040 and $31,620,857 at December 31, 2002 and 2001, respectively. The growth in the loan portfolio was a result of management's aggressive action plan to increase the loan portfolio. Approximately 85.4% of the gross loans at December 31, 2002 are adjustable rate loans. Nearly all of the adjustable rate loans are tied to the prime rate. If the interest rates change, the yield on these loans and other loans renewing during the one-year time frame will also change. To mitigate the negative effect on earnings from declining interest rates, Service 1st Bank has included interest rate floors on some of its loans. Once the interest rate on a loan reaches the interest rate floor, the interest rate can't decline further. As of December 31, 2002, $30,692,719 or 79.8% of the variable rate loans were at their floor interest rate and will not change if interest rates continue to decline. Service 1st Bank anticipates that a 1.00% increase 42 in the prime rate would increase net interest income by approximately $159,427 a year and a 1.00% decrease in the prime rate would decrease net interest income approximately $16,848. The table below summarizes the composition of the loan portfolio as of December 31, 2002 and 2001.
2002 2001 Loan category Amount Percent Amount Percent - --------------------------------- ------------ ------- ------------ ------- Construction and land development $ 8,404,271 18.66% $ 4,842,422 15.31% Real estate 20,949,123 46.53% 13,791,702 43.62% Commercial 10,868,411 24.13% 7,945,345 25.13% Agriculture 2,978,028 6.61% 3,023,456 9.56% Consumer 1,834,207 4.07% 2,017,932 6.38% ------------ ------------ Total gross loans 45,034,040 100.00% 31,620,857 100.00% Deferred loan fees and discounts (142,432) (83,747) Reserve for possible loan losses (598,000) (405,000) ------------ ------------ Total net loans $ 44,293,608 $ 31,132,110 ============ ============
The table below summarizes the approximate maturities and sensitivity to change in interest rates for the loans at December 31, 2002.
After One Year Due Within But Within After Loan category One Year Five Years Five Years Total - --------------------------------- ----------- ----------- ----------- ----------- Construction and land development $ 6,546,991 $ 1,857,280 $ -- $ 8,404,271 Real estate 10,873,950 5,780,762 4,294,411 20,949,123 Commercial 5,747,286 2,170,126 2,950,999 10,868,411 Agriculture 2,207,519 248,746 521,763 2,978,028 Consumer 1,403,974 394,933 35,300 1,834,207 ----------- ----------- ----------- ----------- Totals $26,779,720 $10,451,847 $ 7,802,473 $45,034,040 =========== =========== =========== =========== Predetermined rates $ 3,249,636 $ 1,859,307 $ 1,464,975 $ 6,573,918 Floating or adjustable rates 2,351,672 8,592,540 6,337,498 38,460,122 ----------- ----------- ----------- ----------- Totals $26,766,357 $10,451,847 $ 7,802,473 $45,034,040 =========== =========== =========== ===========
43 Risk Elements. Service 1st Bank assesses and manages credit risk on an ongoing basis through stringent credit review and approval policies, extensive internal monitoring and established formal lending policies. Additionally, Service 1st Bank contracts with an outside source to periodically review the existing loan portfolio. Management believes its ability to identify and assess risk and return characteristics of Service 1st Bank's loan portfolio is critical for profitability and growth. Management strives to continue the historically low level of credit losses by continuing its emphasis on credit quality in the loan approval process, active credit administration and regular monitoring. Management has implemented a loan review and grading system that functions to continually assess the credit risk inherent in the loan portfolio. In extending credit and commitments to borrowers, Service 1st Bank generally requires collateral and/or guarantees as security. The repayment of such loans is expected to come from cash flow or from proceeds from the sale of selected assets of the borrowers. Service 1st Bank's requirement for collateral and/or guarantees is determined on a case-by-case basis in connection with management's evaluation of the creditworthiness of the borrower. Collateral held varies but may include accounts receivable, inventory, personal property, plant and equipment, income-producing properties, residences and other real property. California's economy has not been as robust as in prior years. Construction loans and other real estate secured loans comprise a large portion of total loans outstanding. Although management believes such loans have no more than the normal risk of collectibility, a substantial decline in the economy in general, or a decline in real estate values in Service 1st Bank's primary operating market areas in particular, could have an adverse impact on the collectibility of such loans. In addition, such an occurrence could result in an increase in loan losses and an increase in the provision for loan losses which could adversely affect Service 1st Bank's future prospects, results of operations, overall profitability and the market price of Service 1st Bank's common stock. Management believes that its lending policies and underwriting standards will tend to minimize losses in an economic downturn; however, there is no assurance that losses will not occur under such circumstances. Service 1st Bank's loan policies and underwriting standards include, but are not limited to, the following: (1) maintaining a through understanding of Service 1st Bank's service area and limiting investments outside this area, (2) maintaining a thorough understanding of borrowers' knowledge and capacity in their field of expertise, (3) basing real estate construction loan approval not only on the prospects for sale of the project, but also within the original projected time period, and (4) maintaining conforming and prudent loan to value and loan to cost ratios based on independent outside appraisals and ongoing inspection and analysis by Service 1st Bank's construction lending officers. In addition, Service 1st Bank strives to diversify the risk inherent in the construction portfolio by avoiding concentrations to individual borrowers and on any one project types. Nonaccrual Loans, Loans Past Due 90 Days and OREO. Management generally places loans on nonaccrual status when they become 90 days past due, unless the loan is well secured and in the process of collection. Loans are charged off when, in the opinion of management, collection appears unlikely. There were no nonaccrual loans or loans past due 90 days or more for the years ended December 31, 2002 and 2001. At December 31, 2002, there were no loans that were considered impaired or troubled debt restructurings. Management is not aware of any potential problem loans, which were accruing and current at December 31, 2002, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms. 44 There was no other real estate owned at December 31, 2002 and 2001. Off-Balance Sheet Items. Service 1st Bank has certain ongoing commitments under operating leases. See Note 5 to the financial statements attached in Annex B to this proxy statement-prospectus. These commitments do not significantly impact operating results. As of December 31, 2002, commitments to extend credit were the only financial instruments with off-balance sheet risk. Service 1st Bank has not entered into any contracts for freestanding financial derivative instruments such as futures, swaps, options etc., and did not identify any embedded derivatives. Loan and letter of credit commitments were $12,351,000 at December 31, 2002 and $14,090,000 for December 31, 2001. The commitments represent 27.4% of total loans at year-end 2002 versus 44.6% a year ago. Commitments with a maturity of one year or more were $6,740,516. The commitments exceeding one year were $2,210,000 construction loans, $725,000 agricultural, $1,765,000 commercial loans, $770,000 consumer loans, $1,270,000 home equity lines. Investment Securities. Other earning assets are comprised of Federal Funds sold (funds lent on a short-term basis to other banks), investment securities, mutual funds, commercial paper, and short-term interest bearing deposits at other financial institutions. These assets are maintained for short-term liquidity needs of Service 1st Bank, collateralization of public deposits, and diversification of the earning asset mix. Investment securities increased to $27,449,892 at December 31, 2002 compared to $19,998,853 at December 31, 2001. This represents an increase of approximately $7,451,039 or 37.3%. The increase in investments is needed for liquidity and pledging purposes. 45 The tables below reflect the composition of investment securities, amortized cost, unrealized gains and losses and estimated fair values as of December 31, 2002.
Gross Gross Estimated Amortized Unrealized Unrealized Fair Average Cost Gains Losses Value Yields ------------ ------------ ------------ ------------ ------------ Available-for-Sale Securities: U.S. Government Agencies $ 7,114,164 $ 30,854 $ (9,321) $ 7,135,697 3.31% State and Political Subdivisions 594,693 35,383 -- 630,076 6.72% Short-Term Mutual Funds 2,215,855 1,566 -- 2,217,421 2.38% Asset-Backed Securities 5,300,433 54,988 (2,101) 5,353,320 4.60% Mortgage-Backed Securities 9,431,531 82,278 (9,625) 9,504,544 3.43% ------------ ------------ ------------ ------------ $ 24,656,676 $ 205,069 $ (20,687) $ 24,841,058 3.63% ============ ============ ============ ============ Held-to-Maturity Securities: U.S. Government Agencies $ 160,307 $ -- $ (15,550) $ 144,757 7.25% Asset-Backed Securities 973,887 39,124 -- 1,013,011 6.09% Mortgage-Backed Securities 1,474,640 53,035 -- 1,527,675 5.44% ------------ ------------ ------------ ------------ $ 2,608,834 $ 92,159 $ (15,550) $ 2,685,443 5.79% ============ ============ ============ ============
Proceeds from the sale of available-for-sale securities were $8,124,894 for 2002. Gross gains of $48,391 were realized on sales of securities during 2002. The scheduled maturities of securities available-for-sale and held to maturity as of December 31, 2002 are shown below. Actual maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Available for Sale Held to Maturity ------------------------- ------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ----------- ----------- ----------- ----------- Due in one year or less $ 2,436,354 $ 2,442,899 $ -- $ -- Due from one year to five years 3,311,900 3,358,385 -- -- Due from five years to ten years 3,565,181 3,570,375 -- -- Ten years and over 5,911,710 5,964,855 1,134,194 1,157,768 Mortgage-Backed Securities 9,431,531 9,504,544 1,474,640 1,527,675 ----------- ----------- ----------- ----------- $24,656,676 $24,841,058 $ 2,608,834 $ 2,685,443 =========== =========== =========== ===========
Securities carried at approximately $6,760,000 and $627,000 at December 31, 2002 and 2001, respectively, were pledged to secure deposits of public funds. 46 The amortized cost and estimated fair values of securities as of December 31, 2001 are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------ ------------ ------------ Available-for-sale securities: U.S. Government Agencies $ 4,709,201 $ 58,419 $ (17,546) $ 4,750,074 State and Political Subdivisions 595,382 31,272 -- 626,653 Commercial Paper 3,547,442 -- -- 3,547,442 Short-Term Mutual Funds 5,069,501 3,028 -- 5,072,529 Corporate Bonds 100,767 -- -- 100,767 Mortgage-Backed Securities 1,959,139 728 (4,120) 1,955,747 ------------ ------------ ------------ ------------ $ 15,981,432 $ 93,446 $ (21,666) $ 16,053,212 ============ ============ ============ ============ Held-to-Maturity securities: U.S. Government Agencies $ 917,164 $ -- $ (32,834) $ 884,330 Asset-Backed Securities 640,557 22,058 -- 662,615 Mortgage-Backed Securities 2,388,011 9,092 (17,689) 2,379,414 ------------ ------------ ------------ ------------ $ 3,945,732 $ 31,150 $ (50,523) $ 3,926,359 ============ ============ ============ ============
Proceeds from the sale of available-for-sale securities were $3,241,824 for 2001. Gross gains of $38,322 were realized on sales of securities during 2001. Deposits. Deposits represent Service 1st Bank's principal source of funds for loans and investments. Deposits are primarily core deposits in that they are demand, savings and time deposits under $100,000 generated from local businesses and individuals. These sources are considered to be relatively stable, long-term deposit relationships thereby enhancing steady growth of the deposit base without major fluctuations in overall deposit balances. Total deposits were $74,721,424 at December 31, 2002, compared to $45,640,890 at December 31, 2001. This represents an increase of $29,080,534 or 63.7%. 47 The table below reflects the composition of the deposits and the average rate paid for the years ended December 31, 2002 and 2001. Composition of Deposits - -------------------------------------------------------------------------------- 2002 2001 Deposits Average Average Balance Rate Balance Rate ----------- ------- ----------- ------- Non-interest bearing demand $22,208,821 0.00% $16,463,715 0.00% Interest bearing demand 23,629,218 2.59% 8,444,688 2.46% Money market deposit accounts 7,167,043 1.41% 9,726,019 3.19% Savings accounts 1,401,235 1.29% 1,124,064 1.96% Certificates of deposit 20,315,107 3.38% 9,882,404 5.25% ----------- ----------- $74,721,424 1.91% $45,640,890 2.67% =========== =========== The maturities of time certificates of deposit at December 31, 2002 are summarized as follows: December 31, 2002 ------------ Three months or less $ 6,711,106 Over three months through twelve months 3,513,323 Over one year through three years 1,802,869 Over three years 8,287,809 ------------ Total $ 20,315,107 ============ Capital Resources Service 1st Bank's total shareholders' equity was $8,120,397 at December 31, 2002 compared to $7,835,101 as of December 31, 2001. The increase in shareholders' equity was primarily from the net income made during 2001. Service 1st Bank is subject to regulations issued by the FDIC which require a certain level of capital. Quantitative measures established by regulation to ensure capital adequacy require Service 1st Bank to maintain minimum amounts and ratios of total and Tier l capital to risk-weighted assets and of Tier l capital to average assets. Each of these components is defined in the regulations which are discussed in greater detail in "SUPERVISION AND REGULATION - Capital Adequacy." Management believes that Service 1st Bank meets all its capital adequacy requirements as of December 31, 2002. 48 The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") substantially revised banking regulations and established a framework for determination of capital adequacy of financial institutions. Under the FDICIA, financial institutions are placed into one of five capital adequacy categories as follows: (1) "well capitalized" consisting of institutions with a total risk-based capital ratio of 10% or greater, a Tier l risk-based capital ratio of 6% or greater and a leverage ratio of 5% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive; (2) "adequately capitalized" consisting of institutions with a total risk-based capital ratio of 8% or greater, a Tier l risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater, and the institution does not meet the definition of a "well capitalized" institution; (3) "undercapitalized" consisting of institutions with a total risk-based capital ratio less than 8%, a Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of less than 4%; (4) "significantly undercapitalized" consisting of institutions with a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%; and, (5) "critically undercapitalized" consisting of an institution with a ratio of tangible equity to total assets that is equal to or less than 2%. Financial institutions classified as undercapitalized or below are subject to various limitations including, among other matters, certain supervisory actions by bank regulatory authorities and restrictions related to (i) growth of assets, (ii) payment of interest on subordinated indebtedness, and (iii) payment of dividends or other capital distributions. The FDICIA requires the bank regulatory authorities to initiate corrective action regarding financial institutions which fail to meet minimum capital requirements. Such action may, among other matters, require that the financial institution augment capital and reduce total assets. Critically undercapitalized financial institutions may also be subject to appointment of a receiver or conservator unless the financial institution submits an adequate capitalization plan. The table below presents the capital and leverage ratios of Service 1st Bank as of December 31, 2002 and 2001.
To be well- For capital capitalized under Adequacy prompt corrective Actual Purposes action provisions: -------------------- -------------------- -------------------- Amount Ratio Amount Ratio Amount Ratio ---------- ----- ---------- ----- ---------- ----- As of December 31, 2002 Total capital (to Risk Weighted Assets) $8,610,000 15.1% $4,554,000 8.0% $5,693,000 10.0% Tier 1 capital (to Risk Weighted Assets) $8,012,000 14.1% $1,921,000 4.0% $3,416,000 6.0% Tier 1 capital (to Average Assets) $8,012,000 10.0% $2,105,000 4.0% $3,996,000 5.0% As of December 31, 2001 Total capital (to Risk Weighted Assets) $8,198,000 17.1% $3,841,000 8.0% $4,802,000 10.0% Tier 1 capital (to Risk Weighted Assets) $7,993,000 16.2% $1,912,000 4.0% $2,881,000 6.0% Tier 1 Capital (to Average Assets) $7,993,000 14.8% $2,105,000 4.0% $2,631,000 5.0%
49 Liquidity Liquidity management refers to Service 1st Bank's ability to provide funds on an ongoing basis to meet fluctuations in deposit levels as well as the credit needs and requirements of its customers. Both assets and liabilities contribute to Service 1st Bank's liquidity position. Federal funds lines, short-term investments and securities, and loan repayments contribute to liquidity, along with deposit increases, while loan funding and deposit withdrawals decrease liquidity. Commitments to fund loans at December 31, 2002, were approximately $12,351,000. Such loans relate primarily to real estate construction loans and revolving lines of credit and other commercial loans. Service 1st Bank's sources of liquidity consist of its available-for-sale securities, cash and due from banks, overnight funds sold, and mutual funds. At December 31, 2002, the net ratio of liquid assets not pledged for collateral and other purposes to deposits and other borrowings was 36.6 % compared to 36.2 % in 2001. The ratio of gross loans to deposits, another key liquidity ratio, was 60.3% at year-end 2002 compared to 69.3% at December 31, 2001. Service 1st Bank also has borrowing lines from correspondent banks totaling $12,700,000. Inflation The impact of inflation on a financial institution differs significantly from that exerted on manufacturing, or other commercial concerns, primarily because its assets and liabilities are largely monetary. In general, inflation primarily affects Service 1st Bank indirectly through its effect on market rates of interest, and thus the ability of Service 1st Bank to attract loan customers. Inflation affects the growth of total assets by increasing the level of loan demand, and potentially adversely affects Service 1st Bank's capital adequacy because loan growth in inflationary periods can increase at rates higher than the rate that capital grows through retention of earnings which Service 1st Bank may generate in the future. In addition to its effects on interest rates, inflation directly affects Service 1st Bank by increasing operating expenses of Service 1st Bank. The effects of inflation were not material to Service 1st Bank's results of operations during the years ended December 31, 2002 and 2001. Critical Accounting Policies Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Service 1st Bank's management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note A to the financial statements included in Annex B attached to this proxy statement-prospectus describes the significant accounting policies used in the preparation of the financial statements included in Annex B. A critical accounting policy is defined as one that is both material to the presentation of Service 1st Bank's financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on Service 1st Bank's financial condition and results of operations. Management believes that the following are critical accounting policies: 50 Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal in unlikely. The allowance is an amount that management believes will be adequate to absorb losses inherent in existing loans and commitments to extend credit, based on evaluations of collectibility and prior loss experience of loans and commitments to extend credit. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, loan concentration, specific problem loans, commitments, and current economic conditions that may affect the borrowers' ability to pay. Stock-Based Compensation. SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. Service 1st Bank has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of Service 1st Bank's stock at the date of the grant over the amount an employee must pay to acquire the stock. Other Matters Effects of Terrorism. The terrorist actions on September 11, 2001 and thereafter and potential military conflicts have had significant adverse effects upon the United States economy. Whether the terrorist activities in the future and the actions of the United States and its allies in combating terrorism on a worldwide basis will adversely impact Service 1st Bank and the extent of such impact is uncertain. However, such events have had and may continue to have an adverse effect on the economy in Service 1st Bank's market areas. Such continued economic deterioration could adversely affect Service 1st Bank's future results of operations by, among other matters, reducing the demand for loans and other products and services offered by Service 1st Bank, increasing nonperforming loans and the amounts reserved for loan and lease losses, and causing a decline in Service 1st Bank's stock price. 51 INFORMATION ABOUT SERVICE 1ST BANCORP General Service 1st Bancorp was incorporated on January 23, 2003 for the purpose of engaging in activities permitted for a bank holding company. Service 1st Bancorp has not yet commenced active operations. After consummation of the merger, Service 1st Bancorp will act as a holding company for Service 1st Bank and will be a legal entity separate and distinct from Service 1st Bank. The operations of Service 1st Bancorp will be conducted at the same location and in the same facilities as the operations of Service 1st Bank. Service 1st Bancorp does not expect to engage in activities other than the operation of Service 1st Bank in the reasonably foreseeable future. At the present time, it is not intended that, for the reasonably foreseeable future, Service 1st Bank will be compensated by Service 1st Bancorp for the use of its facilities or that employees, officers or directors of Service 1st Bancorp will be separately compensated by Service 1st Bancorp for their services except with respect to the issuance of Service 1st Bancorp stock options in replacement of outstanding Service 1st Bank stock options. It is anticipated that Service 1st Bancorp income in the reasonably foreseeable future would come from dividends and/or management fees paid to it by Service 1st Bank to the extent permissible under applicable regulations. After the merger, the activities of Service 1st Bancorp will be subject to the supervision of the FRB. Service 1st Bancorp may engage, directly or through subsidiary corporations, in those activities closely related to banking which are specifically permitted by law and regulation. See "SUPERVISION AND REGULATION." Management of Service 1st Bancorp The directors of Service 1st Bancorp are the same as the directors of Service 1st Bank. See "PROPOSAL ONE: ELECTION OF DIRECTORS OF SERVICE 1st BANK." The executive officers of Service 1st Bancorp are also the same as the executive officers of Service 1st Bank. See "COMPENSATION AND CERTAIN TRANSACTIONS." All of the Service 1st Bancorp directors and executive officers have held their respective offices since shortly after the incorporation of Service 1st Bancorp. They will hold office until the next annual meeting of shareholders of Service 1st Bancorp or until their successors are duly elected and qualified. None of the directors were selected pursuant to any arrangement or understanding other than with the directors and officers of Service 1st Bancorp acting within their capacities as such. There are no family relationships between any two or more of the directors, officers or persons nominated or chosen by the board of directors to become a director or officer, except that Bryan R. Hyzdu and Donald L. Walters are brothers-in-law. 52 SUPERVISION AND REGULATION General Service 1st Bancorp. Upon completion of the reorganization, Service 1st Bancorp will become a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and will become subject to the supervision and regulation of the FRB. A notice application for prior approval to become a bank holding company will be filed by Service 1st Bancorp with the FRB. Once approved and registered as a bank holding company, Service 1st Bancorp will be required to file annual reports and other information concerning its business operations and those of its subsidiaries as the FRB may require. The FRB also has the authority to examine Service 1st Bancorp and each of its respective subsidiaries, as well as any arrangements between Service 1st Bancorp and any of its respective subsidiaries, with the cost of any examination to be borne by Service 1st Bancorp. In the future, Service 1st Bancorp will be required to obtain the prior approval of the FRB before it may acquire all or substantially all of the assets of any bank, or ownership or control of voting securities of any bank if, after giving effect to the acquisition, Service 1st Bancorp would own or control more than 5 percent of the voting shares of the bank. A bank holding company and its subsidiaries are also prohibited from engaging in so-called tie-in arrangements in connection with extensions of credit, leases, sales, or the furnishing of services. For example, Service 1st Bank will generally be prohibited from extending credit to a customer on the condition that the customer also obtain other services furnished by Service 1st Bancorp, or any of its subsidiaries, or on the condition that the customer promise not to obtain financial services from a competitor. Service 1st Bancorp and its subsidiaries will also be subject to restrictions with respect to engaging in the underwriting, public sale and distribution of securities. Service 1st Bancorp and any subsidiaries which it may acquire or organize after the merger will be deemed affiliates of Service 1st Bancorp within the meaning of the Federal Reserve Act. Loans by Service 1st Bank to affiliates, investments by Service 1st Bancorp in affiliates' stock, and taking affiliates' stock by Service 1st Bank as collateral for loans to any borrower will be limited to 10 percent of Service 1st Bank's capital, in the case of each affiliate, and 20 percent of Service 1st Bank's capital, in the case of all affiliates. In addition, these transactions must be on terms and conditions that are consistent with safe and sound banking practices and, in particular, a bank and its subsidiaries generally may not purchase from an affiliate a low-quality asset, as that term is defined in the Federal Reserve Act. Such restrictions also prevent a bank holding company and its other affiliates from borrowing from a banking subsidiary of the bank holding company unless the loans are secured by marketable collateral of designated amounts. A bank holding company is also prohibited from itself engaging in or acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the FRB by order or regulation to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making these determinations, the FRB considers whether the performance of such activities by a bank holding company or a bank holding company subsidiary would offer advantages to the public which outweigh possible adverse effects. 53 FRB Regulation Y sets out those activities which are regarded as closely related to banking or managing or controlling banks, and thus, are permissible activities that may be engaged in by bank holding companies subject to approval in certain cases by the FRB. The Gramm-Leach-Bliley Act discussed below allows a new type of bank holding company called a "financial holding company" under the Bank Holding Company Act. A financial holding company is allowed to engage in a broad range of business activities considered to be "financial" in nature or incidental to financial activities including securities underwriting, merchant banking and insurance company portfolio investment activities. Service 1st Bancorp has no present plans, agreements or arrangements to engage in any non-banking activities; however, in the future, Service 1st Bancorp may consider engaging in non-banking activities, subject to the approval of the FRB. Service 1st Bank. The common stock of Service 1st Bank is registered under Section 12(g) of the Securities Exchange Act of 1934, as amended. Service 1st Bank is also subject to the periodic reporting requirements of Section 13 of the Securities Exchange Act of 1934, which include, but are not limited to, the filing of annual, quarterly and other current reports with the FDIC. Service 1st Bank is licensed by the California Commissioner of Financial Institutions ("Commissioner"), its deposits are insured by the FDIC, and it has chosen not to become a member of the Federal Reserve System. Service 1st Bank has no subsidiaries. Consequently, Service 1st Bank is subject to the supervision of, and is regularly examined by, the Commissioner and the FDIC. This supervision and regulation includes comprehensive reviews of all major aspects of Service 1st Bank's business and condition, including its capital ratios, allowance for possible loan losses and other factors. However, no inference should be drawn that the Commissioner or the FDIC have approved those factors. Service 1st Bank is required to file reports with the Commissioner and the FDIC and provide the additional information as the Commissioner and the FDIC may require. Under federal law, no person, acting directly or indirectly or through or in concert with one or more persons, may acquire control of any insured depository institution such as Service 1st Bank, unless the FDIC has been given 60 days' prior written notice of the proposed acquisition and within that time period the FDIC has not issued a notice disapproving the proposed acquisition, or extended the period of time during which a disapproval may be issued. See "THE MERGER - Required Approvals." For purposes of these provisions, "control" is defined as the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25% or more of any class of voting securities of an insured depository institution. The purchase, assignment, transfer, pledge or other disposition of voting stock through which any person will acquire ownership, control or the power to vote 10% or more of a class of voting securities of Service 1st Bank would be presumed to be an acquisition of control. An acquiring person may request an opportunity to contest any presumption of control. California law has a similar provision requiring the approval of the Commissioner to the acquisition of control of a state-chartered bank, like Service 1st Bank. Capital Adequacy Capital adequacy is a measure of the amount of capital needed to sustain asset growth and act as a cushion for losses. Capital protects depositors and the FDIC deposit insurance fund from potential losses and is a source of funds for the investments Service 1st Bank needs to remain competitive. The FDIC and other federal banking agencies have adopted risk-based capital guidelines for evaluating capital adequacy. The guidelines are designed to make capital requirements sensitive to differences in risk profiles among banking organizations, to take into account off-balance sheet exposures 54 and to aid in making the definition of bank capital uniform internationally. Under the guidelines, Service 1st Bank is required to maintain capital equal to at least 8.0% of its assets and commitments to extend credit, weighted by risk, of which at least 4.0% must consist primarily of common equity (including retained earnings) and the remainder may consist of subordinated debt, cumulative preferred stock, or a limited amount of loan loss reserves. Assets, commitments to extend credit, and off-balance sheet items are categorized according to risk and certain assets considered to present less risk than others permit maintenance of capital at less than the 8% ratio. For example, most home mortgage loans are placed in a 50% risk category and therefore require maintenance of capital equal to 4% of such loans, while commercial loans are placed in a 100% risk category and therefore require maintenance of capital equal to 8% of such loans. The guidelines establish two categories of qualifying capital: Tier 1 capital comprising core capital elements, and Tier 2 capital comprising supplementary capital requirements. At least one-half of the required capital must be maintained in the form of Tier 1 capital. Tier 1 capital includes common shareholders' equity and qualifying perpetual preferred stock. Tier 2 capital includes, among other items, limited life and cumulative preferred stock, mandatory convertible securities, subordinated debt and a limited amount of reserve for credit losses. The FDIC and federal banking agencies also adopted minimum leverage ratios for banking organizations as a supplement to the risk-weighted capital guidelines. The leverage ratio is generally calculated using Tier 1 capital (as defined under risk-based capital guidelines) divided by quarterly average net total assets (excluding intangible assets and certain other adjustments). The leverage ratio establishes a limit on the ability of banking organizations, including Service 1st Bank, to increase assets and liabilities without increasing capital proportionately. The FDIC leverage ratio consists of (i) a 3 percent Tier 1 minimum capital leverage ratio for highly-rated banks (those with a composite regulatory rating of 1 and not experiencing or anticipating significant growth); and (ii) a 4 percent Tier 1 minimum capital leverage ratio for all other banks, as a supplement to the risk-based capital guidelines. Amendments to the risk-based capital guidelines, effective December 31, 1994, require that net unrealized holding gains and losses on securities available for sale determined in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," are not to be included in the Tier 1 capital component consisting of common stockholders' equity. Net unrealized losses on marketable equity securities (equity securities with a readily determinable fair value), however, will continue to be deducted from Tier 1 capital. This rule has the general effect of valuing available for sale securities at amortized cost (based on historical cost) rather than at fair value (generally at market value) for purposes of calculating the risk-based and leverage capital ratios. Effective January 17, 1995, the risk-based capital guidelines were amended to identify concentrations of credit risk and evaluate an institution's ability to manage such risks and the risk posed by non-traditional activities as important factors in assessing an institution's overall capital adequacy. At December 31, 2002, Service 1st Bank is in compliance with the risk-based capital and leverage ratios described above. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - Capital Resources" for a listing of Service 1st Bank's risk-based capital ratios at December 31, 2002 and 2001. 55 Prompt Corrective Action Federal banking agencies adopted regulations effective December 19, 1992, implementing a system of prompt corrective action under Section 38 of the Federal Deposit Insurance Act and Section 131 of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). The regulations established five capital categories with the following characteristics: o "Well capitalized" - consisting of institutions with a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio of 5% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive; o "Adequately capitalized" - consisting of institutions with a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater and leverage ratio of 4% or greater, and the institution does not meet the definition of a "well capitalized" institution; o "Undercapitalized" - consisting of institutions with a total risk-based capital ratio less than 8%, a Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of less than 4%; o "Significantly undercapitalized" - consisting of institutions with a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%; and o "Critically undercapitalized" - consisting of an institution with a ratio of tangible equity to total assets that is equal to or less than 2%. Included in the regulations are procedures for classification of financial institutions within the capital categories, filing and reviewing capital restoration plans required under the regulations and procedures for issuance of directives by the appropriate regulatory agency. The regulations impose restrictions upon all institutions to refrain from certain actions which would cause an institution to be classified within any one of the three "undercapitalized" categories, such as declaration of dividends or other capital distributions or payment of management fees, if following the distribution or payment the institution would be classified within one of the "undercapitalized" categories. In addition, institutions which are classified in one of the three "undercapitalized" categories are subject to mandatory and discretionary supervisory actions. Mandatory supervisory actions include: o increased monitoring and review by the appropriate federal banking agency; o implementation of a capital restoration plan; o total asset growth restrictions; and o limitation upon acquisitions, branch expansion, and new business activities without prior approval of the appropriate federal banking agency. Discretionary supervisory actions may include: o requirements to augment capital; o restrictions upon affiliate transactions; o restrictions upon deposit gathering activities and interest rates paid; o replacement of senior executive officers and directors; o restrictions upon activities of the institution and its affiliates; o requiring divestiture or sale of the institution; and o any other supervisory action that the appropriate federal banking agency determines is necessary to further the purposes of the regulations. Further, the federal banking agencies may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed 56 in restoring the financial institution's capital. In addition, for a capital restoration plan to be acceptable, a financial institution's parent holding company must guarantee that the institution will comply with the capital restoration plan. The aggregate liability of the parent holding company under the guaranty is limited to the lesser of an amount equal to 5 percent of the financial institution's total assets at the time it became undercapitalized, and the amount that is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to the financial institution as of the time it fails to comply with the plan. If a financial institution fails to submit an acceptable plan, it is treated as if it were "significantly undercapitalized." The FDICIA also restricts the solicitation and acceptance of and interest rates payable on brokered deposits by insured financial institutions that are not "well capitalized." An "undercapitalized" institution is not allowed to solicit deposits by offering rates of interest that are significantly higher than the prevailing rates of interest on insured deposits in the particular institution's normal market areas or in the market areas in which such deposits would otherwise be accepted. Any financial institution which is classified as "critically undercapitalized" must be placed in conservatorship or receivership within 90 days of such determination unless it is also determined that some other course of action would better serve the purposes of the regulations. Critically undercapitalized institutions are also prohibited from making (but not accruing) any payment of principal or interest on subordinated debt without the prior approval of the FDIC, and the FDIC must prohibit a critically undercapitalized institution from taking certain other actions without its prior approval, including: o entering into any material transaction other than in the usual course of business, including investment expansion, acquisition, sale of assets or other similar actions; o extending credit for any highly leveraged transaction; o amending articles or bylaws unless required to do so to comply with any law, regulation or order; o making any material change in accounting methods; o engaging in certain affiliate transactions; o paying excessive compensation or bonuses; and o paying interest on new or renewed liabilities at rates which would increase the weighted average costs of funds beyond prevailing rates in the institution's normal market areas. Safety and Soundness Regulations The federal banking agencies have established safety and soundness standards for insured financial institutions covering (1) internal controls, information systems and internal audit systems; (2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth; (6) compensation, fees and benefits; and (7) excessive compensation for executive officers, directors or principal shareholders which could lead to material financial loss. If an agency determines that an institution fails to meet any standard, the agency may require the financial institution to submit to the agency an acceptable plan to achieve compliance with the standard. If the agency requires submission of a compliance plan and the institution fails to timely submit an acceptable plan or to implement an acceptable plan, the agency must require the institution to correct the deficiency. Under the final rule, an institution must file a compliance plan within 30 days of a request to do so from the institution's primary federal regulatory agency. The agencies may elect to initiate enforcement action in certain cases rather than rely on an existing plan particularly where failure to meet one or more of the standards could threaten the safe and sound operation of the institution. 57 Interest Rate Risk The federal banking agencies issued a joint agency policy statement during 1996 regarding the management of interest-rate risk exposure (interest rate risk is the risk that changes in market interest rates might adversely affect a bank's financial condition) with the goal of ensuring that financial institutions with high levels of interest-rate risk have sufficient capital to cover their exposures. This policy statement reflected the agencies' decision at that time not to promulgate a standardized measure and explicit capital charge for interest rate risk, in the expectation that industry techniques for measurement of such risk would evolve. However, the Federal Financial Institution Examination Counsel ("FFIEC") on December 13, 1996, approved an updated Uniform Financial Institutions Rating System ("UFIRS"). In addition to the five components traditionally included in the so-called "CAMEL" rating system which has been used by bank examiners for a number of years to classify and evaluate the soundness of financial institutions (including capital adequacy, asset quality, management, earnings and liquidity), UFIRS includes for all bank regulatory examinations conducted on or after January 1, 1997, a new rating for a sixth category identified as sensitivity to market risk. Ratings in this category are intended to reflect the degree to which changes in interest rates, foreign exchange rates, commodity prices or equity prices may adversely affect an institution's earnings and capital. The rating system is identified as the "CAMELS" system. Community Reinvestment Act Community Reinvestment Act ("CRA") regulations evaluate banks' lending to low and moderate income individuals and businesses across a four-point scale from "outstanding" to "substantial noncompliance," and are a factor in regulatory review of applications to merge, establish new branches or form bank holding companies. In addition, any bank rated in "substantial noncompliance" with the CRA regulations may be subject to enforcement proceedings. Service 1st Bank has a current rating of "satisfactory" or better for CRA compliance based upon its last examination during 2001. Deposit Insurance Assessments In 1995, the FDIC reduced bank deposit insurance assessment rates to a range from $0 to $0.27 per $100 of deposits, dependent upon a bank's risk. Based upon this risk-based assessment rate schedule, Service 1st Bank's current capital ratios and its current levels of deposits, Service 1st Bank anticipates no change in the assessment rate applicable to the Bank during 2003 from that in 2002. Service 1st Bank's deposit insurance assessment by the FDIC was $14,428 for the year 2002. Limitations on Dividends Service 1st Bancorp. Under California law, shareholders of Service 1st Bancorp may receive dividends when and as declared by its board of directors out of funds legally available therefor. With certain exceptions, a California corporation may not pay a dividend to its shareholders unless its retained earnings equal at least the amount of the proposed dividend. California law further provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if it meets the following two generally stated conditions: (i) the corporation's assets equal at least 1 1/4 times its liabilities; and (ii) the corporation's current assets equal at least its current liabilities or, if the average of the corporation's earnings before taxes on income and before interest expense for the two preceding fiscal years was less than the average of the corporation's 58 interest expense for such fiscal years, then the corporation's current assets must equal at least 1 1/4 times its current liabilities. Holders of Service 1st Bancorp common stock will be entitled to receive dividends as may be declared by the board of directors of Service 1st Bancorp out of funds legally available therefor. While Service 1st Bancorp will not be subject to certain restrictions on dividends and stock redemptions and repurchases applicable to Service 1st Bank, the ability of Service 1st Bancorp to pay dividends to the holders of its stock will depend to a large extent upon the amount of dividends paid by Service 1st Bank to Service 1st Bancorp. The ability of Service 1st Bank to pay dividends in the future will depend upon the earnings and financial condition of Service 1st Bank. As a newly organized corporation, Service 1st Bancorp has no dividend policy. See "MARKET INFORMATION CONCERNING SERVICE 1ST BANK'S AND SERVICE 1ST BANCORP'S COMMON STOCK - Dividends and Dividend Policy." Service 1st Bank. Service 1st Bank's ability to pay dividends is subject to regulatory requirements and limitations of the California Financial Code which restricts the total dividend payment of any bank in any calendar year to the lesser of (1) the bank's retained earnings or (2) the bank's net income for its last three fiscal years, less distributions made to shareholders' during the same three-year period. Holders of Service 1st Bank common stock are entitled to such dividends as may be declared by the board of directors out of funds legally available therefor. No cash or stock dividends have been paid by Service 1st Bank. Whether or not dividends will be paid in the future will be determined by the board of directors after consideration of various factors. Service 1st Bank's profitability and regulatory capital ratios in addition to other financial conditions will be key factors considered by the board of directors in making such determinations regarding the payment of dividends by Service 1st Bank. After the merger, any dividends paid by Service 1st Bank will be paid to its sole shareholder, Service 1st Bancorp. See "MARKET INFORMATION CONCERNING SERVICE 1ST BANK'S AND SERVICE 1ST BANCORP'S COMMON STOCK - Dividends and Dividend Policy." Impact of Monetary Policies Banking is a business which depends on interest rate differentials. In general, the difference between the interest rate paid by Service 1st Bank to obtain its deposits and its other borrowings and the interest rate received by Service 1st Bank on loans extended to its customers and on securities held in Service 1st Bank's portfolio comprise the major portion of the its earnings. The interest rate differentials of Service 1st Bank, and therefore its earnings, are affected not only by general economic conditions, both domestic and foreign, but also by the monetary and fiscal policies of the United States as set by statutes and as implemented by federal agencies, particularly the FRB. The FRB can and does implement national monetary policy, such as seeking to curb inflation and combat recession, by its open market operations in United States government securities, adjustments in the amount of interest free reserves that banks and other financial institutions are required to maintain, and adjustments to the discount rates applicable to borrowing by banks from the FRB. These activities influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and timing of any future changes in monetary policies and their impact on Service 1st Bank are not predictable. 59 Recent Legislation and Other Changes From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks and other financial institutions are frequently made in Congress, in the California legislature and before various bank regulatory agencies. Some of the potentially significant legislative and other changes which may affect Service 1st Bancorp and Service 1st Bank are discussed below. California Assembly Bill 1432. In August 1997, California Assembly Bill 1432 ("AB1432") was signed into law, which provides for certain changes in the banking laws of California. Effective January 1, 1998, AB1432 eliminated the provisions regarding impairment of contributed capital and the assessment of shares when there is an impairment of capital. AB1432 now allows the California Department of Financial Institutions to close a bank, if the Department of Financial Institutions finds that the bank's tangible shareholders' equity is less than the greater of 3% of the bank's total assets or $1 million. Gramm-Leach-Bliley Act. In 1999, the Gramm-Leach-Bliley Act was signed into law (the "GLB Act"). The GLB Act eliminates most of the remaining depression-era "firewalls" between banks, securities firms and insurance companies which was established by The Banking Act of 1933, also known as the Glass-Steagall Act ("Glass-Steagall"). Glass-Steagall sought to insulate banks as depository institutions from the perceived risks of securities dealing and underwriting, and related activities. The GLB Act repeals Section 20 of Glass-Steagall which prohibited banks from affiliating with securities firms. Bank holding companies that can qualify as "financial holding companies" can now acquire securities firms or create them as subsidiaries, and securities firms can now acquire banks or start banking activities through a financial holding company. The GLB Act includes provisions which permit national banks to conduct financial activities through a subsidiary that are permissible for a national bank to engage in directly, as well as certain activities authorized by statute, or that are financial in nature or incidental to financial activities to the same extent as permitted to a "financial holding company" or its affiliates. This liberalization of United States banking and financial services regulation applies both to domestic institutions and foreign institutions conducting business in the United States. Consequently, the common ownership of banks, securities firms and insurance firms is now possible, as is the conduct of commercial banking, merchant banking, investment management, securities underwriting and insurance within a single financial institution using a "financial holding company" structure authorized by the GLB Act. Prior to the GLB Act, significant restrictions existed on the affiliation of banks with securities firms and on the direct conduct by banks of securities dealing and underwriting and related securities activities. Banks were also (with minor exceptions) prohibited from engaging in insurance activities or affiliating with insurers. The GLB Act removes these restrictions and substantially eliminates the prohibitions under the Bank Holding Company Act on affiliations between banks and insurance companies. Bank holding companies which qualify as financial holding companies can now insure, guarantee, or indemnify against loss, harm, damage, illness, disability, or death; issue annuities; and act as a principal, agent, or broker regarding such insurance services. In order for a commercial bank to affiliate with a securities firm or an insurance company pursuant to the GLB Act, its bank holding company must qualify as a financial holding company. A bank holding company will qualify if its banking subsidiaries are "well capitalized" and "well managed" and it files with the FRB a certification to such effect and a declaration that it elects to become a financial holding company. The amendment of the Bank Holding Company Act now permits financial 60 holding companies to engage in activities, and acquire companies engaged in activities, that are financial in nature or incidental to such financial activities. Financial holding companies are also permitted to engage in activities that are complementary to financial activities if the FRB determines that the activity does not pose a substantial risk to the safety or soundness of depository institutions or the financial system in general. These standards expand upon the list of activities "closely related to banking" which have to date defined the permissible activities of bank holding companies under the Bank Holding Company Act. One further effect of the GLB Act is to require that federal financial institution and securities regulatory agencies prescribe regulations to implement the policy that financial institutions must respect the privacy of their customers and protect the security and confidentiality of customers' non-public personal information. These regulations require, in general, that financial institutions (1) may not disclose non-public personal information of customers to non-affiliated third parties without notice to their customers, who must have opportunity to direct that such information not be disclosed; (2) may not disclose customer account numbers except to consumer reporting agencies; and (3) must give prior disclosure of their privacy policies before establishing new customer relationships. No determination has been made as to whether or when Service 1st Bancorp and Service 1st Bank may seek to acquire and exercise new powers or activities under the GLB Act. USA Patriot Act. On October 26, 2001, President Bush signed the USA Patriot Act (the "Patriot Act"), which includes provisions pertaining to domestic security, surveillance procedures, border protection, and terrorism laws to be administered by the Secretary of the Treasury. Title III of the Patriot Act entitled, "International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001" includes amendments to the Bank Secrecy Act which expand the responsibilities of financial institutions in regard to anti-money laundering activities with particular emphasis upon international money laundering and terrorism financing activities through designated correspondent and private banking accounts. Effective December 25, 2001, Section 313(a) of the Patriot Act prohibits any insured financial institution such as Service 1st Bank, from providing correspondent accounts to foreign banks which do not have a physical presence in any country (designated as "shell banks"), subject to certain exceptions for regulated affiliates of foreign banks. Section 313(a) also requires financial institutions to take reasonable steps to ensure that foreign bank correspondent accounts are not being used to indirectly provide banking services to foreign shell banks, and Section 319(b) requires financial institutions to maintain records of the owners and agent for service of process of any such foreign banks with whom correspondent accounts have been established. Effective July 23, 2002, Section 312 of the Patriot Act creates a requirement for special due diligence for correspondent accounts and private banking accounts. Under Section 312, each financial institution that establishes, maintains, administers, or manages a private banking account or a correspondent account in the United States for a non-United States person, including a foreign individual visiting the United States, or a representative of a non-United States person shall establish appropriate, specific, and, where necessary, enhanced, due diligence policies, procedures, and controls that are reasonably designed to detect and record instances of money laundering through those accounts. Service 1st Bank is not currently aware of any account relationships between Service 1st Bank and any foreign bank or other person or entity as described above under Sections 313(a) or 312 of the Patriot Act. The terrorist attacks on September 11, 2001 have realigned national security priorities of the United 61 States and it is reasonable to anticipate that the United States Congress may enact additional legislation in the future to combat terrorism including modifications to existing laws such as the Patriot Act to expand powers as deemed necessary. The effects which the Patriot Act and any additional legislation enacted by Congress may have upon financial institutions is uncertain; however, such legislation would likely increase compliance costs and thereby potentially have an adverse effect upon Service 1st Bank's results of operations. Sarbanes-Oxley Act of 2002. President Bush signed the Sarbanes-Oxley Act of 2002 on July 30, 2002, which responds to recent issues in corporate governance and accountability. Among other matters, key provisions of the Sarbanes-Oxley Act and rules promulgated by the Securities and Exchange Commission pursuant to the Act include the following: o Expanded oversight of the accounting profession by creating a new independent public company oversight board to be monitored by the SEC. o Revised rules on auditor independence to restrict the nature of non-audit services provided to audit clients and to require such services to be pre-approved by the audit committee. o Improved corporate responsibility through mandatory listing standards relating to audit committees, certifications of periodic reports by the CEO and CFO and making issuer interference with an audit a crime. o Enhanced financial disclosures, including periodic reviews for largest issuers and real time disclosure of material company information. o Enhanced criminal penalties for a broad array of white collar crimes and increases in the statute of limitations for securities fraud lawsuits. o Disclosure of whether a company has adopted a code of ethics that applies to the company's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, and disclosure of any amendments or waivers to such code of ethics. The disclosure obligation becomes effective for fiscal years ending on or after July 15, 2003. The ethics code must contain written standards that are reasonably designed to deter wrongdoing and to promote: o Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; o Full, fair, accurate, timely, and understandable disclosure in reports and documents that a registrant files with, or submits to, the Securities and Exchange Commission and in other public communications made by the registrant; o Compliance with applicable governmental laws, rules and regulations; o The prompt internal reporting to an appropriate person or persons identified in the code of violations of the code; and o Accountability for adherence to the code. o Disclosure of whether a company's audit committee of its board of directors has a member of the audit committee who qualifies as an "audit committee financial expert." The disclosure obligation becomes effective for fiscal years ending on or after July 15, 2003 (December 15, 2003 for "small business issuers"). To qualify as an "audit committee financial expert," a person must have: o An understanding of generally accepted accounting principles and financial statements; o The ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves; o Experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to 62 the breadth and complexity of issues that can reasonably be expected to be raised by the registrant's financial statements, or experience actively supervising one or more persons engaged in such activities; o An understanding of internal controls and procedures for financial reporting; and o An understanding of audit committee functions. A person must have acquired the above listed attributes to be deemed to qualify as an "audit committee financial expert" through any one or more of the following: o Education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or experience in one or more positions that involve the performance of similar functions; o Experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions; o Experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or o Other relevant experience. The rule contains a specific safe harbor provision to clarify that the designation of a person as an "audit committee financial expert" does not cause that person to be deemed to be an "expert" for any purpose under Section 11 of the Securities Act of 1933, as amended, or impose on such person any duties, obligations or liability greater that the duties, obligations and liability imposed on such person as a member of the audit committee and the board of directors, absent such designation. Such a designation also does not affect the duties, obligations or liability of any other member of the audit committee or board of directors. o A prohibition on insider trading during pension plan black-out periods. o Disclosure of off-balance sheet transactions. o A prohibition on personal loans to directors and officers; provided that a bank may extend credit to directors and officers in compliance with applicable banking regulations. o Conditions on the use of non-GAAP (generally accepted accounting principles) financial measures. o Standards on professional conduct for attorneys requiring attorneys having an attorney-client relationship with a company, among other matters, to report "up the ladder" to the audit committee, another board committee or the entire board of directors certain material violations. o Expedited filing requirements for Form 4 reports of changes in beneficial ownership of securities reducing the filing deadline to within 2 business days of the date a transaction triggers an obligation to report. o Accelerated filing requirements for Forms 10-K and 10-Q by public companies which qualify as "accelerated filers" to be phased-in over a four year period reducing the filing deadline for Form 10-KSB reports from 90 days after the fiscal year end to 60 days and Form 10-Q reports from 45 days after the fiscal quarter end to 35 days. o Disclosure concerning website access to reports on Forms 10-K, 10-Q and 8-K, and any amendments to those reports, by "accelerated filers" as soon as reasonably practicable after such reports and material are filed with or furnished to the Securities and Exchange Commission. o Proposed rules requiring national securities exchanges and national securities associations to prohibit the listing of any security whose issuer does not meet audit committee standards established pursuant to the Sarbanes-Oxley Act. These proposed rules would establish audit committee: o Independence standards for members; 63 o Responsibility for selecting and overseeing the issuer's independent accountant; o Responsibility for handling complaints regarding the issuer's accounting practices; o Authority to engage advisers; and o Funding requirements for the independent auditor and outside advisers engaged by the audit committee. The proposed audit committee rules provide a one-year phase-in period for compliance. The Securities and Exchange Commission must adopt final rules by April 26, 2003. The effect of the Sarbanes-Oxley Act upon Service 1st Bank and Service 1st Bancorp is uncertain; however, many of the provisions of the Sarbanes-Oxley Act are or may become applicable to Service 1st Bank and Service 1st Bancorp and it is therefore likely that they will incur increased costs to comply with the Sarbanes-Oxley Act and the rules and regulations promulgated under the Sarbanes-Oxley Act by the Securities and Exchange Commission, bank regulatory agencies and other regulatory authorities having jurisdiction over Service 1st Bancorp and Service 1st Bank. Service 1st Bank does not currently anticipate, however, that compliance with the Sarbanes-Oxley Act and the related rules and regulations will have a material adverse effect upon its financial position or results of its operations or its cash flows. California Corporate Disclosure Act. On September 28, 2002, California Governor Gray Davis signed into law the California Corporate Disclosure Act (the "CCD Act"), which became effective January 1, 2003. The CCD Act requires publicly traded corporations incorporated or qualified to do business in California such as Service 1st Bank and after the merger, Service 1st Bancorp, to disclose information about their past history, auditors, directors and officers. The CCD Act requires companies to disclose: o The name of a company's independent auditor and a description of services, if any, performed for the company during the previous 24 months; o The annual compensation paid to each director and executive officer, including stock or stock options not otherwise available to other company employees; o A description of any loans made to a director at a "preferential" loan rate during the previous 24 months, including the amount and terms of the loans; o Whether any bankruptcy was filed by a company or any of its directors or executive officers within the previous 10 years; o Whether any director or executive officer of a company has been convicted of fraud during the previous 10 years; and o Whether a company violated any federal securities laws or any securities or banking provisions of California law during the previous 10 years for which the company was found liable or fined more than $10,000. The Bank does not currently anticipate that compliance with the CCD Act will have a material adverse effect upon its financial position or results of its operations or its cash flows. It is not known to what extent, if any, additional legislative proposals will be enacted and what effect such legislation would have on the structure, regulation and competitive relationships of financial institutions and bank holding companies. It is likely, however, that such legislation could subject Service 1st Bank and Service 1st Bancorp to increased regulation, disclosure and reporting requirements and increase competition and their costs of doing business. 64 CAPITAL STOCK OF SERVICE 1ST BANK AND SERVICE 1ST BANCORP Upon consummation of the merger, the holders of Service 1st Bank common stock will become shareholders of Service 1st Bancorp and receive one share of Service 1st Bancorp common stock for each of their shares of Service 1st Bank common stock. Immediately following the merger, Service 1st Bank's shareholders will hold all of the outstanding shares of Service 1st Bancorp common stock and be the only shareholders of Service 1st Bancorp. While the classes of authorized, and the number of outstanding, shares of stock are the same for Service 1st Bank and Service 1st Bancorp, there are certain differences under California law between the rights of shareholders of Service 1st Bancorp as opposed to Service 1st Bank. Shareholders should consider carefully the differences in Service 1st Bancorp common stock and Service 1st Bank common stock under California law. Authorized Capital Service 1st Bank currently has an authorized capitalization of 20,000,000 shares of no par value common stock and 10,000,000 shares of preferred stock. As of April 11, 2003, 1,100,100 shares of Service 1st Bank common stock were issued and outstanding, 171,000 shares of common stock were reserved for issuance upon exercise of outstanding stock options under the Service 1st Bank 1999 Stock Option Plan, and no shares of preferred stock were outstanding. Service 1st Bancorp currently has an authorized capitalization of 20,000,000 shares of no par value common stock and 10,000,000 shares of preferred stock. Of such authorized shares, 100 shares of Service 1st Bancorp common stock are currently issued and outstanding (and will be repurchased by Service 1st Bancorp upon consummation of the merger). Under the terms of the plan of reorganization and merger agreement, Service 1st Bancorp will issue 1,100,100 shares of its common stock in exchange for all of the outstanding shares of Service 1st Bank common stock. An additional 171,000 shares of Service 1st Bancorp common stock will be reserved for issuance upon exercise of outstanding stock options under the 1999 Stock Option Plan to be assumed by Service 1st Bancorp. See "THE MERGER - Conversion of Options." The balance of Service 1st Bancorp's authorized capital stock will be available to be issued when and as the board of directors of Service 1st Bancorp determines it advisable to do so. Such shares of capital stock could be issued for the purpose of raising additional capital, in connection with acquisitions of other businesses, or for other appropriate purposes. The board of directors of Service 1st Bancorp has the authority to issue shares of common stock to the extent of the number of authorized unissued shares without obtaining the approval of existing holders of common stock. The issuance of additional shares of Service 1st Bancorp common stock could adversely affect the voting power of holders of common stock. Voting Rights Holders of Service 1st Bank common stock are entitled to, and holders of Service 1st Bancorp common stock will be entitled to, one vote for each share held, except that in the election of directors each shareholder has cumulative voting rights. See "GENERAL INFORMATION - Voting Securities; Record Date; Cumulative Voting." 65 Assessment of Shares The outstanding shares of Service 1st Bank common stock are fully paid and nonassessable. The common stock of Service 1st Bancorp is not subject to assessment, as its articles of incorporation do not confer upon its board of directors the authority to order such assessment. Repurchase of Shares Service 1st Bank may not repurchase shares of its own capital stock except after application and receipt of specific regulatory approval. Consequently, if situations arose where the board of directors considered a repurchase of shares to be in Service 1st Bank's best interests, Service 1st Bank's ability to respond would be subject to such conditions and any delay related to obtaining approval. Assuming that Service 1st Bank continues to be well-capitalized, however (see "SUPERVISION AND REGULATION - Capital Adequacy" above), Service 1st Bancorp under current regulations of the FRB would probably qualify to repurchase its shares without FRB or other regulatory approval, provided that Service 1st Bancorp's capital exceeds the standards for a "well-capitalized" bank both before and after any such repurchases, its FRB examination results in a rating of "1" or "2," and there are no unresolved supervisory issues with respect to Service 1st Bancorp. Bylaws The bylaws of Service 1st Bank and of Service 1st Bancorp are identical in all material respects (including with respect to the number of authorized directors), except with respect to provisions in Service 1st Bank's bylaws required by the California Financial Code and applicable only to banks. Articles of Incorporation The articles of incorporation of Service 1st Bank and Service 1st Bancorp are substantially identical, except that Service 1st Bank's articles of incorporation authorize it to engage in the commercial banking business and Service 1st Bancorp's articles of incorporation forbid it to engage in the banking or trust company business or the practice of a profession permitted to be incorporated under the California Corporations Code. Under California law, amendments to Service 1st Bank's articles of incorporation require the Commissioner's approval in addition to any shareholder approvals which may be required, and must be filed with the California Secretary of State before they may take effect. Amendments to Service 1st Bancorp's articles of incorporation do not require the approval of the Commissioner or any other regulatory authority, although shareholder approval is required for certain amendments and all such amendments also must be filed with the California Secretary of State before they may take effect. Copies of the articles of incorporation of Service 1st Bank and Service 1st Bancorp are available at Service 1st Bank's executive office at 2800 W. March Lane, Suite 120, Stockton, California 95219, to be inspected and copied during regular business hours by any interested shareholder. Applicability of Securities Laws The securities of Service 1st Bank, unlike those of Service 1st Bancorp, are exempt from the registration requirements of the Securities Act of 1933 and the California Corporate Securities Law of 1968, as amended (the "CSL"). The effect on Service 1st Bank of such exemptions is to allow Service 1st Bank to sell its securities without registration under such laws, although Service 1st Bank must obtain a permit from the Commissioner to offer and sell its securities otherwise than pursuant to employee stock option plans. In contrast to Service 1st Bank, the public sale by Service 1st Bancorp of its securities must be registered under 66 the Securities Act of 1933 and the CSL, unless an exemption from registration is available. The requirement that Service 1st Bancorp register its securities for public sale could increase the cost of the sale of such securities. Dividends The shareholders of Service 1st Bank are entitled to dividends when and as declared by Service 1st Bank's board of directors out of funds legally available therefor, subject to the restrictions set forth in the California Financial Code. See "SUPERVISION AND REGULATION - Limitations on Dividends." The shareholders of Service 1st Bancorp will be entitled to receive dividends when and as declared by its board of directors, out of funds legally available therefor, subject to the restrictions set forth in the California General Corporation Law. See "SUPERVISION AND REGULATION - Limitations on Dividends." Subject to the restrictions on payment of cash dividends as described above, Service 1st Bancorp may pay cash dividends depending upon the earnings of Service 1st Bancorp, management's assessment of the future capital needs of Service 1st Bank, and other factors; however, no assurance can be given as to whether or when Service 1st Bancorp may begin paying cash or stock dividends. Dividends from Service 1st Bank are the only source of funds available from which Service 1st Bancorp in turn can pay dividends, except to the extent that Service 1st Bancorp receives management fees for any management services it may provide to Service 1st Bank or engages in other permitted income-producing activities. The ability of Service 1st Bank to pay dividends to Service 1st Bancorp is restricted by statute as described above. See "SUPERVISION AND REGULATION - Limitations on Dividends." Preemptive Rights Holders of Service 1st Bank common stock do not, and holders of Service 1st Bancorp common stock will not, have preemptive rights. Service 1st Bank common stock and Service 1st Bancorp common stock do not have any applicable conversion rights, redemption rights or sinking fund provisions. Liquidation Rights Upon liquidation of Service 1st Bank, the shareholders of Service 1st Bank common stock have the right to receive their pro rata portion of the assets of Service 1st Bank distributable to shareholders. The holders of Service 1st Bancorp common stock will also be entitled to receive their pro rata share of the assets of Service 1st Bancorp distributable to shareholders upon liquidation. Deregistration of Service 1st Bank Common Stock Service 1st Bank is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, and in accordance with that statute files reports and proxy statements with the FDIC. After the merger, the only shares of Service 1st Bank common stock outstanding will be owned by Service 1st Bancorp. Accordingly, after the merger, Service 1st Bank will deregister its common stock and thereby terminate its obligations to file such reports and proxy statements with the FDIC. Also after the merger, there will no longer be any trading in Service 1st Bank common stock. Service 1st Bancorp common stock will be traded in the over-the-counter market, and Service 1st Bancorp will be subject to the periodic reporting requirements of the Securities Exchange Act of 1934 and will file such reports with the Securities Exchange Commission. See "MARKET INFORMATION REGARDING SERVICE 1ST BANK'S AND SERVICE 1ST BANCORP'S COMMON STOCK." 67 INDEMNIFICATION California Legislation Service 1st Bank and Service 1st Bancorp are subject to the California General Corporation Law (the "CGCL"), which provides a detailed statutory framework covering limitation of liability of directors in certain instances and indemnification of any officer, director or other agent of a corporation who is made or threatened to be made a party to any legal proceeding by reason of his or her service on behalf of such corporation. With respect to limitation of liability, the CGCL permits a California corporation to adopt a provision in its articles of incorporation reducing or eliminating the liability of a director to the corporation or its shareholders for monetary damages for breach of the fiduciary duty of care, provided that such liability does not arise from certain proscribed conduct (including intentional misconduct and breach of the duty of loyalty). The CGCL in this regard relates only to actions brought by shareholders on behalf of the corporation (i.e., "derivative actions") and does not apply to claims brought by outside parties. With respect to indemnification, the CGCL provides that to the extent any officer, director or other agent of a corporation is successful "on the merits" in defense of any legal proceeding to which such person is a party or is threatened to be made a party by reason of his or her service on behalf of such corporation or in defense of any claim, issue, or matter therein, such agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith, but does not require indemnification in any other circumstance. The CGCL also provides that a corporation may indemnify any agent of the corporation, including officers and directors, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in a third party proceeding against such person by reason of his or her services on behalf of the corporation, provided the person acted in good faith and in a manner he or she reasonably believed to be in the best interests of such corporation. The CGCL further provides that in derivative suits a corporation may indemnify such a person against expenses incurred in such a proceeding, provided such person acted in good faith and in a manner he or she reasonably believed to be in the best interests of the corporation and its shareholders. Indemnification is not available in derivative actions (i) for amounts paid or expenses incurred in connection with a matter that is settled or otherwise disposed of without court approval or (ii) with respect to matters for which the agent shall have been adjudged to be liable to the corporation unless the court shall determine that such person is entitled to indemnification. The CGCL permits the advancing of expenses incurred in defending any proceeding against a corporate agent by reason of his or her service on behalf of the corporation upon the giving of a promise to repay any such sums in the event it is later determined that such person is not entitled to be indemnified. Finally, the CGCL provides that the indemnification provided by the statute is not exclusive of other rights to which those seeking indemnification may be entitled, by bylaw, agreement or otherwise, to the extent additional rights are authorized in a corporation's articles of incorporation. The law further permits a corporation to procure insurance on behalf of its directors, officers and agents against any liability incurred by any such individual, even if a corporation would not otherwise have the power under applicable law to indemnify the director, officer or agent for such expenses. The articles of incorporation and bylaws of Service 1st Bank and Service 1st Bancorp implement the applicable statutory framework by limiting the personal liability of directors for monetary damages for a breach of a directors' fiduciary duty of care and allowing Service 1st Bank and Service 1st Bancorp to expand the scope of their indemnification of directors, officers and other agents to the fullest extent permitted by California law. The articles of Service 1st Bank and Service 1st Bancorp, under the applicable provisions of 68 the CGCL, also include a provision allowing Service 1st Bank and Service 1st Bancorp to include in their bylaws, and in agreements between Service 1st Bank and Service 1st Bancorp and their directors, officers and other agents, provisions expanding the scope of indemnification beyond that specifically provided under California law. Service 1st Bank has no such agreements in force, and no such agreements are planned for the directors, officers or other agents of Service 1st Bancorp. Directors' and Officers' Liability Insurance Service 1st Bank presently maintains a policy of directors' and officers' liability insurance. There is no assurance, however, that such coverage will continue to be available with such breadth of coverage as Service 1st Bank deems advisable and at reasonable expense. It is intended that the coverage provided by the insurance be made available to the officers and directors of Service 1st Bancorp after the merger. Commission Position on Indemnification Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling Service 1st Bancorp pursuant to the foregoing provisions, Service 1st Bancorp has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable. 69 PROPOSAL NO. 3 RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS The accounting firm of Vavrinek, Trine, Day & Co., LLP, certified public accountants, served Service 1st Bank as its independent public accountants and auditors in connection with various services described below for the 2002 fiscal year at the direction of the board of directors of Service 1st Bank. Moss Adams, LLP, was Service 1st Bank's predecessor accountants during 2001. Moss Adams, LLP was dismissed on October 16, 2001, and was replaced by Vavrinek, Trine, Day & Co., LLP, which was engaged on October 19, 2001 to conduct the audit for the fiscal year ended December 31, 2001. The change in accountants was recommended by the audit committee on September 20, 2001, and approved by the board of directors on September 20, 2001, after evaluation of proposals for audit and accounting services. The accountant reports issued by Moss Adams, LLP in 1999 and 2000 did not contain an adverse opinion or disclaimer of opinion and were not modified as to uncertainty, audit scope, or accounting principles. There were no disagreements with Moss Adams, LLP, unresolved or resolved, on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures. Vavrinek, Trine, Day & Co., LLP has no interests, financial or otherwise, in Service 1st Bank. The services rendered by Vavrinek, Trine, Day & Co., LLP during the 2002 fiscal year were audit services and consultation in connection with various accounting matters. The services rendered by Moss Adams, LLP during the 2001 fiscal year were audit services, consultation in connection with various accounting matters, and preparation of Service 1st Bank's income tax returns. The fees paid to Vavrinek, Trine, Day & Co., LLP for professional services during the 2002 fiscal year were as follows: Audit Fees Service 1st Bank paid Vavrinek, Trine, Day & Co., LLP $33,750 during the 2002 fiscal year for the audit of Service 1st Bank's financial statements for the fiscal year ended December 31, 2002, and for reviews of Service 1st Bank's financial statements included in Service 1st Bank's Form 10-QSB filings for the 2002 fiscal year. Financial Information Systems Design and Implementation Fees No services were provided by Vavrinek, Trine, Day & Co., LLP and no payments made for financial information systems design and implementation during the 2002 fiscal year. All Other Fees Service 1st Bank paid Vavrinek, Trine, Day & Co, LLP $4,100 during the 2002 fiscal year for all other services rendered by Vavrinek, Trine, Day & Co., LLP to Service 1st Bank. No services other than the audit and tax return preparation services discussed above were provided by Vavrinek, Trine, Day & Co., LLP to Service 1st Bank during the 2002 fiscal year. The board of directors of Service 1st Bank approved each professional service rendered by Vavrinek, Trine, Day & Co., LLP during the 2002 fiscal year and considered whether the provision of such services was compatible with Vavrinek, Trine, Day & Co., LLP maintaining its independence. It is 70 anticipated that one or more representatives of Vavrinek, Trine, Day & Co., LLP will be present at the annual meeting and will be able to make a statement if they so desire and answer appropriate questions. The Board of Directors has selected Vavrinek, Trine, Day & Co., LLP to serve as the Bank's independent public accountants for the year 2002 and recommends that shareholders vote "FOR" the ratification of the appointment of Vavrinek, Trine, Day & Co., LLP. EXPERTS The financial statements of Service 1st Bank included in this proxy statement-prospectus as of December 31, 2002 and for the years ended December 31, 2002, and 2001 have been audited by Vavrinek, Trine, Day & Co., LLP, independent accountants, as stated in their report, given upon their authority as experts in accounting and auditing. LEGAL MATTERS The validity of the Service 1st Bancorp common stock to be issued pursuant to the merger will be passed upon for Service 1st Bancorp and Service 1st Bank by Dodd-Mason-George LLP, 303 Almaden Boulevard, 5th Floor, San Jose, California 95110. ANNUAL REPORT ON FORM 10-KSB SERVICE 1ST BANK WILL PROVIDE WITHOUT CHARGE TO EACH SHAREHOLDER SOLICITED BY THIS PROXY STATEMENT-PROSPECTUS A COPY OF SERVICE 1ST BANK'S ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002, REQUIRED TO BE FILED WITH THE FEDERAL DEPOSIT INSURANCE CORPORATION, UPON WRITTEN REQUEST TO SERVICE 1st BANK, 2800 W. MARCH LANE, SUITE 120, STOCKTON, CALIFORNIA 95219, ATTENTION: BRYAN R. HYZDU, CORPORATE SECRETARY. EACH REQUEST MUST SET FORTH A GOOD FAITH REPRESENTATION THAT AS OF APRIL 11, 2003, THE PERSON MAKING THE REQUEST WAS A BENEFICIAL OWNER OF SECURITIES ENTITLED TO VOTE AT THE MEETING. ANNUAL REPORT The Annual Report to Shareholders for the year ended December 31, 2002, is being mailed concurrently with this proxy statement-prospectus to all shareholders of record as of April 11, 2003. ANNUAL DISCLOSURE STATEMENT Service 1st Bank's Annual Report to Shareholders for the year ended December 31, 2002 containing important information regarding the financial condition of Service 1st Bank, also constitutes Service 1st Bank's Annual Disclosure Statement. Upon request, Service 1st Bank will provide a copy to you, at no additional cost. Additional copies may be obtained for a nominal fee. To obtain a copy, call (209) 956-7800 or write to Service 1st Bank, 2800 W. March Lane, Suite 120, Stockton, California 95219, Attention: Bryan R. Hyzdu, Corporate Secretary. 71 SHAREHOLDERS' PROPOSALS Next year's annual meeting of shareholders is currently scheduled to be held on May 20, 2004. Any shareholder desiring to submit a proposal for action at the 2004 annual meeting which is desired to be presented in Service 1st Bank's proxy statement with respect to that annual meeting, should mail the proposal by certified mail return receipt requested, to Service 1st Bank, 2800 W. March Lane, Suite 120, Stockton, California 95219, Attention: Bryan R. Hyzdu, Corporate Secretary. All such proposals must be received by Service 1st Bank not later than December 27, 2003. Matters pertaining to such proposals, including the number and length thereof, eligibility of persons entitled to have such proposals included, and other aspects, are regulated by the Securities Exchange Act of 1934, and regulations of the Federal Deposit Insurance Corporation as promulgated thereunder. Management of Service 1st Bank will have discretionary authority to vote proxies obtained by it in connection with any shareholder proposal not submitted on or before December 27, 2003. OTHER MATTERS Management is not aware of any other matters to come before the annual meeting. If any other matter not mentioned in this proxy statement-prospectus is brought before the annual meeting, the persons named in the enclosed form of proxy will have discretionary authority to vote all proxies with respect thereto in accordance with the recommendations of management. WHERE TO FIND MORE INFORMATION Service 1st Bancorp has filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C., a Registration Statement on Form S-4EF under the Securities Act of 1933, as amended, with respect to the securities being offered. This proxy statement-prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information, please see the Registration Statement and the exhibits filed with it. The Registration Statement may be inspected and copied at the public reference room maintained by the Commission in Washington, D.C., New York, New York and Chicago, Illinois. You may also obtain copies of the Registration Statement by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 upon payment of fees at prescribed rates. Please call the Securities and Exchange Commission at (800) SEC-0330 for further information on the public reference facilities. Copies also may be viewed and downloaded from the Internet at the Commission's web site maintained at http://www.sec.gov. Service 1st Bank is subject to the informational requirements of a "small business filer" under the Securities Exchange Act of 1934, as amended. In accordance with the Securities Exchange Act of 1934, Service 1st Bank files reports, proxy statements and other information with the Federal Deposit Insurance Corporation ("FDIC"). You may inspect these reports, proxy statements and other information Service 1st Bank has filed with the FDIC at its offices located at 550 17th Street, N.W., Washington, D.C. 20429. You may also request copies of these reports, proxy statements and other information under the Freedom of Information Act by contacting the Federal Deposit Insurance Corporation, Attention: Accounting and Securities Disclosure Section, 550 17th Street, N.W., Room F-6043, Washington, D.C. 20429. Additionally, you may request copies of such filings from Service 1st Bank by contacting Robert Bloch, Executive Vice President and Chief Financial Officer, Service 1st Bank, 2800 W. March Lane, Suite 120, Stockton, California 95219. 72 ANNEX A PLAN OF REORGANIZATION AND MERGER AGREEMENT DATED MARCH 11, 2003 AMONG SERVICE 1ST BANCORP, SERVICE 1ST BANK AND SERVICE 1ST MERGER CORPORATION PLAN OF REORGANIZATION AND MERGER AGREEMENT ------------------------------------------- This Plan of Reorganization and Merger Agreement (the "Merger Agreement") is entered into as of March 11, 2003, by and among Service 1st Bank ("Bank"), Service 1st Merger Corporation ("Subsidiary"), and Service 1st Bancorp ("Bancorp"). RECITALS AND UNDERTAKINGS A. The Bank is a California state-chartered bank with its principal office in the City of Stockton and a branch office in the City of Tracy, State of California. The Subsidiary and Bancorp are corporations duly organized and existing under the laws of the State of California with their principal offices in the City of Stockton, State of California. B. As of the date hereof, the Bank has 20,000,000 shares of common stock authorized of which 1,100,100 shares are issued and outstanding, and 10,000,000 shares of preferred stock authorized of which no shares are issued and outstanding. C. As of the date hereof, the Subsidiary has 20,000,000 shares of common stock authorized of which 100 shares are issued and outstanding, and 10,000,000 shares of preferred stock authorized of which no shares are issued and outstanding. Immediately prior to the Effective Date (as such term is defined below), 100 shares of Subsidiary's common stock will be issued and outstanding, all of which shares will be owned by Bancorp. D. As of the date hereof, Bancorp has 20,000,000 shares of common stock authorized of which 100 shares are issued and outstanding, and 10,000,000 shares of preferred stock authorized of which no shares are issued and outstanding. Immediately prior to the Effective Date, 100 shares of Bancorp's common stock will be issued and outstanding. E. The Boards of Directors of the Bank, Bancorp and the Subsidiary, respectively, have approved this Merger Agreement and authorized its execution. AGREEMENT Section 1. General ------- 1.1 The Merger. On the Effective Date(as such term is defined below), the Subsidiary shall be merged with and into the Bank, with the Bank being the surviving corporation (the "Merger"). The Bank shall thereafter be a subsidiary of Bancorp, and its name shall continue to be "Service 1st Bank." 1.2 Effective Date. The Merger described herein shall become effective at the close of business on the day (the "Effective Date") upon which an executed counterpart of this Merger Agreement shall have been filed with the Secretary of State of the State of California in accordance with Section 1103 of the California General Corporation Law. 1.3 Articles of Incorporation and Bylaws. On the Effective Date, the Articles of Incorporation of the Bank, as in effect immediately prior to the Effective Date, shall remain the Articles A-1 of Incorporation of the Bank until amended; the Bylaws of the Bank, as in effect immediately prior to the Effective Date, shall remain the Bylaws of the Bank until amended; the certificate of authority of the Bank issued by the California Department of Financial Institutions shall remain the certificate of authority of the Bank; and the Bank's deposit insurance coverage by the Federal Deposit Insurance Corporation shall remain the deposit insurance of the Bank. 1.4 Directors and Officers. On the Effective Date, the directors and officers of the Bank immediately prior to the Effective Date shall remain the directors and officers of the Bank. The directors of the Bank shall serve until the next annual meeting of shareholders of the Bank or until such time as their successors are elected and have been qualified. 1.5 Effect of the Merger. -------------------- (a) Assets and Rights. On the Effective Date and thereafter, all rights, privileges, franchises and property of the Subsidiary and all debts and liabilities due or to become due to the Subsidiary including choses in action and every interest or asset of conceivable value or benefit, shall be deemed fully and finally and without any right of reversion vested in the Bank without further act or deed; and the Bank shall have and hold the same in its own right as fully as the same was possessed and held by the Subsidiary. (b) Liabilities. 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, the Subsidiary shall be and become the debts, liabilities or obligations of, or the claims or demands against, the Bank in the same manner as if the Bank had itself incurred or become liable for them. (c) Creditors' Rights and Liens. On the Effective Date and thereafter, all rights of creditors of the Subsidiary and all liens upon the property of the Subsidiary shall be preserved unimpaired, and shall be limited to the property affected by such liens immediately prior to the Effective Date. (d) Pending Actions. On the Effective Date and thereafter, any action or proceeding pending by or against the Subsidiary shall not be deemed to have abated or been discontinued, but may be pursued to judgment with 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 Bank substituted in place of the Subsidiary as the case may be. 1.6 Further Assurances. The Subsidiary agrees that at any time, or from time to time, as and when requested by the Bank, or by its successors or 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 Bank, all such conveyances, assignments, transfers, deeds and other instruments, and will take or cause to be taken such further or other action as the Bank, or its successors or assigns, may deem necessary or desirable in order to carry out the vesting, perfecting, confirming, assignment, devolution or other transfer of the interests, property, privileges, powers, immunities, franchises and other rights transferred to the Bank in this Section 1, or otherwise to carry out the intent and purposes of this Merger Agreement. A-2 Section 2. Stock ----- 2.1 Stock of Subsidiary. On the Effective Date, each share of common stock of the Subsidiary issued and outstanding immediately prior to the Effective Date shall, by virtue of the Merger described herein, be deemed to be exchanged for and converted into one share of fully paid and nonassessable common stock of the Bank. 2.2 Stock of Bancorp. On the Effective Date, each share of common stock of Bancorp issued and outstanding immediately prior to the Effective Date shall be repurchased by Bancorp for the amount paid for such shares upon their original issuance. 2.3 Stock of Bank. On the Effective Date, each share of common stock of the Bank issued and outstanding immediately prior to the Effective Date shall, by virtue of the Merger described herein, be deemed to be exchanged for and converted into one share of fully paid and nonassessable common stock of Bancorp, in accordance with the provisions of Paragraph 2.4 hereof. 2.4 Exchange of Stock by the Bank Shareholders. On the Effective Date or as soon as practical thereafter, the following actions shall be taken to effectuate the exchange and conversion specified in Paragraph 2.3 hereof: (a) The shareholders of the Bank of record immediately prior to the Effective Date shall be allocated and entitled to receive for each share of common stock of the Bank then held by them respectively, one share of common stock of Bancorp. (b) Subject to the provisions of Paragraph 2.4(c) hereof, Bancorp shall issue to the shareholders of the Bank the shares of common stock of Bancorp which said shareholders are entitled to receive. (c) Thereafter, outstanding certificates representing shares of common stock of the Bank (except certificates issued to Bancorp in connection with the Merger described herein) shall represent shares of the common stock of Bancorp, and such certificates may, but need not, be exchanged by the holders thereof for new certificates for the appropriate number of shares of Bancorp. 2.5 Other Rights to Stock. --------------------- (a) On the Effective Date and thereafter, the Bank's 1999 Stock Option Plan (the "1999 Plan"), shall be administered in an appropriate manner to reflect the Merger described herein; and any outstanding options to purchase shares of common stock of the Bank shall be deemed to be options granted by Bancorp upon the same terms and conditions, except that appropriate adjustments shall be deemed to be made to such terms and conditions to reflect the Merger described herein. Any options thereafter granted pursuant to the 1999 Plan, shall be deemed to be options granted by Bancorp, subject to any limitations or requirements related to such option grants and/or the 1999 Plan as may be imposed by the California Commissioner of Corporations pursuant to a permit application filed by Bancorp to effectuate the transactions contemplated by the Merger Agreement. (b) Not later than the Effective Date, the Bank's 401(k) Profit-Sharing Plan (the "401(k) Plan") shall have been amended, to the extent necessary, to provide for the use of Bancorp's A-3 common stock in place of common stock of the Bank. On the Effective Date and thereafter, all Bank employees eligible to participate in the 401(k) Plan and any other employee benefit plans will continue to be eligible to so participate with the same rights, privileges, and preferences as before the Effective Date. (c) From time to time as and when required by the provisions of any agreement to which the Bank or Bancorp shall become a party after the date hereof that provides for the issuance of shares of common stock or other securities, either debt or equity, of the Bank or Bancorp in connection with a merger into the Bank of any other banking institution or the acquisition by the Bank of the assets or stock of any other banking institution or other corporation, Bancorp shall issue in accordance with the terms of any such agreement shares of its common stock or other debt or equity securities as required by such agreement or in substitution for the shares of common stock or other debt or equity securities of the 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. Approvals --------- 3.1 Shareholder Approval. This Merger Agreement shall be submitted to the shareholder(s) of Bancorp, the Subsidiary and the Bank for ratification and approval to the extent required by, and in accordance with, applicable provisions of law. 3.2 Regulatory Approvals. Each of the parties hereto shall proceed expeditiously and cooperate fully in procuring all other consents and approvals, and in satisfying all other requirements, prescribed by law or otherwise, necessary or desirable for the Merger described herein to be consummated, including without limitation the consents and approvals referred to in Paragraphs 4.1(b), 4.1(c) and 4.1(d) hereof. Section 4. Conditions Precedent; Termination and Payment of Expenses --------------------------------------------------------- 4.1 Conditions Precedent to the Merger. Consummation of the Merger described herein is conditioned upon the following: (a) Ratification and approval of this Merger Agreement by the shareholders of Bancorp, the Subsidiary and the Bank in accordance with applicable provisions of law; (b) Procuring all other consents and approvals and satisfying all other requirements, prescribed by law or otherwise, which are necessary for the Merger described herein to be consummated, including without limitation: (i) approval from the Board of Governors of the Federal Reserve System, the California Department of Financial Institutions, and the Federal Deposit Insurance Corporation; (ii) approval of the California Commissioner of Corporations under the California Corporate Securities Law of 1968, and securities administrators of other applicable jurisdictions, with respect to the securities of Bancorp issuable upon consummation of the Merger, and (iii) the declaration by the Securities and Exchange Commission of the effectiveness of a registration statement under the Securities Act of 1933 with respect to the securities of Bancorp issuable upon consummation of the Merger or the automatic effectiveness of such registration statement; (c) Receipt (unless waived by each of the parties hereto) of an opinion of accountants with respect to the tax consequences to the parties and their shareholders of the Merger described herein; A-4 (d) Procuring all consents or approvals, governmental or otherwise, which in the opinion of counsel for the Bank are or may be necessary to permit or to enable the Bank to conduct, upon and after the Merger described herein, all or any part of the businesses and other activities that the Bank engages in immediately prior to the Merger, in the same manner and to the same extent that the Bank engaged in such businesses and other activities immediately prior to the Merger; and (e) Performance by each of the parties hereto of all obligations under this Merger Agreement which are to be performed prior to the consummation of the Merger described herein. 4.2 Termination of the Merger. In the event that any condition specified in Paragraph 4.1 hereof cannot be fulfilled, or prior to the Effective Date the Board of Directors of any of the parties hereto reaches any of the following determinations: (a) The number of shares of common stock of the Bank voting against the Merger described herein makes consummation of the Merger inadvisable; or (b) Any action, suit, proceeding or claim relating to the Merger described herein, whether initiated or threatened, makes consummation of the Merger inadvisable; or (c) Consummation of the Merger described herein is inadvisable for any other reason; then this Merger Agreement shall terminate. Upon termination, this Merger Agreement shall be void and of no further effect, and there shall be no liability by reason of this Merger Agreement or the termination hereof on the part of any of the parties hereto or their respective directors, officers, employees, agents or shareholders. 4.3 Expenses of the Merger. Each party hereto will pay its own expenses incurred in connection with the transactions contemplated by the Merger Agreement including the Merger. Promptly after the Effective Date, the Bank will pay a special dividend to Bancorp, subject to the prior approval by the California Department of Financial Institutions of an application under Section 643 of the California Financial Code, in an amount equal to the sum of the expenses incurred by Bancorp in connection with the transactions contemplated by the Merger Agreement including the Merger, and the principal amount of any loan or line of credit that Bancorp shall have obtained to carry out the transactions contemplated by the Merger Agreement including the Merger, plus any accrued and unpaid interest and fees with respect thereto. A-5 IN WITNESS WHEREOF, the parties hereto have caused this Merger Agreement to be executed by their duly authorized officers in the City of Stockton, State of California, as of the day and year first written above. Service 1st Bank /s/ JOHN O. BROOKS - --------------------------------------- John O. Brooks, Chief Executive Officer /s/ BRYAN HYZDU - --------------------------------------- Bryan Hyzdu, Secretary Service 1st Bancorp /s/ JOHN O. BROOKS - --------------------------------------- John O. Brooks, Chief Executive Officer /s/ BRYAN HYZDU - --------------------------------------- Bryan Hyzdu, Secretary Service 1st Merger Corporation /s/ JOHN O. BROOKS - --------------------------------------- John O. Brooks, Chief Executive Officer /s/ BRYAN HYZDU - --------------------------------------- Bryan Hyzdu, Secretary A-6 ANNEX B SERVICE 1ST BANK AUDITED FINANCIAL STATEMENTS WITH INDEPENDENT AUDITORS' REPORT DECEMBER 31, 2002 AND 2001 TABLE OF CONTENTS Page Number - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT ON THE FINANCIAL STATEMENTS B-2 - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS Balance Sheets B-3 Statements of Operations B-4 Statement of Shareholders' Equity B-5 Statements of Cash Flows B-6 Notes to Financial Statements B-7 through B-21 - -------------------------------------------------------------------------------- B-1 [GRAPHIC Vavrinek, Trine, Day & Co., LLP OMITTED] Certified Public Accountants & Consultants VALUE THE DIFFERENCE -------------------- INDEPENDENT AUDITOR'S REPORT Board of Directors and Shareholders Service 1st Bank We have audited the accompanying balance sheets of Service 1st Bank as of December 31, 2002 and 2001, and the related statements of operations, shareholders' equity, and cash flows for the years then ended. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 Service 1st Bank as of December 31, 2002 and 2001, and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ VAVRINEK, TRINE, DAY & CO., LLP Laguna Hills, California February 6, 2003 25231 Paseo De Alicia, Suite 100 Laguna Hills, CA 92653 Tel: 949.768.0833 Fax: 949.768.8408 www.vtdcpa.com FRESNO o LAGUNA HILLS o PLEASANTON o RANCHO CUCAMONGA o SAN JOSE ---------------------------------------------------------------- B-2 SERVICE 1st BANK BALANCE SHEETS December 31, 2002 and 2001 ASSETS
2002 2001 ------------ ------------ Cash and due from banks $ 4,814,464 $ 2,240,345 Federal funds sold 5,270,236 1,445,000 ------------ ------------ Cash and cash equivalents 10,084,700 3,685,345 Investment securities, available for sale 24,841,058 16,053,212 Investment securities, held to maturity 2,608,834 3,945,732 Loans, net 44,293,608 31,132,110 Bank premises and equipment, net 784,127 879,617 Accrued interest receivable 357,430 257,852 Other assets 336,570 243,051 ------------ ------------ $ 83,306,327 $ 56,196,919 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing demand $ 22,208,821 $ 16,463,715 Money market, NOW and savings 32,197,496 19,294,771 Time deposits under $100,000 7,602,473 4,415,958 Time deposits $100,000 and over 12,712,634 5,466,446 ------------ ------------ Total deposits 74,721,424 45,640,890 Other borrowings -- 2,500,000 Accrued interest and other liabilities 464,506 220,928 ------------ ------------ Total liabilities 75,185,930 48,361,818 Commitments and contingencies - Notes 5 and 9 -- -- Shareholders' equity: Preferred stock, no par value, 10,000,000 shares authorized, none issued or outstanding -- -- Common stock, no par value, 20,000,000 shares authorized; issued and outstanding, 1,100,100 shares 10,915,069 10,915,069 Accumulated deficit (2,902,979) (3,122,132) Accumulated other comprehensive income, net of tax 108,307 42,164 ------------ ------------ Total shareholders' equity 8,120,397 7,835,101 ------------ ------------ $ 83,306,327 $ 56,196,919 ============ ============
The accompanying notes are an integral part of this statement. B-3 SERVICE 1st BANK STATEMENTS OF OPERATIONS For the years ended December 31, 2002 and 2001
2002 2001 ----------- ----------- Interest Income: Interest and fees on loans $ 3,007,193 $ 1,867,082 Interest on investment securities 952,008 767,092 Interest on federal funds sold 36,921 103,865 ----------- ----------- 3,996,122 2,738,039 Interest Expense: Interest expense on deposits 1,227,239 842,054 Other interest expense 7,083 5,863 ----------- ----------- 1,234,322 847,917 ----------- ----------- Net interest income 2,761,800 1,890,122 Provision for loan losses 193,000 315,000 ----------- ----------- Net interest income after provision for loan losses 2,568,800 1,575,122 Other income: Service charges, fees and other income 167,949 74,715 Gain on sale of loans 175,839 -- Gain on the sale of investment securities 48,391 38,322 ----------- ----------- 392,179 113,037 Other expenses: Salaries and employee benefits 1,546,360 1,208,615 Occupancy expense 237,297 229,490 Equipment expense 280,598 283,234 Data processing and other professional services 295,554 293,305 Office supplies and equipment 124,148 95,490 Advertising and promotion 92,930 57,977 Courier expense 38,511 32,444 Other operating expenses 125,628 129,134 ----------- ----------- 2,741,026 2,329,689 ----------- ----------- Net income (loss) before income taxes 219,953 (641,530) Income taxes 800 800 ----------- ----------- Net income (loss) $ 219,153 $ (642,330) =========== =========== Net income (loss) per share - basic $ 0.20 $ (0.58) =========== =========== Net income (loss) per share - diluted $ 0.20 $ (0.58) =========== ===========
The accompanying notes are an integral part of this statement. B-4 SERVICE 1st BANK STATEMENT OF SHAREHOLDERS' EQUITY For the years ended December 31, 2002 and 2001
Accumulated Common Stock Other Total ------------------------- Comprehensive Accumulated Comprehensive Shareholders' Shares Amount Income Deficit Income Equity ----------- ----------- ----------- ----------- ----------- ----------- Balance at January 1, 2001 1,099,900 $10,912,569 $(2,479,802) $ 91,438 $ 8,524,205 Exercise of warrants 200 2,500 2,500 Comprehensive Income: Net loss $ (642,330) (642,330) (642,330) Unrealized losses on securities, net of tax of $15,629 (26,664) (26,664) (26,664) Reclassification adjustment for gains included in net loss, net of tax of $15,712 (22,610) (22,610) (22,610) ----------- Comprehensive Income $ (691,604) =========== ----------- ----------- ----------- ----------- ----------- Balance at December 31, 2001 1,100,100 10,915,069 (3,122,132) 42,164 7,835,101 Comprehensive Income: Net income $ 219,153 219,153 219,153 Unrealized gains on securities, net of tax of $66,299 94,694 94,694 94,694 Reclassification adjustment for gains included in net income, net of tax of $19,840 (28,551) (28,551) (28,551) ----------- Comprehensive Income $ 285,296 =========== ----------- ----------- ----------- ----------- ----------- Balance at December 31, 2002 1,100,100 $10,915,069 $(2,902,979) $ 108,307 $ 8,120,397 =========== =========== =========== =========== ===========
The accompanying notes are an integral part of this statement. B-5 SERVICE 1st BANK STATEMENTS OF CASH FLOWS For the years ended December 31, 2002 and 2001
2002 2001 ------------ ------------ Cash flows from operating activities: Net income (loss) $ 219,153 $ (642,330) Adjustments to reconcile net income (loss) to net cash from (used) by operating activities: Provision for loan losses 193,000 315,000 Depreciation 209,139 209,263 Gain on sale of securities (48,391) (38,322) Amortization and accretion on securities 218,697 (107,572) Increase in accrued interest (99,578) (42,764) Increase in other assets (193,097) (135,695) Increase in accrued expenses and other liabilities 150,934 65,487 ------------ ------------ Net cash from (used in) operating activities 649,857 (376,933) Cash flows from investing activities: Maturity of certificates of deposits -- 198,000 Purchases of securities available for sale (71,295,739) (40,925,505) Proceeds from sales of securities available for sale 8,124,894 3,241,824 Proceeds from maturities and calls of securities available for sale 54,699,309 34,541,149 Purchases of securities held to maturity (1,209,584) (4,160,617) Proceeds from maturities and calls of securities held to maturity 2,318,231 231,381 Net increase in loans (13,354,498) (24,699,890) Purchases of premises and equipment (113,649) (24,574) ------------ ------------ Net cash used in investing activities (20,831,036) (31,598,232) Cash flows from financing activities: Net increase in demand, interest-bearing deposits, and savings 18,647,831 19,581,521 Net increase in time deposits 10,432,703 5,792,514 Net change in other borrowings (2,500,000) 2,500,000 Proceeds from exercise of options -- 2,500 ------------ ------------ Net cash from financing activities 26,580,534 27,876,535 ------------ ------------ Net increase (decrease) in cash and cash equivalents 6,399,355 (4,098,630) Cash and cash equivalents at beginning of year 3,685,345 7,783,975 ------------ ------------ Cash and cash equivalents at end of year $ 10,084,700 $ 3,685,345 ============ ============ Supplemental disclosures of cash flow information: Interest $ 1,207,436 $ 748,197 Income taxes $ 800 $ 800
The accompanying notes are an integral part of this statement. B-6 NOTES TO FINANCIAL STATEMENTS December 31, 2002 and 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows: Nature of operations - -------------------- The Bank has been organized as a single operating segment and operates full-service branch offices in Stockton and Tracy, California. The Bank's primary source of revenue is providing loans to customers, who are predominately small and middle-market businesses and individuals. Use of estimates - ---------------- In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents - ------------------------- For purposes of the statement of cash flows, the Bank considers cash, due from banks, certificates of deposit with maturities of three months or less and federal funds sold to be cash equivalents. Securities available-for-sale - ----------------------------- Available-for-sale securities consist of bonds, notes, short-term mutual funds, commercial paper and debentures not classified as trading securities or held-to-maturity securities. These securities are carried at estimated fair value with unrealized holding gains and losses, net of tax, reported as a separate component of stockholders' equity, accumulated other comprehensive income, until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. The amortization of premiums and accretion of discounts are recognized as adjustments to interest income over the period to maturity. Loans and allowance for loan losses - ----------------------------------- Loans are reported at the principal amount outstanding, net of deferred loan fees and the allowance for loan losses. Interest on loans is calculated by using the simple interest method on the daily balance of the principal amount outstanding. Loan fees net of certain origination costs are deferred and amortized over the contractual term of the loan, as an adjustment to the interest yield. B-7 NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Loans and allowance for loan losses - continued - ----------------------------------------------- The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal in unlikely. The allowance is an amount that management believes will be adequate to absorb losses inherent in existing loans and commitments to extend credit, based on evaluations of collectibility and prior loss experience of loans and commitments to extend credit. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, loan concentration, specific problem loans, commitments, and current economic conditions that may affect the borrowers' ability to pay. Premises and equipment - ---------------------- Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line basis. The estimated lives used in determining depreciation are: Equipment 3 - 5 years Furniture and fixtures 5 - 7 years Leasehold improvements 5 - 15 years Leasehold improvements are amortized over the lesser of the useful life of the asset or the term of the lease. The straight-line method of depreciation is followed for all assets for financial reporting purposes, but accelerated methods are used for tax purposes. Deferred income taxes have been provided for the resulting temporary differences. Income taxes - ------------ The Bank recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be covered. The Bank provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not. Earnings per shares (EPS) - ------------------------- Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. As of December 31, 2002 and 2001, the Bank had no dilutive securities. B-8 NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Comprehensive income - -------------------- Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", requires the disclosure of comprehensive income and its components. Included in accumulated other comprehensive income at December 31, 2002 is unrealized gain on investment securities available for sale of $184,382, less taxes of $76,075. Included in accumulated other comprehensive income at December 31, 2001 is unrealized gain on investment securities available for sale of $71,780, less taxes of $29,616. Financial instruments - --------------------- In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit as described in Note 9. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. Fair values of financial instruments - ------------------------------------ SFAS No. 107 specifies the disclosure of the estimated fair value of financial instruments. The Bank's estimated fair value amounts have been determined by the Bank using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates are not necessarily indicative of the amounts the Bank could have realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since the balance sheet date and, therefore, current estimates of fair value may differ significantly from the amounts presented in the accompanying Notes. Current accounting pronouncements - --------------------------------- In August 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations", was issued which requires the Bank to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of long-term assets. SFAS No. 143 is effective for the Bank in 2003; however, management does not believe adoption will have a material impact on the Banks' financial statements. Reclassifications - ----------------- Certain reclassifications were made to prior years' presentations to conform to the current year. These reclassifications are of a normal recurring nature. B-9 NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Stock based compensation - ------------------------ SFAS No. 123, "Accounting for Stock-Based Compensation," requires entities to disclose the fair value of their employee stock options, but permits entities to continue to account for employee stock options under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The Bank has determined that it will continue to use the method prescribed by APB Opinion No. 25, which recognizes compensation cost to the extent of the difference between the quoted market price of the stock at the date of grant and the amount an employee must pay to acquire the stock. The exercise price of each option is greater than or equal to the fair market value of the Bank's stock on the date of grant. Accordingly, no compensation cost has been recognized for the plan. Had compensation cost for the plan been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, the Bank's net income (loss) and income (loss) per share would have been changed to the pro forma amounts indicated below:
2002 2001 ----------- ----------- Net Income (Loss): As Reported $ 219,153 $ (642,330) Stock-Based Compensation using the Intrinsic Value Method -- -- Stock-Based Compensation that would have been reported using the Fair Value Method of SFAS 123 (130,711) (125,215) ----------- ----------- Pro Forma $ 88,442 $ (767,545) =========== =========== Net income (loss) per share - basic As reported $ 0.20 $ (0.58) Pro forma $ 0.08 $ (0.70) Net income (loss) per share - diluted As reported $ 0.20 $ (0.58) Pro forma $ 0.08 $ (0.70)
NOTE 2 - CASH AND DUE FROM BANKS Cash and due from banks includes balances with the Federal Reserve and other correspondent banks. The Bank is required to maintain specified reserves by the Federal Reserve Bank. The average reserve requirements are based on a percentage of the Bank's deposit liabilities. In addition, the Federal Reserve requires the Bank to maintain a certain minimum balance at all times. The Bank maintains amounts due from banks, which exceed federally insured limits. The Bank has not experienced any losses in such accounts. B-10 NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE 3 - SECURITIES The amortized cost and estimated fair values of securities as of December 31, 2002 are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------ ------------ ------------ Available-for-Sale Securities: U.S. Government Agencies $ 7,114,164 $ 30,854 $ (9,321) $ 7,135,697 State and Political Subdivisions 594,693 35,383 -- 630,076 Short-Term Mutual Funds 2,215,855 1,566 -- 2,217,421 Asset-Backed Securities 5,300,433 54,988 (2,101) 5,353,320 Mortgage-Backed Securities 9,431,531 82,278 (9,265) 9,504,544 ------------ ------------ ------------ ------------ $ 24,656,676 $ 205,069 $ (20,687) $ 24,841,058 ============ ============ ============ ============ Held-to-Maturity Securities: U.S. Government Agencies $ 160,307 $ -- $ (15,550) $ 144,757 Asset-Backed Securities 973,887 39,124 -- 1,013,011 Mortgage-Backed Securities 1,474,640 53,035 -- 1,527,675 ------------ ------------ ------------ ------------ $ 2,608,834 $ 92,159 $ (15,550) $ 2,685,443 ============ ============ ============ ============
Proceeds for the sale of available-for-sale securities were $8,124,894 for 2002. Gross gains of $48,391 were realized on sales of securities during 2002. The scheduled maturities of securities available-for-sale as of December 31, 2002 are shown below. Actual maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Available for Sale Held to Maturity ------------------------ ------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ----------- ----------- ----------- ----------- Due in one year or less $ 2,436,354 $ 2,442,899 $ -- $ -- Due from one year to five years 3,311,900 3,358,385 -- -- Due from five year to ten years 3,565,181 3,570,375 -- -- Ten years and over 5,911,710 5,964,855 1,134,194 1,157,768 Mortgage-backed securities 9,431,531 9,504,544 1,474,640 1,527,675 ----------- ----------- ----------- ----------- $24,656,676 $24,841,058 $ 2,608,834 $ 2,685,443 =========== =========== =========== ===========
B-11 NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE 3 - SECURITIES - CONTINUED Securities carried at approximately $6,760,000 and $627,000 at December 31, 2002 and 2001, respectively, were pledged to secure deposits of public funds and borrowing arrangements. The amortized cost and estimated fair values of securities as of December 31, 2001 are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------ ------------ ------------ Available-for-Sale Securities: U.S. Government Agencies $ 4,709,201 $ 58,419 $ (17,546) $ 4,750,074 State and Political Subdivisions 595,382 31,271 -- 626,653 Commercial Paper 3,547,442 -- -- 3,547,442 Short-Term Mutual Funds 5,069,501 3,028 -- 5,072,529 Corporate Bonds 100,767 -- -- 100,767 Mortgage-Backed Securities 1,959,139 728 (4,120) 1,955,747 ------------ ------------ ------------ ------------ $ 15,981,432 $ 93,446 $ (21,666) $ 16,053,212 ============ ============ ============ ============ Held-to-Maturity Securities: U.S. Government Agencies $ 917,164 $ -- $ (32,834) $ 884,330 Asset-Backed Securities 640,557 22,058 -- 662,615 Mortgage-Backed Securities 2,388,011 9,092 (17,689) 2,379,414 ------------ ------------ ------------ ------------ $ 3,945,732 $ 31,150 $ (50,523) $ 3,926,359 ============ ============ ============ ============
Proceeds for the sale of available-for-sale securities were $3,241,824 for 2001. Gross gains of $38,322 were realized on sales of securities during 2001. NOTE 4 - LOANS The Bank's customers are primarily located in San Joaquin County. Approximately 65% of the Bank's loans are for real estate and construction and approximately 24% of the Bank's loans are for general commercial uses including professional, retail and small businesses. Consumer loans make up approximately 4% of the loan portfolio with agriculture loans making up the remaining 7%. Generally, real estate loans are collateralized by real property while commercial and other loans are collaterized by funds on deposit, business or personal assets. B-12 NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE 4 - LOANS - CONTINUED Loans at December 31, 2002 and 2001 consisted of the following: 2002 2001 ------------ ------------ Construction and land development loans $ 8,404,271 $ 4,842,422 Real estate loans 20,949,123 13,791,702 Commercial loans 10,868,411 7,945,345 Agricultural loans 2,978,028 3,023,456 Consumer loans 1,834,207 2,017,932 ------------ ------------ 45,034,040 31,620,857 Deferred loan fees and costs, net (142,432) (83,747) Allowance for loan losses (598,000) (405,000) ------------ ------------ $ 44,293,608 $ 31,132,110 ============ ============ A summary of activity in the allowance for loan losses is as follows: 2002 2001 ------------ ------------ Balance, beginning of year $ 405,000 $ 90,000 Provision for loan losses 193,000 315,000 ------------ ------------ Balance, end of year $ 598,000 $ 405,000 ============ ============ The Bank had no impaired loans during the years ended December 31, 2002 and 2001. NOTE 5 - PREMISES AND EQUIPMENT Major classifications of premises and equipment are summarized as follows: 2002 2001 ------------ ------------ Leasehold improvements $ 524,497 $ 518,849 Furniture, fixtures and equipment 833,024 725,023 ------------ ------------ 1,357,521 1,243,872 Less accumulated depreciation and amortization (573,394) (364,255) ------------ ------------ $ 784,127 $ 879,617 ============ ============ B-13 NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE 5 - PREMISES AND EQUIPMENT - CONTINUED Depreciation expense on premises and equipment was $209,139 and $209,263 for the years ended December 31, 2002 and 2001, respectively. The Bank leases its premises under noncancelable operating leases with initial terms expiring in 2007 and 2009. Certain of these contain renewal options and escalation clauses that provide for increased lease payments. The Bank recognized rent expense of $196,150 and $176,790 in 2002 and 2001, respectively. The future minimum commitments under these operating leases are as follows: 2003 $ 205,420 2004 210,081 2005 215,055 2006 220,153 2007 151,828 Thereafter 248,870 ----------- $ 1,251,407 =========== NOTE 6 - TIME DEPOSITS Time deposits issued and their remaining maturities as of December 31, 2002 are as follows: 2003 $ 10,224,429 2004 through 2005 1,802,869 2006 through 2007 8,287,809 ------------ Total $ 20,315,107 ============ NOTE 7 - BORROWING ARRANGEMENTS The Bank has unsecured borrowing lines with correspondent banks totaling $10,000,000 and secured borrowing lines totaling $2,700,000. Management uses these borrowing lines for short-term funding needs and usually repays the lines within a week. The interest rate charged on these lines is approximately the prevailing federal funds rate plus 30 basis points. As of December 31, 2002, there were no balances outstanding on these lines. As of December 31, 2001, the Bank had borrowed $2,500,000 under these lines. The 2001 advances were repaid in early 2002. B-14 NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE 8 - INCOME TAXES Expected tax expense in 2002 was offset by a $77,000 reduction in the valuation allowance. The tax benefits related to the operating losses incurred during 2001 were not recognized, as realization of the benefits is dependent upon future income. Deferred income taxes reflect the effect of temporary differences between the tax basis of assets and liabilities and the reported amounts of those assets and liabilities for financial reporting purposes. Deferred income taxes also reflect the value of net operating losses and an offsetting valuation allowance. The Bank's deferred tax assets, liabilities and corresponding valuation allowance consist of the following: 2002 2001 ----------- ----------- Deferred tax assets: Allowance for loan losses $ 205,000 $ 125,000 Organization and start up costs 149,000 230,000 Net operating loss carryforward 906,000 1,023,000 Other items 21,000 -- ----------- ----------- 1,281,000 1,378,000 Deferred tax liabilities: Accrual to cash (43,000) (94,000) Unrealized gain on investment securities (77,000) (30,000) ----------- ----------- (120,000) (124,000) Total deferred income tax asset 1,161,000 1,254,000 Valuation allowance (1,207,000) (1,284,000) ----------- ----------- Net deferred income tax liability $ (46,000) $ (30,000) =========== =========== The amounts above include a valuation allowance relating to tax assets for net operating loss carryforwards and other future deductible items, which may not be utilized. The Bank has net operating loss carryforwards of approximately $2.1 million for federal and $2.6 million for state income tax purposes. Net operating loss carryforwards will expire in 2021 for federal income tax purposes and in 2013 for state income tax purposes, if not previously utilized. Utilization of California net operating losses has been suspended until 2004. NOTE 9 - FINANCIAL INSTRUMENTS The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. B-15 NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE 9 - FINANCIAL INSTRUMENTS - CONTINUED The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitment to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Financial instruments at December 31, 2002 and 2001 whose contract amounts represent credit risk: 2002 2001 ----------- ----------- Undisbursed loan commitments $12,351,000 $13,790,000 Standby letters of credit -- 300,000 ----------- ----------- $12,351,000 $14,090,000 =========== =========== Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. NOTE 10 - RELATED PARTY TRANSACTIONS In the ordinary course of business, the Bank has granted loans to certain officers and 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 of comparable transactions with other persons. The following is a summary of the activity in these loans: 2002 2001 ----------- ----------- Balance at the beginning of the year $ 3,618,000 $ -- New loans and renewals 746,000 3,618,000 Repayments and renewals (2,441,000) -- ----------- ----------- Balance at the end of the year $ 1,923,000 $ 3,618,000 =========== =========== B-16 NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE 11 - BANK SAVINGS PLAN In October 2001, the Bank elected to establish a deferred compensation plan for those employees employed as of this date or for all employees who have completed at least 1,000 hours of service during a twelve consecutive month period. The employees may defer a portion of their compensation subject to certain limits based on federal tax laws. The Bank may elect to make matching contributions to the plan. Matching contributions vest to the employee equally over a five-year period. For the years ended December 2002 and 2001, the Bank did not make any contributions to the plan. NOTE 12 - STOCK OPTION PLAN During 1999, the Bank's Board of Directors approved a fixed stock option plan under which incentive and non-qualified stock options may be granted to key, full-time salaried officers, employees and directors of the Bank. The shares of stock initially subject to options authorized to be granted under the Plan consist of 240,000 shares of the authorized and unissued common stock of the Bank. All options are granted at an exercise price equal to the fair market value of the shares on the date of grant and have an exercise period of not longer than ten years from the date of grant. The Plan was ratified by the shareholders at the Bank's annual meeting in May 2001. These options vest equally over a three-year period. The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions used for grants in 2002 and 2001: no expected dividends, a volatility rate of zero; risk-free interest rates of 3.75% in 2002 and 4.0% in 2001; and expected life of 5 years. A summary of the status of the Bank's fixed stock option plan for the years ended December 31, 2002 and 2001 is presented below:
2002 2001 ------------------------ ------------------------ Weighted- Weighted- Average Average Exercise Exercise Shares Price Shares Price ---------- ---------- ---------- ---------- Outstanding at beginning of year 162,500 $ 9.94 181,000 $ 10.00 Granted 15,000 $ 9.50 18,500 $ 9.50 Forfeited (6,500) $ 9.88 (37,000) $ 10.00 ---------- ---------- Outstanding at end of year 171,000 $ 9.91 162,500 $ 9.94 ========== ========== Options exercisable at year end 126,999 $ 9.98 78,347 $ 10.00 Weighted-average fair value of options granted during the year $ 1.60 $ 1.68
B-17 NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE 12 - STOCK OPTION PLAN - CONTINUED
Options Outstanding Options Exercisable ------------------------------------------ --------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Number Remaining Exercise Number Exercise Price Outstanding Life Price Exercisable Price ---------- ------------- ----------- ---------- ------------- ---------- $ 9.50 32,000 8.75 years $ 9.50 5,666 $ 9.50 $ 10.00 139,000 7.25 years $ 10.00 121,333 $ 10.00 ------------- ------------- 171,000 7.50 years $ 9.91 126,999 $ 9.98 ============= =============
NOTE 13 - WARRANTS The Bank was initially capitalized with the sale of 1,099,900 shares of common stock at $10 per share. Each shareholder also received one warrant for each five shares of common stock purchased. The warrants entitled the holder thereof to purchase one share of common stock at the price of $12.50 per share for each warrant. All outstanding warrants expired in November 2002. NOTE 14 - RESTRICTION ON RETAINED EARNINGS Under California State banking laws, the Bank may not pay cash dividends in an amount that exceeds the lesser of retained earnings of net earnings for its last three years (less any dividends paid during that period). If the above requirements are not met, cash dividends may only be paid with the prior approval of the Commissioner of the Department of Financial Institutions, in an amount not exceeding the Bank's earnings for the current or preceding year. NOTE 15 - REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). There are no events or conditions since notification that management believes have changed the Bank's category. B-18 NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE 15 - REGULATORY MATTERS - CONTINUED The Bank's primary federal regulator is the Federal Deposit Insurance Corporation (FDIC). As of December 31, 2002, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table.
To be well- For capital capitalized under adequacy prompt corrective Actual purposes action provisions: ---------------------- ---------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio ------------ ------- ------------ ------- ------------ ------- As of December 31, 2002 Total capital (to Risk Weighted Assets) $8,610,000 15.1% $4,554,000 8.0% $5,693,000 10.0% Tier 1 capital (to Risk Weighted Assets) $8,012,000 14.1% $2,277,000 4.0% $3,416,000 6.0% Tier 1 capital (to Average Assets) $8,012,000 10.0% $3,197,000 4.0% $3,996,000 5.0% As of December 31, 2001 Total capital (to Risk Weighted Assets) $8,198,000 17.1% $3,841,000 8.0% $4,802,000 10.0% Tier 1 capital (to Risk Weighted Assets) $7,993,000 16.2% $1,921,000 4.0% $2,881,000 6.0% Tier 1 capital (to Average Assets) $7,993,000 14.8% $2,105,000 4.0% $2,631,000 5.0%
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. B-19 NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates. The following methods and assumptions were used to estimate the fair value of significant financial instruments: Financial Assets - ---------------- The carrying amounts of cash, short-term investments, due from customers on acceptances, and Bank acceptances outstanding are considered to approximate fair value. Short-term investments include federal funds sold, securities purchased under agreements to resell, commercial paper and interest bearing deposits with Banks. The fair values of investment securities, including available-for-sale, are generally based on quoted market prices. The fair value of loans are estimated using a combination of techniques, including discounting estimated future cash flows and quoted market prices of similar instruments where available. Financial Liabilities - --------------------- The carrying amounts of deposit liabilities payable on demand, commercial paper, and other borrowed funds are considered to approximate fair value. For fixed maturity deposits, fair value is estimated by discounting estimated future cash flows using currently offered rates for deposits of similar remaining maturities. The fair value of long-term debt is based on rates currently available to the Bank for debt with similar terms and remaining maturities. Off-Balance Sheet Financial Instruments - --------------------------------------- The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair value of these financial instruments is not material. B-20 NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 and 2001 NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED The estimated fair value of financial instruments is summarized as follows: (dollar amounts in thousands)
December 31, ------------------------------------------------- 2002 2001 ----------------------- ----------------------- Carrying Fair Carrying Fair Value Value Value Value ---------- ---------- ---------- ---------- Financial Assets: Cash and due from banks $ 4,814 $ 4,814 $ 2,240 $ 2,240 Federal funds sold 5,270 5,270 1,445 1,445 Investment securities 27,450 27,526 19,999 19,979 Loans, net 44,294 44,344 31,132 31,266 Accrued interest receivable 357 357 258 258 Financial Liabilities: Deposits 74,721 75,188 45,641 45,665 Other borrowings -- -- 2,500 2,500 Accrued interest and other liabilities 465 465 221 221
B-21 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers California Legislation Service 1st Bank and Service 1st Bancorp are subject to the California General Corporation Law (the "CGCL"), which provides a detailed statutory framework covering limitation of liability of directors in certain instances and indemnification of any officer, director or other agent of a corporation who is made or threatened to be made a party to any legal proceeding by reason of his or her service on behalf of such corporation. With respect to limitation of liability, the CGCL permits a California corporation to adopt a provision in its articles of incorporation reducing or eliminating the liability of a director to the corporation or its shareholders for monetary damages for breach of the fiduciary duty of care, provided that such liability does not arise from certain proscribed conduct (including intentional misconduct and breach of the duty of loyalty). The CGCL in this regard relates only to actions brought by shareholders on behalf of the corporation (i.e., "derivative actions") and does not apply to claims brought by outside parties. With respect to indemnification, the CGCL provides that to the extent any officer, director or other agent of a corporation is successful "on the merits" in defense of any legal proceeding to which such person is a party or is threatened to be made a party by reason of his or her service on behalf of such corporation or in defense of any claim, issue, or matter therein, such agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith, but does not require indemnification in any other circumstance. The CGCL also provides that a corporation may indemnify any agent of the corporation, including officers and directors, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in a third party proceeding against such person by reason of his or her services on behalf of the corporation, provided the person acted in good faith and in a manner he or she reasonably believed to be in the best interests of such corporation. The CGCL further provides that in derivative suits a corporation may indemnify such a person against expenses incurred in such a proceeding, provided such person acted in good faith and in a manner he or she reasonably believed to be in the best interests of the corporation and its shareholders. Indemnification is not available in derivative actions (1) for amounts paid or expenses incurred in connection with a matter that is settled or otherwise disposed of without court approval or (ii) with respect to matters for which the agent shall have been adjudged to be liable to the corporation unless the court shall determine that such person is entitled to indemnification. The CGCL permits the advancing of expenses incurred in defending any proceeding against a corporate agent by reason of his or her service on behalf of the corporation upon the giving of a promise to repay any such sums in the event it is later determined that such person is not entitled to be indemnified. Finally, the CGCL provides that the indemnification provided by the statute is not exclusive of other rights to which those seeking indemnification may be entitled, by bylaw, agreement or otherwise, to the extent additional rights are authorized in a corporation's articles of incorporation. The law further permits a corporation to procure insurance on behalf of its directors, officers and agents against any liability incurred by any such individual, even if a corporation would not otherwise have the power under applicable law to indemnify the director, officer or agent for such expenses. The Articles of Incorporation and Bylaws of Service 1st Bank and Service 1st Bancorp implement the applicable statutory framework by limiting the personal liability of directors for monetary damages for a breach of a directors' fiduciary duty of care and allowing Service 1st Bank and Service 1st Bancorp to II-1 expand the scope of their indemnification of directors, officers and other agents to the fullest extent permitted by California law. The Articles of Service 1st Bank and Service 1st Bancorp, pursuant to the applicable provisions of the CGCL, also include a provision allowing Service 1st Bank and Service 1st Bancorp to include in their bylaws, and in agreements between Service 1st Bank and Service 1st Bancorp and their directors, officers and other agents, provisions expanding the scope of indemnification beyond that specifically provided under California law. Directors' and Officers' Liability Insurance Service 1st Bank presently maintains a policy of directors' and officers' liability insurance. There is no assurance, however, that such coverage will continue to be available with such breadth of coverage as Service 1st Bank deems advisable and at reasonable expense. It is intended that the coverage provided by the insurance be made available to the officers and directors of Service 1st Bancorp upon consummation of the Merger. Item 21. Exhibits and Financial Statement Schedules (a) The following exhibits are filed as part of this Registration Statement: (2.1) Plan of Reorganization and Merger Agreement (included in Annex A). (3.1) Articles of Incorporation. (3.2) Bylaws. (4.1) Specimen form of certificate for Service 1st Bancorp common stock. (5.1) Opinion and consent of Dodd-Mason-George LLP. (8.1) Opinion of Vavrinek, Trine, Day & Co., LLP. (10.1) Lease agreement dated May 3, 2002, related to 2800 W. March Lane, Suite 120, CA 95219. (10.2) Lease agreement dated April 13, 1999 and amendment thereto dated June 17, 1999, related to 60 W. 10th Street, Tracy, CA 95376. (10.3)* 1999 Service 1st Bank Stock Option Plan and related forms of Incentive and Nonstatutory Stock Option Agreements entered into with executive officers and directors of Service 1st Bank. (10.4) Agreement dated July 27, 1999 with BancData Solutions, Inc. for service bureau and data processing services. (10.5) Agreement with Financial Marketing Services dated February 1, 2000. (10.6)* Service 1st Bank 401(k) Profit Sharing Plan and Trust Summary Plan Description, dated January 1, 2000. (10.7)* Patrick Carman Employment Letter dated May 26, 2000. II-2 (10.8)* John O. Brooks Employment Agreement dated November 1, 2000. (10.9)* Robert E. Bloch Employment Letter dated February 26, 2001. (10.10) Dennis A. Reed (Senior Vice President/Senior Real Estate Officer) Employment Agreement dated January 22, 2002. (10.11) John A. Montalbo (Senior Vice President/SBA Department Manager) Employment Agreement dated March 18, 2002. (10.12)* Bryan Hyzdu Severance Agreement dated November 1, 2002. (23.1) Consent of Vavrinek, Trine, Day & Co., LLP. (23.2) Consent of Dodd-Mason-George LLP (included in Exhibit 5.1). (24.1) Power of Attorney (included at Pages II-6 and II-7). (99.1) Form of Proxy for 2003 Annual Meeting of Service 1st Bank Shareholders. *Denotes management compensatory plans or arrangements Item 22. Undertakings The undersigned Registrant hereby undertakes: (1) 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 of 1933; (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; provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the Registration Statement is on Form S-3 or Form S-8 and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-3 The undersigned Registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through the use of a Prospectus which is a part of this Registration Statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the Registrant undertakes that such reoffering Prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters in addition to the information called for by other Items of the applicable form. The Registrant undertakes that every Prospectus (i) that is filed pursuant to Paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the Prospectus pursuant to Items 4, 10(b), 11 or 13 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. The Registrant hereby undertakes to supply by means 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. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant duly caused this Registration Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Stockton, State of California, on April 1, 2003. SERVICE 1ST BANCORP By: /s/ JOHN O. BROOKS ------------------------------------- John O. Brooks Chairman 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. Date: April 1, 2003 /s/ JOHN O. BROOKS ----------------------------------------- John O. Brooks Chairman and Chief Executive Officer Date: April 1, 2003 /s/ ROBERT BLOCH ----------------------------------------- Robert Bloch Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) II-5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John O. Brooks and Robert Bloch, and each or any one of them, his true and lawful attorney-in-fact and agent, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Signature Title Date --------- ----- ---- /s/ JOHN O. BROOKS Chairman April 1, 2003 - ------------------------------ John O. Brooks /s/ EUGENE C. GINI Director April 1, 2003 - ------------------------------ Eugene C. Gini /s/ BRYAN R. HYZDU Director April 1, 2003 - ------------------------------ Bryan R. Hyzdu /s/ ROBERT D. LAWRENCE Director April 1, 2003 - ------------------------------ Robert D. Lawrence /s/ FRANCES C. MIZUNO Director April 1, 2003 - ------------------------------ Frances C. Mizuno /s/ RICHARD R. PAULSEN Director April 1, 2003 - ------------------------------ Richard R. Paulsen /s/ GARY A. PODESTO Director April 1, 2003 - ------------------------------ Gary A. Podesto /s/ TONI MARIE RAYMUS Director April 1, 2003 - ------------------------------ Toni Marie Raymus /s/ MICHAEL K. REPETTO Director April 1, 2003 - ------------------------------ Michael K. Repetto II-6 /s/ ANTHONY F. SOUZA Director April 1, 2003 - ------------------------------ Anthony F. Souza /s/ ALBERT VAN VELDHUIZEN Director April 1, 2003 - ------------------------------ Albert Van Veldhuizen /s/ DONALD L. WALTERS Director April 1, 2003 - ------------------------------ Donald L. Walters II-7 EXHIBIT INDEX
Exhibit Sequential No. Exhibit Name Page No. - --- ------------ -------- 2.1 Plan of Reorganization and Merger Agreement (included in Annex A). 3.1 Articles of Incorporation. 3.2 Bylaws. 4.1 Specimen form of certificate for Service 1st Bancorp common stock. 5.1 Opinion and consent of Dodd-Mason-George LLP. 8.1 Opinion of Vavrinek, Trine, Day & Co., LLP. 10.1 Lease agreement dated May 3, 2002, related to 2800 W. March Lane, Suite 120, Stockton, CA 95219. 10.2 Lease agreement dated April 13, 1999 and amendment thereto dated June 17, 1999, related to 60 W. 10th Street, Tracy, CA 95376. 10.3* 1999 Service 1st Bank Stock Option Plan and related forms of Incentive and Nonstatutory Stock Option Agreements entered into with executive officers and directors of Service 1st Bank. 10.4 Agreement dated July 27, 1999 with BancData Solutions, Inc. for service bureau and data processing services. 10.5 Agreement with Financial Marketing Services dated February 1, 2000. 10.6* Service 1st Bank 401(k) Profit Sharing Plan and Trust Summary Plan Description, dated January 1, 2000. 10.7* Patrick Carman Employment Letter dated May 26, 2000. 10.8* John O. Brooks Employment Agreement dated November 1, 2000. 10.9* Robert E. Bloch Employment Letter dated February 26, 2001. 10.10 Dennis A. Reed (Senior Vice President/Senior Real Estate Officer) Employment Agreement dated January 22, 2002. 10.11 John A. Montalbo (Senior Vice President/SBA Department Manager) Employment Agreement dated March 18, 2002. 10.12* Bryan Hyzdu Severance Agreement dated November 1, 2002.
II-8 23.1 Consent of Vavrinek, Trine, Day & Co., LLP. 23.2 Consent of Dodd-Mason-George LLP (included in Exhibit 5.1). 24.1 Power of Attorney (included at Pages II-6 and II-7). 99.1 Form of Proxy for 2003 Annual Meeting of Service 1st Bank Shareholders. *Denotes management compensatory plans or arrangements II-9 EX-3.1 3 ex3_1.txt EXHIBIT 3.1 EXHIBIT 3.1 ARTICLES OF INCORPORATION OF SERVICE 1ST BANCORP The name of this corporation is Service 1st Bancorp. II The purpose of this 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. III The name and address in the State of California of this corporation's initial agent for service of process is: John O. Brooks c/o Service 1st Bank 2800 West March Lane, Suite 120 Stockton, CA 95219 IV This corporation is authorized to issue two classes of shares designated "Common Stock" and "Preferred Stock," respectively. The number of shares of Common Stock authorized to be issued is 20,000,000, and the number of shares of Preferred Stock authorized to be issued is 10,000,000. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares of any series of Preferred Stock and to determine the designation of any such series. The Board of Directors is also authorized to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, and, 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, to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. V Section 1. Limitation of Directors' Liability. The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. Section 2. Indemnification of Directors and Officers. This corporation is authorized to indemnify the directors and officers of the corporation to the fullest extent permissible under California law. Section 3. Repeal or Modification. Any repeal or modification of the foregoing provisions of this Article V shall not adversely affect any right of indemnification or limitation of liability of a director or officer of this corporation relating to acts or omissions occurring prior to such repeal or modification. Dated: January 23, 2003 /s/SHANNON EVANS ---------------- Shannon Evans Sole Incorporator EX-3.2 4 ex3_2.txt EXHIBIT 3.2 EXHIBIT 3.2 BYLAWS OF SERVICE 1ST BANCORP TABLE OF CONTENTS ----------------- Page ARTICLE I Offices...........................................................1 ------- Section 1. Principal Office...........................................1 --------- ---------------- Section 2. Other Offices..............................................1 --------- ------------- ARTICLE II Meetings of Shareholders.........................................1 ------------------------ Section 3. Place of Meeting...........................................1 --------- ---------------- Section 4. Annual Meeting; Shareholder Proposals......................1 --------- ------------------------------------- Section 5. Special Meeting............................................2 --------- --------------- Section 6. Notice of Shareholders' Meeting............................2 --------- ------------------------------- Section 7. Nominations for Election to Board of Directors.............2 --------- ---------------------------------------------- Section 8. Quorum.....................................................3 --------- ------ Section 9. Adjourned Meeting..........................................3 --------- ----------------- Section 10. Waiver or Consent by Shareholders.........................3 ---------- --------------------------------- Section 11. Action Without Meeting....................................4 ---------- ---------------------- Section 12. Voting Rights; Cumulative Voting..........................4 ---------- -------------------------------- Section 13. Proxies...................................................5 ---------- ------- Section 14. Inspectors of Election....................................5 ---------- ---------------------- ARTICLE III Directors; Management...........................................5 --------------------- Section 15. Powers....................................................5 ---------- ------ Section 16. Number and Qualification of Directors.....................5 ---------- ------------------------------------- Section 17. Election and Term of Office...............................6 ---------- --------------------------- Section 18. Removal of Directors......................................6 ---------- -------------------- Section 19. Vacancies.................................................6 ---------- --------- Section 20. Place of Meeting..........................................6 ---------- ---------------- Section 21. Organizational Meetings...................................7 ---------- ----------------------- Section 22. Other Regular Meeting.....................................7 ---------- --------------------- Section 23. Special Meeting...........................................7 ---------- --------------- Section 24. Quorum....................................................7 ---------- ------ Section 25. Contents of Notice and Waiver of Notice...................7 ---------- --------------------------------------- Section 26. Adjournment...............................................7 ---------- ----------- Section 27. Notice of Adjournment.....................................7 ---------- --------------------- Section 28. Telephone Participation...................................8 ---------- ----------------------- Section 29. Action without Meeting....................................8 ---------- ---------------------- Section 30. Fees and Compensation.....................................8 ---------- --------------------- ARTICLE IV Officers.........................................................8 -------- Section 31. Officers..................................................8 ---------- -------- Section 32. Election..................................................8 ----------- -------- Section 33. Subordinate Officers......................................8 ---------- -------------------- Section 34. Removal and Resignation...................................8 ---------- ----------------------- Section 35. Vacancies.................................................8 ---------- --------- Section 36. Chairman of the Board.....................................9 ---------- --------------------- Section 37. Chief Executive Officer...................................9 ---------- ----------------------- Section 38. Vice Presidents...........................................9 ---------- --------------- Section 39. Secretary.................................................9 ---------- --------- Section 40. Chief Financial Officer...................................9 ---------- ----------------------- ARTICLE V General Corporate Matters........................................10 ------------------------- Section 41. Record Date and Closing of Stockbooks....................10 ---------- ------------------------------------- Section 42. Corporate Records and Inspection by ---------- ------------------------------------ Shareholders and Directors......................................10 -------------------------- Section 43. Checks, Drafts, Evidences of Indebtedness................11 ---------- ----------------------------------------- Section 44. Corporate Contracts and Instruments; How Executed........11 ---------- ------------------------------------------------ Section 45. Stock Certificates.......................................11 ---------- ------------------ Section 46. Lost Certificates........................................11 ---------- ----------------- Section 47. Reports to Shareholders..................................11 ---------- ----------------------- Section 48. Indemnity of Officers and Directors......................12 ---------- ----------------------------------- ARTICLE VI Amendments......................................................15 ---------- Section 49. Amendments by Shareholders...............................15 ---------- -------------------------- Section 50. Amendments by Directors..................................15 ---------- ----------------------- ARTICLE VII Committees of the Board........................................15 ----------------------- Section 51. Committees of the Board..................................15 ---------- ----------------------- ARTICLE I Offices ------- Section 1. Principal Office. The principal executive office in the State of California for the transaction of the business of the corporation (called the principal office) shall be fixed from time to time by resolution of the Board of Directors. Section 2. Other Offices. One or more branches or other subordinate offices may at any time be fixed and located by the Board of Directors at such place or places within or without the State of California as the Board deems appropriate. ARTICLE II Meetings of Shareholders ------------------------ Section 3. Place of Meeting. Meetings of the shareholders shall be held at any place within or outside the State of California that may be designated either by the Board of Directors in accordance with these Bylaws, or by the written consent of all persons entitled to vote at the meeting, given either before or after the meeting and filed with the Secretary of the corporation. If no such designation is made, the meetings shall be held at the principal office of the corporation designated in accordance with Section 1 of these Bylaws. Section 4. Annual Meeting; Shareholder Proposals. --------- ------------------------------------- (a) The annual meeting of the shareholders shall be held on a date and at a time and location designated by the Board of Directors. The date so designated shall be within fifteen (15) months after the last annual meeting of shareholders, if not a legal holiday, and if a legal holiday, then on the next succeeding business day, at which time the shareholders shall elect a Board of Directors, consider reports of the affairs of the corporation, and transact such other business as may properly be brought before the meeting. (b) If the annual meeting of shareholders shall not be held on the date above specified, the Board of Directors shall cause such a meeting to be held as soon thereafter as convenient, and any business transacted or election held at such meeting shall be as valid as if transacted or held at an annual meeting on the date above specified. (c) Notice of proposals which shareholders intend to present at any annual meeting of shareholders and wish to be included in the proxy statement of management of the bank distributed in connection with such annual meeting must be received at the principal executive offices of the bank not less than 120 days prior to the date on which, during the previous year, management's proxy statement for the previous year's annual meeting was first distributed to shareholders. Any such proposal, and the proponent shareholder, must comply with the eligibility requirements set forth in Rule 14a-8 of the Securities and Exchange Commission. (d) The proxy solicited by management for any annual meeting of shareholders shall confer discretionary authority upon management's proxy holders to vote with respect to any shareholder proposal offered at such meeting, the proponent of which has not notified the bank, within the time period specified by Section 2 of these Bylaws, of his or her intention to present such proposal at the annual meeting. Specific reference to such voting authority shall be made in management's proxy statement for each annual meeting. 1 Section 5. Special Meeting. Special meetings of the shareholders, for any purpose or purposes whatsoever, may be called at any time by the Board of Directors, the Chairman of the Board, the President, or by holders of shares entitled to cast not less than ten percent (10%) of the votes at the meeting. At such meetings, no business may be transacted other than as is generally specified in the notice provided to the shareholders pursuant to Section 6 of these Bylaws. Section 6. Notice of Shareholders' Meeting. --------- ------------------------------- (a) Whenever shareholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date and hour of the meeting and (1) in the case of a special meeting, the general nature of the business to be transacted, or (2) in the case of the annual meeting, those matters which the Board, at the time of the mailing of the notice, intends to present for action by the shareholders, but subject to the provisions of Section 601(f) of the California Corporations Code (the "Code"), any proper matter may be presented at the meeting for such action. The notice of any meeting at which directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by management for election. (b) Notice of a shareholders' meeting shall be given either personally or by first class mail or other means of written communication, addressed to the shareholder at the address of such shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice; or if no such address appears or is given, at the place where the principal office of the corporation is located. The 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. (c) Notwithstanding the foregoing, whenever the corporation has outstanding shares held of record by five hundred (500) or more persons, notice may be given by third class mail as provided in Sections 601(a) and 601(b) of the Code. (d) If any notice 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 to the shareholder at such address, all future notices 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 office of the corporation for a period of one year from the date of the giving of the notice to all other shareholders. (e) Upon request in writing to the Chairman of the Board, President, or Secretary by any person entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than thirty-five nor more than sixty days after the receipt of the request. Section 7. Nominations for Election to Board of Directors. Nominations for election to the Board of Directors may be made by the Board of Directors or by any shareholder entitled to vote for the election of directors. Nominations, other than those made by the Board of Directors, shall be made in writing and shall be delivered or mailed, with first-class United States mail postage prepaid, to the President by the later of: (i) the close of business twenty-one (21) days prior to any meeting of shareholders called for the election of directors; or (ii) seven (7) days after the date of mailing of notice of the meeting of shareholders. Shareholder nominations shall contain the following information: (a) the name, age, business address and, if known, residence address of each proposed nominee; (b) the principal occupation or employment of each proposed nominee; (c) the total number of shares of capital stock of the corporation that are beneficially owned by each proposed nominee and by the nominating shareholder; 2 (d) the name and residence address of the notifying shareholder; and (e) any other information the corporation must disclose regarding director nominees in the corporation's proxy solicitation. Shareholder nominations shall be signed by the nominating shareholder and by each nominee, and shall be accompanied by a written consent to be named as a nominee for election as a director from each proposed nominee. Nominations not made in accordance with this Section may be disregarded by the Chairman of the meeting, and if the Chairman so instructs, the inspectors of election may disregard all votes cast for each such nominee. Section 8. Quorum. The presence at any meeting, in person or by proxy, of the persons entitled to vote a majority of the voting shares of the corporation shall constitute a quorum for the transaction of business. Shareholders present at a valid meeting at which a quorum is initially 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 persons voting more than twenty five percent (25%) of the shares entitled to vote. Section 9. Adjourned Meeting. --------- ----------------- (a) Any annual or special shareholders' meeting may be adjourned from time to time, even though a quorum is not present, by vote of the holders of a majority of the voting shares present at the meeting either in person or by proxy, provided that in the absence of a quorum, no other business may be transacted at the meeting except as provided in Section 8. (b) Notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, any business may be transacted which might have been transacted at the original meeting. If the adjournment is for more than forty-five (45) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. Section 10. Waiver or Consent by Shareholders. ---------- --------------------------------- (a) The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, one or more of the holders of each of the shares entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. (b) Attendance of a person at a meeting shall constitute a waiver of notice of and presence at such meeting, except when the person objects, at the beginning of the 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 required by Section 6 of these Bylaws or Section 601(f) of the Code to be included in the notice but not so included, if such objection is expressly made at the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of shareholders need be specified in any written waiver of notice, consent to the holding of the meeting or approval of the minutes thereof, except as provided in Section 601(f) of the Code. 3 Section 11. Action Without Meeting. ---------- ---------------------- (a) Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, shall be 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, except that unanimous written consent shall be required for election of directors to non-vacant positions. (b) Unless the consents of all shareholders entitled to vote have been solicited or received in writing, notice shall be given to non-consenting shareholders to the extent required by Section 603(b) of the Code. (c) Any shareholder giving a written consent, or the shareholder's proxyholders, or a transferee of the shares or a personal representative of the shareholder or their respective proxyholders, may revoke the consent by a writing received by the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary of the corporation. Section 12. Voting Rights; Cumulative Voting. ---------- -------------------------------- (a) Only persons in whose names shares entitled to vote stand on the stock records of the corporation at the close of business on the record date fixed by the Board of Directors as provided in Section 41 hereof for the determination of shareholders of record shall be entitled to notice of and to vote at such meeting of shareholders. If no record date is fixed, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board has been taken, shall be the day on which the first written consent is given: and the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. (b) Except as provided in the next following sentence and except as may be otherwise provided in the Articles of Incorporation, each shareholder entitled to vote shall be entitled to one vote for each share held on each matter submitted to a vote of shareholders. In the election of directors, each such shareholder complying with the following paragraph may cumulate such shareholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are normally entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder thinks fit. (c) No shareholder shall be entitled to cumulate votes in favor of any candidate or candidates unless such candidate's or candidates' names have been placed in nomination prior to the voting and the shareholder has given notice at the meeting prior to the voting of the shareholder's intention to cumulate the shareholder's votes. If any one shareholder has given such notice, such fact shall be announced to all shareholders and proxies present, who may then cumulate their votes for candidates in nomination. (d) In any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them, up to the number of directors to be elected by such shares, are elected. 4 (e) Voting may be by voice or ballot, provided that any election of directors must be by ballot upon the demand of any shareholder made at the meeting and before the voting begins. Section 13. Proxies. Every person entitled to vote shares may authorize another person or persons to act by proxy with respect to such shares. All proxies must be in writing and must be signed by the shareholder confirming the proxy or his attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. Every proxy continues in full force and effect until revoked by the person executing it prior to the vote pursuant thereto, except as otherwise provided in Section 705 of the Code. Such revocation may be effected by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by the person executing the prior proxy and presented to the meeting, or as to any meeting, by attendance at such meeting and voting in person by the person executing the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. Section 14. Inspectors of Election. ---------- ---------------------- (a) In advance of any meeting of shareholders the Board may appoint inspectors of election to act at the meeting and any adjournment thereof. If inspectors of election are not so appointed, or if any persons so appointed fail to appear or refuse to act, the chairman of any meeting of shareholders may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election for persons to replace those who so fail or refuse) at the meeting. The number of inspectors shall be either one or three. 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 or three inspectors are to be appointed. 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. (b) The inspectors of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies, receive votes, ballots or consents, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes or consents, determine when the polls shall close, determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE III Directors; Management --------------------- Section 15. Powers. Subject to any provisions of the Articles of Incorporation, of the Bylaws and of law limiting the powers of the Board of Directors or reserving powers to the shareholders, the Board of Directors shall, directly or by delegation, manage the business and affairs of the corporation and exercise all corporate powers permitted by law. Section 16. Number and Qualification of Directors. The authorized number of directors shall not, unless and until changed by an amendment to this Section 16 adopted by the shareholders pursuant to Section 50, be less than nine (9) nor more than seventeen (17) provided, however, that so long as the corporation has only one shareholder, the authorized number of directors shall be one, and so long as the corporation has only two shareholders the number of directors shall be two. The exact number of directors within said range shall be fixed by a resolution adopted by the Board of Directors; and unless and until so fixed, the exact number of directors is hereby fixed at twelve (12). A reduction in the authorized number of directors shall not remove any director prior to the expiration of such director's term of office. Directors need not be shareholders of the corporation. 5 Section 17. Election and Term of Office. The directors shall be elected annually by the shareholders at the annual meeting of the shareholders; provided, however, that if for any reason said annual meeting or an adjournment thereof is not held or the directors are not elected thereat, then the directors may be elected at any special meeting of the shareholders called and held for that purpose. The term of office of the directors shall, except as provided in Section 18, begin immediately after their election and shall continue until their respective successors are elected and qualified. Section 18. Removal of Directors. ---------- -------------------- (a) A director may be removed from office by the Board of Directors if he or she is declared of unsound mind by the order of a court or convicted of a felony. Any or all of the directors may be removed from office without cause by a vote of shareholders holding a majority of the outstanding shares entitled to vote at an election of directors, however, unless the entire Board is removed, an individual director shall not be removed if the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast, or, if such action is taken by written consent, all shares entitled to vote were voted, and the entire number of directors authorized at the time of the director's most recent election were then being elected. A director may also be removed from office by the Superior Court of the county in which the principal office is located, at the suit of shareholders holding at least ten percent (10%) of the number of outstanding shares of any class, in case of fraudulent or dishonest acts or gross abuse of authority or discretion with reference to the corporation, in the manner provided by law. (b) No reduction of the authorized number of directors shall have the effect of removing any director before his term of office expires. Section 19. Vacancies. ---------- --------- (a) A vacancy or vacancies on the Board of Directors shall exist when any authorized position of director is not then filled by a duly elected director, whether caused by death, resignation, removal, change in the authorized number (by the Board or the shareholders) or otherwise. (b) Except for a vacancy created by the removal of a director, vacancies on the Board of Directors may be filled by a majority of the remaining directors although less than a quorum, or by a sole remaining director, and each director elected in this manner shall hold office until his successor is elected at an annual or special shareholders' meeting. (c) The shareholders may elect a director at any time to fill any vacancy not filled by the directors. Any such election by written consent other than to fill a vacancy created by removal requires the consent of a majority of the outstanding shares entitled to vote. (d) 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 resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Section 20. Place of Meeting. Regular and special meetings of the Board of Directors shall be held at any place within or outside the State of California that is designated by resolution of the Board or, either before or after the meeting, consented to in writing by all the Board members. If the place of a regular or special meeting is not fixed by resolution or written consents of the Board, it shall be held at the corporation's principal office. 6 Section 21. Organizational Meetings. Immediately following each annual shareholders' meeting, the Board of Directors shall hold an organizational meeting to organize, elect officers, and transact other business. Notice of this meeting shall not be required. Section 22. Other Regular Meeting. Other regular meetings of the Board of Directors shall be held on the third Thursday of every month each year until changed by resolution of the Board of Directors; provided, however, if this day falls on a legal holiday, the meeting shall be held at the same time on the next succeeding day that is a full business day. Notice of these regular meetings shall not be required. Section 23. Special Meeting. ---------- --------------- (a) Special meetings of the Board of Directors for any purpose may be called at any time by the Chairman of the Board, the President, any Vice President, the Secretary, or any two directors. (b) Special meetings of the Board shall be held upon four days' notice by mail or forty-eight (48) hours' notice delivered personally or by telephone, facsimile or electronic transmission. If notice is by telephone, it shall be delivered when the person calling the meeting believes in good faith that the notified person has heard and acknowledged the notice. If the notice is by mail, it shall be delivered when deposited in the United States mail at the place where the corporation's principal office is located, charges prepaid and addressed to the notified person at such person's address appearing on the corporate records or, if it is not on these records or is not readily ascertainable, at the place where the regular Board meeting is held. If the notice is by facsimile or electronic transmission, it shall be delivered when sent to the facsimile or electronic transmission number or address designated by the person for receipt of facsimile or electronic transmissions and upon receipt by the person calling the meeting of a confirmation of the delivery of the notice to such number or address in the form of a written or electronic confirmation generated by the facsimile or electronic device used by the person giving notice, or confirmation by oral acknowledgement or attendance at the meeting of the person notified. Section 24. Quorum. A majority of the authorized number of directors (unless the authorized number of directors is one) shall constitute a quorum for the transaction of business, except to adjourn a meeting under Section 26. Every act done or decision made by a majority of the directors present at a meeting at which a quorum is present shall be regarded as the act of the Board of Directors, unless the vote of a greater number is required by law, the Articles of Incorporation, or these Bylaws. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by a majority of the required quorum for such meeting. Section 25. Contents of Notice and Waiver of Notice. Neither the business to be transacted at, nor the purpose of, any regular or special Board meeting need be specified in the notice or waiver of notice of the meeting. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, either before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to said director. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 26. Adjournment. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. Section 27. Notice of Adjournment. Notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place are fixed at the meeting being adjourned, except that if the meeting is adjourned for more than twenty-four (24) hours such notice shall be given prior to the adjourned meeting to the directors who were not present at the time of the adjournment. 7 Section 28. Telephone Participation. 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 meetings can hear one another. Such participation constitutes presence in person at such meeting. Section 29. Action without Meeting. The Board of Directors may take any action without a meeting that may be required or permitted to be taken by the Board at a meeting, if all members of the Board individually or collectively consent in writing to the action. The written consent or consents shall be filed in the minutes of the proceedings of the Board. Such action by written consent shall have the same effect as a unanimous vote of directors. Section 30. Fees and Compensation. Directors and members of committees shall receive neither compensation for their services nor reimbursement for their expenses unless these payments are fixed by resolution of the Board. ARTICLE IV Officers -------- Section 31. Officers. The officers of the corporation shall be a President, a Secretary, and a Chief Financial Officer. The corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries, and any other officers who may be appointed under Section 33 of these Bylaws. Section 32. Election. The officers of the corporation, except those appointed under Section 33 of these Bylaws, shall be chosen annually by the Board of Directors, and each shall hold his office until he or she resigns or is removed or otherwise disqualified to serve, or his or her successor is elected and qualified. Section 33. Subordinate Officers. The Board of Directors may appoint, and may authorize the President to appoint, any other officers that the business of the corporation may require, each of whom shall hold office for the period, have the authority, and perform the duties specified in the Bylaws or by the Board of Directors. Section 34. Removal and Resignation. ---------- ----------------------- (a) Any officer may be removed with or without cause either by the Board of Directors at any regular or special directors' meeting or, except for an officer chosen by the Board, by any officer on whom the power of removal may be conferred by the Board. (b) Any officer may resign at any time by giving written notice to the Board of Directors, the Chairman and Chief Executive Officer, the President or the Secretary of the corporation. An officer's resignation shall take effect when it is received or at any later time specified in the resignation. Unless the resignation specifies otherwise, its acceptance by the corporation shall not be necessary to make it effective. Section 35. 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 the office. 8 Section 36. Chairman of the Board. The Chairman of the Board, if such office is created and filled by the Board of Directors, shall preside at all meetings of the directors and shareholders at which he or she is present, shall be ex-officio a member of all the standing committees created by the Board, and shall exercise and perform any other powers and duties assigned to him or her by the Board or prescribed by the Bylaws. Section 37. Chief Executive Officer . Subject to any supervisory powers that may be given by the Board of Directors or the Bylaws to the Chairman of the Board or any other officer who may be designated the Chief Executive Officer, the corporation's chief executive officer shall be designated the Chief Executive Officer, and shall, subject to the supervision and control of the Board of Directors, have general supervision, direction, and control over the corporation's business and officers. He or she shall preside as chairman at all meetings of the shareholders and directors not presided over by the Chairman of the Board, shall be ex-officio a member of all the standing committees, shall have the general powers and duties that are prescribed by the Board of Directors or the Bylaws, and shall be primarily responsible for carrying out all orders and resolutions of the Board of Directors. Section 38. Vice Presidents. If the President is absent or is unable or refuses to act, 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 on, the President. Each Vice President shall have any other powers and perform any other duties that are prescribed for him or her by the Board of Directors or their Bylaws. Section 39. Secretary. ---------- --------- (a) The Secretary shall keep or cause to be kept, and be available at the principal office and any other place that the Board of Directors specifies, a book of minutes of all directors' and shareholders' meetings. The minutes of each meeting shall state the time and place that it was held, whether it was regular or special, if a special meeting, how it was authorized, the notice given the names of those present or represented at shareholders' meetings, and the proceedings of the meetings. A similar minute book shall be kept for any committees, if required by the Board. (b) The Secretary shall keep, or cause to be kept, at the principal office or at the office of the corporation's transfer agent, a share register, or duplicate share register, showing the shareholders' names and addresses, the number and classes of shares held by each, the number and date of each certificate issued for these shares, and the number and date of cancellation of each certificate surrendered for cancellation. (c) The Secretary shall give, or cause to be given, notice of all directors' and shareholders' meetings required to be given under these Bylaws or by law, shall keep the corporate seal in safe custody, and shall have any other powers and perform any other duties that are prescribed by the Board of Directors or the Bylaws. Section 40. Chief Financial Officer. ---------- ----------------------- (a) The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the corporation's properties and business transactions, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. (b) The Chief Financial Officer shall deposit all money and other valuables in the name and to the credit of the corporation with the depositories designated by the Board of Directors. He or she shall 9 disburse the corporation's funds as ordered by the Board of Directors; shall render to the President and directors, whenever they request it, an account of all his or her transactions as Chief Financial Officer and of the corporation's financial condition; and shall have any other powers and perform any other duties that are prescribed by the Board of Directors or Bylaws. (c) If required by the Board of Directors, the Chief Financial Officer shall give the corporation a bond in the amount and with the surety or sureties specified by the Board for faithful performance of the duties of his or her office and for restoration to the corporation of all its books, papers, vouchers, money, and other property of every kind in his or her possession or under his or her control on his or her death, resignation, retirement, or removal from office. ARTICLE V General Corporate Matters ------------------------- Section 41. Record Date and Closing of Stockbooks. ---------- ------------------------------------- (a) The Board of Directors may fix a time in the future as a record date for determining shareholders entitled to notice of and to vote at any shareholders' meeting: to receive any dividend, distribution, or allotment of rights: or to exercise rights in respect of any other lawful action, including change, conversion, or exchange of shares. The record date shall not, however, be more than sixty (60) nor less than ten (10) days prior to the date of such meeting nor more than sixty (60) days prior to any other action. If a record date is fixed for a particular meeting or event, only shareholders of record on that date are entitled to notice and to vote and to receive the dividend, distribution, or allotment of 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. (b) A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting, but the Board shall fix a new record date if the meeting is adjourned for more than forty-five (45) days. Section 42. Corporate Records and Inspection by Shareholders and ---------- ---------------------------------------------------- Directors. - --------- (a) Books and records of account and minutes of the proceedings of the shareholders, Board, and committees of the Board shall be kept available for inspection at the principal office. A record of the shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each, shall be kept available for inspection at the principal office or at the office of the corporation's transfer agent or registrar. (b) A shareholder or shareholders holding at least five percent in the aggregate of the outstanding voting shares of the corporation shall have an absolute right to do either or both of the following: (1) inspect and copy the record of shareholders' names and addresses and shareholdings during the usual business hours upon five business days' prior written demand upon the corporation, or (2) obtain from the transfer agent for the corporation, upon five business days' prior written demand and upon the tender of its usual charges for such a list (the amount of which charges shall be stated to the shareholder by the transfer agent upon request), a list of the shareholders' names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. The record of shareholders shall also be open to inspection and copying by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to such holder's interests as a shareholder or holder of a voting trust certificate. Inspection and copying may be made in person or by agent or attorney. 10 (c) Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation and its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and includes the right to copy and make extracts. Section 43. Checks, Drafts, Evidences of Indebtedness. All checks, drafts, or other orders for payment of money, notes, and all mortgages, or other evidences of indebtedness, issued in the name of or payable to the corporation, and all assignments and endorsements of the foregoing, shall be signed or endorsed by the person or persons and in the manner specified by the Board of Directors. Section 44. Corporate Contracts and Instruments; How Executed. Except as otherwise provided in the Bylaws, officers, agents, or employees must be authorized by the Board of Directors to enter into any contract or execute any instrument in the corporation's name and on its behalf. This authority may be general or confined to specific instances. Section 45. Stock Certificates. One or more certificates for shares of the corporation's capital stock shall be issued to each shareholder for any of his shares that are fully paid up. The corporate seal or its facsimile may be fixed on certificates. All certificates shall be signed by (a) either the Chairman of the Board, the President, or a Vice President and (b) either the Secretary, the Chief Financial Officer, or an Assistant Secretary. Any or all of the signatures on the certificate may be facsimile signatures. Section 46. Lost Certificates. No new share certificate that replaces an old one shall be issued unless the old one is surrendered and canceled at the same time, provided, however, that if any share certificate is lost, stolen, mutilated, or destroyed, the Board of Directors may authorize issuance of a new certificate replacing the old one on any terms and conditions, including a reasonable arrangement for indemnification of the corporation, that the Board may specify. Section 47. Reports to Shareholders. ---------- ----------------------- (a) The requirement for the annual report to shareholders referred to in Section 1501(a) of the Code is hereby expressly waived so long as there are less than 100 holders of records of the corporation's shares. The Board of Directors shall cause to be sent to the shareholders such annual or other periodic reports as they consider appropriate or as otherwise required by law. In the event the corporation has 100 or more holders of its shares, an annual report complying with Section 1501(a) and, when applicable, Section 1501(b) of the Code shall be sent to the shareholders not later than 120 days after the close of the fiscal year and at least fifteen (15) days prior to the annual meeting of shareholders to be held during the next fiscal year. (b) If no annual report for the last fiscal year has been sent to shareholders, the corporation shall, upon the written request of any shareholder made more than 120 days after the close of such fiscal year, deliver or mail to the person making the request within thirty (30) days thereafter the financial statements referred to in Section 1501(a) of the Code for such year. (c) A shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of a 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 thirty (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 statements referred to in Section 1501(a) of the Code for the last fiscal year. The statement shall be delivered or mailed to the person making the request within thirty (30) days thereafter, copy of the statements shall be kept on file in the principal office of the corporation for twelve (12) months and they 11 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 income statements and balance sheets referred to 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 48. Indemnity of Officers and Directors. ---------- ----------------------------------- (a) Action, Etc., Other Than by Right of the Corporation. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the corporation to procure a judgment in its favor) by reason of the fact that such person is or was an Agent (as that term is defined in paragraph of this Section 48, below) of the corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceedings if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the corporation and, in the case of a criminal proceeding, has no reasonable cause to believe the conduct of such person 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 a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of the corporation or that the person had reasonable cause to believe that the person's conduct was unlawful. (b) Action, Etc., by or in the Right of the Corporation. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was an Agent of the corporation, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action if such person acted in good faith, in a manner such person believed to be in the best interests of the corporation and its shareholders, except that no indemnification shall be made under this paragraph (b) of Section 48 for any of the following: (1) In respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation in the performance of such person's duty to the corporation and its shareholders, 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, such person is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine; (2) Of amounts paid in settling or otherwise disposing of a pending action without court approval: or (3) Of expenses incurred in defending a threatened or pending action which is settled or otherwise disposed of without court approval. (c) Determination of Right of Indemnification. Any indemnification under paragraphs (a) or (b) of Section 48, above, shall be made by the corporation only if authorized in the specific case, upon a determination that indemnification of the Agent is proper in the circumstances because the Agent has met the applicable standard of conduct by any of the following: (1) A majority vote of a quorum consisting of directors who are not parties to such proceedings; (2) If such a quorum of directors is not obtainable, by independent legal counsel in a written opinions; 12 (3) Approval of the shareholders by the affirmative vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present or by the written consent of shareholders as provided in Section 11, with the shares owned by the person to be indemnified not being entitled to vote thereon; or (4) The court in which such proceeding is or was pending, upon application made by the corporation, or the Agent, the attorney, or another person rendering services in connection with the defense, whether or not such application by the Agent, the attorney, or such other person is opposed by the corporation. (d) Advances of Expenses. Expenses (including attorneys' fees), costs, and charges incurred in defending any proceeding shall be advanced by the corporation prior to the final disposition of such proceeding upon receipt of an undertaking by or on behalf of the Agent to repay such amount unless it shall be determined ultimately that the Agent is entitled to be indemnified as authorized in this Section 48. (e) Indemnification Against Expenses of Successful Party. Notwithstanding the other provisions of this Section 48, to the extent that an Agent has been successful on the merits in a defense of any proceeding, claim, issue or matter referred to in paragraphs (a) and (b), above, such Agent shall be indemnified against all expenses actually and reasonably incurred by the Agent in connection therewith. (f) Right of Agent to Indemnification Upon Applications Procedure Upon Application. Any indemnification provided for in paragraphs (a), (b) or (c) of Section 48 shall be made no later than ninety (90) days after the corporation is given notice of a request by Agent, provided that such request is made after final adjudication, dismissal or settlement unless an appeal is filed, in which case the request is made after the appeal is resolved (hereafter referred to as "Final Disposition"). Upon such notice, if a quorum of directors who were not parties to the action, suit or proceeding giving rise to indemnification is obtainable, the corporation shall within two (2) weeks call a Board of Directors meeting to be held within four (4) weeks of such notice, to make a determination as to whether the Agent has met the applicable standard of conduct. Otherwise, if a quorum consisting of directors who were not parties in the relevant action, suit or proceeding is not obtainable, the corporation shall retain (at the corporation's expense) independent legal counsel chosen either jointly by the corporation and Agent or else by corporation counsel within two (2) weeks to make such determination. If (1) at such directors meeting, such a quorum is not obtained or, if obtained, refuses to make such determination, or (2) if such legal counsel is not so retained or, if retained, does not make such determination within four (4) weeks, then the Board of Directors shall cause a shareholders meeting to be held within four (4) weeks to make such a determination. If notice of a request for payment of a claim under these Bylaws, under any statute, under any provision of any agreement with the corporation, or under the corporation's Articles of Incorporation providing for indemnification or advance or expenses has been given to the corporation by Agent, and such claim is not paid in full by the corporation within ninety (90) days of the later occurring of the giving of such notice and Final Disposition in the case of indemnification and twenty (20) days of the giving of such notice in the case of advance of expenses, Agent may, but need not, at any time thereafter bring an action against the corporation to receive the unpaid amount of the claim or the expense advance and, if successful, Agent shall also be paid for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its Final Disposition) that Agent has not met the standards of conduct which make it permissible under applicable law for the corporation to indemnify Agent for the amount claimed, and Agent shall be entitled to receive interim payment of expenses pursuant to paragraph (d) of Section 48 unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. Neither the failure of the 13 corporation (including its Board of Directors, independent legal counsel or its shareholders) that Agent has not met such applicable standard of conduct, shall create a presumption that the Agent has or has not met the applicable standard of conduct. (g) Other Rights and Remedies. The indemnification provided by this Section 48 shall not be deemed exclusive of, and shall not affect, any other rights to which an Agent seeking indemnification may be entitled under any law, other provision of these Bylaws, the corporation's Articles of Incorporation, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be an Agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. (h) Insurance. The corporation may purchase and maintain insurance on behalf of any person who is or was an Agent against any liability asserted against such person and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify such person against such liability under the provisions of this Section 48. (i) Optional Means of Assuring Payment. Upon request by an Agent certifying that the Agent has reasonable grounds to believe the Agent may be made a party to a proceeding for which the Agent may be entitled to be indemnified under this Section 48, the corporation may but is not required to create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such sums as may become necessary to effect indemnification as provided herein. (j) Savings Clause. If this Section 48 or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each Agent as to expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit, proceeding or investigation, whether civil, criminal or administrative, and whether internal or external, including a grand jury proceeding and an action or suit brought by or in the right of the corporation, to the full extent permitted by any applicable portion of this Section that shall not have been invalidated, or by any other applicable law. (k) Definition of Agent. For the purposes of this Section 48, "Agent" means any person who is or was a director, officer, employee or other 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, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the corporation or of another enterprises at the request of such predecessor corporation, "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and "expenses" includes without limitation attorneys' fees and any expenses of establishing a right to indemnification. (l) Indemnification under Section 204(a)(11) of the California Corporations Code. Subject to the provisions of California Corporations Code Section 204(a)(11) and any other applicable law, notwithstanding any other provisions of these Bylaws, the following shall apply to the indemnification of Agents under these Bylaws: (1) The corporation shall indemnify a person pursuant to this paragraph (1) if the corporation would be required to indemnify such person pursuant to paragraphs (a) and (b) of Section 48, if in paragraphs (a) and (b) the phrase "in a manner such person reasonably believed to be in the best interests of the corporation" is replaced with the phrase "in a manner such person did not believe to be contrary to the best interests of the corporation." If pursuant to paragraphs (c) and (f) of Section 48, the person making the paragraphs (a) and/or (b), above, conduct 14 standard determination determines that such standard has not been satisfied, such person shall also determine whether this subsection (1) of paragraph (l) conduct standard has been satisfied; (2) There shall be a presumption that the Agent met the applicable standard of conduct required to be met in paragraph (c) of Section 48 for indemnification of the Agent, rebuttable by clear and convincing evidence to the contrary; (3) The corporation shall have the burden of proving that the Agent did not meet the applicable standard of conduct in paragraph (c) of Section 48; (4) In addition to the methods provided for in paragraph (c) of Section 48, a determination that indemnification is proper in the circumstances because that Agent met the applicable standard of conduct may also be made by the arbitrator in any arbitration proceeding in which such matter is or was pending; (5) Unless otherwise agreed to in writing between an Agent and the corporation in any specific case, indemnification may be made under paragraph (b) of Section 48 for amounts paid in settling or otherwise disposing of a pending action without court approval. ARTICLE VI Amendments ---------- Section 49. Amendments by Shareholders. Bylaws may be adopted, amended or repealed by the affirmative vote or written consent of a majority of the outstanding shares entitled to vote; provided, however, that an amendment to Section 16 reducing the number of directors on a fixed-number board or the minimum number of directors on a variable-number board to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting or the shares not consenting, in the case of action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote. Section 50. Amendments by Directors. Subject to the right of shareholders under the preceding Section 48, Bylaws may be adopted, amended, or repealed by the Board of Directors, except that only the shareholders can adopt a Bylaw or amendment thereto which specifies or changes the number of directors on a fixed-number Board, or the minimum or maximum number of directors on a variable-number Board, or which changes from a fixed-number Board to a variable-number Board or vice versa, or amends this Section 50. ARTICLE VII Committees of the Board ----------------------- Section 51. Committees of the Board. ---------- ----------------------- (a) The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the Board and with such authority and organization as the Board may from time to time determine. The Board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any such committee, to the extent provided in the resolution of the Board, shall have all the authority of the Board except with respect to: (1) The approval of any action for which shareholder approval is also required; 15 (2) The filling of vacancies on the Board or in any committee; (3) The fixing of compensation of the directors for serving on the Board or on any committee; (4) The amendment or repeal of Bylaws or the adoption of new Bylaws; (5) The amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable; (6) Distribution to the shareholders of the corporation as defined in Section 166 of the Code, except at a rate or in a periodic amount or within a price range determined by the Board; and (7) The appointment of other committees of the Board or the members thereof. (b) The Board shall designate a chairman for each committee who shall have the sole power to call any committee meeting other than a meeting set by the Board. Except as otherwise established by the Board, Article III of these Bylaws shall apply to committees of the Board and action by such committees, mutatis mutandis. 16 CERTIFICATE OF SECRETARY I, the undersigned, certify that: 1. I am the duly elected and acting Secretary of Service 1st Bancorp, a California corporation; and 2. The foregoing Bylaws, consisting of 18 pages, is a true and correct copy of the Bylaws as duly adopted for the corporation and approved by the Board of Directors of the corporation as of February 20, 2003. IN WITNESS WHEREOF, I have subscribed my name as of the 20th day of February, 2003. /s/ BRYAN HYZDU -------------------------------- Bryan Hyzdu, Secretary EX-4.1 5 ex4_1.txt EXHIBIT 4.1 EXHIBIT 4.1 [graphic omitted} INCORPORATED UNDER THE LAWS OF [graphic omitted] ================================================================================ California --------------------- ---------------------- | NUMBER | | SHARES | | ******* | | ******* | | [graphic omitted] | | [graphic omitted] | --------------------- ---------------------- [graphic eagle omitted] ------------------------------------------------------------- | SERVICE 1ST BANCORP | | [graphic omitted] | ------------------------------------------------------------- This Certifies that ** SPECIMEN ** is the registered holders of ------------------------------- ***************** Shares. - ----------------- transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed. IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be signed by its duly authorized officers and its Corporate Seal to be hereunto affixed this ****** day of ****** A.D. --------- -------- Service 1st Bancorp INCORPORATED JAN. 23, 2003 CALIFORNIA [graphic seal omitted] ================================================================================ EX-5.1 6 ex5_1.txt EXHIBIT 5.1 EXHIBIT 5.1 [LETTERHEAD OF DODD - MASON - GEORGE LLP] April 1, 2003 Service 1st Bancorp 2800 W. March Lane, Suite 120 Stockton, California 95219 Re: Service 1st Bancorp -- Registration Statement on Form S-4 Ladies and Gentlemen: With reference to Registration Statement on Form S-4 filed by Service 1st Bancorp, a California corporation, with the Securities and Exchange Commission in connection with the registration under the Securities Act of 1933, as amended, of 1,271,100 shares of Service 1st Bancorp Common Stock, no par value (the "Bancorp Common Stock"), to be issued in connection with the plan of reorganization contemplated by the Plan of Reorganization and Merger Agreement dated as of March 11, 2003 (the "Merger Agreement"), among Service 1st Bank, a California-chartered bank, Service 1st Bancorp, and Service 1st Merger Corporation, which Merger Agreement is described therein and filed as an exhibit thereto: We are of the opinion that the Bancorp Common Stock has been duly authorized and, when issued in accordance with the Merger Agreement, will be legally issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement. Further, we hereby consent to the use of our name under the caption "Legal Matters" in the Registration Statement and in the Proxy Statement-Prospectus included therein. Very truly yours, /s/ DODD - MASON - GEORGE LLP EX-8.1 7 ex8_1.txt EXHIBIT 8.1 EXHIBIT 8.1 [LETTERHEAD OF VAVRINEK, TRINE, DAY & CO., LLP] April 1, 2003 Service 1st Bancorp Service 1st Bank 2800 W. March Lane, Suite 120 Stockton, California 95219 Dear Sirs and Mesdames: You have requested our opinion regarding certain federal income tax consequences of the proposed acquisition of Service 1st Bank ("Bank") by Service 1st Bancorp ("Bancorp"), pursuant to which Bank will become a separate, wholly-owned subsidiary of Bancorp. FACTS Service 1st Bancorp, a corporation organized in California, is the parent corporation of Service 1st Merger Corporation ("Subsidiary"), organized under the laws of California. Bancorp intends to register as a bank holding company under the Bank Holding Company Act of 1956, as amended, and engage in the business of a bank holding company. Subsidiary is a transitory merger corporation that engages in no substantial business activities other than to effect this merger. The Bancorp does not own, and immediately prior to the merger will not own, any stock of Bank. Bank is a state-chartered bank that engages in activities of commercial banking. The terms of the proposed merger (the "Merger") are contained in the Plan of Reorganization and Merger Agreement dated as of March 11, 2003, between Bancorp, Bank and Subsidiary ("Agreement"). Terms not otherwise defined in this letter shall have the meanings assigned to them in the Plan of Reorganization and Merger Agreement. You have directed us to assume in preparing this opinion that (1) the Merger will be consummated in accordance with the terms, conditions and other provisions of the Agreement, and (2) all of the factual information, descriptions, representations and assumptions set forth in this letter, in the Agreement, in the letter to us from Bank dated April 1, 2003 (the "Letter"), and in the Proxy Statement-Prospectus anticipated to be dated on or about April 28, 2003, and mailed to Bank shareholders in connection with the annual meeting of shareholders to approve the Merger, are accurate and complete and will be accurate and complete at the time the Merger becomes effective (the "Effective Date"). We have not independently verified any factual matters relating to the Merger with or apart from our preparation of this opinion and, accordingly, our opinion does not take into account any matters not set forth herein which might have been disclosed by independent verification. Page 2 The Agreement provides that Subsidiary will be merged with and into Bank, with the Bank being the surviving corporation, in accordance with the applicable provisions of state law. The Merger must be approved as required by law by the Bank shareholders at an annual meeting scheduled to be held on May 29, 2003. On the Effective Date, all assets and liabilities of Subsidiary will be transferred by operation of law to Bank; the separate corporate existence of Subsidiary will cease, and, each share of Bank Common Stock then outstanding will be converted into one share of Common Stock of Bancorp. No fractional shares of Bancorp Common Stock will be issued in the Merger. No cash will be exchanged for shares of Bank Common Stock or shares of Bancorp Common Stock pursuant to the Merger. On the Effective Date, each outstanding stock option under the Bank's 1999 Stock Option Plan shall be converted into the right to receive one share of common stock of Bancorp on the same terms and conditions as existed prior to the Merger. Except as described above, no options to purchase Bank Common Stock and no securities or other instruments convertible into Bank Common Stock will be outstanding on the Effective Date. OPINION Assuming that the Merger is consummated in accordance with the terms and conditions set forth in the Agreement and based on the facts set forth in the Proxy Statement-Prospectus, the Letter, and this letter (including all representations), it is our opinion that for federal income tax purposes: 1. The merger of the Subsidiary into the Bank and the issuance of Bancorp Common Stock in connection with the Merger will constitute a tax-free reorganization under Sections 368(a)(1)(A) and 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Neither Bancorp nor Subsidiary will recognize gain or loss as a result of the Merger. 3. Bank will not recognize gain or loss as a result of the Merger. 4. To the extent Bank Common Stock is exchanged in the Merger for Bancorp Common Stock, no gain or loss will be recognized by the shareholders of Bank. 5. The holding period for the shares of Bancorp Common Stock received by each shareholder of Bank will include the holding period for the shares of Bank Common Stock of such shareholder exchanged in the Merger, provided that the shareholder holds such Bank Common Stock as a capital asset at the effective time of the Merger. 6. The tax basis of the shares of Bancorp Common Stock received by each shareholder of Bank will equal the tax basis of such shareholder's shares of Bank Common Stock exchanged in the Merger. 7. No gain or loss will be recognized by the holder of nonstatutory options to acquire Bank Common Stock upon conversion of those options into nonstatutory options to acquire Bancorp Common Stock under the same terms and conditions as in effect immediately prior to the Merger. Page 3 8. The conversion of incentive stock options to acquire Bancorp Common Stock for incentive stock options to acquire Bank Common Stock will not be a modification as defined in Section 424(h)(3) of the Code, and will not result in the recognition of income, gain, or loss to the holders of the incentive stock options to acquire Bank Common Stock. Such options to acquire Bancorp Common Stock will be incentive stock options as defined in Section 422(b) of the Code. Our opinion is limited to the foregoing federal income tax consequences of the Merger, which are the only matters as to which you have requested our opinion, and you must judge whether the matters addressed herein are sufficient for your purposes. We do not address any other federal income tax consequences of the Merger or other matters of federal law and have not considered matters (including state or local tax consequences) arising under the laws of any jurisdiction other than matters of federal law arising under the laws of the United States. Our opinion is based on the understanding that the relevant facts are, and will be on the Effective Date, as set forth in this letter. If this understanding is incorrect or incomplete in any respect, our opinion could be affected. Our opinion is also based on the Code, Treasury Regulations, case law, and Internal Revenue Service rulings as they now exist. These authorities are all subject to change and such change may be made with retroactive effect. We can give no assurance that after any such change, our opinion would not be different. We undertake no responsibility to update or supplement our opinion. Only Bancorp and Bank may rely on this opinion, and only with respect to the proposed Merger described herein. /s/ VAVRINEK, TRINE, DAY & CO., LLP - ----------------------------------- Vavrinek, Trine, Day & Co., LLP Laguna Hills, California EX-10.1 8 ex10_1.txt EXHIBIT 10.1 EXHIBIT 10.1 MARCH TOWER OFFICE LEASE BASIC LEASE INFORMATION SUMMARY A. GENERAL INFORMATION LANDLORD: MARCH TOWER ASSOCIATES II/LLC (MTA), a California limited liability company 1. Tenant Name: SERVICE 1st BANK Tenant Address: 2800 WEST MARCH LANE, SUITE 120 STOCKTON, CA 95219 2. Project Address: 2800 W. March Lane, Suite 120 Stockton, CA 95219 3. Use of Premises: Commercial Bank 4. Lease Term In Years: Seven (7) Years 5. Lease Period: *From: 10/1/02 To: 9/30/09 6. Rent Concession: *From: N/A To: 7. Rent Commencement Date: 10/1/02 8. Option To Renew: Two (2) Five (5) year options at market rent 9. Occupancy Date: Immediate 10. Date Lease Executed: 11. Security Deposit Amount: N/A 12. Broker: B. RENTAL INFORMATION 1. Square Feet of Space: 4,715 2. Rate Per Square Foot: $1.88 3. Tenant Percent of Total Net Rentable Area: 9.04% 4. Basic Rent: MONTHLY: $8,864.20 ANNUALLY: $106,370.40 5. Tenant Improvement Allowance: $N/A /Sq. Ft., or a total allowance of $__________. Any additional amount needed to complete the space will be paid by Tenant in cash, one-half upon commencement of construction and one-half upon completion of the space and prior to occupancy. Landlord estimates the Tenant Improvement costs of the space plan as shown in Exhibit "C" to be $__________, or $__________ over the allowance. 6. Improvements Completion Date: N/A 7. Annual Basic Operating Cost Base: 2001 Base Year 8. Estimated Monthly Bldg. Operating Cost Overage: None * Adjustments in dates based upon actual occupancy date. 9. Sign Rent: $500.00 per month, payable with the Basic Rent 1. Definitions ............................................................. 1 1.1. "Building" ....................................................... 1 1.2. "Building Standard Improvements".................................. 1 1.3. "Common Areas" ................................................... 1 1.4. "Holidays" ....................................................... 1 1.5. "Net Rentable Area" .............................................. 1 1.6. "Rent" ........................................................... 1 1.7. "Substantial Completion" ......................................... 1 1.8. "Tenant's Extra Improvements ..................................... 1 1.9. "Tenant's Improvements" .......................................... 1 1.10. "Tenant's Proportionate Share" ................................... 1 1.11. "Term" ........................................................... 1 1.12. "Term Commencement Date" ......................................... 1 2. Term .................................................................... 1 3. Rent .................................................................... 1 3.1. Basic Rent ....................................................... 1 3.2. Basic Operating Cost Adjustment .................................. 2 3.3. Cost Attributable Solely to Tenant ............................... 2 4. Security Deposit ........................................................ 2 5. Improvement of the Premises ............................................. 2 6. Use ..................................................................... 2 7. Utilities and Services .................................................. 3 8. Repairs and Maintenance ................................................. 3 8.1. Landlord's Obligation to Repair .................................. 3 8.2. Repairs Necessitated by Tenant's Act ............................. 3 8.3. Tenant's Obligation to Repair .................................... 3 9. Alterations ............................................................. 3 9.1. Approval of Alterations .......................................... 3 9.2. Mechanic's Liens ................................................. 3 9.3. Improvements and Alterations of Landlord's Property .............. 4 10. Entry by Landlord ....................................................... 4 11. Insurance ............................................................... 4 11.1. Tenant's Insurance ............................................... 4 11.2. Form of Insurance ................................................ 4 11.3. Cancellation of Insurance ........................................ 4 12. Indemnity ............................................................... 4 13. Assignment and Subletting ............................................... 4 13.1. Assignment or Sublease ........................................... 4 13.2. Transfer of Rights Deemed an Assignment .......................... 4 13.3. Upon Default ..................................................... 4 13.4. Upon Termination ................................................. 5 14. Damage .................................................................. 5 14.1. Landlord's Obligation to Restore ................................. 5 14.2. Landlord's Option to Terminate ................................... 5 14.3. Damage to the Building ........................................... 5 14.4. Damage During Last Year of Term................................... 5 14.5. No Claims ........................................................ 5 15. Condemnation ............................................................ 5 15.1. Total Taking ..................................................... 5 15.2. Partial Taking ................................................... 5 15.3. Termination of Lease ............................................. 5 15.4. Condemnation Award ............................................... 5 15.5. Temporary Taking ................................................. 5 15.6. Restoration of the Building and Premises ......................... 5 16. Subordination ........................................................... 5 17. Default ................................................................. 5 18. Signs ................................................................... 6 19. Rules and Regulations ................................................... 6 20. Compliance with Regulations ............................................. 6 20.1. Compliance by Tenant ............................................. 6 20.2. Right to Contest ................................................. 6 20.3. Notice to Landlord ............................................... 6 21. Self-Help ............................................................... 6 22. Attorneys' Fees ......................................................... 6 23. Brokerage ............................................................... 7 24. Quiet Enjoyment ......................................................... 7 25. Notices ................................................................. 7 - i - 26. Holding Over ............................................................ 7 27. Transfer by Landlord .................................................... 7 28. Tenant's Remedies ....................................................... 7 29. Guaranty ................................................................ 7 30. Substitution of Premises ................................................ 7 31. Parking ................................................................. 7 32. Miscellaneous ........................................................... 7 32.1. Grammar .......................................................... 7 32.2. Covenants Binding on Successors .................................. 7 32.3. Captions ......................................................... 7 32.4. Estoppel Certificates ............................................ 7 32.5. Modification ..................................................... 7 32.6. Memorandum of Lease .............................................. 7 32.7. Time Is of the Essence ........................................... 7 32.8. Relationship of Parties .......................................... 7 32.9. Severability ..................................................... 7 32.10. Law Applicable ................................................... 7 32.11. Covenants and Conditions ......................................... 7 32.12. Entire Agreement ................................................. 7 32.13. Authority of Tenant .............................................. 7 EXHIBIT A - LEGAL DESCRIPTION OF PROPERTY .................................... 9 EXHIBIT B - SITE PLAN ........................................................10 EXHIBIT C - FLOOR PLAN(S) ....................................................11 EXHIBIT D - TENANT IMPROVEMENTS WORK LETTER AGREEMENT ........................12 SCHEDULE D-1 .................................................................15 EXHIBIT E - Rules and Regulations ............................................16 EXHIBIT F - PARKING AGREEMENT ................................................17 EXHIBIT G - Option to Extend Term ............................................18 EXHIBIT H - HOURS OF OPERATION ...............................................19 EXHIBIT I- GUARANTEE AGREEMENT ..............................................20 - ii - MARCH TOWER OFFICE LEASE THIS LEASE is executed this ______ day of __________, 2002, by and between MARCH TOWER ASSOCIATES II LLC (hereinafter referred to as "Landlord"), and SERVICE 1st BANK, (hereinafter referred to as "Tenant"); W I T N E S S E T H: WHEREAS, Landlord is owner of that certain real property located and addressed at 2800 West March Lane, Stockton, California, and as more particularly described in Exhibit "A" attached hereto, and as outlined on the Site Plan for the Project attached hereto as Exhibit "B", and the building or buildings and certain other improvements which are being or have been constructed thereon (hereinafter referred to as the "Project"); and WHEREAS, Landlord desires to Lease to Tenant, and Tenant desires to Lease from Landlord, that portion of the Building specified in the Basic Lease Information, as outlined on the Site Plan attached hereto as Exhibit "B" and more particularly defined on the Floor Plan(s) attached hereto as Exhibit "C" (the Premises); NOW, THEREFORE, Landlord hereby Leases the Premises to Tenant, and Tenant hereby Leases the Premises from Landlord, for the term, at the rent, and upon and subject to the terms and conditions hereinafter set forth. Landlord reserves to itself the use of the roof, exterior walls, Common Areas (as hereinafter defined), and the area above and below the Premises together with the right to install, maintain, use, repair and replace pipes, lines, ducts, pumps, conduits, wires, transformers, glazing and structural elements now or in the future leading through the Premises and which serve other parts of the Building. This Lease is subject to any and all existing encumbrances, conditions, rights, covenants, easements, restrictions and rights of way of record, and other matters of record, if any, applicable zoning and building laws, regulations and codes, and such matters as may be disclosed by Inspection or survey. 1. Definitions. Certain terms used herein shall have the following meanings: 1.1. "Building" shall mean the building designated on Exhibit "B". 1.2. "Building Standard Improvements" shall mean those improvements which are to be installed by Landlord at its expense in the Premises or for which a credit is to be given pursuant to the Work Letter Agreement attached hereto as Exhibit "D". 1.3. "Common Areas" shall mean the areas on individual floors devoted to corridors, fire vestibules, elevator foyers, engineer room, lobbies, electric and telephone closets, rest rooms, mechanical rooms, janitor closets and other similar facilities for the benefit of all Tenants (or invitees) on the particular floor and shall also mean those areas of the Building devoted to mechanical and service rooms servicing more than one floor or the Building as a whole. 1.4. "Holidays" shall mean New Year's Day, President's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. 1.5. "Net Rentable Area" shall mean the area or areas of space within the Building determined as follows: (i) Net Rentable Area on a single tenancy floor is determined by measuring from the inside surface of the outer glass and extensions of the plane thereof in non-glass areas to the inside surface of the opposite outer glass and extensions of the plane thereof in non-glass areas and shall include all areas within the outside walls, excluding vertical penetrations such as building stairs, elevator shafts, flues, vents, stacks, pipe shafts and vertical ducts; provided, however, vertical penetrations which are for the specific use of the Tenant, such as special stairs or elevators, shall be included as Net Rentable Area, and (ii) Net Rentable Area for a partial floor shall include all space within the demising walls (measured from the mid-point of demising walls and in the case of exterior walls, measured as defined in (i) above) plus Tenant's share of any Common Areas on such floors attributable to such space. No deductions from Net Rentable Area shall be made for columns or projections in the Building. The Net Rentable Area in the Premises has been calculated on the basis of the foregoing definition and is hereby stipulated for all purposes hereof to be the amount stated in the Basic Lease Information subject to confirmation by actual measurements by Landlord's architect, at the request of either party, prior to Tenant's occupancy. 1.6. "Rent" shall mean Basic Rent, Gross Rent and all others sums payable by Tenant to Landlord under this Lease. "Gross Rent" shall mean Basic Rent and Tenant's Proportionate Share of Basic Operating Cost increases determined pursuant to Section 3.2. 1.7. "Substantial Completion" shall mean (and the Premises shall be deemed "Substantially Complete") when Landlord's architect shall have issued a certificate of substantial completion with respect to the Premises or that portion of the Building within which they are contained, whether or not Substantial Completion of the Building itself shall have occurred. Substantial Completion shall be deemed to have occurred notwithstanding a requirement to complete "punchlist" or similar corrective work. 1.8. "Tenant's Extra Improvements" shall mean those improvements which are to be installed in the Premises at Tenant's expense pursuant to the Work Letter Agreement attached hereto as Exhibit "D". 1.9. "Tenant's Improvements" shall mean Building Standard Improvements and Tenant's Extra Improvements. 1.10. "Tenant's Proportionate Share" shall mean the percentage which the Net Rentable Area of the Premises bears to ninety-five percent (95%) of the total Net Rentable Area of the Building. The terms on the Basic Lease Information sheet shall have the definitions set forth on such sheet which are incorporated herein by this reference. 1.11. "Term" shall mean a period commencing with the Term Commencement Date and ending on the Term Expiration Date specified on the Basic Lease Information sheet as such Term Expiration Date may be extended. The Scheduled Term Commencement Date specified on the Basic Lease Information sheet represents the parties' estimate of the Term Commencement Date. The Term Commencement Date shall be confirmed pursuant to Section 2 hereof. 1.12. "Term Commencement Date" shall mean the date when the Term commences as determined pursuant to Section 2 hereof. 2. Term. The Term shall commence upon Substantial Completion of the Premises which the parties expect to occur on the Scheduled Term Commencement Date and, except as otherwise provided herein or in any exhibit or addendum hereto, shall continue in full force until the Term Expiration Date. If the Premises are not Substantially Complete by the Scheduled Term Commencement Date for any reason, Landlord shall not be liable for any claims, damages or liabilities in connection therewith or by reason thereof, but the Term Commencement Date shall be the day when the Premises are Substantially Complete. If Substantial Completion occurs prior to the Scheduled Term Commencement Date and the Tenant takes occupancy, then the Term shall commence. If Landlord is installing Tenant's Improvements, Landlord shall provide Tenant as much notice as circumstances allow of the date when Landlord expects to achieve Substantial Completion, based upon the progress of the work. Should the Term Commencement Date be a date other than the Scheduled Term Commencement Date, either Landlord or Tenant, at the request of the other, shall execute an amendment to the Lease specifying the Term Commencement Date. Tenant's obligation to pay Rent shall commence upon the Term Commencement Date (except as expressly otherwise provided herein with respect to obligations arising earlier). If the term commences on other than the first day of the month, the rent shall be prorated and the term of the Lease shall commence on the first day of the next succeeding month. 3. Rent. 3.1. Basic Rent 3.1.1. Tenant shall pay to Landlord, as Basic Rent for the Premises during the term of this Lease, the sum set forth in the Basic Lease Information, payable in advance in equal monthly installments as set forth in the Basic Lease Information on or before the first day of each month during the term hereof. The Basic Rent shall be subject to adjustment as provided in this Section 3.1, and shall be in addition to all other amounts required to be paid by Tenant pursuant to the provisions of this Lease. 3.1.2. Basic Rent for the second and each successive Lease year during the Lease Term, and any extensions or renewals hereof, shall increase over the Basic Rent payable for the immediately preceding Lease year by three percent (3%) each year. 3.1.3. If the Term commences on a date other than the first day of a calendar month, Basic Rent for the period from the Term Commencement Date through the last day of the calendar month in which the term commences shall be prorated on the basis of a thirty-day month, and Basic Rent for the first full or fractional month of the term of this Lease shall be payable on the Term Commencement Date. In the event the Term Expiration Date falls on a day other than the last day of the calendar month, Basic Rent for the period from the first day of the last calendar month of the Term to the end of the Term shall be prorated on the basis of a thirty-day month. 3.1.4. Basic Rent and all other amounts due under this Lease shall be paid, without deduction or offset, and without prior notice or demand, to Landlord at the address specified for notices on the Basic Lease Information sheet, or at such other addresses as Landlord may from time to time specify by written notice to Tenant. All amounts of money payable by Tenant to landlord hereunder, if not paid when due, shall bear interest from the due date until paid at the maximum rate an individual is permitted by law to charge. Tenant further acknowledges that late payment by Tenant to Landlord of Basic Rent will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impracticable to fix. Such - 1 - costs include, without limitation, processing and accounting charges, and late charges that may be imposed on Landlord by the terms of any encumbrance and note secured by any encumbrance covering the Project or the Premises. Therefore, if any installment of Basic Rent due from Tenant is not received by Landlord when due, Tenant shall pay to Landlord an additional sum of ten percent (10%) of the overdue Basic Rent as and for a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of late payment by Tenant. Acceptance of any late charge shall not constitute a waiver of Tenant's default with respect to the overdue amount nor prevent Landlord from exercising any of the other rights and remedies available to Landlord. 3.2. Basic Operating Cost Adjustment. 3.2.1. For the purposes of this Section 3.2, the following terms are defined as follows: "Lease Year": Each calendar year of the term. "Basic Operating Cost Base": The amount of the annual Basic Operating Cost which Landlord has included in Annual Basic Rent and which amount is set forth in the Basic Lease Information. "Basic Operating Cost": All costs and expenses of the nature hereinafter described, incurred in connection with ownership and operation of the Project and such additional facilities now and in subsequent years as may be determined by Landlord to be necessary to the Project. All costs and expenses shall be determined in accordance with generally accepted accounting principles which shall be consistently applied with accruals appropriate to Landlord's business. Basic Operating Costs as used herein shall mean all expenses and costs (but not specific costs which are separately billed to and paid by specific Tenants) of every kind and nature which Landlord shall pay or become obligated to pay because of or in connection with the management and operation of the Project and supporting facilities or the Project, including but not limited to the following: 3.2.2. (1) Wages, salaries and related benefits of all employees engaged in management, operation, maintenance, or security of the Project; employer's Social Security taxes, unemployment taxes or insurance, payroll taxes and any other taxes which may be levied on such wages and salaries; uniforms of Landlord's service, security and maintenance personnel; the cost of disability and hospitalization insurance and worker's compensation and pension or retirement and all other benefits for such employees; and the costs of maintaining and operating building management offices. (2) All supplies, small tools and materials used in operation and maintenance of the Project. (3) Cost of all utilities and communications services, including water and power, sewer and other waste disposal, heating, air conditioning and ventilating for the entire Project. (4) Cost of all repair, maintenance, security, janitorial and other services for the Project or for equipment therein, including, without limitation, alarm and/or guard service, life safety, window cleaning, scaffold maintenance, energy conservation and elevator maintenance, and computer operations for the basic building systems. (5) Cost of all insurance applicable to the Project, including, but not limited to, fire, earthquake, flood, casualty, extended coverage risk, vandalism and malicious mischief, boiler and pressure apparatus insurance, war damage, catastrophe excess, rent abatement or rent interruption insurance, general liability insurance, and any other types of insurance that a prudent owner of similar property would maintain on the Project, all personnel engaged in its management, maintenance and operation, and Landlord's personal property used in connection therewith (the enumeration of such coverages not imposing upon Landlord the duty or obligation to maintain them), as well as casualty losses not covered by such insurance due to the deductible provisions contained therein. If Landlord elects to self-insure for all or any portion of the Insurance covering the Project, the costs that would otherwise be incurred to provide the coverage described by this subsection (5) shall be included in Operating Costs. (6) Cost of all accounting, (including cost of certified public accountants), legal or their professional fees incurred in connection with the operation of the Project. (7) A reasonable fee, not to exceed 6% of gross income, to Landlord or its agent for general overhead, management and other services. (8) Cost of necessary repairs and replacements (other than capital improvements) and general maintenance, including, without limitation, landscaping and all costs of periodic relamping and reballasting of fluorescent fixtures with respect to the Project. (9) All maintenance costs relating to public and service areas of the Project, including (but without limitation) sidewalks, landscaping, service areas, health club, mechanical rooms and Building exteriors. (10) All taxes, service payments in lieu of taxes, occupancy fees, annual or periodic license or use fees, excises, transit charges, housing fund assessments, assessments, Federal or State environmental assessments or charges, levies, fees or charges, general and special, ordinary and extra-ordinary, unforeseen as well as foreseen, of any kind which are assessed, levied, charged, confirmed, or imposed by any public authority upon the Project, its operations or the Rent (or any portion or component thereof), except (i) inheritance or estate taxes imposed upon or assessed against the Project, or any part thereof or interest therein, and (ii) taxes computed upon the basis of the net income derived from the Project by Landlord or the owner of any interest therein. (11) Amortization (together with reasonable financing charges) of capital improvements made to the Project subsequent to the Term Commencement Date which will improve the operating efficiency of the Project or which may be required by governmental authorities. 3.2.3 If the amount of the Basic Operating Cost paid or incurred by Landlord for a Lease Year during the term of this Lease on account of the operation or maintenance of the Building is in excess of the Basic Operating Cost Base, then Tenant shall pay such increase as additional rent. During the Term, Tenant shall pay to Landlord monthly in advance and every month during the Term, one-twelfth (1/12th) of the amount of such additional rent as estimated by Landlord in advance, acting reasonably, to be due from the Tenant. Annually as soon as is reasonably possible after the expiration of each Lease Year, Landlord shall deliver to Tenant a statement, which statement shall be conclusive between the parties hereto, setting forth the Basic Operating Cost for the preceding Lease Year and the amount of additional rent as determined in accordance with the provisions of this Section 3.2. If the aggregate amount of the estimated additional rental payments made by Tenant in any Lease Year should be less than the Basic Operating Cost Base, then Tenant shall pay to Landlord as additional rent upon demand the amount of such deficiency. If the aggregate amount of such estimated additional rental payments made by Tenant in any Lease year should be greater than the additional rent due for such year under this subsection 3.2.3, then should Tenant not be otherwise in default hereunder, the amount of such excess for the last year of the Term, the amount thereof wi11 be credited against Tenant's next due payment of Basic Rent. In the event the Term Commencement Date or Term Expiration Date occurs on a day other than January 1, or ends on a day other than December 31, Tenant's Proportionate Share of Basic Operating Cost increases for such partial calendar year shall be appropriately prorated so that Tenant shall pay Tenant's Proportionate Share of Basic Operating Cost increases only for the portion of the calendar year falling within the Term. 3.3 Cost Attributable Solely to Tenant. In addition to the payment of Tenant's Proportionate Share of Basic Operating Cost, Tenant shall also pay, from time to time and when and as incurred by Landlord, any Basic Operating Cost for the Project as a whole, whether such Basic Operating Cost arises as a result of Tenant's Extra Improvements, real property or personal property taxes on Tenant's Extra Improvements or Tenant's fixtures or personal property, use of services in excess of those provided by Landlord hereunder, Landlord's curing defaults pursuant to Section 21, or otherwise. 4. Security Deposit. [Clause Deleted] 5. Improvement of the Premises. As promptly as practicable after the date of execution of this Lease, Landlord and Tenant shall undertake their respective obligations to prepare the Premises for occupancy by Tenant in accordance with the Work Letter Agreement attached hereto as Exhibit D. 6. Use. The Premises shall be used for general office purposes only. Tenant shall at its own cost and expense obtain any and all licenses and permits necessary for any such use. Tenant agrees not to do or permit to be done in or about the Premises or the - 2 - Building, nor to bring or keep or permit to be brought or kept in or about the Premises or the Building, anything which is prohibited by or will in any way conflict with any law, statute or governmental regulation, or any rule or regulation of the Insurance Services Office or its successor, now or hereafter in effect, which is prohibited by the standard form of fire insurance policy, or which will in any way increase the existing rate of, cause the cancellation of, or otherwise affect fire or any other insurance on the Building or any of its contents. Tenant agrees not to do or permit to be done anything in, on or about the Premises or the Building which will in any way obstruct or interfere with the rights of other Tenants or occupants of the Building, or injure or annoy them, or use or allow the Premises to be used for residential purposes or for any improper, immoral, unlawful or objectional purpose. Tenant agrees not to cause, maintain or permit any nuisance in, on or about the Premises or the Building, erect any antennas, nor to use or permit to be used any loudspeaker or other device, system or apparatus which can be heard outside the Premises without the prior written consent of the Landlord. Tenant agrees not to commit or suffer to be committed any waste in or about the Premises. The provisions of this Section 6 are for the benefit of Landlord only and shall not be construed to be for the benefit of any other Tenant or occupant of the Building. 7. Utilities and Services. 7.1. Landlord shall make customary arrangements with public utilities and/or public agencies to furnish any electricity and water utilized in operating the facilities serving the Premises. 7.2. Landlord shall furnish Tenant during Tenant's occupancy of the Premises: 7.2.1. Domestic and cool water at those points of supply provided for general use of other Tenants in the Project; central heat and air conditioning in season, at such times as Landlord normally furnishes these services to other Tenants in the Project and at such temperatures and in such amounts as are considered by Landlord to be standard or as may be limited or controlled by applicable laws, ordinances, rules and regulations; 7.2.2. Routine maintenance, painting and electrical lighting service for all public areas and special service areas of the Project in the manner and to the extent deemed by Landlord to be standard; 7.2.3. Janitorial service on a five (5) day week basis, excluding holidays; provided, however, that if Tenant's Extra Improvements are not consistent in quality and quantity with Building Standard Improvements, Tenant shall pay any extra cleaning and janitorial cost attributable thereto; 7.2.4. Electrical facilities comparable to those supplied in other first class office buildings in the vicinity of the Project to provide sufficient power for typewriters and other office machines of similar low electrical consumption, but not including special lighting in excess of Building Standard Improvements, and any other item of electrical equipment which (singly) consumes more than ,5 kilowatts per hour at rated capacity or requires a voltage other than one hundred twenty (120) volts single phase; and provided, however, that if the installation of such electrical equipment requires additional air conditioning capacity above that provided to the Building Standard Improvements, then the additional air conditioning installation and operating costs attributable thereto shall be paid by Tenant; 7.2.5. Initial lamps, bulbs, starters and ballasts used in the Premises; 7.2.6. Security for the Project; provided, however, that Landlord shall not be liable to Tenant for losses due to theft or burglary, or for damages done by unauthorized persons in or on the Project; and 7.2.7. Public elevator service serving the floors on which the Premises are situated. 7.3. Any heating, ventilation, air conditioning, electrical or elevator service provided by Landlord to Tenant during other than normal business days during business hours of operation set forth in Exhibit "H" shall be furnished upon the prior written request of Tenant and at Tenant's sole cost and expense. Landlord shall have the right to estimate from time to time the amount that Tenant should pay on account for such excess useage. 7.4. If Tenant shall require electric current in excess of that usually furnished or supplied for use of the Premises as set forth in Paragraph 6, Tenant shall first procure the consent of Landlord to the use thereof and Landlord may cause a meter to be installed in the Premises, or Landlord shall have the right to cause a reputable independent electrical engineering or consulting firm to survey and determine the value of the electric service furnished for such excess electric current. The cost of any such survey or meters and of installation, maintenance and repair thereof shall be paid for by Tenant. Tenant agrees to pay to Landlord, promptly upon demand therefor, for all such electrical current so consumed. 7.5. Tenant covenants and agrees that at all times its use of electric current shall never exceed Tenant's Proportionate Share of the capacity of existing feeders to the Building or the risers or wiring installation. Any riser or risers or wiring to meet Tenant's excess electrical requirements, upon written request of Tenant, will be installed by Landlord, at the sole cost and expense of Tenant if, in Landlord's sole judgment, the same are necessary and will not cause permanent damage or injury to the Building or Premises or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alternative repairs or expense or interfere with or disturb other Tenants or occupants. 7.6. To the extent that Tenant shall require special or more frequent cleaning and janitorial service than that normally provided to Tenants in the Project generally (hereinafter referred to as "Special Cleaning Service") Landlord shall upon reasonable advance notice by Tenant, furnish such Special Cleaning Service and Tenant agrees to pay Landlord, within ten (10) days of being billed therefor, Landlord's charge for providing such additional service. 7.7. Landlord shall not be liable for damages to either person or property, nor shall Landlord be deemed to have evicted Tenant nor shall there be any abatement of Rent nor shall Tenant be relieved from performance of any covenant on its part to be performed hereunder by reason of the unreasonable failure by Landlord to furnish the above described services or the cessation of such services due to causes or circumstances beyond the control of Landlord. Landlord shall use reasonable diligence to make such repairs as may be required to machinery or equipment within the Project to provide restoration of services and, where the cessation or interruption of service has occurred due to circumstances or conditions beyond the Project boundaries, to cause the same to be restored by diligent application or request to the provider thereof. Tenant acknowledges that one (1) year may be required after the Building is fully occupied in order to adjust and balance the climate control system. 8. Repairs and Maintenance. 8.1. Landlord's Obligation to Repair. Subject to the other provisions of this Lease imposing obligations in this respect upon Tenant, Landlord shall repair, replace and maintain the external and structural parts of the Building which do not comprise a part of the Premises and are not Leased to others, and janitor and equipment closets and shafts within the Premises designated by landlord for use by it in connection with the operation and maintenance of the Building. Landlord shall perform such repairs, replacements and maintenance with reasonable dispatch, in a good and workmanlike manner, but Landlord shall not be liable for any damages, direct, indirect or consequential, reasonable delays in the performance of such repairs, replacements and maintenance, unless caused by the deliberate act or omission, or the negligence of Landlord, its servants, agents, or employees. 8.2. Repairs Necessitated by Tenant's Act. If the Building, the elevators, boilers, engines, pipes or other apparatus used for the purpose of climate control of the Building or operating the elevators, or if the water pipes, drainage pipes, electric lighting or other equipment of the Building, or the roof or outside the walls of the Building, get out of repair or become damaged or destroyed through the negligence, carelessness or misuse of Tenant, its agents, employees or anyone permitted by Tenant to be in the Building, or through it in any way, the costs of the necessary repairs, replacements or alterations shall be borne by Tenant who shall pay the same to Landlord as Rent forthwith on demand. 8.3. Tenant's Obligation to Repair. Tenant shall repair the Premises, including without limiting the generality of the foregoing all interior partitions, fixtures (including all plumbing facilities), Tenant's Improvements and any alterations in the Premises and any special mechanical and electrical equipment not a normal part of the Premises installed by or for Tenant, reasonable wear and tear, damage with respect to which Landlord has an obligation to repair as provided in Section 14.1 and 15.6 only excepted; provided that, prior to making any repairs to the Premises that affect the base Building structural, electrical, or mechanical systems, Tenant shall obtain the consent of the Landlord, such consent not to be unreasonably withheld. Landlord may enter and view the state of repair and Tenant will repair in a good and workmanlike manner according to notice from Landlord in writing. 9. Alterations. 9.1. Approval of Alterations. During the Term of this Lease Tenant shall not make any alterations, additions, or improvements to the Premises without first meeting the following requirements: 9.1.1. Prior to the commencement of any work, Tenant shall submit plans and specifications prepared by an architect and/or structural engineer licensed by the State of California for Landlord's approval, which approval shall not be unreasonably withheld and obtain any necessary governmental permits and deliver a copy thereof to Landlord; 9.1.2. The alterations shall be made by a contractor designated by Landlord or a contractor chosen by Tenant and approved by Landlord, which approval shall not be unreasonably withheld; 9.1.3. Tenant shall provide satisfactory evidence of sufficient contractor's comprehensive general liability insurance covering Landlord, builder's risk insurance, and workmen's compensation insurance; 9.1.4. Tenant shall provide a performance and payment bond satisfactory in form and substance to the Landlord; 9.1.5. Tenant shall provide such other security as Landlord may reasonably require to insure payment for the - 3 - completion of all work free and clear of liens; and 9.1.6. Tenant shall give Landlord at least five (5) business days' notice before commencing any work so that Landlord can post and record a notice of non-responsibility. 9.2. Mechanic's Liens. Any mechanics' lien filed against the Premises or the Building for work done by or materials furnished to Tenant or its agents shall be discharged by Tenant at its expense within twenty (20) days thereafter by the filing of the bond required by law, by payment, by satisfaction or otherwise. Failure to so discharge any such lien shall constitute a default hereunder. 9.3. Improvements and Alterations of Landlord's Property. All Tenant's Improvements and all alterations made thereto and installed for Tenant shall be and remain Landlord's property, except Tenant's furniture, furnishings and trade fixtures, and shall not be removed without the written consent of Landlord. All goods, effects, personal property, business and trade fixtures, machinery and equipment owned by Tenant or installed at Tenant's expense in the Premises shall remain the personal property of Tenant and may be removed by Tenant at any time, and from time to time, during the Term of this Lease provided Tenant shall, in removing any such property, repair all damage to the Premises and the Building caused by such removal and to restore the Premises to their original condition. 10. Entry by Landlord. Landlord and Landlord's agents and representatives shall have the right to enter and inspect the Premises at any reasonable time, for the purpose of ascertaining the condition of the Premises, of exercising any right or performing any obligation of Landlord hereunder, or of exhibiting the Premises to prospective Tenants, purchasers, mortgagees or insurers of Landlord's interest in the Building. In the case of emergency Landlord shall have the right to enter the Premises at any time; and, if Tenant is not present to permit such entry, Landlord may forcibly enter the Premises and any such entry shall not in any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction of Tenant, actual or constructive, from the Premises or any portion thereof. No entry by Landlord permitted hereunder shall be deemed a re-entry nor shall Tenant be entitled to compensation or abatement of rent for any inconvenience, nuisance or discomfort occasioned thereby. 11. Insurance. 11.1. Tenant's Insurance. During the term hereof, Tenant shall, at its own cost and expense, provide and keep in force the following insurance: 11.1.1. Comprehensive general liability insurance for the mutual benefit of Landlord and Tenant against claims for bodily injury, death or property damage occurring in or about the Premises (including, without limitation, bodily injury, death or property damage resulting directly or indirectly from or in connection with any change, alteration, improvement or repair thereof), with a limit of not less than $2,000,000 combined single limit bodily injury and property damage. Not more frequently than each three (3) years, if, in the opinion of any mortgagee of Landlord or of the insurance broker retained by Landlord, the amount of general liability and property damage insurance coverage at that time is not adequate, Tenant shall increase the insurance coverage as required by either any mortgagee of Landlord or Landlord's insurance broker. Said insurance shall insure performance by Tenant of the indemnity provision of Section 12 hereof; 11.1.2. All Risk Replacement Cost insurance with Agreed Amount Endorsement covering the Premises and upon property of every description and kind owned by Tenant and for Tenant's Special Improvements and personal property located in the Premises in an amount equal to 100% of the full replacement value thereof, which value shall be determined every two (2) years by an insurance appraiser mutually satisfactory to Landlord and Tenant; 11.1.3. Worker's compensation insurance to the extent required by law; and 11.1.4. Such other insurance, in such amounts as may from time to time be reasonably requested by Landlord or any mortgagee of Landlord, against other insurable hazards which at the time are reasonably available at reasonable cost and commonly insured against in the case of premises or buildings similarly situated, with due regard to the height and the type of the Premises or the Project, its construction, use and occupancy. 11.2. Form of Insurance. The aforesaid insurance shall name Landlord and Landlord's agent as additional insured and shall be with companies and in form, substance and amount (where not stated above) satisfactory to Landlord and Landlord's agent, and shall contain the Insurer's waiver of subrogation clause against Landlord and standard mortgage clause satisfactory to Landlord and Landlord's agent. The aforesaid insurance shall not be subject to cancellation or modification except after at least thirty (30) days prior written notice to Landlord and any agent of Landlord. Certified copies of the insurance policies, or at the option of Landlord certificates of such coverage, together with satisfactory evidence of payment of premiums thereon, shall be delivered to Landlord at the commencement of the Term hereof; and renewals of such policies shall be so delivered not less than thirty (30) days prior to the end of the term of each such coverage. 11.3. Cancellation of Insurance. If any insurance policy carried by Landlord shall be cancelled or cancellation shall be threatened or the coverage thereunder reduced or threatened to be reduced, in any way by reason of the use or occupation of the Premises or any part thereof by Tenant or by any assignee or subtenant of Tenant or by anyone permitted by Tenant to be upon the Premises and, if Tenant fails to remedy the condition giving rise to cancellation, threatened cancellation or reduction of coverage within forty-eight (48) hours after notice thereof, Landlord may enter upon the Premises and attempt to remedy such condition and Tenant shall forthwith pay the costs thereof to Landlord as Rent. Landlord shall not be liable for any damage or injury caused to any property of Tenant or of others located on the Premises as a result of such entry. In the event that Landlord shall be unable to remedy such condition, then Landlord shall have all of the remedies provided for in the Lease in the event of a default by Tenant. Notwithstanding the foregoing provisions of this Section 11.3, if Tenant fails to remedy as aforesaid, Tenant shall be in default of its obligation hereunder and Landlord shall have no obligation to attempt to remedy such default. 12. Indemnity. Landlord shall not be liable to Tenant for any loss or damage to persons or property caused by theft, fire, act of God, acts of the public enemy, riot, strike, insurrection, war, court order, requisition or order of governmental body or authority or other causes beyond Landlord's reasonable control, or any damage or inconvenience which may arise through repair or alteration of any part of the Project or failure to make any such repair. Tenant shall indemnify Landlord and hold Landlord harmless of and from any and all loss, cost, damage, injury or expense arising out of or related to claims of injury to or death of persons, damage to property occurring or resulting directly or indirectly from the use or occupancy of the Premises or activities of Tenant in or about the Premises or Project, such indemnity to include, but without limitation, the obligation to provide all costs of defense against any such claims; provided that such indemnity shall not extend to any such loss arising from Landlord's negligence. In addition, Tenant shall hold and save Landlord harmless and indemnify Landlord of and from any and all loss, damage, injury or expense arising out of or in any way related to claims for work or labor performed, materials or supplies furnished to or at the request of Tenant or in connection with performance of any work done for the account of Tenant in the Premises or the Project. 13. Assignment and Subletting. 13.1. Assignment or Sublease. Tenant shall not voluntarily assign or encumber its interest in this Lease or in the Premises, or sublease all or any part of the Premises, or allow any other person or entity to occupy or use all or any part of the Premises, without first obtaining Landlord's written consent. Any assignment, encumbrance or sublease without Landlord's prior written consent shall be voidable, at Landlord's election, and shall constitute a default. No consent to any assignment, encumbrance, or sublease shall constitute a further waiver of the provisions of this section. Tenant shall notify Landlord in writing of Tenant's intent to sublease, encumber or assign this Lease at least ninety (90) days in advance of the effective date thereof and Landlord shall, within thirty (30) days of receipt of such written notice, elect one of the following: 13.1.1. Consent to such proposed assignment, encumbrance or sublease; 13.1.2. Refuse such consent, which refusal shall be on reasonable grounds. As a condition for granting its consent to any assignment, encumbrance or sublease, Landlord may require that the sublessee or assignee remit directly to Landlord on a monthly basis, all monies due to Tenant by said assignee or sublessee and the proposed sublessee or assignee is engaged in a business which and the use of the demised Premises is in keeping with the then character and nature of all other Tenants in the Building. Landlord's waiver or consent to any assignment or subletting shall not relieve Tenant from any obligation under this Lease. Tenant shall pay to Landlord upon demand any costs or expenses including attorney's fees reasonably incurred by Landlord in connection with each assignment, sublease or encumbrance. 13.2. Transfer of Rights Deemed an Assignment. If Tenant or any permitted assignee or sublessee of Tenant is a corporation, and if at any time during the Term any part or all of the corporate shares or voting rights of shareholders shall be transferred by sale, assignment, bequest, inheritance, trust, operation of law or other disposition, or treasury shares be issued so as to result in a change in the control of said corporation by reason of ownership of greater than fifty (50%) percent of the voting shares of the corporation or otherwise, then such transfer or issue shall be deemed an assignment for the purposes of Section 13.1. Tenant shall notify the Landlord in writing of such changes and, upon request of Landlord, shall make available to Landlord for inspection or copying or both, all books and records of Tenant and those of Tenant's shareholders which, alone or with other data, show the applicability or inapplicability of this Section 13.2. 13.3. Upon Default. Upon the occurrence of an event of default hereunder, if the Premises or any part thereof are then assigned - 4 - or sublet, Landlord, in addition to any other remedies herein provided or provided by law, may at its option collect directly from such assignee or subtenant all rents becoming due to Tenant under such assignment or sublease and apply such rent against any sums due to Landlord from Tenant hereunder, and no such collection shall be construed to constitute a novation or a release of Tenant from the further performance of Tenant's obligations hereunder or an acquiescence by Landlord to the occupancy of any part of the Premises by such subtenant or assignee. 13.4. Upon Termination. In the event of a termination of this Lease, at Landlord's option, each subtenant of space in the Premises shall attorn to Landlord. Each subtenant who hereafter subleases space within the Premises shall be deemed to have agreed to the provisions of this subsection. 14. Damage. 14.1. Landlord's Obligation to Restore. Subject to the provisions of Sections 14.2, 14.3 and 14.4 hereof, in case of damage to the Building Standard Work by fire or other casualty against which Landlord is insured, Tenant shall give immediate notice to Landlord, who shall, to the extent originally provided as Building Standard improvements, cause the damage to be repaired with reasonable speed at the expense of Landlord, subject to delays which may arise by reason of adjustment of loss under insurance policies and for delays beyond the reasonable control of Landlord, and to the extent that any part of the Premises are rendered untenantable, the Rent shall be proportionately abated until the restoration of the Building Standard Improvements is completed. In no event shall Tenant be able to terminate this lease if Landlord is acting in good faith and diligently prosecuting to completion such repairs. 14.2. Landlord's Option to Terminate. If the Premises are damaged or destroyed by any cause whatsoever, and if, in the sole discretion of Landlord, the Premises cannot be rebuilt or made fit for the purposes of Tenant within one hundred twenty (120) days of the damage or destruction, Landlord instead of rebuilding or making the Premises fit for Tenant, may at its option terminate this Lease by giving notice of termination to Tenant within thirty (30) days after such damage or destruction and thereupon Rent shall be apportioned and paid to the date of such damage, and Tenant shall immediately deliver up possession of the Premises to Landlord. Provided, however, that those provisions of this Lease which are designated to cover matters of termination and thereafter shall survive the termination hereof. 14.3. Damage to the Building. Irrespective of whether the Premises are damaged or destroyed, in the event that one half or more of the Net Rentable Area of the Building is damaged or destroyed by any cause whatsoever, and if, in the reasonable opinion of Landlord, the said area cannot be rebuilt or made fit for the purpose of the Tenants of such space within one hundred and eighty (180) days after the damage or destruction, the Landlord may at its option terminate this Lease by giving to Tenant within thirty (30) days after such damage notice of termination requiring it to vacate the Premises sixty (60) days after delivery of the notice of termination and thereupon Rent shall be apportioned and paid to the date on which possession is relinquished and Tenant shall deliver up possession of the Premises to Landlord in accordance with such notice of termination. 14.4. Damage During Last Year of Term. In case the Building, the Premises or Building Standard Improvements are substantially destroyed by fire or other causes at any time during the last year of the Term of this Lease, either Landlord or Tenant may terminate this Lease upon written notice to the other party hereto given within sixty (60) days of the date of such destruction. 14.5. No Claims. No damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Premises, the Building Standard Improvements or of the Building. Landlord shall use its best efforts to effect such repairs promptly and in such manner as not to interfere unreasonably with Tenant's occupancy. 15. Condemnation. 15.1. Total Taking. In the event that the whole or substantially the whole of the Building or the Land shall be lawfully condemned or taken in any manner for any public or quasi-public use, this Lease and the term and estate hereby granted shall forthwith cease and terminate as of the date of taking of possession for such use or purpose. 15.2. Partial Taking. If more than fifty percent (50%) of the Premises should be condemned or taken, either party may elect at anytime within thirty (30) days of the date of such taking to cancel this Lease upon written notice to the other, and thereupon this Lease shall terminate upon the date specified in said notice, which date shall be no earlier than the date of such taking. Upon any such taking or condemnation and the continuing in force of this Lease as to any part of the Premises, the Gross Rent shall be diminished by an amount representing the part of the Gross Rent properly applicable to the portion of the Premises which may be so condemned or taken. 15.3. Termination of Lease. In the event of the termination of this Lease pursuant to the provisions of Section 15.1 and 15.2, this Lease and the term and estate hereby granted shall expire as of the date of such termination in the same manner and with the same effect as if that were the date set for the normal expiration of the Term of this Lease, and the Gross Rent shall be apportioned as of such date. The provisions of this Section 15.3 shall apply in the same manner to any partial termination of this Lease pursuant to the provisions of this Section 15. 15.4. Condemnation Award. Landlord shall be entitled to receive the entire aware in any condemnation proceeding without deduction therefrom for any estate vested in Tenant by this Lease and Tenant shall receive no part of such award or awards or any part thereof. Notwithstanding the foregoing, in the event of any condemnation or taking pursuant to Section 15.1 or 15.2, Tenant shall be entitled to appear, claim, prove and receive in the condemnation proceeding such award as may be made as represents the loss or damage to Tenant's trade fixtures and removable personal property, removal or relocation costs, and the unamortized balance of any of Tenant's Extra Improvements or of any alterations installed in the Premises at Tenant's expense. 15.5. Temporary Taking. If the temporary use or occupancy of all or any part of the Premises shall be condemned or taken for any public or quasi-public use during the Term of this Lease, this Lease shall be and remain unaffected by such condemnation or taking and Tenant shall continue to pay in full all sums payable hereunder by Tenant, but in no event shall Tenant be liable for the payment of sums payable hereunder for any period during such temporary use or occupancy beyond the Term of this Lease. In the event of any such taking, Tenant shall be entitled to appear, claim, prove and receive the entire award for such taking as represents compensation for use or occupancy of the Premises during the Term of this Lease, and Landlord shall be entitled to appear, claim, prove and receive the entire award as represents the cost of restoration of the Premises and the award representing use or occupancy of the Premises after the end of the Term hereof. 15.6. Restoration of the Building and Premises. In the event of any condemnation or taking of less than the whole of the Building, and this Lease shall continue in effect, in whole or in part, or in the event of a condemnation or taking for a temporary use or occupancy of all or any part of the Premises, Landlord, to the extent that the award shall be sufficient for the purpose, shall proceed with reasonable diligence to repair, alter and restore the remaining part of the Building and the Premises to substantially their former condition to the extent that the same may be feasible. 16. Subordination. This Lease and all the rights of Tenant hereunder are subject and subordinate to any deed of trust or mortgage, which does now or may hereafter affect the Project and to any and all renewals, modifications, consolidations, replacements and extensions thereof. It is the intention of the parties that this provision be self-operative and that no further instrument shall be required to effect such subordination of this Lease. Tenant shall, however, upon demand at any time or times execute, acknowledge and deliver to Landlord without expense to Landlord, any and all instruments that may be necessary or proper to subordinate this Lease and all rights of Tenant hereunder to said deed of trust or mortgage or to confirm or evidence said subordination. In the event any proceedings are brought for the foreclosure of any such deed of trust or mortgage Tenant covenants and agrees to attorn to the purchaser at any summary proceedings or foreclosure sale, if requested to do so by such purchaser, and to recognize such purchaser as the Landlord under this Lease. Upon the request of the Landlord, or the trustee or beneficiary of such deed of trust or mortgage, or of such purchaser, Tenant agrees to execute and deliver within ten (10) days of such request any instrument which, in the sole judgment of such requesting party, may be necessary or appropriate in any such summary or foreclosure proceeding or otherwise to evidence such attornment. Tenant further waives the provisions of any statute or rule of law, now or hereafter in effect, which may give or purport to give Tenant any right of election to terminate or otherwise adversely affect this Lease and the obligations of Tenant hereunder in the event any such foreclosure proceeding is brought, prosecuted, or completed. 17. Default. In the event that: 17.1. Tenant shall default in the payment of Rent when the same shall become due, and such default shall continue for a period of ten (10) consecutive days; or 17.2. Tenant shall vacate or abandon the Premises for a continuous period in excess of ten (10) days; or 17.3. Tenant shall default in the performance of any obligation required to be performed by Tenant under this Lease (other than abandonment or the payment of Rent) and shall fail, for a period of twenty (20) days after written notice from Landlord specifying such default, to cure said default (unless such default cannot be cured within said twenty (20) days in which case Tenant shall commence to cure said default within said twenty 920) days and shall cure the same with all reasonable dispatch); or 17.4. Tenant shall be adjudicated bankrupt, or a petition by or against Tenant for reorganization or adjustment of its obligations - 5 - under the Bankruptcy Act or any other existing or future insolvency or bankruptcy statue shall be approved, or Tenant shall make a general assignment of its property for the benefit of creditors, or a receiver or trustee shall be appointed to take control of the business or assets of Tenant; then and in each such case, Landlord may, at its option, terminate Tenant's right to possession and thereby terminate this Lease, or without terminating this Lease re-enter the Premises and for the account of Tenant re-let the same or any portion or portions thereof for all or any part of the unexpired term of this Lease upon such terms and conditions as Landlord may elect. In the event of any such termination of this Lease by Landlord, Landlord shall be entitled to recover from Tenant: 1) the worth at the time of award of the unpaid Rent which had been earned at the time of termination; 2) the worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; 3) the worth at the time of award of the amount by which the unpaid Rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; and 4) any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform Tenant's obligation under this Lease, or which in the ordinary course of things would be likely to result therefrom. Efforts by landlord to mitigate the damages caused by Tenant's breach of this Lease shall not constitute a waiver by Landlord of its right to recover damages hereunder. In the event of such re-letting without terminating this Lease, Landlord shall be entitled to recover monthly from Tenant the difference between the monthly installments of Gross Rent and such other amounts as may be payable by Tenant to Landlord pursuant to the provisions hereof over the total monthly rental received by Landlord upon such re-letting, after first deducting therefrom all expenses reasonably incurred by Landlord in such re-letting and in repairing, renovating, remodeling and altering the Premises for the purpose of such re-letting. Landlord shall not be deemed to have elected to terminate this Lease or the liability of Tenant to pay Rent thereafter to accrue or its liability for damages under any of the provisions hereof by any such re-entry or by any action in unlawful detainer or otherwise to obtain possession of the Premises, unless Landlord shall have notified Tenant in writing that it has so elected to terminate this Lease, and Tenant agrees that the service by Tenant of any notice pursuant to the unlawful detainer statues of the State of California, and the surrender of possession pursuant to such notice (unless Landlord elects to the contrary at the time of or at any time subsequent to the service of such notice and such election be evidenced by a written notice to Tenant) shall not be deemed to be a termination of this Lease. For purpose of this Section 17, the following shall not constitute termination of Tenant's right to possession: A) acts of maintenance or preservation or efforts to re-let the Premises; or B) the appointment of a receiver upon initiative of Landlord to protect the Landlord's interest under this Lease. Nothing herein contained shall be construed as obligating Landlord to re-let the whole or any part of the Premises. In the event of any entry or taking possession of the Premises, Landlord shall have the right, but not the obligation, to remove therefrom all or any part of the personal property located therein and may place the same in storage at a public warehouse selected by Landlord at the expense and risk of the owner or owners thereof. The remedies provided Landlord hereunder shall be cumulative and shall be in addition and supplemental to all other rights or remedies which Landlord may lawfully pursue in the event of any breach or threatened breach by Tenant of any of the provisions of this Lease. 17.5 For purposes of computing unpaid Rent which would have accrued and become payable under this Lease pursuant to the provisions of this Section 17, unpaid Rent shall consist of the sum of: (i) The total Basic Rent for the balance of the Term; plus (ii) A computation of the Basic Operating Cost increases for the balance of the Term, the assumed Basic Operating Cost increase for the calendar year of the default and each future calendar year in the Term to be equal to the Basic Operating Cost increase for the calendar year prior to the year in which default occurs compounded at a per annum rate equal to the mean average rate of inflation for the preceding five (5) calendar years as determined by the index (as defined in Section 3.2(b) above). If the index is either unavailable, is no longer published, or is calculated on a significantly different basis, the average rate of inflation shall be determined by reference to the most comprehensive official index then published which most closely approximates the rate of inflation. The "worth at the time of award of the amounts referred to in (i) and (ii) above shall be computed with interest at the lesser of eighteen percent (18%) per annum or the maximum rate allowed by law. The "worth at the time of award" of the amount referred to in (iii) above shall be computed by reference to competent appraisal evidence or the formula prescribed by and using the lowest discount rate permitted under applicable law. 18. Signs. Tenant shall not install any sign or advertising or publicity device which is visible from outside the Premises, in any public area, on any roof, on any window or on any outside portion of the Building. Tenant may install an identification sign within or adjacent to the entrance of the Premises provided such sign has the prior approval of Landlord and conforms to the graphic standards of the Building. Landlord shall list Tenant's name on the directory board that Landlord shall provide and maintain in the lobby of the Building. As space is available, other names may be listed on the directory board at Landlord's option in relation to Tenant's Proportionate Share of the Building. 19. Rules and Regulations. At all times during the terms of this Lease, Tenant shall comply with the Rules and Regulations for the Project which are attached hereto as Exhibit "E" and incorporated herein by reference. Tenant agrees that Landlord shall have the right to amend said Rules and Regulations and to promulgate new Rules and Regulations applicable to all Tenants in the Building which relate to their use and occupancy thereof. Landlord shall not be responsible to Tenant for the nonperformance by any other Tenant or occupant of any said Rules and Regulations. 20. Compliance With Regulations. 20.1. Compliance by Tenant. Tenant shall at its sole cost and expense promptly comply with all laws, statutes, laws concerning environmental hazards, including, but not limited to asbestos, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force, with the requirements of any board of fire underwriters or other similar body now or hereafter constituted, with any direction or occupancy certificate issued pursuant to any law by any public officer or officers, as well as the provisions of all recorded documents affecting the Premises, insofar as any thereof relate to or affect the condition, use or occupancy of the Premises, excluding requirements of structural changes not related to or affected by improvements made by or for Tenant or not necessitated by Tenant's acts. The judgment of any court of competent jurisdiction or the admission by Tenant in any action or proceeding against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such law, ordinance, requirement or order in the use of the Premises, shall be conclusive of the fact as between Landlord and Tenant. 20.2. Right to Contest. Landlord may at its option contest the validity of any such law, ordinance, rule, order or regulation (hereinafter the "Law") by notifying Tenant of its decision to do so within ten (10) days after receiving the notice required by Section 20.3 hereof from Tenant. If Landlord declines to so contest such Law, Tenant may do so at its own expense, and non-compliance by it during such contest shall not constitute a breach of this Lease; provided that it shall, to the satisfaction of the Landlord, indemnify and hold Landlord harmless against the cost of compliance and against all liability for any loss, damages, and expenses (including reasonable attorneys' fees) which might result from or be incurred in connection with such contest or non-compliance; except that non-compliance shall not continue so as to subject Landlord to any fine or penalty or to prosecution for a crime. 20.3. Notice to Landlord. If Tenant receives written notice of any violation of any law, ordinance, rule, order or regulation applicable to the Premises, it shall give prompt notice thereof to Landlord. 21. Self-Help. Tenant covenants and agrees that if it shall at any time fail to make any payment or perform any act which the Tenant is obligated to make or perform under this Lease, then Landlord may, but shall not be obligated so to do, after any applicable grace period provided in Section 17 has expired, and without waiving, or releasing the Tenant from, any obligations of the Tenant in this Lease contained, make any payment or perform any act which the Tenant is obligated to perform under this Lease, in such manner and to such extent as shall be necessary, and in exercising any such rights, pay necessary and incidental costs and expenses, employ counsel and incur and pay reasonable attorneys' fees. Notwithstanding the foregoing, Landlord may make any such payment or perform any such act before said applicable grace period has expired if the same is necessary or required for the preservation or protection of the Premises or the avoidance of penalties or other charges due to delinquent payment of taxes or other actions. All sums so paid by Landlord and all necessary and incidental costs and expenses in connection with the performance of any such act by Landlord, together with interest thereon at the maximum rate provided by law from the date of the making of such expenditure by Landlord, shall be deemed Rent hereunder and shall be payable to Landlord on demand, or at the option of Landlord may be added to any Rent then due or thereafter becoming due under this Lease. Tenant covenants to pay any such sum or sums with interest as aforesaid and Landlord, in addition to any other right or remedy it may have, shall have the same rights and remedies in the event of the non-payment thereof by Tenant as in the case of default by Tenant in the payment of Rent. The performance of any such act by Landlord shall not constitute a waiver of Tenant's default in failing to perform the same. Unless caused by Landlord's negligence or the negligence of Landlord's agents, employees or contractors, Landlord shall not in any event be liable for inconvenience, annoyance, disturbance, loss of business or other damage of Tenant or any other occupant of the Premises or part thereof, by reason of making repairs or the performance of any work on the Premises or on account of bringing materials, supplies and equipment into or through the Premises during the course thereof; and the obligations of Tenant under this Lease shall not thereby be affected in any manner whatsoever, - 6 - 22. Attorneys' Fees. If as a result of any breach or default in the performance of any of the provisions of this Lease, Landlord uses the services of an attorney in order to secure compliance with such provisions or recover damages therefor, or to terminate this Lease or evict Tenant, Tenant shall reimburse Landlord upon demand for any and all attorneys' fees and expenses so incurred by Landlord, provided that if Tenant shall be the prevailing party in any legal action brought by Landlord against Tenant, Tenant shall be entitled to recover the fees of its attorneys in such amount as the court may adjudge reasonable. 23. Brokerage. Tenant covenants and represents that it has negotiated this Lease directly with the broker designated on the Basic Lease information sheet and has not acted by implication to authorize, nor has authorized, any other real estate broker or salesman to act for it in these negotiations. Tenant agrees to defend, indemnify and hold Landlord harmless from any and all claims by any other real estate broker or salesman for a commission or finder's fee as a result of Tenant's entering into this Lease. 24. Quiet Enjoyment. So long as Tenant is not in default under any of the covenants and agreements of this Lease, Tenant's quiet and peaceful enjoyment of the Premises shall not be disturbed or interfered with by Landlord or by any person claiming by, through or under Landlord. 25. Notices. Any notice or other written instrument relating to this Lease may be delivered personally to the party to whom such notice is addressed (delivery to the president, a vice president, or the secretary of such party to constitute personal delivery to such party), or may be mailed by registered or certified mail to such party at the address listed on the Basic Lease Information sheet or at such other address as such party from time to time may designate by written notices. Any notice or other written instrument mailed as above provided shall be effective at the expiration of seventy-two (72) hours after deposit of the same, postage prepaid, in the United States mail at any place within the State of California. 26. Holding Over. In the event Tenant shall hold the Premises after the expiration of the Term hereof with the express or implied consent of Landlord, such holding over shall be deemed to have created a tenancy from month to month, terminable on thirty (30) days' notice by either party to the other, at a monthly Basic Rent equal to two hundred percent (200%) of Landlord's published rate for the Premises, which published rate shall not exceed 150% of the rate charged for similar space in the local area, and otherwise subject to all of the terms and provisions of this Lease. 27. Transfer by Landlord. Landlord shall have the right to transfer and assign, in whole or in part, all of its rights and obligations hereunder and in the Project, and in such event and upon its transferee's assumption of Landlord's obligations hereunder no further liability or obligations shall thereafter accrue against Landlord hereunder, and Landlord shall be entirely relieved of all agreements and conditions of this Lease thereafter to be performed by the Landlord under this Lease. Tenant agrees to attorn to any such transferee or assignee. 28. Tenant's Remedies. Tenant shall look solely to Landlord's interest in the Project for the recovery of any judgment from Landlord. Landlord, or if Landlord is a partnership, its partners whether general or limited, or if Landlord is a corporation, its directors, officers or shareholders, shall never personally be liable for any such judgment. Any lien obtained to enforce any such judgment and any levy of execution thereon shall be subject and subordinate to any lien, mortgage or deed of trust to which Section 16 applies or may apply. 29. Guaranty. At the request of Landlord, Tenant shall provide a guaranty in the form and from a party satisfactory to Landlord to guaranty all of the obligations of Tenant hereunder. 30. Substitution of Premises. [Clause Deleted] 31. Parking. Tenant shall have a right to parking spaces in the parking area adjacent to the Building in accordance with the Parking Agreement attached hereto as Exhibit F. 32. Miscellaneous. 32.1. Grammar. Words of any gender used in this Lease shall be held and construed to include any other gender and words and the singular number shall be held to include the plural, unless the context otherwise requires. 32.2. Covenants Binding on Successors. The terms, provisions, covenants and conditions contained in this Lease shall apply to, inure to the benefit of, and be binding upon, the parties hereto and upon their respective heirs, legal representatives, successors and permitted assigns except as otherwise herein provided. 32.3. Captions. The captions inserted in this Lease are for convenience only and in no way define, limit, or otherwise describe the scope or intent of this Lease, or any provision hereof, nor in any way affect the interpretation of this Lease. 32.4. Estoppel Certificates. Tenant agrees, from time to time, within twenty (20) days after request of Landlord, to deliver to Landlord, or Landlord's designee, an estoppel certificate stating that this Lease is unmodified and in full force and effect (or if there have been modifications, that the Lease is in full force and effect as modified and stating the modifications), the date to which Rent and other charges have been paid, the unexpired term of this Lease, whether there are any defaults or rent abatements or offsets claimed by Tenant and such other matters pertaining to this Lease as may be reasonably requested by Landlord or Landlord's Mortgagee, it being intended that any such statements delivered pursuant to this subparagraph may be relied upon by any prospective purchaser of all or any part of the interest of Landlord in the Premises or mortgagee or assignee of any mortgage upon all or any part of such interest of the Landlord, and their respective successors and assigns. 32.5. Modification. This Lease may not be altered, changed or amended except by an instrument in writing signed by the parties hereto. 32.6. Memorandum of Lease. The Lease shall not be recorded, but the parties agree, at the request of either of them, to execute a Memorandum of Lease for recording, containing the names of the parties, the legal description, the term of the Lease and the options granted hereunder. 32.7. Time is of the Essence. Time is of the essence of this Lease, and all provisions herein relating thereto shall be strictly construed. 32.8. Relationship of Parties. Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership, or of joint venture by the parties hereto, it being understood and agreed that no provision contained in this Lease nor any acts of the parties hereto shall be deemed to create any relationship other than the relationship of Landlord and Tenant. 32.9. Severability. If any term or provision of this Lease shall to any extent be held invalid or unenforceable, the remaining terms and provisions of this Lease shall not be affected thereby, but each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. 32.10. Law Applicable. This Lease shall be construed and enforced in accordance with the laws of the State of California. 32.11. Covenants and Conditions. All of the obligations of the Tenant and the Landlord hereunder shall be deemed and construed to be conditions as well as covenants as through the words specifically expressing or importing covenants and conditions were used in each separate instance. 32.12. Entire Agreement. This Lease contains the entire agreement between the parties relating thereto. All prior negotiations or stipulations concerning any matter which preceded or accompanied the execution hereof are conclusively deemed to be superseded hereby. 32.13. Authority of Tenant. Each of the persons executing this Lease on behalf of Tenant does hereby covenant and warrant that he or she is authorized to act for Tenant and on its behalf to enter into this Lease, and that if Tenant is a corporation, Tenant is a corporation duly organized and existing in the state of its incorporation and qualified to do business in the State of California. 32.14. Exclusivity. As long as Tenant is not in default of this Lease, Landlord shall not lease any space on the first (1st) floor of the Building to another tenant which is insured by the Federal Insurance Deposit Corporation. 33.15. Negotiation Right. For a period of fifteen (15) days from receipt of Landlord's notice, Tenant shall have the exclusive right to negotiate with Landlord over any vacant space in the Building which is not subject to a previously existing exclusive negotiating right. 33.16. ADA. Landlord shall be responsible for any alterations to the Building which are (i) required under the Americans with Disabilities Act, and (ii) not exclusively occasioned by Tenant's occupancy. - 7 - IN WITNESS WHEREOF the parties hereto have executed this Lease on the date first above written. LANDLORD: MARCH TOWER ASSOCIATES II, LLC By: MARCH TOWER ASSOCIATES II, LLC (Acknowledgment) By Atlas Properties, Inc., Authorized Agent By /s/ Edward A. Barkett --------------------------------------- Title Edward A. Barkett, President TENANT: SERVICE 1st BANK By /s/ Bryan Hyzdu --------------------------------------- Title President (Acknowledgment) By ----------------------------------------- Title -------------------------------------- - 8 - EXHIBIT A LEGAL DESCRIPTION OF PROPERTY That certain real property situated in the City of Stockton, County of San Joaquin, State of California, described as follows: Lot four, Inclusive, as shown upon Parcel Map filed for record July 19, 1985, in Book 13 of Parcel Maps at Page 145, San Joaquin County Records. - 9 - EXHIBIT B SITE PLAN [GRAPHIC OMITTED] - 10 - EXHIBIT C FLOOR PLAN(S) - 11 - EXHIBIT D TENANT IMPROVEMENTS WORK LETTER AGREEMENT [Text of Entire Exhibit Deleted] - Pages 12 through 14 - SCHEDULE D-1 [Text of Entire Schedule Deleted] - 15 - EXHIBIT E Rules and Regulations 1. Sidewalks, doorways, vestibules, halls, stairways, parking areas, driveways, and similar areas shall not be obstructed, nor shall refuse, debris, equipment, furniture, boxes or other items be placed therein by Tenant or its officers, agents, servants and employees, or used for any purpose other than ingress and egress to and from the Premises, or for going from one part of the Building to another part of the Building. Canvassing, soliciting, and peddling in the Building are prohibited. 2. No signs, directories, posters, advertisements or notices shall be painted or affixed on or to any of the windows, doors, balconies or walkways or other parts of the Building, except in such color, size and style, and in such places, as shall be first approved in writing by Landlord in its discretion. One Building standard suite identification sign will be prepared by Landlord at Landlord's expense. No additional sign shall be posted without Landlord's prior written consent as to location and form, and the cost of preparing and posting such signs shall be borne solely by Tenant. Landlord shall have the right to remove all unapproved signs without notice to Tenant at the expense of Tenant. 3. Tenants shall not do, or permit anything to be done in or about the Building, or bring or keep anything therein, that will in any way increase the rate of fire or other insurance on the Building or on property kept therein or otherwise increase the possibility of fire or other casualty. 4. Landlord shall have the power to prescribe the weight and position of heavy equipment or objects which may over stress any portion of the floor. All damage done to the Building by the improper placing of such heavy items will be repaired at the sole expense of the responsible Tenant. 5. A Tenant shall notify the Building manager when safes or other heavy equipment are to be taken in or out of the Building, and the moving shall be done after written permission (which permission shall not be unreasonably withheld) is obtained from Landlord on such conditions as Landlord shall require. Any moving in or moving out of Tenant's equipment, furniture, files and/or fixtures shall be done only with prior written notice to Landlord, and Landlord shall be entitled to prescribe the hours of such activity, the elevators which shall be available for such activity, and shall, in addition, be entitled to place such other conditions upon Tenant's moving activities as Landlord deems appropriate. Tenant shall bear all risk of loss relating to damage incurred with respect to Tenant's property in the process of such a move and, in addition, shall indemnify and hold Landlord harmless as to all losses, damages, claims, causes of action, costs and/or expenses relating to personal injury or property damage sustained by Landlord or any third party on account of Tenant's moving activities. 6. Entry doors, when not in use, shall be kept closed. 7. All deliveries must be made during normal working hours. Landlord's written approval must be obtained for any delivery after normal working hours. Loading areas shall be kept clear for traffic when not in use. 8. Each Tenant shall cooperate with Landlord's employees in keeping the Premises neat and clean. 9. Tenants shall not cause or permit any improper noises in the Building, or allow any unpleasant odors to emanate from the Premises, or otherwise interfere, injure or annoy in any way other Tenants, or persons having business with them. 10. No animals shall be brought into or kept in or about the Building. 11. No boxes, crates or other such materials shall be stored in hallways or other Common Areas. When Tenant must dispose of creates, boxes, etc., it will be the responsibility of Tenant to dispose of same prior to or after the hours of 7:30 a.m. and 5:30 p.m. so as to avoid having such debris visible in the Common Areas during Normal Business Hours. 12. No machinery of any kind, other than computers, computer equipment and ordinary office machines such as typewriters and calculators, shall be operated on Premises without the prior written consent of Landlord, nor shall a Tenant use or keep in the Building any inflammable or explosive fluid or substance (including Christmas trees and ornaments) or any illuminating materials except candles. No space heaters or fans shall be operated in the Building. 13. No bicycles, motorcycles or similar vehicles will be allowed in the Building. 14. Nothing shall be affixed to or made to hang from the ceiling of the Premises without Landlord's prior written consent. 15. Landlord has the right to evacuate the Building in the event of an emergency or catastrophe. 16. No food and/or beverages shall be sold from Tenant's office without prior written approval of Landlord. 17. No additional locks shall be placed upon any doors without the prior written consent of Landlord. All necessary keys shall be furnished by Landlord, and the same shall be surrendered upon termination of this Lease, and Tenant shall then give Landlord or his agent an explanation of the combination of all locks on the doors or vaults. Tenant shall initially be given two (2) keys to the Premises by Landlord. No duplicates of such keys shall be made by Tenant. Additional keys shall be obtained only from Landlord, at a fee to be determined by Landlord. 18. Tenants shall not locate furnishings or cabinets adjacent to mechanical or electrical access panels so as to prevent operating personnel from servicing such units as routine or emergency access may require. Cost of moving such furnishings for Landlord's access will be for Tenant's account. 19. Tenant shall comply with parking rules and regulations as may be posted and distributed from time to time. 20. No portion of the Building shall be used for the purpose of lodging rooms. 21. Vending machines or dispensing machines of any kind will not be placed in the Premises by a Tenant (unless such machines are installed to serve Tenant's employees and invitees entering in connection with Tenant's office activities, but not the public generally). 22. Tenant shall not alter or replace window shades, blinds, drapes, or any other window treatment of any kind whatsoever without Landlord's prior written approval. Landlord will control all internal lighting that may be visible from the exterior of the Building and shall have the right to change any unapproved lighting, without notice to Tenant, at Tenant's expense. 23. No Tenant shall make any changes or alterations to any portion of the Building without Landlord's prior written approval, which may not be unreasonably withheld. All such work shall be done by Landlord or by contractors and/or workmen approved by Landlord, working under Landlord's supervision. - 16 - EXHIBIT F PARKING AGREEMENT 1. Scope. The parking areas, or designated portions thereof, shall be available for the use of Tenants of the Building and, to the extent designated by Landlord, the employees, agents, customers, and invitees of the Tenants subject to the rules and regulations as set by Landlord from time to time. However, Landlord may restrict certain portions of the parking areas to parking for Tenant and other Tenants of the Building and their employees and agents, and may designate other areas to be used at large only by customers and invitees of Tenants of the Building. In addition, Landlord may also assign designated parking stalls for Tenant, its employees, agents and invitees. 2. Parking Stalls. Tenants shall be authorized to use one parking stall per every 250 square feet of net rentable area Leased. 3. Changes. Notwithstanding any provision contained in this Agreement, or in the Lease, Landlord reserves the right from time to time to make reasonable changes in, additions to and deletions from the parking areas and the purposes to which the same may be devoted, and the use of the parking areas shall at all times be subject to such reasonable rules and regulations as may be promulgated by Landlord. Landlord shall not make any change in the parking area or modify the rules and regulations without providing Tenant with at least thirty (30) days' written notice. 4. Removal. Landlord, or its agents, if Landlord has delegated such privileges, shall have the right to cause to be removed any vehicle of Tenant, its employees or agents that are parked in violation of this Agreement or in subsequent rules and regulations, without liability of any kind to Landlord, its agents or employees. Dated: LANDLORD: MARCH TOWER ASSOCIATES II, LLC By: MARCH TOWER ASSOCIATES II, LLC By Atlas Properties Inc., Authorized Agent By /s/ EDWARD A. BARKETT ------------------------------------ Title Edward A. Barkett, President TENANT: SERVICE 1st BANK By /s/ Bryan Hyzdu --------------------------- Title President By --------------------------- Title ------------------------ - 17 - EXHIBIT G Option to Extend Term 1. Landlord hereby grants to Tenant two (2) options (the "Option") to extend the initial Term (the "Initial Term") for an additional five (5) years each (the "Option Term"), upon and subject to the terms and conditions set forth herein. The Option Term shall be each exercised, if at all, by written notice the Landlord on or before the date that is one (1) year prior to the Expiration Date of the Initial Term, except that the Rent to be paid during the Option Term shall be the Prevailing Market Rental, as hereinafter defined, for the Demised Premises for the Option Term. Anything contained herein to the contrary notwithstanding, If Tenant is in default under any of the terms, covenants or conditions of this Lease either at the time Tenant exercises the Option or at any time thereafter prior to the Commencement Date of the Option Term, Landlord shall have, in addition to all of Landlord's other rights and remedies provided in this Lease, the right to terminate the Option upon notice to Tenant, in which event the Expiration Date of this Lease shall be and remain the Expiration Date of the Initial Term. As used herein, the term "Prevailing Market Rental" for the premises shall mean the rental and all other monetary payments and escalations, including, without limitation, consumer price indexing, that Landlord could obtain from a third party desiring to lease the Demised Premises for the Option Term, taking into account the age of the Building, the size, location and floor levels of the Demised Premises, the quality of construction of the Building and the demised Premises, the services provided under the terms of the Lease, the rental then being obtained for new leases of space comparable to the Demised Premises in the locality of the Building, and all other factors that would be relevant to the third party desiring to lease the Demised Premises for the Option Term in determining the rental such party would be willing to pay therefor; provided, however, no allowance for the construction of tenant improvements shall be taken into account in determining Prevailing Market Rental. 2. If Tenant exercises the Option, Landlord shall send to Tenant a notice setting forth the Prevailing Market Rental for the Demised Premises for the Option Term, on or before the date that is 240 days prior to the Expiration Date of the Initial Term. In the event Tenant disputes Landlord's determination of the Prevailing Market Rental for the Option Term, Tenant shall, within thirty (30) days after the date of Landlord's notice setting forth the Prevailing Market Rental for the Option Term, send to Landlord a notice stating that Tenant either (i) elects to terminate its exercise of the Option, in which event the Option shall lapse and this Lease shall terminate on the Expiration Date of the Initial Term in the manner provided herein, or (ii) desires to submit the dispute as to the Prevailing Market Rental for the Option Term to arbitration as provided in Paragraph 3 herein. If Tenant does not send to Landlord a notice as provided in the previous sentence, Landlord's determination of the Prevailing Market Rental shall be the Base Annual Rent to be paid by Tenant hereunder during the Option Term. In the event Tenant elects to arbitrate, and such arbitration shall not have been concluded prior to the Commencement Date of the Option Term, Tenant shall pay Rent to Landlord hereunder adjusted to reflect the Prevailing Market Rental as determined by Landlord in the manner provided above. If the amount of Prevailing Market Rental as finally determined by arbitration is greater than Landlord's determination, Tenant shall pay to Landlord the difference between the amount paid by Tenant and the Prevailing Market Rental as so determined by arbitration within thirty (30) days after the determination, and if the Prevailing Market Rental as finally determined by arbitration is less than Landlord's determination, the difference between the amount paid by Tenant and the Prevailing Market Rental as so determined by arbitration shall be credited against the next installments of Base Annual Rent due from Tenant to Landlord hereunder. 3. In the event Tenant elects to submit the determination of the Prevailing Market Rental for the Demised Premises for the Option Term to arbitration, the judgement or the award rendered in any such arbitration may be entered in any court having jurisdiction and shall be final and binding upon the parties. The arbitration shall be conducted and determined in the City and County where the Site is located in accordance with the then prevailing rules of the American Arbitration Association or its successor for arbitration of commercial disputes, except to the extent that the procedures mandated by said rules shall be modified as follows: (a) Landlord shall specify the name and address of the person to act as the arbitrator on its behalf. The arbitrator shall be qualified as a real estate appraiser familiar with the prevailing market rentals of first-class office buildings in the area in which the Site is located and shall be a member of the National Institute of Real Estate Appraisers. Within ten (10) business days after the selection by Landlord of its arbitrator, Tenant shall give notice to Landlord specifying the name and address of the person designated by Tenant as arbitrator on its behalf who shall be similarly qualified. If Tenant fails to notify Landlord of the appointment of its arbitrator, within or by the time above specified, then the arbitrator appointed by Landlord shall be the arbitrator to determine the issue. (b) In the event that two (2) arbitrators are chosen pursuant to Paragraph 3(a) herein, the arbitrators so chosen shall meet within ten (10) business days after the second arbitrator is appointed and, if within ten (10) business days after such first meeting the arbitrators shall be unable to agree properly upon a determination of the Prevailing Market Rental for the Demised Premises for the Option Term, shall appoint a third arbitrator, who shall be a competent and impartial person with qualifications similar to those required of the first two arbitrators pursuant to Paragraph 3(a) herein. In the event they are unable to agree upon such appointment within five (5) business days after the expiration of such ten-day period, the third arbitrator shall be selected by the parties themselves, if they can agree thereon, within a further period of ten (10) days, If the parties do not so agree, then either party on behalf of both, may request appointment of such a qualified person by the then Chief Judge of the United States District Court having jurisdiction over the City and County in which the Site is located and the other party shall not raise any question as to such Judge's full power and jurisdiction to entertain the application for and make appointment. The three arbitrators shall decide the dispute if it has not previously been resolved by following the procedure set forth in Paragraph 3(c) herein and shall attempt to so decide the issue within ten (10) business days of the appointment of the third arbitrator. (c) The determination of the appraisers or the sole appraiser shall be conclusive upon the parties. If the appraisers do not agree on the Prevailing Market Value, the determination of the two appraisers which are closest in value should be averaged, which average shall be the Prevailing Market Rental. (d) In the event of a failure, refusal or inability of any arbitrator or act, his successor shall be appointed by him, but in the case of the third arbitrator, his successor shall be appointed in the same manner as provided for appointment of the third arbitrator. Any decision in which the arbitrator appointed by Landlord and the arbitrator appointed by Tenant concur shall be binding and conclusive upon the parties. Each party shall pay the fee and expenses of its respective arbitrator, and both shall equally share the fee and expenses of the third arbitrator, if any, and the attorney's fees and expenses of counsel for the respective parties and of witnesses shall be paid by the respective party engaging such counsel or calling such witnesses. (e) The arbitrators shall have the right to consult experts and competent authorities with factual information or evidence pertaining to a determination of the Prevailing Market Rental, but any such consultation shall be made in the presence of both parties with full right on their part to cross-examine. The arbitrators shall render their decision and award in writing with counterpart copies to each party. The arbitrators shall have no power to modify the provisions of this Lease. - 18 - EXHIBIT H HOURS OF OPERATION Tenant shall occupy the premises during "Normal Working Hours", more particularly described as: Monday through Friday 7:00 a.m. - 6:00 p.m. Saturday 9:00 a.m. - 12:00 p.m. Not to be included in normal working hours are "Holidays", which are defined in Section 1.4 of this Lease, and Sundays. Any times not included in normal working hours are to be known as "Above-Standard". If, at any time, Tenant wishes to occupy the premises during above-standard hours, Tenant by doing so implicitly agrees to pay Landlord, on a monthly basis, for the Increased operating costs caused by Tenant's above-standard usage of the building. Landlord will furnish to Tenant, no later than 20 days after end of the month in which Tenant has enjoyed above-standard usage, an invoice for Tenant's proportionate share of the above-standard operating expenses. The invoice will be due and payable at the same time the next month's Lease payment is due. SERVICE 1st BANK By /s/ BRYAN HYZDU --------------------------------- Its President By --------------------------------- Its --------------------------------- Date -------------------------------- - 19 - EXHIBIT I GUARANTEE AGREEMENT [Text of Entire Exhibit Deleted] GUARANTORS By ---------------------------- By ---------------------------- By ---------------------------- - 20 - TENANT ESTOPPEL CERTIFICATE The undersigned ("Tenant") hereby warrants, represents and certifies to and agrees with SALOMON BROTHERS REALTY CORPORATION, its successors and assigns, whose mailing address is 388 Greenwich Street, 11th Floor, New York, New York ("Lender"), the following statements set forth below in this Tenant Estoppel Certificate (the "Certificate") with the understanding that Lender is relying on such warranties, representations, certifications and agreements in this Certificate as an inducement to the Lender in making a permanent loan (the "Loan") to MARCH TOWER ASSOCIATES II, LLC ("Landlord"), secured by, among other things, that certain deed of trust/mortgage, assignment of rents and security agreement executed (or to be executed) by Landlord for the benefit of Lender (the "Instrument") encumbering the land and buildings located on the property as more particularly described on Exhibit A attached hereto (the "Mortgaged Property"). Based upon the foregoing, Tenant hereby warrants, represents and certifies as follows: 1. The Tenant is the subtenant under that certain Sublease (the "Sublease") dated February 1, 1999 between Tenant and Foundation Health Systems, Inc. The Sublease and the underlying master lease expires on September 30, 2002. Tenant and Landlord have executed that certain lease (the "Lease") dated April 24, 2002 between Landlord, as landlord, and Tenant, as tenant, covering office space located at 2800 W. March Lane, Suite No. 120 (the "Demised Premises") in the Mortgaged Property and the following information concerning the Lease, the Tenant and the Demised Premises is true and correct: (a) A true, correct and complete copy of the Lease together with all amendments, modifications, side letters, guaranties, letters of credit and other documents evidencing, governing or securing the Tenant's obligations under the Lease are attached hereto as Exhibit B. The Lease constitutes the entire agreement between the Landlord and the Tenant concerning the Demised Premises and the Mortgaged Property and there are no other agreements, written or oral, between the Landlord and the Tenant relating thereto except as attached in Exhibit B. (b) The Lease will commence pursuant to its terms and be in full force and effect as of October 1, 2002. Except as otherwise set forth in the Lease or as permitted by applicable law, the Tenant has no right to vacate the Demised Premises or cease to operate its business therefrom. (c) The Lease will commence on 10/01/2002 and expire on September 30, 2009. The Tenant has two remaining options to renew the Lease for two successive periods of five years each. (d) As of October 1, 2002, the Tenant will be presently obligated to pay the following amounts to the Landlord pursuant to the Lease: Tenant Estoppel Certificate (Page 1 of 6) 2800 West March Lane - Stockton, California SBRC Loan # Service 1st Bank Estoppel.doc (i) - ------------------- --------------- ------------------------ Annual Minimum Rent Monthly Payment Applicable Periods - ------------------- --------------- ------------------------ $106,370.40 $ 8,864.20 10/01/2002 to 09/30/2003 - ------------------- --------------- ------------------------ $109,561.56 $ 9,130.13 10/01/2003 to 09/30/2004 - ------------------- --------------- ------------------------ $112,848.36 $ 9,404.03 10/01/2004 to 09/30/2005 - ------------------- --------------- ------------------------ $116,233.80 $ 9,686.15 10/01/2005 to 09/30/2006 - ------------------- --------------- ------------------------ $119,720.76 $ 9,976.73 10/01/2006 to 09/30/2007 - ------------------- --------------- ------------------------ $123,312.36 $10,276.03 10/01/2007 to 09/30/2008 - ------------------- --------------- ------------------------ $127,011.72 $10,584.31 10/01/2008 to 09/30/2009 - ------------------- --------------- ------------------------ (ii) Common area maintenance (CAM) charges of $0.00 per month (amount is based upon an estimate): (iii) Real estate taxes are included with common area maintenance (CAM) charges; (iv) Insurance charges are included with common area maintenance (CAM) charges; and (v) Other charges of $500.00 per month representing costs for Sign. (e) If percentage rent is payable by the Tenant to the Landlord under the Lease, the last year for which such percentage rent was calculated under the Lease was N/A, 19__ to N/A, 19__ and the amount of percentage rent due and paid for such year was $N/A. (f) The Tenant has paid the monthly charges described in subparagraph 1(d)(i) above through and including the month of N/A. The Tenant has paid the charges described in subparagraphs 1(d)(ii) through 1(d)(v) through the most recent billing period for such charges. (g) The Tenant is in possession of the Demised Premises, is presently open and conducting business with the public at the Demised Premises under the trade name of Service lst Bank and occupies and uses no other space in the Mortgaged Property other than the Demised Premises. (h) As of the date hereof, except as otherwise expressly set forth in the Lease or on the attached schedule (if necessary), the Tenant is not entitled to any credits, reductions, offsets, defenses, free rent, rent concessions or abatements of rent under the Lease or otherwise against the payment of rent or other charges under the Lease. (i) No rent has been paid more than one (1) month in advance. (j) Under the Lease, Landlord has no obligation to make or to pay the Tenant for any improvements, alterations or work done on the Demised Premises. (k) To Tenant's knowledge, there are no existing or claimed conditions which are or with the passage of time would constitute a default on the part of the Landlord or the Tenant under the terms of the Lease. The Tenant has not assigned, transferred, mortgaged, or hypothecated the Lease or any interest therein or subleased all or any portion of the Demised Premises. (l) The Tenant does not have any option or right of first refusal to purchase the Demised Premises or all or any portion of the Mortgaged Property. The Tenant does have an exclusive negotiating right on vacant space within the Mortgaged Property. (m) The Landlord is not holding any security deposit except in the amount of $N/A. (n) Neither Tenant nor any guarantor of the Lease is presently the subject of any proceeding pursuant to the United States Bankruptcy Code of 1978, as amended. 2. This Certificate shall apply to, bind and inure to the benefit of the Lender and the Tenant and their respective successors and assigns. As used herein, the term "Tenant" shall mean and include the present tenant under the Lease, any permitted subtenant under the Lease, any permitted assignee of Tenant under the Lease and any successor of any of them. The term "Lender" as used herein shall include the current holder of the Instrument, successors and assigns of Lender and any person, party or entity which shall become the owner of (a) the Mortgaged Property by reason of a foreclosure of the Instrument or the acceptance of a deed or assignment in lieu of foreclosure or otherwise and/or (b) the Loan and Instrument; provided, however, any party listed herein as included in the definition of "Lender" shall only be liable for any acts, omissions, liabilities or obligations of that particular party and not for any such matters of any other party included in the definition of "Lender". The term "Landlord" as used herein shall mean and include the present landlord under the Lease and such landlord's predecessors and successors in interest under the Lease. 3. The warranties, representations, certifications and agreements of Tenant set forth in this Tenant Estoppel Certificate are given and made with reference to the facts and circumstances existing and known to Tenant as of the date of Tenant's signature below. Tenant does not undertake to notify Lender of any different, changed or new facts and circumstances of which Tenant may become aware after the date of Tenant's signature. [remainder of page intentionally left blank] Tenant: Service lst Bank a California Corporation By: /s/ Bryan Hyzdu ------------------------------------- Title: [Print Name/Title] Bryan Hyzdu, President Date: 5-3-02 EXHIBIT A MORTGAGED PROPERTY THAT CERTAIN REAL PROPERTY SITUATED IN THE CITY OF STOCKTON, COUNTY OF SAN JOAQUIN, STATE OF CALIFORNIA, DESCRIBED AS FOLLOWS: LOT FOUR, INCLUSIVE, AS SHOWN ON PARCEL MAP FILED FOR RECORD JULY 19, 1985, IN BOOK 13 OF PARCEL MAPS AT PAGE 145, SAN JOAQUIN COUNTY RECORDS. EXHIBIT B LEASE (attach copy of lease) EX-10.2 9 ex10_2.txt EXHIBIT 10.2 EXHIBIT 10.2 AMENDMENT TO LEASE This Amendment is entered into on June 17, 1999 by and between Elf Realty Corporation, as Landlord ("Landlord") and Service 1st Bank as Tenant ("Tenant"). Recitals A. Landlord and Tenant have entered into that certain Lease dated April 13, 1999 (the "Lease") pursuant to which Tenant has leased certain real property and improvements at 60 West 10th Street, Tracy, California. B. Landlord and Tenant now desire to make certain corrections in numbering, add language, and clarify the payment of rents. NOW THEREFORE, in consideration of good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, and of the benefits to accrue to the parties hereto, Landlord and Tenant agree as follows: 1. Section 1.01 Basic Lease Provisions - Lease Term Rental Commencement Date and Term (Section 2.05). The reference to Section 2.05 is hereby changed to Section 2.03. 2. Section 1.01 Basic Lease Provisions - Common Area Maintenance Payment & Operating Expense (Section 4.01). The reference to Section 4.01 is hereby changed to Section 5.01 and 6.02. 3. Section 3.01 Fixed Minimum Rent. Add the following to the end of the paragraph: All payments of rent shall be made payable and sent to HSR Realty, 814 Ackerman Dr., Danville, CA. 94526. 4. Section 10.01.5. Add this new paragraph: Notwithstanding any other provision of this Lease, Landlord shall not have the right to take possession of any of Tenant's business records or the records or personal property located on the premises of any customer of Tenant or of any other third party. Furthermore, any rights and remedies of Landlord are subject to the powers of the California Department of Financial Institutions and other Regulatory Authority to enter upon or assume control of the Premises and of any personal property thereon. 5. Except as set forth above, the terms and conditions of the Lease shall retrain unmodified and in full force and effect. IN WITNESS WHEREOF, Landlord and Tenant have caused this Amendment to Lease to be executed on the date hereinabove set forth. LANDLORD, Elf Realty Corporation: TENANT, Service 1st Bank By:__________________________ By: _______________________________ Brian Collins, President Brian Garrett, Chief Executive Officer ARTICLE I --------- BASIC LEASE PROVISIONS ENUMERATION OF EXHIBITS SECTION 1.01. Basic Lease Provisions. - ------------- ----------------------- DATE: April 13,1999 LANDLORD: Elf Realty Corporation ADDRESS OF LANDLORD: HSR Realty 814 Ackerman Dr. Danville, CA 94526 TENANT: Service 1st Bank (Proposed) ADDRESS OF TENANT: 60 West Tenth Street, Tracy, CA. PERMITTED USE: (1) The delivery of financial services to commercial and retail customers including operating a bank, savings bank, credit union, insurance company/agency, stock brokerage, trust company, or related financial services company or institution, (2) general office use, (3) data processing, or (4) any other business now or in the future operated by Tenant, its affiliates, subsidiaries, or assignees, in accordance with Article IV. TENANT'S TRADE NAME: Service 1st Bank (Proposed) PREMISES: The entire building located at 60 West Tenth Street, Tracy, CA. LEASE TERM RENTAL COMMENCEMENT Seven (7) years commencing no later than 60 days DATE AND TERM (Section 2.05): following the vacating of the Premises by the current Tenant, but no later than May 1, 2000 (commencement date) LEASE YEAR: If the Commencement date is other than the first day of a calendar month, the first Lease Year shall be the period of time from said Commencement Date to the end of the month in which said Commencement date shall occur plus the following twelve (12) calendar months. Each Lease Year thereafter shall be successive period of twelve (12) calendar months. FIXED MINIMUM RENT $6,100.00 (Six Thousand One Hundred Dollars) per (Section 3.01): calendar month of the Lease Year. PERIODIC COST OF LIVING An integral part of this Lease ADJUSTMENT (Section 3.02): - -------------------------------------------------------------------------------- 1 COMMON AREA MAINTENANCE Tenant to pay all taxes and assessments, PAYMENT & OPERATING EXPENSE maintenance and repairs. Landlord to pay real (Section 4.01): property Insurance. PREPAID RENT: $6,100.00 (Six Thousand One Hundred Dollars) upon execution of this Lease as prepaid rent to be applied to the first installment of Fixed Minimum Rent due hereunder. If this Lease is terminated as per Section 17.21 below, the prepaid rent shall immediately be refunded to Tenant. SECURITY DEPOSIT: $6,100.00 (Six Thousand One Hundred Dollars) upon execution of this Lease. If this Lease is terminated as per Section 17.21 below, the Security Deposit shall immediately be refunded to Tenant. OPTION TO RENEW: Tenant has two (2) consecutive options to extend the Lease term for five (5) years each as per Section 3.05 below. The Fixed Minimum Rent shall be adjusted under the terms of this Lease. All other terms of this Lease shall remain in effect. SECTION 1.02. Significance of a Basic Lease Provision. - ------------ ---------------------------------------- Each reference in this "Lease" to any of the Basic Lease Provisions contained in Section 1.01 of this Article shall be deemed and construed to incorporate all of the terms thereof. The Basic Lease Provisions shall be construed in connection with and limited by any such reference. - -------------------------------------------------------------------------------- 2 ARTICLE II ---------- DEMISE OF PREMISES AND QUIET ENJOYMENT SECTION 2.01. Description and General Obligations. - ------------. ------------------------------------ Landlord owns the building located at 60 West Tenth Street, Tracy, CA. In consideration of the rents, covenants and agreements reserved and contained in this Lease, Landlord hereby leases and demises the Premises to Tenant and Tenant rents same, in order that Tenant shall continuously operate its business operations thereon in accordance with its Permitted Use, subject only to the terms and conditions herein contained and all liens, encumbrances, easements, restrictions, zoning laws, and governmental or other regulations affecting the Premises. The Premises shall include the following fixtures: any items left by the previous Tenant such as the vault, teller line, and other cabinetry to be mutually agreed upon, and which shall remain the property of Landlord. SECTION 2.02. Quiet Enjoyment. - ------------- ---------------- Landlord covenants that Tenant, upon paying all sums due from Tenant to Landlord, hereunder "Rent", and performing and observing all of Tenant's obligations under this Lease, shall peacefully and quietly have, hold and enjoy the Premises and the appurtenances throughout the Lease Term without interference by the Landlord, subject, nevertheless, to the other terms and provisions of this Lease. SECTION 2.03. Statement of Lease Term. - ------------- ------------------------ When the commencement date and termination date of the Lease Term have been determined, Landlord and Tenant shall execute and deliver a written statement in recordable form specifying therein the Rental Commencement Date and termination date of the Lease Term. ARTICLE III ----------- RENT SECTION 3.02. Fixed Minimum Rent. - ------------- ------------------- During the entire Lease Term, Tenant covenants and agrees to pay to Landlord, in lawful money of the United States, without any prior demand and without any deduction or setoff whatsoever, the fixed Minimum Rent as provided in Section 1.01. The payment of Fixed Minimum Rent by Tenant to Landlord shall be made in advance on the first day of each calendar month during the Lease Term hereof. Fixed Minimum Rent for any partial calendar month during the Lease Term shall be prorated on a per diem basis. SECTION 3.02 Periodic Cost of Living Adjustment. - ------------ ----------------------------------- The minimum monthly rent shall be subject to adjustment at the commencement of the second year of the term and each year thereafter ("the adjustment date") as follows: The base for computing the adjustment is the Consumer Price Index (All Urban consumers) (base year 1982-1984 - 100) for San Francisco-Oakland-San Jose published by the United States Department of Labor, Bureau of Labor Statistics ("Index") which was last published one (1) year prior to the Adjustment Date ("Beginning Index"). The Index last published prior to the Adjustment Date ("Extension Index") is to be used in determining the amount of the adjustment. If the Extension Index has increased over the - -------------------------------------------------------------------------------- 3 Beginning Index, the minimum monthly rent for the following year (until the next rent adjustment) shall be set by multiplying the minimum monthly rent for the preceding period by a fraction, the numerator of which is the Extension Index and the denominator of which is the Beginning Index. The above adjustment shall be subject to a minimum floor of two percent (2%) and a maximum cap of five percent (5%) therefore the adjusted minimum rent shall be no less than two percent (2%) greater than the monthly minimum rent in effect prior to the Adjustment Date then occurring and shall be no more than five percent (5%) greater than the monthly minimum rent in effect prior to the Adjustment Date then occurring. If the Index is changed so that the base year differs from that in effect when the term commences, the Index shall be converted in accordance with the conversion factor published by the United States Department of Labor, Bureau of Labor Statistics. If the Index is discontinued or revised during the term, such other government index or computation with which it is replaced shall be used in order to obtain substantially the same result as would be obtained if the Index had not been discontinued or revised. SECTION 3.03. Additional Charges. - ------------- ------------------- In addition to Fixed Minimum Rent, all other payments (except reimbursements) to be made by Tenant to Landlord shall be deemed to be and shall become "Additional Rent" hereunder whether or not the same be designated as such, and shall be due and payable on demand together with any interest thereon; and Landlord shall have the same remedies for failure to pay same as for a non-payment of Minimum Rents. (Minimum Rent and Additional Rent are hereinafter sometimes collectively referred to as "Rent"). If Tenant fails to make any payment of Rent when due as required under the applicable provisions of this Lease, Tenant shall pay a late charge in accordance with Section 3.04 hereof. SECTION 3.04. Past Due Rent and Additional Rent. - ------------- ---------------------------------- If Tenant shall fail to pay, when the same is due and payable, any Rent or any Additional Rent, or amounts or charges of the character described in Section 3.03 hereof, Tenant shall pay as Additional Rent a late fee equal to six (6%) percent of the delinquent amount if such payments are not paid within five days of their due date. Landlord and Tenant agree that this late charge represents a reasonable estimate of the costs and expenses Landlord will incur and is fair compensation to Landlord for its loss suffered by reason of late payment by Tenant. SECTION 3.05. Option to Renew. - ------------- ---------------- If Tenant elects to exercise its Option to Renew provided for in Section 1.01, then Tenant shall provide Landlord with written notice not earlier than six (6) months prior to the expiration of the then current term of the Lease, but no later than 5:00 p.m. (Pacific Time) on the date which is three (3) months prior to the expiration of the then current term of the Lease. If Tenant fails to provide such notice, Tenant shall have no further or additional right to extend or renew the term of the Lease. SECTION 3.06. Option Minimum Rent. - ------------- -------------------- The Fixed Minimum Monthly Rent for the Option Period shall be determined by either the Cost of Living Adjustment (Section 3.02) or the Fair Market Rental (Section 3.07 below), whichever is greater. Should the Fair Market Rental Adjustment prevail for one or both of the two Option Periods, the Fixed Minimum Monthly Rent shall be adjusted in accordance with Section 3.07 for the first year and Section 3.02 for the second and subsequent years. - -------------------------------------------------------------------------------- 4 SECTION 3.07. Fair Market Rental. - ------------- ------------------- Fair Market Rental shall be the actual rental rates for comparable space of comparable financial institutions in other comparable areas of Tracy, California, adjusting to account for, with respect to such rental, any difference between the lease and the lease(s) of comparable space, including without limitation, net versus gross lease provisions. Fair Market Rental shall be determined pursuant to the foregoing factors and shall mean the Fair Market Rental in effect as of the beginning of the Option Period. Not less than sixty (60) days before the beginning of each Option Period, Landlord shall notify Tenant of Landlord's determination of the Fair Market Rental for the Premises for the coming Option Period (the Fair Market Rental Notice). If Tenant disputes the amount of the Fair Market Rental as determined by Landlord, Tenant may require that Landlord submit the dispute to arbitration. The judgment rendered in any such arbitration may be entered in any court having jurisdiction and shall be final and binding between parties. The arbitration shall be conducted in San Francisco, California, in accordance with the then prevailing rules of the American Arbitration Association or its successors for arbitration of commercial disputes, except to the extent that the procedures mandated by such rules shall be modified as follows: Tenant shall make demand for arbitration in writing within twenty (20) business days after receipt of the Fair Market Rental Notice, specifying therein the name and address of the person to act as the arbitrator on Tenant's behalf. The arbitrator shall be qualified as a real estate appraiser familiar with the fair market rental of comparable space in comparable areas in Tracy, California. Failure on the part of Tenant to make a timely and proper demand for such arbitration shall constitute a waiver of the right thereto, and rental for the option period shall be the amount stated in the Fair Market Rental Notice. Within ten (10) business days after the service of the demand for arbitration, Landlord shall give notice to Tenant specifying the name and address of the person designated by Landlord to act as arbitrator on its behalf who shall be similarly qualified. If Landlord fails to notify Tenant of the appointment of its arbitrator within or by the time above specified, then the arbitrator appointed by Tenant shall be the arbitrator to determine the issue. If two arbitrators are chosen pursuant to the preceding paragraph, the arbitrators so chosen shall meet within ten (10) business days after the second arbitrator has been appointed and, if within twenty (20) business days after such meeting the two arbitrators are unable to agree promptly upon a determination of Fair Market Rental, they - themselves - shall appoint a third arbitrator who shall be a competent and impartial person with qualifications similar to those required of the first two arbitrators. If the two arbitrators are unable to agree upon such appointment within five (5) business days after the expiration of such twenty (20) day period, the third arbitrator shall be selected by the parties themselves, if they can agree thereon within a further period of ten (10) business days. If the parties cannot so agree, then either party, on behalf of both, may request the then Chief Judge of the United States District Court having jurisdiction over the City of San Francisco, California, to appoint a third arbitrator and the other party shall not raise any question as to the judge's full power and jurisdiction to entertain the application for and make the appointment. Where the issue cannot be resolved by agreement between the two arbitrators selected by Landlord and Tenant or settled between the parties during the course of arbitration, the issue shall be resolved by the three arbitrators as follows: The arbitrator selected by each of the parties shall state in writing his determination of the Fair Market Rental supported by the reasons therefore with counterpart copies to each party. The arbitrators shall arrange for a simultaneous exchange of such proposed resolutions. The role of the third arbitrator shall be to select which of the two proposed resolutions most closely approximates his determination of Fair Market Rental. The third arbitrator shall have no right to propose - -------------------------------------------------------------------------------- 5 a middle ground or any modification of either of the two proposed resolutions. The resolution he chooses as most closely approximating his determination shall constitute the decision of the arbitrators and shall be final and binding upon the parties. If any arbitrator fails, refuses, or is unable to act, his successor shall be appointed by him, but in the case of the third arbitrator, his successor shall be appointed in the same manner as provided for the appointment of the third arbitrator. The arbitrators shall attempt to decide the issue within ten (10) business days after the appointment of the third arbitrator. Any decision in which the arbitrator appointed by Landlord and arbitrator appointed by Tenant concur shall be binding and conclusive upon the parties. Each party shall pay the fee and expense of its respective arbitrator and both shall share the fees and expenses of the third arbitrator, if any. The attorneys' fees and expenses of counsel for the respective parties and of witnesses shall be paid by the respective party engaging such counsel or calling such witnesses. The arbitrators shall have the right to consult experts and competent authorities for factual information or evidence pertaining to a determination of Fair Market Rental, but any such consultation shall be made in the presence of both parties with full right on their part to cross-examine. The arbitrators shall render their decision in writing with counter-part copies to each party. The arbitrators shall have no power to modify the provisions of the lease. If the new rental term begins prior to determination of Fair Market Rental, then the minimum monthly rental initially due during the new rental term shall be the amount stated in the Fair Market Rental Notice. Within fifteen (15) days after determination of the Fair Market Rental, the appropriate party shall pay the other party the difference between the amount actually paid and the amount that should have been paid pursuant to this Paragraph 2. In no case shall the Fixed Minimum Monthly Rent be less than the minimum monthly rent paid immediately preceding the option period year, plus two (2%) percent. ARTICLE IV ---------- PERMITTED USE SECTION 4:01. Use of Premises. - ------------- ---------------- Tenant shall use and occupy the Premises during the term for the purpose of delivering financial services to commercial and retail customers including operating a bank, savings bank, credit union, mortgage company, insurance company/agency, stock brokerage, trust company, or related financial services company or institution (2) general office use, (3) data processing, or (4) any other business now or in the future operated by Tenant, its affiliate, subsidiaries, or assignees, and for no other purpose whatsoever without the written consent of Landlord. SECTION 4.02. Continuous Operation. - ------------- --------------------- Tenant shall continuously during the entire term hereof conduct and carry on Tenant's aforesaid business in the Premises and shall keep said Premises open for business and cause such business to be conducted thereon during each and every business day for such number of hours each day as is customary for business of like character in the City of Tracy, except for a temporary shutdown on account of strikes, lockouts or causes beyond the control of Tenant, or (for not more than one (1) day) out of respect to the memory of any deceased officer or employee of Tenant. - -------------------------------------------------------------------------------- 6 Should Tenant close the Premises without the express consent of Landlord, Landlord may terminate this Lease. SECTION 4.03. Abandonment. - ------------- ------------ Tenant agrees not to vacate or abandon the Premises at any time during the Lease Term. Should Tenant vacate or abandon the Premises or be dispossessed by process of law or otherwise, such abandonment, vacation or dispossession shall be a breach of this Lease and, in addition to any other rights which Landlord may have, Landlord may, after notice to Tenant, terminate this Lease and remove any personal property belonging to Tenant which remains on the Premises and store the same in a public warehouse or elsewhere, such removal and storage to be at the cost of and for the account of Tenant Notwithstanding the above, Tenant may vacate the Premises, with prior written notice to Landlord, at any time, for no more than six (6) months, and such action shall not constitute an event of default provided Tenant continues to meet all other Lease Obligations, including Rent. SECTION 4.04. Surrender of Premises. - ------------- ---------------------- At the termination of this Lease, Tenant shall surrender the Premises in the same condition (subject to the removals hereinafter required) as the Premises were on the date Tenant opened the Premises for business to the public, reasonable wear and tear and loss due to insured casualty excepted, and shall surrender all keys for the Premises to Landlord at the place then fixed for the payment of Rents and shall inform Landlord of all combinations on locks, safes and vaults, if any, in the Premises. Prior to termination, Tenant shall remove all its trade fixtures, and, to the extent required by Landlord by written notice, any other installation, alterations or improvements before surrendering the Premises as aforesaid and shall repair any damage to the Premises caused thereby. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of the Lease Term. ARTICLE V --------- OPERATING COSTS SECT10N 5.01. Operating Costs. - ------------- ---------------- During each month of the Lease Term, Tenant shall pay all taxes, public charges and assessments of whatsoever nature directly or indirectly assessed or imposed upon the land, buildings, equipment and improvements constituting the Premises, including, but not limited to, all real property taxes, rates, duties and assessments, local improvement taxes, import charges or levies, whether general or special, that are levied, charged or assessed against the Premises by any lawful taxing authority whether federal, state, county, municipal, school or otherwise (other than income, inheritance and franchise taxes thereon). ARTICLE VI ---------- INSTALLATION, MAINTENANCE, OPERATION AND REPAIR SECTION 6.01. Tenant Installation. - ------------- -------------------- Tenant shall, at Tenant's sole expense, install all trade fixtures and equipment required to operate its business (all of which shall be of first-class quality and workmanship). All trade fixtures, signs, or other personal property installed in the Premises by Tenant shall remain the property of Tenant and may be removed at any time provided that Tenant is not in default hereunder and provided the removal thereof - -------------------------------------------------------------------------------- 7 does not cause, contribute to, or result in Tenant's default hereunder; and further provided that Tenant shall at Tenant's sole expense promptly repair any damage to the Premises resulting from the removal of personal property and shall replace same with personal property of like or better quality. The term "trade fixtures" as used herein shall not include carpeting, floor coverings, attached shelving, lighting fixtures other than free-standing lamps, wall coverings, or similar Tenant improvements which upon installation shall immediately become the property of Landlord but which can be moved, modified, or changed by Tenant at any time during the Lease Term without permission from Landlord. Tenant shall not attach any fixtures or articles to any portion of the Premises, nor make any alterations, additions, improvements, or changes or perform any other work whatsoever in and to the Premises, other than minor interior cosmetic and decorative changes which do not exceed Five Thousand Dollars ($5,000.00) in the aggregate per Lease Year, without in each instance obtaining the prior written approval of Landlord. Any alterations, additions, improvements, changes to the Premises or other work permitted herein shall be made by Tenant at Tenant's sole cost and expense. SECTION 6.02. Maintenance and Repairs by Tenant. - ------------- ---------------------------------- Except as provided in Section 6.01 hereof, Tenant shall, at Tenant's expense, at all times keep the Premises and appurtenances and every part thereto in good clean, sanitary and safe order, condition and repair, including fixtures, electrical, plumbing, sewage systems, sidewalks, parking lot and landscaping, thereby waiving all rights to make repairs at the expense of Landlord as provided in Section 1942 of the Civil code of the State of California, and all rights provided for by Section 1941 of said Civil Code. Tenant shall replace all broken glass with glass of the same size and quality and on a quarterly basis maintain and repair HVACs. Any replacement of major parts or an entire HVAC unit shall be handled as follows: Upon determination of the need for replacement of parts or an entire unit, and the cost, Tenant shall notify Landlord of the extent and cost of the replacement, Tenant shall be responsible for the first $5000 of cost for each HVAC unit. The $5000 shall be cumulative from the beginning of the Lease Term, and shall continue through the option periods. The cumulative $5000 shall not include costs paid by Tenant for quarterly maintenance or minor repairs. If the replacement of parts or an entire unit exceeds the $5000 cap per unit, Landlord shall pay the difference between the actual cost and the $5000. Tenant shall, in a manner satisfactory to Landlord, paint the interior of the Premises when necessary to maintain at all times a clean and sightly appearance. In the event Tenant fails to perform any of its obligations as required hereunder, Landlord may, but shall not be required to, perform and satisfy same, with Tenant hereby agreeing to reimburse Landlord for the cost hereof promptly upon demand. Tenant shall make any and all additions, improvements, alterations, and repairs to or on the Premises (other than those required for the structural repair of the roof, or exterior walls), which may at any time during the Lease Term be required or recommended by any lawful authorities, insurance underwriters, inspection rating bureaus, or insurance inspectors designated by Landlord. Landlord may, but shall not be obligated to deal directly with any authorities respecting their requirements for additions, improvements, alterations or repairs. All such repairs shall be performed in a good and workmanlike manner, up to code. All such additions, improvements, and alterations thereto shall become immediately the property of Landlord. Tenant shall comply with all county, municipal, state, and federal laws and regulations including those relating to commercial banks, now in force or which hereafter may be in effect pertaining to the Premises. SECTION 6.03. Signs, Awnings and Canopies. - ------------- ---------------------------- Tenant shall not place or suffer to be placed or maintained on any exterior door, wall or window of the Premises any sign, awning or canopy, or advertising matter or other thing of any kind, and shall not place or maintain any exterior lighting, plumbing fixture or protruding object or any decoration, lettering or advertising matter on the glass of any window or door of the Premises without first obtaining Landlord's written approval and consent, which shall not be unreasonably withheld. Notwithstanding the above, - -------------------------------------------------------------------------------- 8 Tenant shall be allowed to put the business hours, trade name and logo, and legal name in vinyl letters on the door windows, and to place signs and banners on the interior of the windows during marketing promotions without the consent of Landlord. Tenant further agrees to maintain such sign, awning, canopy, decoration, lettering, advertising matter or other thing as may be approved in good condition and repair at all times. Tenant is allowed to place signs and awnings on the exterior of the building as per City of Tracy codes. SECTION 6.04. Discharge Of All Liens. - ------------- ----------------------- Tenant shall not create or permit to be created or to remain, and shall discharge, any lien (including, but not limited to, the liens of mechanics, laborers or materialmen for work or materials alleged to be done or furnished in connection with the Premises), encumbrance or other charge upon the Premises or any part thereof, upon Tenant's leasehold interest therein, provided, that Tenant shall not be required to discharge any such liens, encumbrances or charges as may be placed upon the Premises by the act of Landlord. Tenant shall have the right to contest, in good faith and by appropriate legal proceedings, the validity or amount of any mechanics', laborers' or materialmen's lien or claimed lien. In the event of such contest, Tenant shall give to Landlord reasonable security as may be required by Landlord to insure payment thereof and to prevent any sale, foreclosure or forfeiture of the Premises or any part thereof by reason of such non-payment. On final determination of such lien or such claim for lien, Tenant shall immediately pay any judgment rendered, with all proper costs and charges, and shall have such lien released or judgment satisfied at Tenant's expense, and upon such payment and release of satisfaction, Landlord shall promptly return to Tenant such security as Landlord shall have received in connection with such contest. Landlord reserves the right to enter the Premises to post and keep posted notices of non-responsibility for any such lien. Tenant shall pay, protect and indemnify Landlord from and against all liabilities, losses, claims, damages, costs and expenses, including reasonable attorney's fees, incurred by Landlord by reason of the filing of any lien and/or the removal of the same. SECTION 6.05. Utilities. - ------------- ---------- From the time Tenant first enters the Premises for the purpose of installing fixtures or from the commencement of the Lease Term, whichever date is the earlier, Tenant shall pay in a timely manner for water, gas, light, power, refuse, and all other utilities and services to or consumed in or on the Premises. Utility service providers shall be chosen and retained by Landlord. Tenant shall comply with all present and future laws, order, and regulations of all federal, state, municipal and local governments, departments, commissions, and boards regarding the collection, sorting, separation, and recycling of waste products, garbage, refuse and trash. SECTION 6.06. Maintenance by Landlord. - ------------- ------------------------ Except as provided in Section 9 and for damage caused by any negligent or intentional act or omission of Tenant, Tenant's agents, employees, or invitees, Landlord, at its sole cost and expense, shall keep in good condition and repair the foundations, exterior walls, and exterior roof of the Premises. Landlord shall also maintain the unexposed electrical, plumbing and sewage systems including, without limitation, those portions of the systems lying outside the Premises; window frames, gutters and down spouts on the building. If maintenance or repair of any item in this Section 6.06 is necessary due to the negligent or intentional act or omission of Tenant, Tenant's agents, employees, or invitees, Tenant shall repair and maintain such items. Notwithstanding anything in this Lease to the contrary, Landlord shall only be responsible for repairs of the items mentioned in this Section if said repairs are due to normal wear and tear, age, or obsolescence. For example, if wiring in the walls needs repair because of the age of the wiring or a faulty or old breaker, said repairs shall be the responsibility of Landlord. If Tenant overloads - -------------------------------------------------------------------------------- 9 a circuit by attaching too much equipment to it, causing damage to the wiring or breakers, Tenant shall be responsible for repairing the wires and breakers. Landlord shall comply with all county, municipal, federal, and state laws and regulations, including those relating to commercial banks, now in force or which hereafter may be in effect pertaining to the Premises. Notwithstanding anything to the contrary contained in this Lease, Landlord shall not be liable for failure to make repairs required to be made by Landlord under provisions of this Lease unless Tenant has previously notified Landlord in writing of the need for such repairs and Landlord has failed to commence and complete the repairs within a reasonable time following receipt of Tenant's notification. If Landlord fails to commence such repairs or replacements required of Landlord pursuant to the foregoing within thirty (30) days after written notice from Tenant of the need for such work (or if more than thirty (30) days shall be required because of the nature of the work, if Landlord shall fail to diligently proceed to commence to perform such work after written notice), Tenant shall be entitled to make such repairs as are necessary, and Landlord shall reimburse Tenant for the cost paid by Tenant in doing so within thirty (30) days after Tenant's delivery to Landlord of an invoice, together with reasonable back up documentation for same. SECTION 6.07. Hazardous Substances. - ------------- --------------------- Landlord has no knowledge of the presence of hazardous substances in or on the Premises. Hazardous substances pose only a hazard when disturbed, damaged, or released into the air. Therefore, Tenant shall inform Landlord anytime Tenant plans to repair, remove, or otherwise disturb any areas or materials that may contain hazardous substances and where there may be the possibility of releasing, disturbing, or coming in contract with hazardous substances. In the event that any hazardous substances are discovered in or on the Premises, which may present a danger to Tenant and Tenant's agents, employees, invitees, etc. when disturbed or released in the air, and it is determined that such hazardous substances have been placed on the Premises prior to Tenant's occupancy, such hazardous substances shall be encapsulated (if feasible) or diligently removed by qualified personnel, at Landlord's cost and expense. The making of alterations or the removal of all or a portion of such hazardous substances shall not entitle Tenant to any damages except for injury or damages arising out of Landlord's negligence or that of its agents nor shall it relieve Tenant of the obligation to pay any sums due under this Lease except to the extent that the premises are unusable for the conduct of business during or after the removal. Tenant shall not cause or permit the storage or use of any hazardous substances in or on the Premises. ARTICLE VII ----------- OPERATING RULES, REGULATIONS, SURRENDER SECTION 7.01. Rules and Regulations. - ------------- ---------------------- Tenant agrees to comply with and observe the following rules and regulations: 1. No aerial or antennae shall be erected on the roof or exterior walls of the Premises or on the grounds, without in each instance, the written consent of Landlord. Any aerial or antennae so installed without such written consent shall be subject to removal without notice at any time at Tenant's sole cost and expense. - -------------------------------------------------------------------------------- 10 2. The exterior areas immediately adjoining the Premises shall be kept clean and free from dirt and rubbish by Tenant to the satisfaction of Landlord, and Tenant shall not place or permit any obstructions or merchandise in such areas. 3. The plumbing facilities shall not be used for any other purpose than that for which they are constructed, and no foreign substance of any kind shall be thrown therein, and the expense of any breakage, stoppage, or damage resulting from a violation of this provision shall be borne by Tenant who shall, or whose employees, agents or invitees shall, have caused it 4. Tenant shall not commit or suffer to be committed any waste upon the Premises or any nuisance or other act or thing which may disturb the quiet enjoyment of any other tenant in the building in which the Premises may be located. 6. Tenant shall, at Tenant's sole cost and expense, comply with all of the requirements of all county, municipal, state of California, federal and other applicable governmental authorities, now in force, or which may hereafter be in force, pertaining to the Premises, and shall faithfully observe in the use of the Premises all municipal and county ordinances and state and federal statutes now in force or which may hereafter be in force, and all regulations, orders and other requirements issued or made pursuant to any such ordinances and statutes. Tenant agrees to comply with and observe the rules and regulations set forth above. Tenant's failure to keep and observe said rules and regulations shall constitute a breach of the terms of the Lease Terms in the manner as if the same were contained herein as covenants. Landlord reserves the right from time to time to amend or supplement said rules and regulations, and to adopt and promulgate additional rules and regulations applicable to the Premises provided these amendments are agreeable to both Landlord and Tenant and both shall be reasonable in negotiating if negotiation becomes necessary. ARTICLE VIII ------------ INSURANCE SECTION 8.01. Tenant's Coverage. - ------------- ------------------ Tenant shall maintain at its sole expense during the term hereof, liability insurance covering the Premises with a $2,000,000 Limit of Liability for commercial general liability for each occurrence and $2,000,000 annual aggregate. Tenant shall also keep in force rent insurance as well as special form property insurance for the full replacement value of Tenant's improvements and Tenant's property, including, but not limited to, inventory, trade fixtures, furnishings and other personal property. Tenant shall also have plate glass insurance covering all plate glass on the Premises at full replacement value, however for plate glass coverage Tenant shall have the option to either insure this risk or self-insure. Tenant shall cause such insurance policies to name Landlord as an additional insured and to be written so as to provide that the insurer waives all right of recovery by way of subrogation against Landlord in connection with any loss or damage covered by the policy. In addition, Tenant shall keep in force workman's compensation or similar insurance to the extent required by law. Tenant shall deliver to Landlord at least five (5) days prior to the commencement of the Term a copy of the insurance policy or the endorsement evidencing coverage and evidencing Landlord, Elf Realty Corporation, as additional insured. Each insurer under the policies required hereunder shall agree by endorsement on the policy issued by it or by independent instrument furnished to Landlord that it will give Landlord thirty (30) days' prior written notice before the policy or policies in question shall be altered or canceled. - -------------------------------------------------------------------------------- 11 SECTION 8.02. Landlord Coverage. - ------------- ------------------ Landlord shall throughout the Lease Term, at its sole cost and expense, keep the property insured. SECTION 8.03. Indemnification. - ------------- ---------------- During the term of this Lease, Tenant shall indemnify and hold Landlord, Landlord's officers, agents, and employees, harmless from any loss, cost or expense of any sort or nature, and from any liability to any person on account of any damage to person or property arising out of any failure of Tenant to perform and comply in any respect with any of the requirements and provisions of this Lease, provided that such damage does not result directly or indirectly by reason of conduct of Landlord, Landlord's officers, agents and employees. Landlord shall indemnify and save Tenant harmless from any loss, cost or expense of any sort or nature, and from any liability to any person on account of any damage to person or property arising out of any failure of Landlord to perform and comply in any respect with any of the requirements and provisions of this Lease; provided that such damage does not result directly or indirectly by reason of conduct of Tenant, its agents and employees. SECTION 8.04. Indemnity Agreement. - ------------- -------------------- Tenant hereby agrees to indemnify Landlord, Landlord's officers, agents and employees against, and hold Landlord, Landlord's officers, agents and employees harmless from any and all claims, demands, actions, loss or liability because or on account of injuries to or death of any person (including death or injuries to Tenant's employees) and damage to property of others, howsoever caused or sustained (except where caused in whole or in part by negligence of Landlord, Landlord's officers, agents and/or employees,) and in any way arising out of or connected with the occupancy or use of the Premises (including the ways immediately adjoining). SECTION 8.05. Release. - ------------- -------- Tenant hereby waives and releases all claims which Tenant may have against Landlord, Landlord's officers agents and employees, for damages to or loss of any property of any kind in which Tenant has an interest, howsoever such loss or damage may have occurred or been caused. ARTICLE IX ---------- DAMAGE & CONDEMNATION SECTION 9.01. Partial Damage. - ------------- --------------- If the Premises are partially damaged or destroyed and paragraph 9.02 does not apply, Landlord shall promptly repair the damage and restore the improvement at Landlord's expense. The completed repair, restoration or replacement shall be equal in value, quality and use to the condition of the improvement immediately before the damage. SECTION 9.02. Major Damage: Destruction. - ------------- -------------------------- If the Premises are destroyed or damaged and the damage or destruction renders more than 50% of the Premises permanently untenantable, either party may elect to terminate the Lease as of the date of the damage or destruction by giving the other party written notice within 30 days after the date of the damage. In such event all rights and obligations of the parties shall cease as of the date of termination, and Tenant shall be entitled to reimbursement of any Prepaid Rent. If neither party elects to terminate, Landlord shall promptly and diligently proceed to restore the Premises to substantially the same form as - -------------------------------------------------------------------------------- 12 prior to the damage or destruction. Work shall be commenced as soon as possible and shall proceed without interruption during normal working hours except for work stoppages on account of labor disputes and matters outside of Landlord's control. SECTION 9.03. Rent Abatement. - ------------- --------------- Rent shall be proportionately abated during the repair of any damage to the Premises to the extent Tenant's use of the Premises is materially impaired. SECTION 9.04. Tenant's Work. - ------------- -------------- Promptly following such destruction, Tenant shall, at Tenant's expense, perform any work required to place the Premises in their prior condition and Tenant shall restore, repair or replace its stock in trade fixtures, furniture, furnishings, floor coverings and equipment, and if Tenant has closed, Tenant shall promptly reopen for business. SECTION 9.05. Condemnation. - ------------- ------------- 9.05.1 Taking. The term "Taking" as used in this Section 9.05, shall mean an appropriation or taking under the power of eminent domain by any public or quasi-public authority or a voluntary sale or conveyance in lieu of condemnation but under threat of condemnation. 9.05.2 Total Taking. In the event of a Taking of the entire Premises, this Lease shall terminate and expire as of the date possession is delivered to the condemning authority, and Landlord and Tenant shall each be released from any liability accruing pursuant to this Lease after the date of such termination, but Minimum Annual Rent and Additional Rent for the last month of Tenant's occupancy shall be prorated and Landlord shall refund to Tenant any Minimum Annual Rent and Additional Rent paid in advance. 9.05.3 Partial Taking. If (a) there is a Taking of a material portion of the Premises and the remainder of the Premises is not, in Tenant's sole but reasonable business judgment, suitable for the continued operation of Tenant's business, Tenant may terminate this Lease upon giving notice in writing of such election to Landlord within thirty (30) days after receipt by Tenant from Landlord of written notice that a portion of the Premises has been so appropriated or taken. In each case, the termination of this Lease shall be effective as of the date Tenant is required to vacate the Premises, or the portion of the Premises taken. 9.05.4 Award. The entire award or compensation in any such condemnation proceeding, whether for a total or partial Taking, or for diminution in the value of the leasehold or for the fee, shall belong to and be the property of Landlord; and, in any event, the holder of any mortgage or deed of trust encumbering the Project shall have a first priority to the extent of the unpaid balance of principal and interest on its loan. Without derogating the rights of Landlord or said lender under the preceding sentence, Tenant shall be entitled to recover from the condemning authority such compensation as may be separately awarded by the condemning authority to Tenant or recoverable from the condemning authority by Tenant in its own right for the taking of - -------------------------------------------------------------------------------- 13 trade fixtures and equipment owned by Tenant and for the expense of removing and relocating its trade fixtures and equipment, but only in the event that the compensation awarded to Tenant shall be in addition to and shall not diminish the compensation awarded to Landlord as provided above. 9.05.5 Continuation of Lease. In the event of a Taking, if Landlord and Tenant elect not to terminate this Lease as provided above (or have no right to so terminate), Landlord agrees, at Landlord's cost and expense as soon as reasonably possible after the Taking, to restore the Premises (to the extent of the condemnation proceeds) on the land remaining to a complete unit of like quality and character as existed prior to the Taking and, thereafter, Minimum Annual Rent and Additional Rent payable by Tenant hereunder shall be reduced on an equitable basis, taking into account the relative value of the portion taken as compared to the portion remaining, and Landlord shall be entitled to receive the total award or compensation in such proceedings. ARTICLE X --------- DEFAULT AND REMEDIES SECTION 10.01. Tenant's Default. Each of the following events shall be a default by Tenant and a breach of this Lease: 10.01.1 Failure to Pay Rent Failure of Tenant to make any rent payment within ten days after receipt of written notice from Landlord that it is due. 10.01.2 Other Performance Failures. Failure of Tenant to perform any other term, condition or covenant of the Lease within thirty (30) days after receipt of written notice from Landlord specifying the nature of the failure with reasonable particularity. If the failure is of such a nature that it cannot be completely remedied within the 30-day period, the failure shall not be a default if Tenant begins correction of the failure within the 30 day period and thereafter proceeds with reasonable diligence and in good faith to correct the failure as soon as possible. 10.01.3 Attachment. Attachment, execution, levy or other seizure by legal process of any right or interest of Tenant under this Lease if not released within thirty (30) days. 10.01.4 Bankruptcy. An assignment by Tenant for the benefit of creditors, the filing by Tenant of a voluntary petition in bankruptcy, the filing of an involuntary petition in bankruptcy and failure of Tenant to secure a dismissal of the petition within thirty (30) days after filing, the appointment of a receiver to take possession of the Premises or improvements or the leasehold estate or of Tenant's operations on the Premises for any reason. - -------------------------------------------------------------------------------- 14 10.01.5 Notwithstanding anything to the contrary in this Lease, in the event (a) Tenant or its successors or assignees shall become insolvent or bankrupt, or it or their interests under this Lease shall be levied upon or sold under execution of other legal process, or (b) the depository institution then operating on the Premises is closed, or is taken over by any depository institution regulatory authority ("Regulatory Authority"), Landlord may, in either such event, terminate this Lease only with concurrence of any Receiver or Liquidator appointed by such Regulatory Authority; provided, that in the event this Lease is terminated by the Receiver or Liquidator, the maximum claim of Lessor for Rent, damages, or indemnity for injury resulting from the termination, rejection, or abandonment of the unexpired Lease shall by law in no event be in an amount greater than all accrued and Unpaid Rent to the date of termination. SECTION 10.02. Rights and Remedies. - -------------- -------------------- Landlord shall have the following remedies if Tenant commits a default. These remedies are not exclusive; they are cumulative in addition to any remedies now or later allowed by law. Landlord may continue this Lease in full force and effect, and the Lease shall continue in effect as long as Landlord does not terminate Tenant's right to possession, and Landlord shall have the right to collect Rent when due during the original term of this Lease. Tenant shall be liable immediately, however payment is only due within thirty (30) days of written notice by Landlord, to Landlord for all reasonable costs Landlord incurs in reletting the Premises, including, without limitation, brokers' commissions, expenses of remodeling the Premises required by the reletting, and like costs. Reletting can be for a period shorter or longer than the remaining Lease Term, but Tenant shall only be responsible for the obligations under this Lease for original Term hereof. Tenant shall pay to Landlord the Rent due under this Lease on the dates Rent is due, less Rent Landlord receives from any reletting. No act by Landlord allowed by this paragraph shall terminate this Lease unless Landlord notifies Tenant that Landlord elects to terminate this Lease. After Tenant's default and for as long as Landlord does not terminate Tenant's right to possession of the Premises, if Tenant obtains Landlord's consent, Tenant shall have the right to assign or sublet its interest in this Lease, but Tenant shall not be released from liability. Landlord's consent to a proposed assignment or subletting shall not be unreasonably withheld. If Landlord elects to relet the Premises as provided in this paragraph, Rent that Landlord receives from reletting shall be applied to the payment of: First, any indebtedness from Tenant to Landlord other than Rent due from Tenant; Second, all costs, including those for maintenance and repair, incurred by Landlord in reletting; Third, Rent due and unpaid under this Lease. After deducting the payments referred to in this paragraph, any sum remaining from Rent Landlord receives from reletting shall be held by Landlord and applied in payment of future Rent as Rent becomes due under this Lease. In no event shall Tenant be entitled to any excess Rent received by Landlord. If, on the date Rent is due under this Lease, the Rent received from the reletting is less than Rent due on that date, Tenant shall pay to Landlord, in addition to the remaining Rent due, all costs, including those for maintenance and repair, Landlord incurred in reletting that remain after applying Rent received from the reletting as provided in this paragraph. Landlord may terminate Tenant's right to possession of the Premises at any time. No act by Landlord other than giving notice to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the Premises, or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this Lease shall not constitute a termination of Tenant's right to possession. On termination, Landlord has the right to recover from Tenant: - -------------------------------------------------------------------------------- 15 a) The worth, at the time of the award, of the unpaid Rent that had been earned at the time of termination of this Lease; b) The worth, at the time of the award, of the amount by which the unpaid Rent that would have been earned after the date of termination of this Lease until the time of award exceeds the amount of the loss of Rent that Tenant proves could have been reasonably avoided; c) The worth, at the time of the award, of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of the loss of Rent that Tenant proves could have been reasonably avoided; and d) Any other amount, and court costs, necessary to compensate Landlord for all detriment proximately caused by Tenant's default. "The worth, at the time of the award", as used in a) and b) of this paragraph, shall be 10%. "The worth, at the time of the award", as referred to in c) of this paragraph, is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus 1%. Landlord, at any time after Tenant commits a default, may cure the default at Tenant's cost. If Landlord at any time, by reason of Tenant's default, pays any sum or does any act that requires the payment of any sum, the sum paid by Landlord shall be due immediately from Tenant to Landlord at the time the sum is paid, and if paid at a later date shall bear interest at the maximum rate an individual is permitted by law to charge from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant. The sum, together with interest on it, shall be Additional Rent. ARTICLE XI ---------- ASSIGNMENT AND SUBLETTING SECTION 11.01. Landlord's Consent Required. - -------------- ---------------------------- Tenant shall not assign or sublease all or any part of its interest in this Lease or transfer any interest of Tenant therein (any and all such acts being collectively referred to herein as a "Transfer") without the prior written consent of Landlord, and attempt to do so without such consent being first had and obtained shall be wholly void and shall constitute a breach of this Lease. Landlord shall not unreasonably withhold its consent to a Transfer provided that the provisions of this Article XI are met. The only exception would be the transfer to an affiliate or subsidiary in which case the prior written consent of the Landlord is not required provided that the other provisions of this Article XI are met. SECTION 11.02. Condition of Transfer. - -------------- ---------------------- If Tenant desires to effect a Transfer, Tenant shall submit in writing to Landlord within a reasonable time for evaluation prior to the proposed Transfer the following information all in sufficient detail to enable Landlord to evaluate the proposed Transfer and the prospective Transferee: a) The name and legal composition of the proposed Transferee; b) The nature of the business proposed to be carried on in the Premises; c) The terms and provisions of the proposed Transfer; d) Such reasonable financial information as Landlord may request concerning the proposed Transferee. - -------------------------------------------------------------------------------- 16 It is the intent of the parties hereto that this Lease shall confer upon Tenant only the right to use and occupy the Premises, and to exercise such other rights as are conferred upon Tenant by this Lease. In the event Tenant seeks to transfer its interest in this Lease or the Premises, Landlord shall have the following options, which may be exercised at its sole choice without limiting Landlord in the exercise of any other right of remedy which Landlord may have by reason of such proposed Transfer: 1) Landlord may terminate this Lease effective as of the proposed effective date of the proposed Transfer and release Tenant from any liability hereunder accruing after such termination date by giving Tenant written notice of such termination within fifteen (15) days after receipt by Landlord of Tenant's notice of intent to transfer as provided above. If Landlord gives such notice, Tenant shall surrender the Premises, in accordance with Section 15, on the effective termination date. 2) Landlord may consent to the proposed Transfer on certain conditions, including without limitations one or more of the conditions set forth in Section 11.03 (c), and (d) below. SECTION 11.03. Reasonable Consent. - -------------- ------------------- The parties hereto agree that Landlord's refusal to consent to any proposed Transfer, or conditional consent to any Transfer, shall not be deemed unreasonable if: a) The proposed Transferee, or the proposed Transfer of the Premises to such Transferee will not attract the same or greater volume of trade and patronage to the Building as Tenant of the use of the Premises by Tenant; b) Tenant fails to provide Landlord with the information requested by Landlord pursuant to Section 11.02 (a), (b), (c), and (d) above, within a reasonable time for evaluation prior to the proposed Transfer; c) Landlord conditions its consent to such Transfer by requiring that Tenant agree to pay to Landlord, as Additional Rent, fifty percent (50%) of any and all rents in excess of the Rent to be paid under this Lease. For the purpose of this Article 11, the term "Rent" shall include any consideration of any kind received or to be received, by Tenant from the Transferee, if such sums are related to Tenant's interest in this Lease. Tenant expressly agrees that the conditions imposed by Landlord for any Transfer pursuant to this Article 11 are not unreasonable for purposes of Section 1951.4 (b) (2) of the California Civil Code, as amended from time to time. SECTION 11.04. Assignment Fees. - -------------- ---------------- Should Tenant request the consent of Landlord to an assignment of this Lease or of any of Tenant's rights thereunder and whether or not such consent is ultimately given by Landlord and/or any such assignment, subletting, occupancy or use is carried out, Tenant agrees to pay to Landlord's agent the sum of $500.00 for services plus expenses and to Landlord reasonable attorneys' fees incurred in connection with each such request. - -------------------------------------------------------------------------------- 17 ARTICLE XII ----------- RIGHT OF ENTRY SECTION 12.01. Right of Entry. - -------------- --------------- Landlord or Landlord's agents shall have the right to enter the Premises at reasonable times, with notice if possible, to examine the same, and to show them to prospective purchasers or tenants, to post notices, and to make such repairs, alterations, improvements or additions as Landlord may deem necessary, and Landlord shall be allowed to take all material into and upon the Premises that may be required therefor without the same constituting an eviction of Tenant in whole or in part, and the Rent reserved shall in no wise abate while said repairs, alterations, improvements, or additions are being made, by reason of loss or interruption of business of Tenant, or otherwise. During the six months prior to the expiration of the Lease Term or any renewal term, Landlord may place upon the Premises the usual notices "For Lease" which notices Tenant shall permit to remain thereon without molestation. Landlord shall limit any "For Sale" sign placed on the building to no larger than 4 feet by 4 feet, and clearly indicate on the sign that the building, not the Bank or the business, is for sale. ARTICLE XIII ------------ TENANTS PROPERTY SECTION 13.01. 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 Lease Term against any personal property of any kind, owned by or placed in, upon or about the Premises by Tenant and taxes assessed on the basis of Tenant's occupancy thereof, including, but not limited to, taxes measured by Rents due from Tenant hereunder. SECTION 13.02. Notices by Tenant. - -------------- ------------------ Tenant shall give immediate telephone or facsimile notice to Landlord in case of fire, casualty, or accidents in the Premises or in the building of which the Premises are a part or of defects therein or in any fixtures of and/or equipment and shall promptly thereafter confirm such notice in writing. ARTICLE XIV ----------- SUCCESSION TO LANDLORD'S INTEREST SECTION 14.01. Attornment. - -------------- ----------- If the interest of Landlord is transferred to any person or entity by reason of foreclosure or other proceedings of enforcement of any mortgage, deed of trust or security interest or by delivery of a deed in lieu of foreclosure or other proceedings, Tenant shall upon delivery to Tenant by said transferee of a nondisturbance agreement, immediately and automatically attorn to such person or entity. In the event of such transfer, this Lease and Tenant's rights hereunder shall continue undisturbed so long as Tenant is not in default. - -------------------------------------------------------------------------------- 18 SECTION 14.02. Subordination. - -------------- -------------- This Lease shall be subordinate to the lien of any mortgage or security deed or the lien resulting from any other method of financing or refinancing now or hereafter in force against the Premises, any portion thereof, or upon any buildings hereafter placed upon the land of which the Premises are a part, and to any and all advances to be made under such mortgages, and all renewals, modifications, extensions, consolidations and replacements thereof. The aforesaid provisions shall be self-operative and no further instrument of subordination shall be required to evidence such subordination. Tenant covenants and agrees to execute and deliver, upon demand, such further instrument or instruments subordinating this Lease on the foregoing basis to the lien of any such mortgage or mortgages as shall be desired by Landlord and any mortgagees or proposed mortgagees. SECTION 14.03. Estoppel Certificate. - -------------- --------------------- Within ten (10) days after request therefor by Landlord, or in the event that upon any sale, assignment or hypothecation of the Premises and/or the land thereunder by Landlord, an estoppel certificate shall be required from Tenant, Tenant agrees to deliver in recordable form, a certificate to any proposed mortgagee or purchaser, or to Landlord, certifying that this Lease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified, and stating the modification), that there are no defenses or offsets thereto (or stating those claimed by Tenant) and the dates to which Fixed Minimum Rent, and other charges have been paid. ARTICLE XV ---------- SURRENDER OF PREMISES SECTION 15.01. Condition on Surrender. - -------------- ----------------------- At the expiration or earlier termination of this Lease, Tenant shall surrender the Premises to Landlord broom clean and in the same condition as when tendered by Landlord, reasonable wear and tear and insured casualty excepted. Tenant shall promptly repair any damage to the Premises caused by the removal of any furniture, trade fixtures or other personal property placed in the Premises. SECTION 15.02. Holding Over. - -------------- ------------- Should Tenant, with Landlord's written consent, hold over at the end of the term, Tenant shall become a Tenant at will and any such holding over shall not constitute an extension of this Lease. During such holding over, Tenant shall pay rent and other charges at 105% of the highest monthly rate provided for herein. ARTICLE XVI ----------- TENANT FINANCIAL DATA SECTION 16.01. Tenant Financial Data. - -------------- ---------------------- Within fifteen (15) days after Landlord's written request, Tenant shall furnish Landlord with financial statements or other reasonable financial information reflecting Tenants current financial condition, certified by Tenant or its financial officer. If Tenant is a publicly traded corporation, delivery of Tenant's last published financial information shall be satisfactory for purposes of this Section. - -------------------------------------------------------------------------------- 19 Landlord may request the financial statements set forth herein only if the request is made for a specific reason, such as in connection with a sale, financing or refinancing the Project. Any information obtained from Tenant's financial statements shall be confidential and shall not be disclosed other than to carry out the purposes of this Lease; provided, however, Landlord shall incur no liability for the inadvertent disclosure of any such information. Landlord may divulge the contents of any financial statements in connection with any financing arrangement or sale of Landlord's interest in the Premises or in connection with any administrative or judicial proceedings. ARTICLE XVII ------------ MISCELLANEOUS SECTION 17.01. Waiver. - -------------- ------- The waiver by Landlord of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent. No covenant, term or condition of this Lease shall be deemed to have been waived by Landlord, unless such waiver be in writing by Landlord. SECTION 17.02. Accord and Satisfaction. - -------------- ------------------------ No payment by Tenant or receipt by Landlord of a lesser amount than the monthly Rent herein stipulated shall be deemed to be other than on account of the earliest stipulated Rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Rent or pursue any other remedy in this Lease provided. SECTION 17.03. Entire Agreement. - -------------- ----------------- This Lease and the Exhibits and Rider, if any, attached hereto and forming a part hereof, set forth all the covenants, promises, agreements, conditions and understandings between Landlord and Tenant concerning the Premises and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between them other than as are herein set forth. Except as herein otherwise provided, no subsequent alteration, amendment, change or addition to this Lease shall be binding upon Landlord or Tenant unless reduced to writing and signed by them. SECTION 17.04. No Partnership. - -------------- --------------- Landlord does not, in any way or for any purpose, become a partner of Tenant in the conduct of its business, or otherwise, or joint adventurer or a member of a joint enterprise with Tenant SECTION 17.05. Force Majeure. - -------------- -------------- In the event that Landlord shall be delayed or hindered in or prevented from doing or performing any act or thing required hereunder by reason of strikes, lock-outs, casualties, Acts of God, labor troubles, inability to procure materials, failure of power, governmental laws or regulations, riots, insurrection, war or other causes beyond the reasonable control of Landlord, then Landlord shall not be liable or responsible for any such delays and the doing or performing of such act or thing shall be excused for the - -------------------------------------------------------------------------------- 20 period of the delay and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay. SECTION 17.06. Notices. - -------------- -------- Any notice, demand, request or other instrument which may be or are required to be given under this Lease shall be delivered personally or sent by either United States certified mail postage prepaid or expedited mail service and shall be addressed (a) if to Landlord at the address provided in Section 1.01 for Landlord or at such other address as Landlord may designate by written notice and (b) if to Tenant at the address provided in Section 1.01 for Tenant or at such other address as Tenant shall designate by written notice. Notices shall be effective upon delivery unless delivery is refused or cannot be made in which event notice shall be effective on mailing. SECTION 17.07. Captions and Section Numbers. - -------------- ----------------------------- The captions, section numbers, article numbers, and index appearing in this Lease are inserted only as a matter of convenience and in no way define, limit, construe, or describe the scope or intent of such section or articles of this Lease nor in any way affect this Lease. SECTION 17.08. Tenant Defined, Use of Pronoun. - -------------- ------------------------------- The word "Tenant" shall be deemed and taken to mean each and every person or party mentioned as a Tenant herein, be the same one or more; and if there shall be more than one Tenant, any notice required or permitted by the terms of this lease may be given by or to any one thereof, and shall have the same force and effect as if given by or to all thereof. The word "Landlord" shall be deemed and taken to mean each and every person or party mentioned as a Landlord herein, be the same one or more; and if there shall be more than one Landlord, any notice required or permitted by the terms of this Lease shall be given by or to any one thereof, and shall have the same force and effect as if given by or to all thereof. The use of the neuter singular pronoun to refer to Landlord or Tenant shall be deemed a proper reference even though Landlord or Tenant may be an individual, a corporation, or a group of two or more individuals or corporations. The necessary grammatical changes required to make the provisions of this Lease apply in the plural sense where there is more than one Landlord or Tenant and to either corporations, associations, partnerships, or individuals, males or females, shall in all instances be assumed as though in each case fully expressed. SECTION 17.09. Partial Invalidity. - -------------- ------------------- If any term, covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Lease shall be valid and be enforced to the fullest extent permitted by law. SECTION 17.10. Execution of Lease. - -------------- ------------------- The submission of this Lease for examination does not constitute a reservation of or option for the Premises and this Lease becomes effective as a Lease only upon execution and delivery thereof by Landlord and Tenant. If Tenant is a corporation, Tenant shall furnish Landlord with such evidence, as Landlord reasonably requires to evidence the binding effect on Tenant of the execution and delivery of this Lease. - -------------------------------------------------------------------------------- 21 SECTION 17.11. Recording. - -------------- ---------- Tenant agrees not to record this Lease. However, Tenant and Landlord, upon request of either, agree to execute and deliver a memorandum or so-called "short form" of this Lease in recordable form for the purpose of recordation at Tenant's expense. Said memorandum or short form of this Lease shall describe the parties, the Premises and the Lease Term and shall incorporate this Lease by reference. SECTION 17.12. Applicable Law. - -------------- --------------- The Laws of the State of California shall govern the validity, performance and enforcement of this Lease with venue in San Joaquin County, except where indicated differently in this Lease. SECTION 17.13. Time is of the Essence. - -------------- ----------------------- Time is of the essence of this Agreement. SECTION 17.14. Successors and Assigns. - -------------- ----------------------- Except as otherwise provided herein, this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, executors, administrators, successors and assigns; except that nothing in this Paragraph shall be deemed to permit any assignment, subletting, occupancy, or use contrary to the provisions of this Article. SECTION 17.15. Survival of Obligations. - -------------- ------------------------ Any obligation of Tenant to pay any sum owing in order to perform the provisions of this Lease after the expiration or other termination of this Lease, shall survive the expiration or other termination of this Lease. SECT10N 17.16. Arbitration. - -------------- ------------ Any controversy between the parties hereto involving the construction or application of any of the terms, covenants, or conditions of this Lease shall on written request of one party served on the other be submitted to arbitration and such arbitration shall comply with and be governed by the provisions of the American Arbitration Association. SECTION 17.17. Attorney Fees. - -------------- -------------- In case suit should be brought for recovery of the Premises, or for any sum or rents due hereunder, or because of any act which may arise out of the possession of the Premises, by either party, the prevailing party shall be entitled to all costs incurred in connection with such action, including a reasonable attorney's fee. If Landlord shall be made a party to any litigation commenced by or against Tenant, Tenant shall pay all costs, expenses and attorneys' fees incurred by Landlord in connection with such litigation except in the event that such litigation shall determine that Landlord has committed a breach of this Lease and shall adjudicate that Landlord is liable therefor. SECTION 17.18. Representations. - -------------- ---------------- Tenant acknowledges that neither Landlord nor Landlord's agents, employees, or contractors have made any representations or promises with respect to the Premises, or this Lease except as expressly set forth herein. - -------------------------------------------------------------------------------- 22 SECTION 17.19. Landlord's Liability. - -------------- --------------------- Landlord's liability hereunder shall be limited solely to Landlord's interest in the Premises. SECTION 17.20. Landlord's Consent Must Be Reasonable. - -------------- -------------------------------------- Wherever in this Lease the consent or approval of Landlord is required, such consent or approval shall not be unreasonably withheld. SECTION 17.21. Contingency. - -------------- ------------ This Lease is contingent upon regulatory approval by the California Department of Financial Institutions and the FDIC. If the contingencies are not lifted by August 1, 1999, the Lease shall become null and void and the security deposit and Prepaid Rent shall be refunded to Tenant. IN WITNESS WHEREOF the parties hereto have executed this Lease this day and year first above written. LANDLORD, Elf Realty Corporation TENANT, Service 1st Bank (Proposed) By:_____________________________ By:_______________________________ Brian Collins Brian Garrett President Chief Executive Officer - -------------------------------------------------------------------------------- 23 ARTICLE I --------- BASIC LEASE PROVISIONS ENUMERATION OF EXHIBITS SECTION 1.01. Basic Lease Provisions DATE: April 13,1999 LANDLORD: Elf Realty Corporation ADDRESS OF LANDLORD: HSR Realty 814 Ackerman Dr. Danville, CA. 94526 TENANT: Service 1st Bank (Proposed) ADDRESS OF TENANT: 60 West Tenth Street, Tracy, CA. PERMITTED USE: (1) The delivery of financial services to commercial and retail customers including operating a bank, savings bank, credit union, insurance company/agency, stock brokerage, trust company, or related financial services company or institution, (2) general office use, (3) data processing, or (4) any other business now or in the future operated by Tenant, its affiliates, subsidiaries, or assignees, in accordance with Article IV. TENANT'S TRADE NAME: Service 1st Bank (Proposed) PREMISES: The entire building located at 60 West Tenth Street, Tracy, CA. LEASE TERM RENTAL Seven (7) years commencing no later than 60 days COMMENCEMENT DATE AND TERM following the vacating of the Premises by the (Section 2.05): current Tenant, but no later than May 1, 2000 (commencement date) LEASE YEAR If the Commencement date is other than the first day of a calendar month, the first Lease Year shall be the period of time from said Commencement Date to the end of the month in which said Commencement date shall occur plus the following twelve (12) calendar months. Each Lease Year thereafter shall be successive period of twelve (12) calendar months. FIXED MINIMUM RENT $6,100.00 (Six Thousand One Hundred Dollars) per (Section 3.01): calendar month of the Lease Year. PERIODIC COST OF LIVING An integral part of this Lease ADJUSTMENT (Section 3.02): - -------------------------------------------------------------------------------- 1 COMMON AREA MAINTENANCE Tenant to pay all taxes and assessments, PAYMENT & OPERATING EXPENSE maintenance and repairs. Landlord to pay real (Section 4.01): property Insurance. PREPAID RENT: $6,100.00 (Six Thousand One Hundred Dollars) upon execution of this Lease as prepaid rent to be applied to the first installment of Fixed Minimum Rent due hereunder. If this Lease is terminated as per Section 17.21 below, the prepaid rent shall immediately be refunded to Tenant. SECURITY DEPOSIT: $6,100.00 (Six Thousand One Hundred Dollars) upon execution of this Lease. If this Lease is terminated as per Section 17.21 below, the Security Deposit shall immediately be refunded to Tenant. OPTION TO RENEW: Tenant has two (2) consecutive options to extend the Lease term for five (5) years each as per Section 3.05 below. The Fixed Minimum Rent shall be adjusted under the terms of this Lease. All other terms of this Lease shall remain in effect. SECTION 1.02. Significance of a Basic Lease Provision. - ------------- ---------------------------------------- Each reference in this "Lease" to any of the Basic Lease Provisions contained in Section 1.01 of this Article shall be deemed and construed to incorporate all of the terms thereof. The Basic Lease Provisions shall be construed in connection with and limited by any such reference. - -------------------------------------------------------------------------------- 2 ARTICLE II ---------- DEMISE OF PREMISES AND QUIET ENJOYMENT SECTION 2.01. Description and General Obligations. - ------------- ------------------------------------ Landlord owns the building located at 60 West Tenth Street, Tracy, CA. In consideration of the rents, covenants and agreements reserved and contained in this Lease, Landlord hereby leases and demises the Premises to Tenant and Tenant rents same, in order that Tenant shall continuously operate its business operations thereon in accordance with its Permitted Use, subject only to the terms and conditions herein contained and all liens, encumbrances, easements, restrictions, zoning laws, and governmental or other regulations affecting the Premises. The Premises shall include the following fixtures: any items left by the previous Tenant, such as the vault, teller line, and other cabinetry to be mutually agreed upon, and which shall remain the property of Landlord. SECTION 2.02. Quiet Enjoyment. - ------------- ---------------- Landlord covenants that Tenant, upon paying all sums due from Tenant to Landlord, hereunder "Rent", and performing and observing all of Tenant's obligations under this Lease, shall peacefully and quietly have, hold and enjoy the Premises and the appurtenances throughout the Lease Term without interference by the Landlord, subject, nevertheless, to the other terms and provisions of this Lease. SECTION 2.03. Statement of Lease Term. - ------------- ------------------------ When the commencement date and termination date of the Lease Term have been determined, Landlord and Tenant shall execute and deliver a written statement in recordable form specifying therein the Rental Commencement Date and termination date of the Lease Term. ARTICLE III ----------- RENT SECTION 3.01. Fixed Minimum Rent. - ------------- ------------------- During the entire Lease Term, Tenant covenants and agrees to pay to Landlord, in lawful money of the United States, without any prior demand and without any deduction or setoff whatsoever, the fixed Minimum Rent as provided in Section 1.01. The payment of Fixed Minimum Rent by Tenant to Landlord shall be made in advance on the first day of each calendar month during the Lease Term hereof. Fixed Minimum Rent for any partial calendar month during the Lease Term shall be prorated on a per diem basis. SECTION 3.02. Periodic Cost of Living Adjustment. - ------------- ----------------------------------- The minimum monthly rent shall be subject to adjustment at the commencement of the second year of the term and each year thereafter ("the adjustment date") as follows: The base for computing the adjustment is the Consumer Price Index (All Urban consumers) (base year 1982-1984 - 100) for San Francisco-Oakland-San Jose published by the United States Department of Labor, Bureau of Labor Statistics ("Index") which was last published one (1) year prior to the Adjustment Date ("Beginning Index"). The Index last published prior to the Adjustment Date ("Extension Index") is to be used in determining the amount of the adjustment. If the Extension Index has increased over the - -------------------------------------------------------------------------------- 3 Beginning Index, the minimum monthly rent for the following year (until the next rent adjustment) shall be set by multiplying the minimum monthly rent for the preceding period by a fraction, the numerator of which is the Extension Index and the denominator of which is the Beginning Index. The above adjustment shall be subject to a minimum floor of two percent (2%) and a maximum cap of five percent (5%), therefore the adjusted minimum rent shall be no less than two percent (2%) greater than the monthly minimum rent in effect prior to the Adjustment Date then occurring and shall be no more than five percent (5%) greater than the monthly minimum rent in effect prior to the Adjustment Date then occurring. If the Index is changed so that the base year differs from that in effect when the term commences, the Index shall be converted in accordance with the conversion factor published by the United States Department of Labor, Bureau of Labor Statistics. If the Index is discontinued or revised during the term, such other government index or computation with which it is replaced shall be used in order to obtain substantially the same result as would be obtained if the Index had not been discontinued or revised. SECTION 3.03. Additional Charges. - ------------- ------------------- In addition to Fixed Minimum Rent, all other payments (except reimbursements) to be made by Tenant to Landlord shall be deemed to be and shall become "Additional Rent" hereunder whether or not the same be designated as such, and shall be due and payable on demand together with any interest thereon; and Landlord shall have the same remedies for failure to pay same as for a non-payment of Minimum Rents. (Minimum Rent and Additional Rent are hereinafter sometimes collectively referred to as "Rent"). If Tenant fails to make any payment of Rent when due as required under the applicable provisions of this Lease, Tenant shall pay a late charge in accordance with Section 3.04 hereof. SECTION 3.04. Past Due Rent and Additional Rent. - ------------- ---------------------------------- If Tenant shall fail to pay, when the same is due and payable, any Rent or any Additional Rent, or amounts or charges of the character described in Section 3.03 hereof, Tenant shall pay as Additional Rent a late fee equal to six (6%) percent of the delinquent amount if such payments are not paid within five days of their due date. Landlord and Tenant agree that this late charge represents a reasonable estimate of the costs and expenses Landlord will incur and is fair compensation to Landlord for its loss suffered by reason of late payment by Tenant. SECTION 3.05. Option to Renew. - ------------- ---------------- If Tenant elects to exercise its Option to Renew provided for in Section 1.01, then Tenant shall provide Landlord with written notice not earlier than six (6) months prior to the expiration of the then current term of the Lease, but no later than 5:00 p.m. (Pacific Time) on the date which is three (3) months prior to the expiration of the then current term of the Lease. If Tenant fails to provide such notice, Tenant shall have no further or additional right to extend or renew the term of the Lease. SECTION 3.06. Option Minimum Rent - ------------- ------------------- The Fixed Minimum Monthly Rent for the Option Period shall be determined by either the Cost of Living Adjustment (Section 3.02) or the Fair Market Rental (Section 3.07 below), whichever is greater. Should the Fair Market Rental Adjustment prevail for one or both of the two Option Periods, the Fixed Minimum Monthly Rent shall be adjusted in accordance with Section 3.07 for the first year and Section 3.02 for the second and subsequent years. - -------------------------------------------------------------------------------- 4 SECTION 3.07. Fair Market Rental - ------------- ------------------ Fair Market Rental shall be the actual rental rates for comparable space of comparable financial institutions in other comparable areas of Tracy, California, adjusting to account for, with respect to such rental, any difference between the lease and the lease(s) of comparable space, including without limitation, net versus gross lease provisions. Fair Market Rental shall be determined pursuant to the foregoing factors and shall mean the Fair Market Rental in effect as of the beginning of the Option Period. Not less than sixty (60) days before the beginning of each Option Period, Landlord shall notify Tenant of Landlord's determination of the Fair Market Rental for the Premises for the coming Option Period (the Fair Market Rental Notice). If Tenant disputes the amount of the Fair Market Rental as determined by Landlord, Tenant may require that Landlord submit the dispute to arbitration. The judgment rendered in any such arbitration may be entered in any court having jurisdiction and shall be final and binding between parties. The arbitration shall be conducted in San Francisco, California, in accordance with the then prevailing rules of the American Arbitration Association or its successors for arbitration of commercial disputes, except to the extent that the procedures mandated by such rules shall be modified as follows: Tenant shall make demand for arbitration in writing within twenty (20) business days after receipt of the Fair Market Rental Notice, specifying therein the name and address of the person to act as the arbitrator on Tenant's behalf. The arbitrator shall be qualified as a real estate appraiser familiar with the fair market rental of comparable space in comparable areas in Tracy, California. Failure on the part of Tenant to make a timely and proper demand for such arbitration shall constitute a waiver of the right thereto, and rental for the option period shall be the amount stated in the Fair Market Rental Notice. Within ten (10) business days after the service of the demand for arbitration, Landlord shall give notice to Tenant, specifying the name and address of the person designated by Landlord to act as arbitrator on its behalf who shall be similarly qualified. If Landlord fails to notify Tenant of the appointment of its arbitrator within or by the time above specified, then the arbitrator appointed by Tenant shall be the arbitrator to determine the issue. If two arbitrators are chosen pursuant to the preceding paragraph, the arbitrators so chosen shall meet within ten (10) business days after the second arbitrator has been appointed and, if within twenty (20) business days after such meeting the two arbitrators are unable to agree promptly upon a determination of Fair Market Rental, they - themselves - shall appoint a third arbitrator who shall be a competent and impartial person with qualifications similar to those required of the first two arbitrators. If the two arbitrators are unable to agree upon such appointment within five (5) business days after the expiration of such twenty (20) day period, the third arbitrator shall be selected by the parties themselves, if they can agree thereon within a further period of ten (10) business days. If the parties cannot so agree, then either party, on behalf of both, may request the then Chief Judge of the United States District Court having jurisdiction over the City of San Francisco, California, to appoint a third arbitrator and the other party shall not raise any question as to the judge's full power and jurisdiction to entertain the application for and make the appointment. Where the issue cannot be resolved by agreement between the two arbitrators selected by Landlord and Tenant or settled between the parties during the course of arbitration, the issue shall be resolved by the three arbitrators as follows: The arbitrator selected by each of the parties shall state in writing his determination of the Fair Market Rental supported by the reasons therefore with counterpart copies to each party. The arbitrators shall arrange for a simultaneous exchange of such proposed resolutions. The role of the third arbitrator shall be to select which of the two proposed resolutions most closely approximates his determination of Fair Market Rental. The third arbitrator shall have no right to propose - -------------------------------------------------------------------------------- 5 a middle ground or any modification of either of the two proposed resolutions. The resolution he chooses as most closely approximating his determination shall constitute the decision of the arbitrators and shall be final and binding upon the parties. If any arbitrator fails, refuses, or is unable to act, his successor shall be appointed by him, but in the case of the third arbitrator, his successor shall be appointed in the same manner as provided for the appointment of the third arbitrator. The arbitrators shall attempt to decide the issue within ten (10) business days after the appointment of the third arbitrator. Any decision in which the arbitrator appointed by Landlord and arbitrator appointed by Tenant concur shall be binding and conclusive upon the parties. Each party shall pay the fee and expense of its respective arbitrator and both shall share the fees and expenses of the third arbitrator, if any. The attorneys' fees and expenses of counsel for the respective parties and of witnesses shall be paid by the respective party engaging such counsel or calling such witnesses. The arbitrators shall have the right to consult experts and competent authorities for factual information or evidence pertaining to a determination of Fair Market Rental, but any such consultation shall be made in the presence of both parties with full right on their part to cross-examine. The arbitrators shall render their decision in writing with counter-part copies to each party. The arbitrators shall have no power to modify the provisions of the lease. If the new rental term begins prior to determination of Fair Market Rental, then the minimum monthly rental initially due during the new rental term shall be the amount stated in the Fair Market Rental Notice. Within fifteen (15) days after determination of the Fair Market Rental, the appropriate party shall pay the other party the difference between the amount actually paid and the amount that should have been paid pursuant to this Paragraph 2. In no case shall the Fixed Minimum Monthly Rent be less than the minimum monthly rent paid immediately preceding the option period year, plus two (2%) percent. ARTICLE IV ---------- PERMITTED USE SECTION 4.01. Use of Premises - ------------- --------------- Tenant shall use and occupy the Premises during the term for the purpose of delivering financial services to commercial and retail customers including operating a bank, savings bank, credit union, mortgage company, insurance company/agency, stock brokerage, trust company, or related financial services company or institution (2) general office use, (3) data processing, or (4) any other business now or in the future operated by Tenant, its affiliate, subsidiaries, or assignees, and for no other purpose whatsoever without the written consent of Landlord. SECTION 4.02. Continuous Operation - ------------- -------------------- Tenant shall continuously during the entire term hereof conduct and carry on Tenant's aforesaid business in the Premises and shall keep said Premises open for business and cause such business to be conducted thereon during each and every business day for such number of hours each day as is customary for business of like character in the City of Tracy, except for a temporary shutdown on account of strikes, lockouts or causes beyond the control of Tenant, or (for not more than one (1) day) out of respect to the memory of any deceased officer or employee of Tenant. - -------------------------------------------------------------------------------- 6 Should Tenant close the Premises without the express consent of Landlord, Landlord may terminate this Lease. SECTION 4.03. Abandonment - ------------- ----------- Tenant agrees not to vacate or abandon the Premises at any time during the Lease Term. Should Tenant vacate or abandon the Premises or be dispossessed by process of law or otherwise, such abandonment, vacation or dispossession shall be a breach of this Lease and, in addition to any other rights which Landlord may have, Landlord may, after notice to Tenant, terminate this Lease and remove any personal property belonging to Tenant which remains on the Premises and store the same in a public warehouse or elsewhere, such removal and storage to be at the cost of and for the account of Tenant. Notwithstanding the above, Tenant may vacate the Premises, with prior written notice to Landlord, at any time, for no more than six (6) months, and such action shall not constitute an event of default provided Tenant continues to meet all other Lease Obligations, including Rent. SECTION 4.04. Surrender of Premises - ------------- --------------------- At the termination of this Lease, Tenant shall surrender the Premises in the same condition (subject to the removals hereinafter required) as the Premises were on the date Tenant opened the Premises for business to the public, reasonable wear and tear and loss due to insured casualty excepted, and shall surrender all keys for the Premises to Landlord at the place then fixed for the payment of Rent, and shall inform Landlord of all combinations on locks, safes and vaults, if any, in the Premises. Prior to termination, Tenant shall remove all its trade fixtures, and, to the extent required by Landlord by written notice, any other installation, alterations or improvements before surrendering the Premises as aforesaid and shall repair any damage to the Premises caused thereby. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of the Lease Term. ARTICLE V --------- OPERATING COSTS SECTION 5.01. Operating Costs. - ------------- ---------------- During each month of the Lease Term, Tenant shall pay all taxes, public charges and assessments of whatsoever nature directly or indirectly assessed or imposed upon the land, buildings, equipment and improvements constituting the Premises, including, but not limited to, all real property taxes, rates, duties and assessments, local improvement taxes, import charges or levies, whether general or special, that are levied, charged or assessed against the Premises by any lawful taxing authority whether federal, state, county, municipal, school or otherwise (other than income, inheritance and franchise taxes thereon). ARTICLE VI ---------- INSTALLATION, MAINTENANCE, OPERATION AND REPAIR SECTION 6.01. Tenant Installation. - ------------- -------------------- Tenant shall, at Tenant's sole expense, install all trade fixtures and equipment required to operate its business (all of which shall be of first-class quality and workmanship). All trade fixtures, signs, or other personal property installed in the Premises by Tenant shall remain the property of Tenant and may be removed at any time provided that Tenant is not in default hereunder and provided the removal thereof - -------------------------------------------------------------------------------- 7 does not cause, contribute to, or result in Tenant's default hereunder; and further provided that Tenant shall at Tenant's sole expense promptly repair any damage to the Premises resulting from the removal of personal property and shall replace same with personal property of like or better quality. The term "trade fixtures" as used herein shall not include carpeting, floor coverings, attached shelving, lighting fixtures other than free-standing lamps, wall coverings, or similar Tenant improvements which upon installation shall immediately become the property of Landlord but which can be moved, modified, or changed by Tenant at any time during the Lease Term without permission from Landlord. Tenant shall not attach any fixtures or articles to any portion of the Premises, nor make any alterations, additions, improvements, or changes or perform any other work whatsoever in and to the Premises, other than minor interior cosmetic and decorative changes which do not exceed Five Thousand Dollars ($5,000.00) in the aggregate per Lease Year, without in each instance obtaining the prior written approval of Landlord. Any alterations, additions, improvements, changes to the Premises or other work permitted herein shall be made by Tenant at Tenant's sole cost and expense. SECTION 6.02. Maintenance and Repairs by Tenant. - ------------- ---------------------------------- Except as provided in Section 6.01 hereof, Tenant shall, at Tenant's expense, at all times keep the Premises and appurtenances and every part thereto in good clean, sanitary and safe order, condition and repair, including fixtures, electrical, plumbing, sewage systems, sidewalks, parking lot and landscaping, thereby waiving all rights to make repairs at the expense of Landlord as provided in Section 1942 of the Civil code of the State of California, and all rights provided for by Section 1941 of said Civil Code. Tenant shall replace all broken glass with glass of the same size and quality and on a quarterly basis maintain and repair HVACs. Any replacement of major parts or an entire HVAC unit shall be handled as follows: Upon determination of the need for replacement of parts or an entire unit, and the cost, Tenant shall notify Landlord of the extent and cost of the replacement. Tenant shall be responsible for the first $5000 of cost for each HVAC unit. The $5000 shall be cumulative from the beginning of the Lease Term, and shall continue through the option periods. The cumulative $5000 shall not include costs paid by Tenant for quarterly maintenance or minor repairs. If the replacement of parts or an entire unit exceeds the $5000 cap per unit, Landlord shall pay the difference between the actual cost and the $5000. Tenant shall, in a manner satisfactory to Landlord, paint the interior of the Premises when necessary to maintain at all times a clean and sightly appearance. In the event Tenant fails to perform any of its obligations as required hereunder, Landlord may, but shall not be required to, perform and satisfy same, with Tenant hereby agreeing to reimburse Landlord for the cost hereof promptly upon demand. Tenant shall make any and all additions, improvements, alterations, and repairs to or on the Premises (other than those required for the structural repair of the roof, or exterior walls), which may at any time during the Lease Term be required or recommended by any lawful authorities, insurance underwriters, inspection rating bureaus, or insurance inspectors designated by Landlord. Landlord may, but shall not be obligated to deal directly with any authorities respecting their requirements for additions, improvements, alterations or repairs. All such repairs shall be performed in a good and workmanlike manner, up to code. All such additions, improvements, and alterations thereto shall become immediately the property of Landlord. Tenant shall comply with all county, municipal, state, and federal laws and regulations including those relating to commercial banks, now in force or which hereafter may be in effect pertaining to the Premises. SECTION 6.03. Signs, Awnings and Canopies. - ------------- ---------------------------- Tenant shall not place or suffer to be placed or maintained on any exterior door, wall or window of the Premises any sign, awning or canopy, or advertising matter or other thing of any kind, and shall not place or maintain any exterior lighting, plumbing fixture or protruding object or any decoration, lettering or advertising matter on the glass of any window or door of the Premises without first obtaining Landlord's written approval and consent, which shall not be unreasonably withheld. Notwithstanding the above, - -------------------------------------------------------------------------------- 8 Tenant shall be allowed to put the business hours, trade name and logo, and legal name in vinyl letters on the door windows, and to place signs and banners on the interior of the windows during marketing promotions without the consent of Landlord. Tenant further agrees to maintain such sign, awning, canopy, decoration, lettering, advertising matter or other thing as may be approved in good condition and repair at all times. Tenant is allowed to place signs and awnings on the exterior of the building as per City of Tracy codes. SECTION 6.04. Discharge Of All Liens. - ------------- ----------------------- Tenant shall not create or permit to be created or to remain, and shall discharge, any lien (including, but not limited to, the liens of mechanics, laborers or materialmen for work or materials alleged to be done or furnished in connection with the Premises), encumbrance or other charge upon the Premises or any part thereof, upon Tenant's leasehold interest therein, provided, that Tenant shall not be required to discharge any such liens, encumbrances or charges as may be placed upon the Premises by the act of Landlord. Tenant shall have the right to contest, in good faith and by appropriate legal proceedings, the validity or amount of any mechanics', laborers' or materialmen's lien or claimed lien. In the event of such contest, Tenant shall give to Landlord reasonable security as may be required by Landlord to insure payment thereof and to prevent any sale, foreclosure or forfeiture of the Premises or any part thereof by reason of such non-payment. On final determination of such lien or such claim for lien, Tenant shall immediately pay any judgment rendered, with all proper costs and charges, and shall have such lien released or judgment satisfied at Tenant's expense, and upon such payment and release of satisfaction, Landlord shall promptly return to Tenant such security as Landlord shall have received in connection with such contest. Landlord reserves the right to enter the Premises to post and keep posted notices of non-responsibility for any such lien. Tenant shall pay, protect and indemnify Landlord from and against all liabilities, losses, claims, damages, costs and expenses, including reasonable attorney's fees, incurred by Landlord by reason of the filing of any lien and/or the removal of the same. SECTION 6.05. Utilities. - ------------- ---------- From the time Tenant first enters the Premises for the purpose of installing fixtures or from the commencement of the Lease Term, whichever date is the earlier, Tenant shall pay in a timely manner for water, gas, light, power, refuse, and all other utilities and services to or consumed in or on the Premises. Utility service providers shall be chosen and retained by Landlord. Tenant shall comply with all present and future laws, order, and regulations of all federal, state, municipal and local governments, departments, commissions, and boards regarding the collection, sorting, separation, and recycling of waste products, garbage, refuse and trash. SECTION 6.06. Maintenance by Landlord. - ------------- ------------------------ Except as provided in Section 9 and for damage caused by any negligent or intentional act or omission of Tenant, Tenant's agents, employees, or invitees, Landlord, at its sole cost and expense, shall keep in good condition and repair the foundations, exterior walls, and exterior roof of the Premises. Landlord shall also maintain the unexposed electrical, plumbing and sewage systems including, without limitation, those portions of the systems lying outside the Premises; window frames, gutters and down spouts on the building. If maintenance or repair of any item in this Section 6.06 is necessary due to the negligent or intentional act or omission of Tenant, Tenant's agents, employees, or invitees, Tenant shall repair and maintain such items. Notwithstanding anything in this Lease to the contrary, Landlord shall only be responsible for repairs of the items mentioned in this Section if said repairs are due to normal wear and tear, age, or obsolescence. For example, if wiring in the walls needs repair because of the age of the wiring or a faulty or old breaker, said repairs shall be the responsibility of Landlord. If Tenant overloads - -------------------------------------------------------------------------------- 9 a circuit by attaching too much equipment to it, causing damage to the wiring or breakers, Tenant shall be responsible for repairing the wires and breakers. Landlord shall comply with all county, municipal, federal, and state laws and regulations, including those relating to commercial banks, now in force or which hereafter may be in effect pertaining to the Premises. Notwithstanding anything to the contrary contained in this Lease, Landlord shall not be liable for failure to make repairs required to be made by Landlord under provisions of this Lease unless Tenant has previously notified Landlord in writing of the need for such repairs and Landlord has failed to commence and complete the repairs within a reasonable time following receipt of Tenant's notification. If Landlord fails to commence such repairs or replacements required of Landlord pursuant to the foregoing within thirty (30) days after written notice from Tenant of the need for such work (or if more than thirty (30) days shall be required because of the nature of the work, if Landlord shall fail to diligently proceed to commence to perform such work after written notice), Tenant shall be entitled to make such repairs as are necessary, and Landlord shall reimburse Tenant for the cost paid by Tenant in doing so within thirty (30) days after Tenant's delivery to Landlord of an invoice, together with reasonable back up documentation for same. SECTION 6.07. Hazardous Substances - ------------- -------------------- Landlord has no knowledge of the presence of hazardous substances in or on the Premises. Hazardous substances pose only a hazard when disturbed, damaged, or released into the air. Therefore, Tenant shall inform Landlord anytime Tenant plans to repair, remove, or otherwise disturb any areas or materials that may contain hazardous substances and where there may be the possibility of releasing, disturbing, or coming in contract with hazardous substances. In the event that any hazardous substances are discovered in or on the Premises, which may present a danger to Tenant and Tenant's agents, employees, invitees, etc. when disturbed or released in the air, and it is determined that such hazardous substances have been placed on the Premises prior to Tenant's occupancy, such hazardous substances shall be encapsulated (if feasible) or diligently removed by qualified personnel, at Landlord's cost and expense. The making of alterations or the removal of all or a portion of such hazardous substances shall not entitle Tenant to any damages except for injury or damages arising out of Landlord's negligence or that of its agents nor shall it relieve Tenant of the obligation to pay any sums due under this Lease except to the extent that the premises are unusable for the conduct of business during or after the removal. Tenant shall not cause or permit the storage or use of any hazardous substances in or on the Premises. ARTICLE VII ----------- OPERATING RULES, REGULATIONS, SURRENDER SECTION 7.01. Rules and Regulations. - ------------- ---------------------- Tenant agrees to comply with and observe the following rules and regulations: 1. No aerial or antennae shall be erected on the roof or exterior walls of the Premises or on the grounds, without in each instance, the written consent of Landlord. Any aerial or antennae so installed without such written consent shall be subject to removal without notice at any time at Tenant's sole cost and expense. - -------------------------------------------------------------------------------- 10 2. The exterior areas immediately adjoining the Premises shall be kept clean and free from dirt and rubbish by Tenant to the satisfaction of Landlord, and Tenant shall not place or permit any obstructions or merchandise in such areas. 3. The plumbing facilities shall not be used for any other purpose than that for which they are constructed, and no foreign substance of any kind shall be thrown therein, and the expense of any breakage, stoppage, or damage resulting from a violation of this provision shall be borne by Tenant who shall, or whose employees, agents or invitees shall, have caused it. 4. Tenant shall not commit or suffer to be committed any waste upon the Premises or any nuisance or other act or thing which may disturb the quiet enjoyment of any other tenant in the building in which the Premises may be located. 6. Tenant shall, at Tenant's sole cost and expense, comply with all of the requirements of all county, municipal, state of California, federal and other applicable governmental authorities, now in force, or which may hereafter be in force, pertaining to the Premises, and shall faithfully observe in the use of the Premises all municipal and county ordinances and state and federal statutes now in force or which may hereafter be in force, and all regulations, orders and other requirements issued or made pursuant to any such ordinances and statutes. Tenant agrees to comply with and observe the rules and regulations set forth above. Tenant's failure to keep and observe said rules and regulations shall constitute a breach of the terms of the Lease Terms in the manner as if the same were contained herein as covenants. Landlord reserves the right from time to time to amend or supplement said rules and regulations, and to adopt and promulgate additional rules and regulations applicable to the Premises provided these amendments are agreeable to both Landlord and Tenant and both shall be reasonable in negotiating if negotiation becomes necessary. ARTICLE VIII ------------ INSURANCE SECTION 8.01. Tenant's Coverage. - ------------- ------------------ Tenant shall maintain at its sole expense during the term hereof, liability insurance covering the Premises with a $2,000,000 Limit of Liability for commercial general liability for each occurrence and $2,000,000 annual aggregate. Tenant shall also keep in force rent insurance as well as special form property insurance for the full replacement value of Tenant's improvements and Tenant's property, including, but not limited to, inventory, trade fixtures, furnishings and other personal property. Tenant shall also have plate glass insurance covering all plate glass on the Premises at full replacement value, however for plate glass coverage Tenant shall have the option to either insure this risk or self-insure. Tenant shall cause such insurance policies to name Landlord as an additional insured and to be written so as to provide that the insurer waives all right of recovery by way of subrogation against Landlord in connection with any loss or damage covered by the policy. In addition, Tenant shall keep in force workman's compensation or similar insurance to the extent required by law. Tenant shall deliver to Landlord at least five (5) days prior to the commencement of the Term a copy of the insurance policy or the endorsement evidencing coverage and evidencing Landlord, Elf Realty Corporation, as additional insured. Each insurer under the policies required hereunder shall agree by endorsement on the policy issued by it or by independent instrument furnished to Landlord that it will give Landlord thirty (30) days' prior written notice before the policy or policies in question shall be altered or canceled. - -------------------------------------------------------------------------------- 11 SECTION 8.02. Landlord Coverage. - ------------- ------------------ Landlord shall throughout the Lease Term, at its sole cost and expense, keep the property insured. SECTION 8.03. Indemnification. - ------------- ---------------- During the term of this Lease, Tenant shall indemnify and hold Landlord, Landlord's officers, agents, and employees, harmless from any loss, cost or expense of any sort or nature, and from any liability to any person on account of any damage to person or property arising out of any failure of Tenant to perform and comply in any respect with any of the requirements and provisions of this Lease, provided that such damage does not result directly or indirectly by reason of conduct of Landlord, Landlord's officers, agents and employees. Landlord shall indemnify and save Tenant harmless from any loss, cost or expense of any sort or nature, and from any liability to any person on account of any damage to person or property arising out of any failure of Landlord to perform and comply in any respect with any of the requirements and provisions of this Lease; provided that such damage does not result directly or indirectly by reason of conduct of Tenant, its agents and employees. SECTION 8.04. Indemnity Agreement - ------------- ------------------- Tenant hereby agrees to indemnify Landlord, Landlord's officers, agents and employees against, and hold Landlord, Landlord's officers, agents and employees harmless from any and all claims, demands, actions, loss or liability because or on account of injuries to or death of any person (including death or injuries to Tenant's employees) and damage to property of others, howsoever caused or sustained (except where caused in whole or in part by negligence of Landlord, Landlord's officers, agents and/or employees,) and in any way arising out of or connected with the occupancy or use of the Premises (including the ways immediately adjoining). SECTION 8.05. Release - ------------- ------- Tenant hereby waives and releases all claims which Tenant may have against Landlord, Landlord's officers agents and employees, for damages to or loss of any property of any kind in which Tenant has an interest, howsoever such loss or damage may have occurred or been caused. ARTICLE IX ---------- DAMAGE & CONDEMNATION SECTION 9.01. Partial Damage. - ------------- --------------- If the Premises are partially damaged or destroyed and paragraph 9.02 does not apply, Landlord shall promptly repair the damage and restore the improvement at Landlord's expense. The completed repair, restoration or replacement shall be equal in value, quality and use to the condition of the improvement immediately before the damage. SECTION 9.02. Major Damage: Destruction. - ------------- -------------------------- If the Premises are destroyed or damaged and the damage or destruction renders more than 50% of the Premises permanently untenantable, either party may elect to terminate the Lease as of the date of the damage or destruction by giving the other party written notice within 30 days after the date of the damage. In such event all rights and obligations of the parties shall cease as of the date of termination, and Tenant shall be entitled to reimbursement of any Prepaid Rent. If neither party elects to terminate, Landlord shall promptly and diligently proceed to restore the Premises to substantially the same form as - -------------------------------------------------------------------------------- 12 prior to the damage or destruction. Work shall be commenced as soon as possible and shall proceed without interruption during normal working hours except for work stoppages on account of labor disputes and matters outside of Landlord's control. SECTION 9.03. Rent Abatement. - ------------- --------------- Rent shall be proportionately abated during the repair of any damage to the Premises to the extent Tenant's use of the Premises is materially impaired. SECTION 9.04. Tenant's Work. - ------------- -------------- Promptly following such destruction, Tenant shall, at Tenant's expense, perform any work required to place the Premises in their prior condition and Tenant shall restore, repair or replace its stock in trade fixtures, furniture, furnishings, floor coverings and equipment, and if Tenant has closed, Tenant shall promptly reopen for business. SECTION 9.05. Condemnation. - ------------- ------------- 9.05.1 Taking. The term "Taking" as used in this Section 9.05, shall mean an appropriation or taking under the power of eminent domain by any public or quasi-public authority or a voluntary sale or conveyance in lieu of condemnation but under threat of condemnation. 9.05.2 Total Taking. In the event of a Taking of the entire Premises, this Lease shall terminate and expire as of the date possession is delivered to the condemning authority and Landlord and Tenant shall each be released from any liability accruing pursuant to this Lease after the date of such termination, but Minimum Annual Rent and Additional Rent for the last month of Tenant's occupancy shall be prorated and Landlord shall refund to Tenant any Minimum Annual Rent and Additional Rent paid in advance. 9.05.3 Partial Taking. If (a) there is a Taking of a material portion of the Premises and the remainder of the Premises is not, in Tenant's sole but reasonable business judgment, suitable for the continued operation of Tenant's business, Tenant may terminate this Lease upon giving notice in writing of such election to Landlord within thirty (30) days after receipt by Tenant from Landlord of written notice that a portion of the Premises has been so appropriated or taken. In each case, the termination of this Lease shall be effective as of the date Tenant is required to vacate the Premises, or the portion of the Premises taken. 9.05.4 Award. The entire award or compensation in any such condemnation proceeding, whether for a total or partial Taking, or for diminution in the value of the leasehold or for the fee, shall belong to and be the property of Landlord; and, in any event, the holder of any mortgage or deed of trust encumbering the Project shall have a first priority to the extent of the unpaid balance of principal and interest on its loan. Without derogating the rights of Landlord or said lender under the preceding sentence, Tenant shall be entitled to recover from the condemning authority such compensation as may be separately awarded by the condemning authority to Tenant or recoverable from the condemning authority by Tenant in its own right for the taking - -------------------------------------------------------------------------------- 13 of trade fixtures and equipment owned by Tenant and for the expense of removing and relocating its trade fixtures and equipment, but only in the event that the compensation awarded to Tenant shall be in addition to and shall not diminish the compensation awarded to Landlord as provided above. 9.05.5 Continuation of Lease. In the event of a Taking, if Landlord and Tenant elect not to terminate this Lease as provided above (or have no right to so terminate), Landlord agrees, at Landlord's cost and expense as soon as reasonably possible after the Taking, to restore the Premises (to the extent of the condemnation proceeds) on the land remaining to a complete unit of like quality and character as existed prior to the Taking and, thereafter, Minimum Annual Rent and Additional Rent payable by Tenant hereunder shall be reduced on an equitable basis, taking into account the relative value of the portion taken as compared to the portion remaining, and Landlord shall be entitled to receive the total award or compensation in such proceedings. ARTICLE X --------- DEFAULT AND REMEDIES SECTION 10.01: Tenant's Default. ----------------- Each of the following events shall be a default by Tenant and a breach of this Lease: 10.01.1 Failure to Pay Rent. Failure of Tenant to make any rent payment within ten days after receipt of written notice from Landlord that it is due. 10.01.2 Other Performance Failures. Failure of Tenant to perform any other term, condition or covenant of the Lease within thirty (30) days after receipt of written notice from Landlord specifying the nature of the failure with reasonable particularity. If the failure is of such a nature that it cannot be completely remedied within the 30-day period, the failure shall not be a default if Tenant begins correction of the failure within the 30 day period and thereafter proceeds with reasonable diligence and in good faith to correct the failure as soon as possible. 10.01.3 Attachment. Attachment, execution, levy or other seizure by legal process of any right or interest of Tenant under this Lease if not released within thirty (30) days. 10.01.4 Bankruptcy. An assignment by Tenant for the benefit of creditors, the filing by Tenant of a voluntary petition in bankruptcy, the filing of an involuntary petition in bankruptcy and failure of Tenant to secure a dismissal of the petition within thirty (30) days after filing, the appointment of a receiver to take possession of the Premises or improvements or the leasehold estate or of Tenant's operations on the Premises for any reason. - -------------------------------------------------------------------------------- 14 10.01.5 Notwithstanding anything to the contrary in this Lease, in the event (a) Tenant or its successors or assignees shall become insolvent or bankrupt, or it or their interests under this Lease shall be levied upon or sold under execution of other legal process, or (b) the depository institution then operating on the Premises is closed, or is taken over by any depository institution regulatory authority ("Regulatory Authority"), Landlord may, in either such event, terminate this Lease only with concurrence of any Receiver or Liquidator appointed by such Regulatory Authority; provided, that in the event this Lease is terminated by the Receiver or Liquidator, the maximum claim of Lessor for Rent, damages, or indemnity for injury resulting from the termination, rejection, or abandonment of the unexpired Lease shall by law in no event be in an amount greater than all accrued and Unpaid Rent to the date of termination. SECTION 10.02. Rights and Remedies. - -------------- -------------------- Landlord shall have the following remedies if Tenant commits a default. These remedies are not exclusive; they are cumulative in addition to any remedies now or later allowed by law. Landlord may continue this Lease in full force and effect, and the Lease shall continue in effect as long as Landlord does not terminate Tenant's right to possession, and Landlord shall have the right to collect Rent when due during the original term of this Lease. Tenant shall be liable immediately, however payment is only due within thirty (30) days of written notice by Landlord, to Landlord for all reasonable costs Landlord incurs in reletting the Premises, including, without limitation, brokers' commissions, expenses of remodeling the Premises required by the reletting, and like costs. Reletting can be for a period shorter or longer than the remaining Lease Term, but Tenant shall only be responsible for the obligations under this Lease for original Term hereof. Tenant shall pay to Landlord the Rent due under this Lease on the dates Rent is due, less Rent Landlord receives from any reletting. No act by Landlord allowed by this paragraph shall terminate this Lease unless Landlord notifies Tenant that Landlord elects to terminate this Lease. After Tenant's default and for as long as Landlord does not terminate Tenant's right to possession of the Premises, if Tenant obtains Landlord's consent, Tenant shall have the right to assign or sublet its interest in this Lease, but Tenant shall not be released from liability. Landlord's consent to a proposed assignment or subletting shall not be unreasonably withheld. If Landlord elects to relet the Premises as provided in this paragraph, Rent that Landlord receives from reletting shall be applied to the payment of: First, any indebtedness from Tenant to Landlord other than Rent due from Tenant; Second, all costs, including those for maintenance and repair, incurred by Landlord in reletting; Third, Rent due and unpaid under this Lease. After deducting the payments referred to in this paragraph, any sum remaining from Rent Landlord receives from reletting shall be held by Landlord and applied in payment of future Rent as Rent becomes due under this Lease. In no event shall Tenant be entitled to any excess Rent received by Landlord. If, on the date Rent is due under this Lease, the Rent received from the reletting is less than Rent due on that date, Tenant shall pay to Landlord, in addition to the remaining Rent due, all costs, including those for maintenance and repair, Landlord incurred in reletting that remain after applying Rent received from the reletting as provided in this paragraph. Landlord may terminate Tenant's right to possession of the Premises at any time. No act by Landlord other than giving notice to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the Premises, or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this Lease shall not constitute a termination of Tenant's right to possession. On termination, Landlord has the right to recover from Tenant: - -------------------------------------------------------------------------------- 15 a) The worth, at the time of the award, of the unpaid Rent that had been earned at the time of termination of this Lease; b) The worth, at the time of the award, of the amount by which the unpaid Rent that would have been earned after the date of termination of this Lease until the time of award exceeds the amount of the loss of Rent that Tenant proves could have been reasonably avoided; c) The worth, at the time of the award, of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of the loss of Rent that Tenant proves could have been reasonably avoided; and d) Any other amount, and court costs, necessary to compensate Landlord for all detriment proximately caused by Tenant's default. "The worth, at the time of the award", as used in a) and b) of this paragraph, shall be 10%. "The worth, at the time of the award", as referred to in c) of this paragraph, is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus 1%. Landlord, at any time after Tenant commits a default, may cure the default at Tenant's cost. If Landlord at any time, by reason of Tenant's default, pays any sum or does any act that requires the payment of any sum, the sum paid by Landlord shall be due immediately from Tenant to Landlord at the time the sum is paid, and if paid at a later date shall bear interest at the maximum rate an individual is permitted by law to charge from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant. The sum, together with interest on it, shall be Additional Rent. ARTICLE XI ---------- ASSIGNMENT AND SUBLETTING SECTION 11.01. Landlord's Consent Required. - -------------- ---------------------------- Tenant shall not assign or sublease all or any part of its interest in this Lease or transfer any interest of Tenant therein (any and all such acts being collectively referred to herein as a "Transfer") without the prior written consent of Landlord, and attempt to do so without such consent being first had and obtained shall be wholly void and shall constitute a breach of this Lease. Landlord shall not unreasonably withhold its consent to a Transfer provided that the provisions of this Article XI are met. The only exception would be the transfer to an affiliate or subsidiary in which case the prior written consent of the Landlord is not required provided that the other provisions of this Article XI are met. SECTION 11.02. Condition of Transfer. - -------------- ---------------------- If Tenant desires to effect a Transfer, Tenant shall submit in writing to Landlord within a reasonable time for evaluation prior to the proposed Transfer the following information all in sufficient detail to enable Landlord to evaluate the proposed Transfer and the prospective Transferee: a) The name and legal composition of the proposed Transferee; b) The nature of the business proposed to be carried on in the Premises; c) The terms and provisions of the proposed Transfer; d) Such reasonable financial information as Landlord may request concerning the proposed Transferee. - -------------------------------------------------------------------------------- 16 It is the intent of the parties hereto that this Lease shall confer upon Tenant only the right to use and occupy the Premises, and to exercise such other rights as are conferred upon Tenant by this Lease. In the event Tenant seeks to transfer its interest in this Lease or the Premises, Landlord shall have the following options, which may be exercised at its sole choice without limiting Landlord in the exercise of any other right of remedy which Landlord may have by reason of such proposed Transfer: 1) Landlord may terminate this Lease effective as of the proposed effective date of the proposed Transfer and release Tenant from any liability hereunder accruing after such termination date by giving Tenant written notice of such termination within fifteen (15) days after receipt by Landlord of Tenant's notice of intent to transfer as provided above. If Landlord gives such notice, Tenant shall surrender the Premises, in accordance with Section 15, on the effective termination date. 2) Landlord may consent to the proposed Transfer on certain conditions, including without limitations one or more of the conditions set forth in Section 11.03 (c), and (d) below. SECTION 11.03. Reasonable Consent. - -------------- ------------------- The parties hereto agree that Landlord's refusal to consent to any proposed Transfer, or conditional consent to any Transfer, shall not be deemed unreasonable if: a) The proposed Transferee, or the proposed Transfer of the Premises to such Transferee will not attract the same or greater volume of trade and patronage to the Building as Tenant of the use of the Premises by Tenant; b) Tenant fails to provide Landlord with the information requested by Landlord pursuant to Section 11.02 (a), (b), (c), and (d) above, within a reasonable time for evaluation prior to the proposed Transfer; c) Landlord conditions its consent to such Transfer by requiring that Tenant agree to pay to Landlord, as Additional Rent, fifty percent (50%) of any and all rents in excess of the Rent to be paid under this Lease. For the purpose of this Article 11, the term "Rent" shall include any consideration of any kind received or to be received, by Tenant from the Transferee, if such sums are related to Tenant's interest in this Lease. Tenant expressly agrees that the conditions imposed by Landlord for any Transfer pursuant to this Article 11 are not unreasonable for purposes of Section 1951.4 (b) (2) of the California Civil Code, as amended from time to time. SECTION 11.04. Assignment Fees - -------------- --------------- Should Tenant request the consent of Landlord to an assignment of this Lease or of any of Tenant's rights thereunder and whether or not such consent is ultimately given by Landlord and/or any such assignment, subletting, occupancy or use is carried out, Tenant agrees to pay to Landlord's agent the sum of $500.00 for services plus expenses and to Landlord reasonable attorneys' fees incurred in connection with each such request. - -------------------------------------------------------------------------------- 17 ARTICLE XII ----------- RIGHT OF ENTRY SECTION 12.01. Right of Entry. - -------------- --------------- Landlord or Landlord's agents shall have the right to enter the Premises at reasonable times, with notice if possible, to examine the same, and to show them to prospective purchasers or tenants, to post notices, and to make such repairs, alterations, improvements or additions as Landlord may deem necessary, and Landlord shall be allowed to take all material into and upon the Premises that may be required therefor without the same constituting an eviction of Tenant in whole or in part, and the Rent reserved shall in no wise abate while said repairs, alterations, improvements, or additions are being made, by reason of loss or interruption of business of Tenant, or otherwise. During the six months prior to the expiration of the Lease Term or any renewal term, Landlord may place upon the Premises the usual notices "For Lease" which notices Tenant shall permit to remain thereon without molestation. Landlord shall limit any "For Sale" sign placed on the building to no larger than 4 feet by 4 feet, and clearly indicate on the sign that the building, not the Bank or the business, is for sale. ARTICLE XIII ------------ TENANT'S PROPERTY SECTION 13.01. 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 Lease Term against any personal property of any kind, owned by or placed in, upon or about the Premises by Tenant and taxes assessed on the basis of Tenant's occupancy thereof, including, but not limited to, taxes measured by Rents due from Tenant hereunder. SECTION 13.02. Notices by Tenant. - -------------- ------------------ Tenant shall give immediate telephone or facsimile notice to Landlord in case of fire, casualty, or accidents in the Premises or in the building of which the Premises are a part or of defects therein or in any fixtures of and/or equipment and shall promptly thereafter confirm such notice in writing. ARTICLE XIV ----------- SUCCESSION TO LANDLORD'S INTEREST SECTION 14.01. Attornment. - -------------- ----------- If the interest of Landlord is transferred to any person or entity by reason of foreclosure or other proceedings of enforcement of any mortgage, deed of trust or security interest or by delivery of a deed in lieu of foreclosure or other proceedings, Tenant shall upon delivery to Tenant by said transferee of a nondisturbance agreement, immediately and automatically attorn to such person or entity. In the event of such transfer, this Lease and Tenant's rights hereunder shall continue undisturbed so long as Tenant is not in default. - -------------------------------------------------------------------------------- 18 SECTION 14.02. Subordination. - -------------- -------------- This Lease shall be subordinate to the lien of any mortgage or security deed or the lien resulting from any other method of financing or refinancing now or hereafter in force against the Premises, any portion thereof, or upon any buildings hereafter placed upon the land of which the Premises are a part, and to any and all advances to be made under such mortgages, and all renewals, modifications, extensions, consolidations and replacements thereof. The aforesaid provisions shall be self-operative and no further instrument of subordination shall be required to evidence such subordination. Tenant covenants and agrees to execute and deliver, upon demand, such further instrument or instruments subordinating this Lease on the foregoing basis to the lien of any such mortgage or mortgages as shall be desired by Landlord and any mortgagees or proposed mortgagees. SECTION 14.03. Estoppel Certificate. - -------------- --------------------- Within ten (10) days after request therefor by Landlord, or in the event that upon any sale, assignment or hypothecation of the Premises and/or the land thereunder by Landlord, an estoppel certificate shall be required from Tenant, Tenant agrees to deliver in recordable form, a certificate to any proposed mortgagee or purchaser, or to Landlord, certifying that this Lease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified, and stating the modification), that there are no defenses or offsets thereto (or stating those claimed by Tenant) and the dates to which Fixed Minimum Rent, and other charges have been paid. ARTICLE XV ---------- SURRENDER OF PREMISES SECTION 15.01. Condition on Surrender. - -------------- ----------------------- At the expiration or earlier termination of this Lease, Tenant shall surrender the Premises to Landlord broom clean and in the same condition as when tendered by Landlord, reasonable wear and tear and insured casualty excepted. Tenant shall promptly repair any damage to the Premises caused by the removal of any furniture, trade fixtures or other personal property placed in the Premises. SECTION 15.02. Holding Over. - -------------- ------------- Should Tenant, with Landlord's written consent, hold over at the end of the term, Tenant shall become a Tenant at will and any such holding over shall not constitute an extension of this Lease. During such holding over, Tenant shall pay rent and other charges at 105% of the highest monthly rate provided for herein. ARTICLE XVI ----------- TENANT FINANCIAL DATA SECTION 16.01. Tenant Financial Data. - -------------- ---------------------- Within fifteen (15) days after Landlord's written request, Tenant shall furnish Landlord with financial statements or other reasonable financial information reflecting Tenants current financial condition, certified by Tenant or its financial officer. If Tenant is a publicly traded corporation, delivery of Tenant's last published financial information shall be satisfactory for purposes of this Section. - -------------------------------------------------------------------------------- 19 Landlord may request the financial statements set forth herein only if the request is made for a specific reason, such as in connection with a sale, financing or refinancing the Project. Any information obtained from Tenant's financial statements shall be confidential and shall not be disclosed other than to carry out the purposes of this Lease; provided, however, Landlord shall incur no liability for the inadvertent disclosure of any such information. Landlord may divulge the contents of any financial statements in connection with any financing arrangement or sale of Landlord's interest in the Premises or in connection with any administrative or judicial proceedings. ARTICLE XVII ------------ MISCELLANEOUS SECTION 17.01. Waiver. - -------------- ------- The waiver by Landlord of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent. No covenant, term or condition of this Lease shall be deemed to have been waived by Landlord, unless such waiver be in writing by Landlord. SECTION 17.02. Accord and Satisfaction. - -------------- ------------------------ No payment by Tenant or receipt by Landlord of a lesser amount than the monthly Rent herein stipulated shall be deemed to be other than on account of the earliest stipulated Rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Rent or pursue any other remedy in this Lease provided. SECTION 17.03. Entire Agreement. - -------------- ----------------- This Lease and the Exhibits and Rider, if any, attached hereto and forming a part hereof, set forth all the covenants, promises, agreements, conditions and understandings between Landlord and Tenant concerning the Premises and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between them other than as are herein set forth. Except as herein otherwise provided, no subsequent alteration, amendment, change or addition to this Lease shall be binding upon Landlord or Tenant unless reduced to writing and signed by them. SECTION 17.04. No Partnership. - -------------- --------------- Landlord does not, in any way or for any purpose, become a partner of Tenant in the conduct of its business, or otherwise, or joint adventurer or a member of a joint enterprise with Tenant. SECTION 17.05. Force Majeure. - -------------- -------------- In the event that Landlord shall be delayed or hindered in or prevented from doing or performing any act or thing required hereunder by reason of strikes, lock-outs, casualties, Acts of God, labor troubles, inability to procure materials, failure of power, governmental laws or regulations, riots, insurrection, war or other causes beyond the reasonable control of Landlord, then Landlord shall not be liable or responsible for any such delays and the doing or performing of such act or thing shall be excused for the - -------------------------------------------------------------------------------- 20 period of the delay and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay. SECTION 17.06. Notices. - -------------- -------- Any notice, demand, request or other instrument which may be or are required to be given under this Lease shall be delivered personally or sent by either United States certified mail postage prepaid or expedited mail service and shall be addressed (a) if to Landlord at the address provided in Section 1.01 for Landlord or at such other address as Landlord may designate by written notice and (b) if to Tenant at the address provided in Section 1.01 for Tenant or at such other address as Tenant shall designate by written notice. Notices shall be effective upon delivery unless delivery is refused or cannot be made in which event notice shall be effective on mailing. SECTION 17.07. Captions and Section Numbers. - -------------- ----------------------------- The captions, section numbers, article numbers, and index appearing in this Lease are inserted only as a matter of convenience and in no way define, limit, construe, or describe the scope or intent of such section or articles of this Lease nor in any way affect this Lease. SECTION 17.08. Tenant Defined, Use of Pronoun. - -------------- ------------------------------- The word "Tenant" shall be deemed and taken to mean each and every person or party mentioned as a Tenant herein, be the same one or more; and if there shall be more than one Tenant, any notice required or permitted by the terms of this lease may be given by or to any one thereof, and shall have the same force and effect as if given by or to all thereof. The word "Landlord" shall be deemed and taken to mean each and every person or party mentioned as a Landlord herein, be the same one or more; and if there shall be more than one Landlord, any notice required or permitted by the terms of this Lease shall be given by or to any one thereof, and shall have the same force and effect as if given by or to all thereof. The use of the neuter singular pronoun to refer to Landlord or Tenant shall be deemed a proper reference even though Landlord or Tenant may be an individual, a corporation, or a group of two or more individuals or corporations. The necessary grammatical changes required to make the provisions of this Lease apply in the plural sense where there is more than one Landlord or Tenant and to either corporations, associations, partnerships, or individuals, males or females, shall in all instances be assumed as though in each case fully expressed. SECTION 17.09. Partial Invalidity. - -------------- ------------------- If any term, covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Lease shall be valid and be enforced to the fullest extent permitted by law. SECTION 17.10. Execution of Lease. - -------------- ------------------- The submission of this Lease for examination does not constitute a reservation of or option for the Premises and this Lease becomes effective as a Lease only upon execution and delivery thereof by Landlord and Tenant. If Tenant is a corporation, Tenant shall furnish Landlord with such evidence, as Landlord reasonably requires to evidence the binding effect on Tenant of the execution and delivery of this Lease. - -------------------------------------------------------------------------------- 21 SECTION 17.11. Recording. - -------------- ---------- Tenant agrees not to record this Lease. However, Tenant and Landlord, upon request of either, agree to execute and deliver a memorandum or so-called "short form" of this Lease in recordable form for the purpose of recordation at Tenant's expense. Said memorandum or short form of this Lease shall describe the parties, the Premises and the Lease Term and shall incorporate this Lease by reference. SECTION 17.12. Applicable Law. - -------------- --------------- The Laws of the State of California shall govern the validity, performance and enforcement of this Lease with venue in San Joaquin County, except where indicated differently in this Lease. SECTION 17.13. Time is of the Essence. - -------------- ----------------------- Time is of the essence of this Agreement. SECTION 17.14. Successors and Assigns. - -------------- ----------------------- Except as otherwise provided herein, this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, executors, administrators, successors and assigns; except that nothing in this Paragraph shall be deemed to permit any assignment, subletting, occupancy, or use contrary to the provisions of this Article. SECTION 17.15. Survival of Obligations. - -------------- ------------------------ Any obligation of Tenant to pay any sum owing in order to perform the provisions of this Lease after the expiration or other termination of this Lease, shall survive the expiration or other termination of this Lease. SECTION 17.16. Arbitration. - -------------- ------------ Any controversy between the parties hereto involving the construction or application of any of the terms, covenants, or conditions of this Lease shall on written request of one party served on the other be submitted to arbitration and such arbitration shall comply with and be governed by the provisions of the American Arbitration Association. SECTION 17.17. Attorney Fees. - -------------- -------------- In case suit should be brought for recovery of the Premises, or for any sum or rents due hereunder, or because of any act which may arise out of the possession of the Premises, by either party, the prevailing party shall be entitled to all costs incurred in connection with such action, including a reasonable attorney's fee. If Landlord shall be made a party to any litigation commenced by or against Tenant, Tenant shall pay all costs, expenses and attorneys' fees incurred by Landlord in connection with such litigation except in the event that such litigation shall determine that Landlord has committed a breach of this Lease and shall adjudicate that Landlord is liable therefor. SECTION 17.18. Representations. - -------------- ---------------- Tenant acknowledges that neither Landlord nor Landlord's agents, employees, or contractors have made any representations or promises with respect to the Premises, or this Lease except as expressly set forth herein. - -------------------------------------------------------------------------------- 22 SECTION 17.19. Landlord's Liability. - -------------- --------------------- Landlord's liability hereunder shall be limited solely to Landlord's interest in the Premises. SECTION 17.20. Landlord's Consent Must Be Reasonable. - -------------- -------------------------------------- Wherever in this Lease the consent or approval of Landlord is required, such consent or approval shall not be unreasonably withheld. SECTION 17.21. Contingency. - -------------- ------------ This Lease is contingent upon regulatory approval by the California Department of Financial Institutions and the FDIC. If the contingencies are not lifted by August 1, 1999, the Lease shall become null and void and the security deposit and Prepaid Rent shall be refunded to Tenant. IN WITNESS WHEREOF, the parties hereto have executed this Lease this day and year first above written. LANDLORD, Elf Realty Corporation TENANT, Service 1st Bank (Proposed) By: /s/ Brian Collins By: /s/ Brian Garrett ---------------------------------- ---------------------------------- Brian Collins Brian Garrett President Chief Executive Officer - -------------------------------------------------------------------------------- 23 EX-10.3 10 ex10_3.txt EXHIBIT 10.3 Exhibit 10.3 SERVICE 1ST BANK 1999 STOCK OPTION PLAN ---------------------- INDEX ----- ARTICLE COMMENCING NO. DESCRIPTION ON PAGE - -------------------------------------------------------------------------------- 1. PURPOSE 1 2. ADMINISTRATION 1 3. PARTICIPANTS 3 4. THE SHARES 3 5. GRANTS, TERMS AND CONDITIONS OF OPTIONS 4 6. ADJUSTMENT OF AND CHANGES IN THE SHARES 10 7. LISTING OR QUALIFICATION OF SHARES 13 8. AMENDMENT AND TERMINATION OF THE PLAN 13 9. BINDING EFFECT OF CONDITIONS 14 10. EFFECTIVENESS OF THE PLAN 15 11. PRIVILEGES OF STOCK OWNERSHIP; 15 SECURITIES LAW COMPLIANCE 12. INDEMNIFICATION 15 13. INFORMATION TO OPTIONEES 16 i SERVICE 1ST BANK 1999 STOCK OPTION PLAN -------------------[graphic omitted]------------------- 1. PURPOSE ------- The purpose of this 1999 Stock Option Plan (the "Plan") of Service 1st Bank and its Affiliates (hereinafter collectively referred to as the "Company"), is to secure for the Company and its stockholders the benefits of the incentive inherent in the ownership of Common Stock of Service lst Bank by those key, full-time employees and officers of the Company who will share responsibility with management of the Company for its future growth and success. The word "Affiliate", as used in this Plan, means any bank or corporation in an unbroken chain of banks or corporations beginning or ending with the Company, if at the time of the granting of an option, each such bank or corporation other than the last in that chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one or the other banks or corporations in the chain. 2. ADMINISTRATION -------------- The following provisions shall govern the administration of the Plan: (a) The Plan shall be administered by a committee of the Board of Directors duly appointed by the Board (the "Committee") composed of two (2) or more directors, each of whom is a "disinterested person" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "1934 Act"), or successor rule or regulation, i.e. each Committee member has not, during the one year prior to service as a Committee member, received the grant of an option under the Plan or any other plan of the Company, except that participation in a formula plan meeting the conditions of Rule 16b-3 under the 1934 Act shall not disqualify a director from being a "disinterested person". The Board of Directors may from time to time remove members from or add members to the Committee. Vacancies on the Committee, however caused, shall be filled by the Board of Directors. The Board of Directors shall designate a Chairman of the Committee from among the Committee members. Acts of the Committee (i) at a meeting, held at a time and place and in accordance with rules adopted by the Committee, at which a quorum of the Committee is present and acting, or (ii) reduced to and approved in writing by a majority of the members of the Committee, shall be the valid acts of the Committee. (b) The Company shall effect the grant of options under the Plan by execution of instruments in writing in a form approved by the Committee. Subject to the express terms and conditions of the Plan and the terms of any option outstanding under the Plan, the Committee shall have full power to construe the Plan and the terms of any option granted under the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan or such options and to make all other determinations necessary or advisable for the Plan's administration, including, without limitation, the power to (i) determine which persons meet the requirements of Section 3 hereof for selection as participants in the Plan and which persons are considered to be "employees" for purposes of the Internal Revenue Code of 1986, as amended (the "Code"), and therefore eligible to receive incentive stock options under the Plan; (ii) determine to whom of the eligible persons, if any, options shall be granted under the Plan; (iii) establish the terms and conditions required or permitted to be included in every option 2 agreement or any amendments thereto, including whether options to be granted thereunder shall be "incentive stock options", as defined in the Code, or "nonstatutory stock options"; (iv) specify the number of shares to be covered by each option; (v) in the event a particular option is to be an incentive stock option, determine and incorporate such terms and provisions, as well as amendments thereto, as shall be required in the judgement of the Board of Directors or the Committee, so as to provide for or conform such option to any change in any law, regulation, ruling or interpretation applicable thereto; and (vi) to make all other determinations deemed necessary or advisable for administering the Plan. The Committee's determination on the foregoing matters shall be conclusive. 3. PARTICIPANTS ------------ Participants in the Plan shall be those non-employee directors, officers and key, full-time, salaried employees of the Company to whom options may be granted from time to time by the Committee. 4. THE SHARES ---------- The shares of stock initially subject to options authorized to be granted under the Plan shall consist of two hundred forty thousand (240,000) shares of Common Stock (the "Shares") of the Company, or the number and kind of shares of stock or other securities which shall be substituted for such shares or to which such shares shall be adjusted as provided in Section 6. The Shares subject to the Plan may be set aside out of the authorized but unissued shares of Common Stock of the Company not reserved for any other purpose or out of shares of Common Stock subject to an option which, for any reason, terminates unexercised as to the Shares. 3 5. GRANTS, TERMS AND CONDITIONS OF OPTIONS --------------------------------------- Options may be granted at any time prior to the termination of the Plan to non-employee directors, officers and other key, full-time, salaried employees of the Company who, in the judgment of the Committee, contribute to the successful conduct of the Company's operation through their judgment, interest, ability and special efforts; provided, however, that: (i) for incentive stock options, the aggregate fair market value of the stock (determined as of the date the option is granted) which is exercisable for the first time in any calendar year (under all stock option plans of the Company, its Affiliates or any predecessor of any such corporation) shall not exceed $100,000; (ii) except in the case of termination by death or disability or cause or cessation of status as a director, as set forth in Section 5(c) below, the granted option must be exercised by optionee no later than three (3) months after any termination of employment or status as a director with the Company and said employment or status as a director must have been continuous since the granting of the option. Further, incentive stock options may only be granted to full-time, salaried employees of the Company. In addition, options granted pursuant to the Plan shall be subject to the following terms and conditions: (a) Number of Shares. (i) Each agreement evidencing an option granted under the Plan shall state the number of Shares subject to the option. (ii) Each Director who is a Director on the date of adoption of the Plan by the Board of Directors of the Company (the "Commencement Date") shall be entitled to a one-time grant of an option to purchase Five Thousand (5,000) Shares (an "Initial Grant"). The date on which options are granted shall be referred to as the "Date 4 of Grant". Options may not be exercised until approval of the Plan by the Shareholders of the Company at the Company's next Annual Meeting of Shareholders following adoption of the Plan, which shall thereafter vest as provided in Section 5(d) hereof. (b) Vesting Period of Options. With respect to each option granted pursuant to Section 5(a) above, each optionee shall agree to remain as a director and to render his or her services for a period of at least six (6) months from the Date of Grant, but such agreement shall not impose upon the Company any obligation to retain the optionee as a director for any period. No option may be exercised by any optionee unless and until the optionee has served continuously as a director, officer or employee for a period of six (6) months from the Date of Grant of such option, except as set forth in Sections 5(e) and 6 hereof. Options granted pursuant to Section 5(a) shall become exercisable as to one-third of the options each year on the anniversary of the Date of Grant until exercisable in full. (c) Option Price. The purchase price (the "Option Price") under each option shall be not less than one hundred percent (100%) of the fair market value of the Shares subject thereto on the date the option is granted, as such value is determined by the Committee. The fair market value of such stock shall be determined in accordance with any reasonable valuation method, including the valuation methods described in Treasury Regulation Section 20.2031-2. If, however, an employee owns stock of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, the option price of any incentive stock option granted to such optionee shall be not less than one hundred ten percent (110%) of such fair market value at the time such option is granted. 5 (d) Duration and Exercise of Options. Each option shall vest in such manner and at such time at the rate of at least 20% per year up to but not exceeding five (5) years from the date the option is granted for all Participants as the Committee shall determine in its sole discretion, provided that options shall vest pro rata on a monthly basis between the date of grant and any anniversary of the date of grant; provided, further, that if an incentive stock option is granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, such option by its terms is not exercisable after the expiration of four (4) years from the date such option is granted. Each option may be exercised for a period of one hundred twenty (120) months from the date of grant, subject to the vesting provisions set forth herein. The termination of the Plan shall not alter the maximum duration, the vesting provisions, or any other term or condition of any option granted prior to the termination of the Plan. To the extent the right to purchase Shares has vested under a Participant's stock option agreement, options may be exercised from time to time by delivering payment in full at the Option Price for the number of Shares being purchased by either: (i) cash, certified check, official bank check or the equivalent thereof acceptable to the Company; or (ii) shares of the Company's Common Stock with a fair market value on the date of exercise equal to the Option Price; or (iii) a combination of (i) and (ii) above; together with written notice to the Secretary of the Company identifying the option or part thereof being exercised and specifying the number of Shares for which payment is being tendered. The Company shall deliver to the Optionee, which delivery shall be not less than fifteen (15) days and not more than thirty (30) days after the giving of such 6 notice, without transfer or issue tax to the Optionee (or other person entitled to exercise the option) at the principal office of the Company, or such other place as shall be mutually acceptable, a certificate or certificates for such Shares dated the date the options were validly exercised; provided, however, that the time of such delivery may be postponed by the Company for such period as may be required for it with reasonable diligence to comply with any requirements of law. If an option covers incentive and non-statutory stock options, separate stock certificates shall be issued; one or more for stock acquired upon exercise of the incentive stock options and one or more for the stock acquired upon exercise of the non-statutory stock options. (e) Termination of Employment, or Director or Officer Status. Upon the termination of an Optionee's status as an employee, director or officer of the Company, his or her rights to exercise an option then held shall be only as follows: DEATH OR DISABILITY: If an Optionee's employment or status as an officer or director is terminated by death or disability, such Optionee or such Optionee's qualified representative (in the event of the Optionee's mental disability) or the Optionee's estate (in the event of the Optionee's death) shall have the right for a period of twelve (12) months following the date of such death or disability to exercise the option to the extent the Optionee was entitled to exercise such option on the date of the Optionee's death or disability, provided the actual date of exercise is in no event after the expiration of the term of the option. An Optionee's "estate" shall mean the Optionee's legal representative or any person who acquires the right to exercise an option by reason of the Optionee's death. 7 CAUSE: If an employee or officer is determined by the Board of Directors to have committed an act of embezzlement, fraud, dishonesty, breach of fiduciary duty to the Company, or to have deliberately disregarded the rules of the Company which resulted in loss, damage or injury to the Company, or if an Optionee (other than a director) makes any unauthorized disclosure of any of the secrets or confidential information of the Company, induces any client or customer of the Company to break any contract with the Company or induces any principal for whom the Company acts as agent to terminate such agency relations, or engages in any conduct which constitutes unfair competition with the Company, or if an Optionee is removed from any office of the Company by any bank regulatory agency or by judicial process, the Optionee or the Optionee's estate shall be entitled to exercise any option with respect to any Shares for a period of thirty (30) days after termination of employment or status as a director or officer. The Optionee may receive payment from the Company for vacation pay, for services rendered prior to termination, for services for the day on which termination occurred, for salary in lieu of notice, or for other benefits. In making such determination, the Board of Directors shall act fairly and shall give the Optionee an opportunity to appear and be heard at a hearing before the full Board of Directors and present evidence on the Optionee's behalf. For the purpose of this paragraph, termination of employment or officer status shall be deemed to occur when the Company dispatches notice or advice to the Optionee that the Optionee's employment or status as an officer is terminated and not at the time of Optionee's receipt thereof. OTHER REASONS: If an Optionee's employment or status as a director or officer is terminated for any other reason other than those mentioned above under 8 "Death or Disability" and "Cause", the Optionee may, within three (3) months following such termination, exercise the option to the extent such option was exercisable by the Optionee on the date of termination of the Optionee's employment or status as a director or officer, provided the date of exercise is in no event after the expiration of the term of the option. (f) Transferability of Option. Each option shall be transferable only by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code and shall be exercisable during the Optionee's lifetime only by the Optionee. (g) Other Terms and Conditions. Options may also contain such other provisions, which shall not be inconsistent with any of the foregoing terms, as the Committee shall deem appropriate. No option, however, nor anything contained in the Plan, shall confer upon any Optionee any right to continue in the employ or in the status as an officer of the Company, nor limit in any way the right of the Company to terminate an Optionee's employment or status as an officer at any time. Nor shall any option, nor anything contained in the Plan, obligate the Company or any Affiliate to continue any Optionee's status as a director or to vote any shares held by the Company's proxy holders in favor of any Optionee at any shareholders' meeting of the Company at which directors are to be elected. (h) Use of Proceeds from Stock. Proceeds from the sale of Shares pursuant to the exercise of options granted under the Plan shall constitute general funds of the Company. 9 (i) Rights as a Shareholder. The Optionee shall have no rights as a shareholder with respect to any Shares until the date of issuance of a stock certificate for such Shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the date of such issuance, except as provided in Section 6 hereof. (j) Exercisability of Incentive Stock Options. 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 an optionee during any calendar year (under all such plans of the Company) shall not exceed $100,000. Any option not complying with this Section 5(j) shall be a non-qualified stock option. (k) Tax Withholding. The Company may determine that it is required to withhold taxes relating to the exercise of any option and that such tax withholding shall be satisfied in a manner satisfactory to the Company before Shares pursuant to the exercise of an option are delivered to an Optionee. The Optionee may elect to pay such tax upon the exercise of a stock option by surrendering a sufficient number of previously issued shares. The value of Shares surrendered shall be the fair market value of such Shares on the date the exercise becomes taxable. The election to withhold shares otherwise deliverable upon exercise of the option, or to surrender previously issued shares, shall be subject to the approval of the Committee and must be made pursuant to rules established by the Committee. 6. ADJUSTMENT OF AND CHANGES IN THE SHARES --------------------------------------- In the event the shares of Common Stock of the Company, as presently constituted, shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Company or of another corporation (whether by reason of reorganization, merger, consolidation, recapitalization, reclassification, split-up, 10 combination of shares or otherwise), or if the number of shares of Common Stock of the Company shall be increased through the payment of a stock dividend or increased or decreased through a stock split, the Board of Directors shall substitute for or add to each share of Common Stock of the Company theretofore appropriated or thereafter subject or which may become subject to an option under the Plan, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock of the Company shall be so changed, or for which each share shall be exchanged, or to which each such share shall be entitled, as the case may be. In addition, the Committee shall make appropriate adjustment in the number and kind of shares as to which outstanding options, or portions thereof then unexercised, shall be exercisable so that any Optionee's proportionate interest in the Company by reason of his rights under unexercised portions of such options shall be maintained as before the occurrence of such event. Such adjustment in outstanding options shall be made without change in the total price of the unexercised portion of the option and with a corresponding adjustment in the option price per share. In the event of sale, dissolution or liquidation of the Company or a merger or consolidation in which the Company is not the surviving or resulting corporation, the Committee shall have the power to cause the termination of every option outstanding hereunder, except that the surviving or resulting corporation may, in its absolute and uncontrolled discretion, tender an option or options to purchase its shares on its terms and conditions, both as to the number of shares and otherwise; provided, however, that in all events the Optionee shall have the right immediately prior to such sale, dissolution, liquidation, or merger or consolidation in which the Company is not the surviving or 11 resulting corporation to notification thereof as soon as practicable and, thereafter, to exercise the Optionee's option to purchase Shares subject thereto to the extent of any unexercised portion of the option, regardless of the vesting provisions of Sections 5(b) and (d) hereof. This right of exercise shall be conditioned upon the execution of a final plan of dissolution or liquidation or a definitive agreement of merger or consolidation. In the event of an offer by any person or entity to all shareholders of the Company to purchase any or all shares of Common Stock of the Company (or shares of stock or other securities which shall be substituted for such shares or to which such shares shall be adjusted as provided in Section 6 hereof), any Optionee under this Plan shall have the right upon the commencement of such offer to exercise the option and purchase shares subject thereto to the extent of any unexercised or unvested portion of such option. No right to purchase fractional shares shall result from any adjustment in options pursuant to this Section 6. In case of any such adjustment, the shares subject to the option shall be rounded down to the nearest whole share. Notice of any adjustment shall be given by the Company to each holder of an option which was in fact so adjusted and such adjustment (whether or not such notice is given) shall be effective and binding for all purposes of the Plan. To the extent the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. Any issue by the Company of shares of stock of any class, or securities convertible into shares of any class, shall not affect the 12 number or price of shares of Common Stock subject to the option, and no adjustment by reason thereof shall be made. The grant of an option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassification, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. 7. LISTING OR QUALIFICATION OF SHARES ---------------------------------- All options granted under the Plan are subject to the requirement that if at any time the Board of Directors or the Committee shall determine in its discretion that the listing or qualification of the Shares subject thereto on any securities exchange or under any applicable law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of or in connection with the issuance of Shares under the option, the option may not be exercised in whole or in part unless such listing, qualification, consent or approval shall have been effected or obtained free of any condition not acceptable to the Board of Directors or the Committee. 8. AMENDMENT AND TERMINATION OF THE PLAN ------------------------------------- The Board of Directors shall have complete power and authority to terminate or amend the Plan; provided, however, that the Board of Directors shall not, without the approval of the shareholders of the Company, (i) materially increase the benefits accruing to Participants under the Plan; (ii) increase the number of securities which may be issued under the Plan; or (iii) modify the requirements as to eligibility for participation in the Plan; and provided further that the terms set forth in Section 5 of the Plan shall not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or 13 the rules thereunder. Except as provided in Section 6, no termination, modification or amendment of the Plan may, without the consent of an employee, director or officer to whom such option shall theretofore have been granted, adversely affect the rights of such employee, director or officer under such option. Unless the Plan shall have been terminated by action of the Board of Directors prior thereto, it shall terminate ten (10) years from the earlier of its adoption by the Board of Directors or approval by the Company's shareholders, unless earlier terminated by the Board of Directors. Unless the Plan shall have been terminated by action of the Board of Directors prior thereto, the Plan shall terminate on November 15, 2009 (ten years from the date of its adoption). 9. BINDING EFFECT OF CONDITIONS ---------------------------- The conditions and stipulations herein contained, or in any option granted pursuant to the Plan shall be, and constitute, a covenant running with all of the Shares acquired by the optionee pursuant to this Plan, directly or indirectly, whether the same have been issued or not, and those Shares owned by the optionee shall not be sold, assigned or transferred by any person save and except in accordance with the terms and conditions herein provided, and the optionee shall agree to use best efforts to cause the officers of the Company to refuse to record on the books of the Company any assignment or transfer made or attempted to be made except as provided in the Plan and to cause said officers to refuse to cancel old certificates or to issue or deliver new certificates therefor where the purchaser or assignee has acquired certificates or the Shares represented thereby, except strictly in accordance with the provisions of the Plan. 14 10. EFFECTIVENESS OF THE PLAN ------------------------- The Plan shall become effective only upon approval by the Board of Directors. The grant of any options pursuant to the Plan shall be conditioned upon the registration of the Shares with the Securities and Exchange Commission and Qualification of the offer and sale of the Shares pursuant to the Plan with the Commissioner of Corporations of the State of California, unless in the opinion of counsel to the Company such registration or qualification is not necessary. 11. PRIVILEGES OF STOCK OWNERSHIP; SECURITIES LAW COMPLIANCE; NOTICE OF SALE ------------------------------------------------------------------------ No optionee shall be entitled to the privileges of stock ownership as to any Shares not actually issued and delivered to the optionee. No Shares shall be purchased upon the exercise of any option unless and until any applicable requirements of any regulatory agencies having jurisdiction, and of any exchanges upon which the Common Stock of the Company may be listed, shall have been satisfied. The Company shall diligently endeavor to comply with all applicable securities laws before any options are granted under the Plan and before any Shares are issued pursuant to the exercise of such options. The optionee shall give the Company notice of any sale or other disposition of any such Shares not more than five (5) days after such sale or other disposition. 12. INDEMNIFICATION --------------- The Company shall indemnify its "agents", as defined in Section 317 of the California Corporations Code, to the full extent permitted by Section 317, as amended from time to time, or as permitted by any successor statute to Section 317, and by the Company's Articles of Incorporation. 15 13. INFORMATION TO OPTIONEES ------------------------ The Company shall provide to each optionee during the period for which he or she has one or more options outstanding, copies of all annual reports and other information which are provided to all shareholders of the Company. The Company shall not be required to provide such information to directors or key employees whose duties in connection with the Company assure their access to equivalent information. 16 SERVICE 1st BANK 1999 INCENTIVE STOCK OPTION AGREEMENT ------------------------------------- Date of Grant: TO: We are pleased to notify you that Service 1st Bank (the "Company") this day hereby grants to you an option to purchase all or any part of __________ shares of the Common Stock of the Company (the "Shares") at the Option Price of ____________ per share (the "Option") as a Stock Option under the Company's 1999 Stock Option Plan (the "Plan"). THIS OPTION MAY BE EXERCISED ONLY IN ACCORDANCE WITH THE TERMS OF THE PLAN. ONLY CERTAIN PROVISIONS OF THE PLAN ARE SUMMARIZED IN THIS AGREEMENT. A COPY OF THE PLAN IS PROVIDED WITH THIS AGREEMENT. THIS OPTION MAY BE EXERCISED ONLY IF THE PLAN IS APPROVED BY SHAREHOLDERS HOLDING A MAJORITY OF THE ISSUED AND OUTSTANDING SHARES OF THE COMPANY. 1. Purpose of the Option. --------------------- One of the purposes of the Plan is to advance the interests of the Company by stimulating the efforts of officers and full-time salaried employees on behalf of the Company, by granting them financial participation in the progress and success of the Company. 2. Signature on Option Agreement. ----------------------------- This option cannot be exercised unless you first sign this document in the place provided and return it to the Secretary of the Company. If you fail to do so, this option will terminate and be of no effect. However, your signing and delivering this letter will not bind you to purchase any of the shares subject to this Option. Your obligation to purchase the Shares can arise only when you exercise this Option in the manner set forth in Paragraph 3 below. 3. Terms of Option and Exercise of Option. -------------------------------------- The aggregate fair market value (as determined at the time the option is granted) of the shares pursuant to this Agreement which are exercisable by you for the first time during any calendar year shall not exceed $100,000 under all stock option plans of the Company, its affiliates or any predecessor of any such corporation. Subject to the provisions of Paragraph 4 below and this Paragraph 3, this Option can be exercised by you at any time during a period of ____________ (______________) months from the granting date as follows: (a) After the expiration of ______________________ (___________) months from the granting date, this Option may be exercised to the extent of ________________percent (__________________%) of the Shares; (b) After the expiration of _____________(__________) months from the granting date, this Option may be exercised to the extent of an additional ___________ percent (______________%) of the Shares; (c) After the expiration of _____________(__________) months from the granting date, this Option may be exercised to the extent of an additional __________________ percent (___%) of the Shares; (d) After the expiration of__________________ (____) months from the granting date, this option may be exercised to the extent of an additional ___________percent(_____%) of the Shares. 2 (e) after the expiration of _____________(__________) months from the granting date, this Option may be exercised to the extent of an additional ___________________ percent (______________%) of the Shares. Any portion of the Option that you do not exercise shall accumulate and can be exercised by you any time prior to the expiration of _____________ (___________ ) months from the date of grant. This Option may be exercised by delivering to the Secretary of the Company payment in full at the Option Price for the number of Shares being purchased in either: (i) cash or by certified check or official bank check or the equivalent thereof acceptable to the Company; or (ii) shares of the Company's Common Stock with a fair market value on the date of exercise equal to the Option Price; or (iii) a combination of (i) and (ii) above; together with a written notice in a form satisfactory to the Company, signed by you specifying the number of Shares you then desire to purchase and the time of delivery thereof, which shall not be less than fifteen (15) days and not more than thirty (30) days after the giving of such notice unless an earlier or later date is mutually agreed upon. At such time the Company shall, without transfer or issue tax deliver to you (or such other person entitled to exercise the option) at the principal office of the Company, or such other place as shall be mutually acceptable, a certificate or certificates for such Shares dated the date the Options were validly exercised; provided, however, that the time of such delivery may be postponed by the Company for such period as may be required for it with reasonable diligence to comply with any requirements of law. No fractional Shares shall be issued or delivered. 3 As a holder of an Option, you shall have the rights of a shareholder with respect to the Shares subject to this Option only after such Shares shall have been issued to you upon the exercise of this option. 4. Termination of Office or Employment. ----------------------------------- If your status as an employee or officer of the Company or its Affiliates (as such term is defined in the Plan) is terminated for any reason other than death, disability or cause, this Option may be exercised within three (3) months from the date of such termination to the extent you were entitled to exercise the Option on the date of termination, but in no event may this Option be exercised after the expiration of the term of this Option. If, however, you are removed from your office or your employment with the Company or its Affiliates is terminated for cause as defined in the Plan, this Option shall expire thirty (30) days after the time notice or advice of such removal or termination is dispatched by the Company or its Affiliates and notwithstanding anything else herein to the contrary, neither you nor your estate shall be entitled to exercise any Option with respect to any Shares whatsoever after thirty (30) days following such removal or termination. 5. Death or Disability. ------------------- If you die or become disabled while an officer or employee of the Company or its Affiliates, the Option may be exercised in whole or in part by you or your qualified representative (in the event of your mental disability) or by the duly authorized executor of your Will or by the duly authorized administrator or special administrator of your estate (in the event of your death) within twelve (12) months from the date of your death or disability to the extent that you had the right to exercise this Option on the date of your death or disability, but in no event after the expiration of the term of this Option. 4 Disability shall be determined under Section 422 of the Code in effect at the date of such disability. Section 422 of the Code currently uses the definition of Section 22(e)(3) of the Code which states: "(3) PERMANENT AND TOTAL DISABILITY DEFINED -- An individual is permanently and totally disabled if he is 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. An individual shall not be considered to be permanently and totally disabled unless he furnishes proof of the existence thereof in such form and manner, and at such times, as the Secretary may require." 6. Nontransferability of Option. ---------------------------- This Option shall not be transferable except by Will or the laws of descent and distribution, and this Option may be exercised during your lifetime only by you. Any purported transfer or assignment of this Option shall be void and of no effect, and shall give the Company the right to terminate this Option as of the date of such purported transfer or assignment. 7. Adjustment of and Changes in the Shares. --------------------------------------- Notwithstanding the preceding provisions of this Option Agreement, upon receipt of notice from the Stock Option Committee or the Board of Directors of the pendency of dissolution or liquidation of the Company or a reorganization, merger, or consolidation of the Company with one or more corporations as a result of which the Company will not be the surviving corporation, or a sale of substantially all the assets and property of the Company to another person (a "Terminating Event"), this option shall be exercisable in full and not only as to those shares with respect to which installments, if any, have then accrued. Upon the date thirty (30) days after receipt of said notice, this option or any portion hereof not exercised shall terminate, unless provision shall be made in 5 connection with the Terminating Event for assumption of this Option or for substitution for this Option of new options covering stock of a successor employer corporation, or a parent or subsidiary corporation thereof, solely at the option of such successor corporation or parent or subsidiary corporation, with appropriate adjustments as to the number and kind of shares and prices. 8. Subject to Terms of the Plan. ---------------------------- This Agreement shall be subject in all respects to the terms and conditions of the Plan. Your signature herein represents your acknowledgement of receipt of a copy of the Plan. Any dispute or disagreement which shall arise under or as a result of or pursuant to this Agreement shall be finally and conclusively determined by the Board of Directors of the Company or duly appointed Committee in its sole discretion, and such determination shall be binding upon all parties. 9. Grant and Exercise of Option: Conditions. ---------------------------------------- The grant of this option is conditioned upon approval of the Plan by the shareholders of the Company, registration of the Shares with the Securities and Exchange Commission and qualification of the offer and sale of the Shares to be issued under the Plan by the Commissioner of Corporations of the State of California, unless in the opinion of counsel to the Company such registration or qualification is not necessary. 10. Tax Effects. ----------- THE FEDERAL TAX CONSEQUENCES OF EMPLOYEE STOCK OPTIONS ARE COMPLEX AND SUBJECT TO CHANGE. A TAXPAYER'S PARTICULAR SITUATION MAY BE SUCH THAT SOME VARIATION OF THE GENERAL RULE IS APPLICABLE. ACCORDINGLY, AN OPTIONEE (OR HIS GUARDIAN, ESTATE OR LEGATEE) SHOULD 6 CONSULT WITH HIS OWN TAX ADVISOR BEFORE EXERCISING ANY OPTION OR DISPOSING OF ANY SHARES ACQUIRED UPON THE EXERCISE OF AN OPTION. 11. Rights as a Shareholder. ----------------------- You have no rights as a shareholder of the Company with respect to any Shares until the date of the issuance of a stock certificate to you for such Shares. 12. Notification of Sales. --------------------- You agree that you, or any person acquiring Shares upon exercise of this Option, will notify the Company not more than five (5) days after any sale or disposition of such Shares. 13. Information to Optionees. ------------------------ The Company shall provide to you during the period for which you have one or more options outstanding copies of all annual reports and other information which are provided to all shareholders of the Company. The Company is not required to provide such information to key employees whose duties assure their access to equivalent information. 14. Tax Withholding. --------------- Where in the opinion of counsel to the Company it would be appropriate for the Company to withhold taxes relating to the exercise of any option, the Committee may in its discretion require that such tax obligation be satisfied in a manner satisfactory to the Company before shares deliverable pursuant to the exercise of such option are transferred to the optionee. The optionee may make an election to pay such tax by surrendering a sufficient number of previously issued Shares. The value of Shares surrendered shall be the fair market value of such Shares on the date the exercise becomes taxable. The election to withhold shares otherwise deliverable upon 7 exercise of the option, or to surrender previously issued Shares, shall be subject to the approval of the Committee and must be made pursuant to rules established by the Committee. Service 1st Bank By:______________________________________ Its:_____________________________________ Agreed to this ________day of ______, 19__. ______________________________________ Signature of Optionee SERVICE 1ST BANK 1999 NON-QUALIFIED STOCK OPTION AGREEMENT ---------------------- Date of Grant: TO: We are pleased to notify you that Service 1st Bank (the "Company") this day hereby grants to you an option to purchase all or any part of __________ shares of the Common Stock of the Company (the "Shares") at the Option Price of ________ per share (the "Option") as a Stock Option under the Company's 1999 Stock Option Plan (the "Plan"). THIS OPTION MAY BE EXERCISED ONLY IN ACCORDANCE WITH THE TERMS OF THE PLAN. ONLY CERTAIN PROVISIONS OF THE PLAN ARE SUMMARIZED IN THIS AGREEMENT. A COPY OF THE PLAN IS PROVIDED WITH THIS AGREEMENT. THIS OPTION MAY BE EXERCISED ONLY IF THE PLAN IS APPROVED BY SHAREHOLDERS HOLDING A MAJORITY OF THE ISSUED AND OUTSTANDING SHARES OF THE COMPANY. 1. Purpose of the Option. --------------------- One of the purposes of the Plan is to advance the interests of the Company by stimulating the efforts of officers, directors and full-time salaried employees on behalf of the Company, by granting them financial participation in the progress and success of the Company. 2. Signature on Option Agreement. ----------------------------- This option cannot be exercised unless you first sign this document in the place provided and return it to the Secretary of the Company. If you fail to do so, this option will terminate and be of no effect. However, your signing and delivering this letter will not bind you to purchase any of the shares subject to the option. Your obligation to purchase the Shares can arise only when you exercise this option in the manner set forth in Paragraph 3 below. 3. Terms of Option and Exercise of Option. -------------------------------------- Subject to the provisions of Paragraph 4 below and this Paragraph 3, this option can be exercised by you at any time during a period of __________________ (____) months from the granting date as follows: (a) After the expiration of__________________ (____) months from the granting date, this option may be exercised to the extent of not more than __________________ percent (_____________%) of the Shares. (b) After the expiration of__________________ (____) months from the granting date, this option may be exercised to the extent of an additional ________________percent (______%) of the shares. (c) After the expiration of_________________ (____)months from the granting date, this option may be exercised to the extent of an additional _______________ percent (_________%) of the Shares. 2 (d) After the expiration of__________________ (____) months from the granting date, this option may be exercised to the extent of an additional ___________percent(_____%) of the Shares. (e) After the expiration of__________________ (____) months from the granting date, this option may be exercised to the extent of an additional ___________ percent (______%) of the Shares. (f) After the expiration of__________________ (____) months from the granting date, this option may be exercised to the extent of an additional _____________ percent (___________%) of the Shares. Any portion of the options that you do not exercise shall accumulate and can be exercised by you any time prior to the expiration of________________ (___________) months from the granting date. This option may be exercised by delivering to the Secretary of the Company, payment in full at the Option Price for the number of Shares being purchased in either: (i) cash or by certified check or official bank check or the equivalent thereof acceptable to the Company; or (ii) shares of the Company's Common Stock with a fair market value on the date of exercise equal to the Option Price; or (iii) a combination of (i) and (ii) above; together with a written notice in a form satisfactory to the Company, signed by you specifying the number of Shares you then desire to purchase and the time of delivery thereof, which shall not be less than fifteen (15) days and not more than thirty (30) days after the giving of such notice unless an earlier or later date is mutually agreed upon. At such time, the Company shall, without transfer or issue tax to you (or such other person entitled to exercise the 3 option), deliver to you (or such other person entitled to exercise the option) at the principal office of the Company, or such other place as shall be mutually acceptable a certificate or certificates for such shares dated the date the options were validly exercised; provided, however, that the time of such delivery may be postponed by the Company for such period as may be required for it with reasonable diligence to comply with any requirements of law. No fractional shares shall be issued or delivered. As a holder of an option, you shall have the rights of a shareholder with respect to the Shares subject to this option only after such Shares shall have been issued to you upon the exercise of this option. 4. Termination of Officer or Director Status or Employment. ------------------------------------------------------- If your status as an employee, director or officer of the Company or its Affiliates (as such term is defined in the Plan) is terminated for any reason other than death, disability or cause, this option may be exercised within three (3) months from the date of such termination to the extent you were entitled to exercise the option on the date of termination, but in no event may this option be exercised after the expiration of the term of this option. If, however, you are removed from your office as an officer or director or your employment with the Company or its Affiliate is terminated for cause as defined in the Plan, this option shall expire thirty (30) days after the time notice or advice of such removal or termination is dispatched by the Company or its Affiliates, or in the instance of a non-employee director at the time of any removal proceeding by any appropriate bank regulatory agency or by judicial process and notwithstanding anything else herein to the contrary, neither you nor your estate shall be entitled to exercise any option with respect to any Shares whatsoever after thirty (30) days following such removal or termination. 4 5. Death or Disability. ------------------- If you die or become disabled while an officer, director or employee of the Company or its Affiliates, the option may be exercised in whole or in part by you or your qualified representative (in the event of your mental disability) or by the duly authorized executor of your Will or by the duly authorized administrator or special administrator of your estate (in the event of your death) within twelve (12) months from the date of your death or disability to the extent that you had the right to exercise this option on the date of your death or disability, but in no event after the expiration of the term of this option. Disability shall be determined under Section 422 of the Code in effect at the date of such disability. Section 422 of the Code currently uses the definition of Section 22(e)(3) of the Code which states: "(3) PERMANENT AND TOTAL DISABILITY DEFINED -- An individual is permanently and totally disabled if he is 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. An individual shall not be considered to be permanently and totally disabled unless he furnishes proof of the existence thereof in such form and manner, and at such times, as the Secretary may require." 5 6. Nontransferability of Option. ---------------------------- This option shall not be transferable except by Will or the laws of descent and distribution, and this option may be exercised during your lifetime only by you. Any purported transfer or assignment of this option shall be void and of no effect, and shall give the Company the right to terminate this option as of the date of such purported transfer or assignment. 7. Adjustment of and Changes in the Shares. --------------------------------------- Notwithstanding the preceding provisions of this option agreement, upon receipt of notice from the Stock Option Committee or the Board of Directors of the pendency of dissolution or liquidation of the Company or a reorganization, merger, or consolidation of the Company with one or more corporations as a result of which the Company will not be the surviving corporation, or a sale of substantially all the assets and property of the Company to another person (a "Terminating Event"), this option shall be exercisable in full and not only as to those shares with respect to which installments, if any, have then accrued. Upon the date thirty (30) days after receipt of said notice, this option or any portion hereof not exercised shall terminate, unless provision shall be made in connection with the Terminating Event for assumption of this option or for substitution for this option of new options covering stock of a successor employer corporation, or a parent or subsidiary corporation thereof, solely at the option of such successor corporation or parent or subsidiary corporation, with appropriate adjustments as to the number and kind of shares and prices. 6 8. Subject to Terms of the Plan. ---------------------------- This Agreement shall be subject in all respects to the terms and conditions of the Plan. Your signature herein represents your acknowledgment of receipt of a copy of the Plan. Any dispute or disagreement which shall arise under or as a result of or pursuant to this agreement shall be finally and conclusively determined by the Board of Directors of the Company or duly appointed Committee in its sole discretion, and such determination shall be binding upon all parties. 9. Grant and Exercise of Option: Conditions. ---------------------------------------- The grant of this option is conditioned upon approval of the Plan by the shareholders of the Company, registration of the Shares with the Securities and Exchange Commission and qualification of the offer and sale of the Shares to be issued under the Plan by the Commissioner of Corporations of the State of California, unless in the opinion of counsel to the Company such registration or qualification is not necessary. 10. Tax Effects. ----------- THE FEDERAL TAX CONSEQUENCES OF EMPLOYEE OR DIRECTOR STOCK OPTIONS ARE COMPLEX AND SUBJECT TO CHANGE. A TAXPAYER'S PARTICULAR SITUATION MAY BE SUCH THAT SOME VARIATION OF THE GENERAL RULE IS APPLICABLE. ACCORDINGLY, AN OPTIONEE (OR HIS GUARDIAN, ESTATE OR LEGATEE) SHOULD CONSULT WITH HIS OWN TAX ADVISOR BEFORE EXERCISING 7 ANY OPTION OR DISPOSING OF ANY SHARES ACQUIRED UPON THE EXERCISE OF AN OPTION. 11. Rights as a Shareholder. ----------------------- You have no rights as a shareholder of the Company with respect to any Shares until the date of the issuance of a stock certificate to you for such Shares. 12. Notification of Sales. --------------------- You agree that you, or any person acquiring Shares upon exercise of this Option, will notify the Company not more than five (5) days after any sale or disposition of such Shares. 13. Information to Optionees. ------------------------ The Company shall provide to you during the period for which you have one or more options outstanding copies of all annual reports and other information which are provided to all shareholders of the Company. The Company is not required to provide such information to key employees whose duties assure their access to equivalent information. 14. Tax Withholding. --------------- Where in the opinion of counsel to the Company it would be appropriate for the Company to withhold taxes relating to the exercise of any option, the Committee may in its discretion require that such tax obligation be satisfied in a manner satisfactory to the Company before shares deliverable pursuant to the exercise of such option are transferred to the optionee. The optionee may make an election to pay such tax by surrendering a sufficient number of previously 8 issued Shares. The value of Shares surrendered shall be the fair market value of such Shares on the date the exercise becomes taxable. The election to withhold shares otherwise deliverable upon exercise of the option, or to surrender previously issued Shares, shall be subject to the approval of the Committee and must be made pursuant to rules established by the Committee. Service 1st Bank By:______________________________________ Its:_____________________________________ Agreed to this ___day of __________, 19______. ___________________________________ Signature of Optionee 9 EX-10.4 11 ex10_4.txt EXHIBIT 10.4 EXHIBIT 10.4 SERVICE BUREAU DATA PROCESSING AGREEMENT THIS AGREEMENT is made as of July 27, 1999 by and between BancData Solutions, Inc. ("Servicer"), a corporation duly organized and existing under the laws of the State of California, Service 1st Bank in Organization ("Customer"), duly organized and existing under the laws of the State of California. The parties hereto, in consideration of the obligations herein made and undertaken, and intending to be legally bound, hereby agree as follows: 1.0 Term ---- Subject to the provisions of Section 12 hereof, the initial term shall be five (5) years. This Agreement shall automatically renew for successive one- (1) year terms unless either party notifies the other of intent not to renew within six (6) months before the end of any term. In the event that the formation of the new bank does not occur, then the organizers shall be responsible for only the expenses incurred by the Servicer on behalf of the Customer. 2.0 Services -------- Servicer shall provide nightly processing of daily work. Which shall include item processing, statement rendering, NSF/Unposteds, TRW Reporting and Year-End Reporting. The following Servicer's programs shall be utilized to process customer's source data, JHA CIF 20/20(R). Servicer and Customer may agree from time to time on additional or auxiliary data processing services, and upon the terms and conditions under which such services shall be provided. Servicer shall support the Customer five (5) business days per week, 8 a.m. to 5 p.m. Pacific Time, with emergency support when necessary. On-line system will be available seven (7) days a week, 7 a.m. to 8 p.m. 3.0 Processing Schedule ------------------- Servicer will process Customer's work five (5) business days a week. Servicer acknowledges that prompt performance of Customer's work is necessary to meet Customer's internal operating requirements, but Servicer shall not be responsible for delays attributable to causes beyond its reasonable control, including limitations upon the availability of telephone transmission facilities or failures of other communications equipment or failure of Customer to prepare data properly for input into equipment of Servicer. 4.0 Fees and Taxes -------------- During the first year of the term, Servicer will charge and Customer will pay a flat monthly fee in the first year of $ 1,800.00 for data processing services and then pay the fees and taxes as set forth in Schedule "A", attached hereto, in all following years. Servicer will charge and Customer will pay, for item processing services, the fees and taxes as set forth in Schedule "A", attached hereto. Thereafter, Servicer will adjust the fees annually provided however, that no per unit cost will be increased by more than five percent (5%) from the schedule in effect immediately prior to such increase. Any adjustment of the fee schedule must be available for review by the Customer at least ninety (90) days prior to its effective date 5.0 Backup Services --------------- Servicer shall maintain adequate backup arrangements and equipment in order to maintain services hereunder in the event of the failure of Servicer's equipment. 6.0 Ownership of Programs and Data ------------------------------ All systems, programs, modules and the like shall be and remain the property of Servicer. All source data and results shall remain the property of Customer. Upon termination of this Agreement, all of Customer's source data and results shall be returned to Customer upon Customers payment to Servicer of a reasonable fee to cover such final servicing and all past due fees. 1 /s/ GB /s/ JN ---------------- 7.0 Delivery of Data ---------------- Servicer may refuse to process, and may return to Customer, any source data, records, or input data that in Servicer's opinion: (1) are not of a quality or condition suitable for processing, (2) do not comply with Servicer's applicable standards and procedures; or (3) are otherwise not in proper form. Customer will be responsible for correcting rejected data and submitting the same for reentry. 8.0 User Training Supplied ---------------------- Servicer will supply such instruction as may be reasonably needed to enable the Customer to supply input and to utilize output of the services contracted for thereunder. The first ten- (10) days of training shall be supplied without charge. Instruction in excess of the first ten (10) days may be charged for at a rate to be agreed upon between Servicer and Customer. 9.0 Conversion ---------- If necessary, Servicer's vendor, Jack Henry & Associates, Inc. ("JHA") shall convert Customer's data files to Servicer's system. Customer shall provide all necessary assistance. 10.0 File Confidentiality -------------------- Customer views the data information and records relating to its business and the data information records and accounts of its customers as "confidential information." Servicer views all data information and records relating to its customers, its provision of services under this Agreement and its training of customer's personnel as confidential information. The parties agree, both during the term of this Agreement and for a period of ten (10) years after termination of this Agreement, to hold each other's confidential information in confidence. The parties agree not to make each others confidential information available in any form to any third party or to use each other's confidential information for any purpose other than the implementation of this Agreement. Should either party receive a subpoena or similar judicial or governmental order or request seeking confidential information belonging or pertaining to the other party, notice of such subpoena or order shall be given immediately to the other party so as to afford reasonable opportunity to seek a protective order or such other relief as may be deemed appropriate by the party in interest. Each party agrees to take all reasonable steps to ensure that confidential information is not disclosed or distributed by its employees or agents in violation of the provision of this Agreement. 11.0 Audits and Governmental Examination ----------------------------------- Servicer agrees to permit and cooperate with auditors retained by Customer to audit the procedures for handling and processing of data hereunder upon reasonable notice and compliance with Servicer's security procedures. The parties also acknowledge that certain federal and state agencies may require access to facilities of Servicer to audit the performance of the services by Servicer for Customer under this Agreement, and Servicer will cooperate and comply with respect to all such audits. In connection therewith, Servicer agrees to be subject to the rules, regulations, guidelines and examinations by the federal and state agencies and to maintain software in compliance with California and federal bank regulatory requirements. Servicer agrees to engage a certified public accounting firm annually to perform a third party review of controls within Servicer's computer center, in general, and with respect to the servicing provided to Customer, in particular, all in accordance with applicable American Institute of Certified Public Accountants guidelines. Servicer will notify Customer of the accountant so selected and will provide Customer with a copy of said review. Servicer will promptly correct any material deficiency in its controls as noted in the course of the annual reviews. 2 /s/ GB /s/ JN ---------------- 12.0 Termination ----------- 12.1 Termination for Non-Payment - In the event that Customer fails to pay any fees properly invoiced to Customer by Servicer within forty-five (45) days after Customer's receipt of Servicer's invoice therefore Servicer, in its discretion, may terminate this Agreement upon notice to Customer. 12.2 Termination on Notice - At any time after six (6) months from the date of this Agreement, Customer may terminate this Agreement upon ninety (90) days prior written notice to Servicer. 12.3 Termination Fee - In the event either Servicer or Customer terminates this Agreement pursuant to Section 12.1 or Section 12.2, Customer shall pay to Servicer, in addition to any other amounts due thereunder an early termination fee equal to the fees paid or accrued by Customer during the six (6) month period prior to the giving of notice. The early termination fee is the parties' reasonable pre-estimate of Servicer's probable loss from such early termination and represents a reasonable endeavor by the parties to estimate foreseeable losses that might result from such early termination and provides for the payment of such amounts as liquidated damages in the event of such early termination. 13.0 Duty and Care and Limitation of Liability ----------------------------------------- 13.1 Limitation of Liability - Except as otherwise stated in this Agreement and subject to the limitation of remedies set forth in Section 13.2, Servicer shall be liable to Customer only for Servicer's intentional misconduct for services that are materially varying from industry standard. Servicer shall not be responsible for any loss arising, directly or indirectly, in whole or in part, from: (a) any act or failure to act on the part of any person not within Servicer's reasonable control, (b) the negligence of Customer or the breach of this Agreement by Customer, (c) any ambiguity or inaccuracy in any instruction given to the Servicer by Customer or Customer's agent, or (d) from any error, failure or delay in transmission or delivery of any data, records, or items, including without limitation, any inoperability of computer or communications facilities, or other circumstances beyond Servicer's reasonable control. 13.2 Limitation of Remedy - Subject to the limitations on liability set forth in Sections 13.1 and 17.0, the liability of Servicer under this Agreement and the remedies of Customer shall be limited to: (a) Reprocessing at no additional charge to Customer in order to correct any processing errors attributable solely to Servicer; and (b) Indemnification of Customer against actual costs and actual losses directly resulting from errors in performance of the services attributable solely to Servicer's willful misconduct or actual damages, whichever is higher, provided that Customer has notified Servicer in writing of the error in a reasonable time after the error was made, and provided further, however, that such indemnification for all damages arising out this Agreement, whether special, general, consequential or exemplary, shall be limited to an aggregate amount not exceeding twelve (12) times the monthly average of all charges invoiced to Customer during the term of this Agreement with any amount previously paid to Customer pursuant to this Section 13.2(b) being deducted from the aggregate maximum. Customer expressly waives and releases any claim that it may otherwise have against Servicer in excess of such amounts provided for pursuant to this Section. 13.3 Limitation of Losses - Customer shall adopt such measures as it deems appropriate to limit its exposure and risk with respect to such potential losses and damages including (without limitation) examination and confirmation of results prior to use thereof, provision for identification and correction of errors and omissions, preparation and storage of backup data, replacement of lost or mutilated documents, and reconstruction of data. 3 /s/ GB /s/ JN ---------------- 14.0 Insurance --------- Servicer will carry such insurance as is ordinary and customary for similar types of business including employee fidelity coverage and physical loss coverage insuring Customer's records while in Servicer's possession. If Servicer elects to fulfill the terms of this Agreement through contracting with a third party. Servicer will require that third party have sufficient bonding and insurance coverage to protect Customer to a similar level, as if Servicer was providing the service. 15.0 Indemnity --------- (a) Except to the extent prohibited or limited by law, Customer shall defend, indemnify and hold harmless the Servicer against any and all losses, claims, damages, liabilities, actions, costs or expenses, including reasonable attorneys' fees incurred by it in connection with any claim against it and defending any action (collectively "Losses"), for which the Servicer may become liable and which arise out of or are based upon any act or omission to act by any officer or employee of Customer. (b) Except to the extent prohibited or limited by law, the Servicer shall defend, indemnify and hold harmless Customer from and against any and all losses, claims, damages, liabilities, actions, costs or expenses, including reasonable attorneys' fees incurred by it in connection with any claim against it and defending any action (collectively "Losses"), for which Customer may become liable and which arise out of or are based upon any act or omission to act by any officer or employee of Servicer. (c) The indemnified party shall cooperate in all reasonable respects with the indemnifying party and its attorneys in any investigation, trial and defense relating to a Claim and any appeal arising therefrom; provided, however, that the indemnified party may, at its own costs, participate in the investigation, trial and defense of such claim and any appeal arising therefrom. (d) The rights of the parties to indemnification provided for in this Section 15 shall survive the termination of this Agreement. 16.0 Binding Nature and Assignment ----------------------------- This Agreement shall be binding on parties hereto and their successors and assigns, but neither party may assign this Agreement without the prior written consent of the other, which consent shall not be unreasonably withheld. 17.0 Force Majeure ------------- Servicer shall be excused from performance hereunder for any period Servicer is prevented from performing any services pursuant hereto, in whole or in part, as a result of an Act of God, war, civil disturbance, court order, labor dispute or other cause beyond its reasonable control, including shortages or fluctuations in electric power, heat, light or air conditioning. 18.0 Adherence to License Agreement ------------------------------ Customer acknowledges that Servicer is a party to that certain License Agreement dated January 29, 1996 between JHA and Servicer, a copy of which is attached hereto as Schedule "B". Customer agrees that, to the extent applicable, Customer will conform to, abide by and be governed and bound by the terms of the License Agreement. Should said License Agreement be amended in the future, Servicer will furnish a copy of such amendment to Customer and Customer agrees to be bound by and conform to the terms thereof. Customer acknowledges that under the terms of the License Agreement, JHA may be entitled to significant damages, and other remedies, in the event that software or other property of JHA is copied, misused or transmitted to any unauthorized party. Customer undertakes to maintain the confidentiality of, and control over, any JHA software or other property, which may come into Customer's custody or control. 4 /s/ GB /s/ JN ---------------- 19.0 Entire Agreement ---------------- This Agreement, together with each Schedule annexed hereto, constitutes the entire agreement between the parties. There are no understandings or agreements relative hereto which are not fully expressed herein and no change, waiver or discharge hereof shall be valid unless in writing and executed by the party against whom such change, waiver or discharge is sought to be enforced. This Agreement supersedes any and all previous agreements relating to data processing services entered into between the parties. 20.0 Governing Law ------------- This Agreement shall be governed by and construed in accordance with the laws of the State of California. 21.0 Binding Arbitration ------------------- Any controversy arising out of or relating to this Agreement or the transactions contemplated hereby shall be referred to arbitration pursuant to the provisions of California Code of Civil Procedure Section 638 et. seq. 22.0 Y2K Compliance -------------- BancData Solutions' products and services will be Year 2000 compliant. Based upon Jack Henry & Associates representation, the CIF20/20 core product is currently Year 2000 compliant. 23.0 Acquisition of Servicer ----------------------- If within the initial term of the contract and Servicer has a change in control of over 75% of its existing shares: the client has the right to terminate the contract if the acquiring institution does not continues to support JHA CIF20/20. BancData Solutions, Inc. ("Servicer") ("Customer") By: /s/ [illegible] By: /s/ [illegible] --------------------------- ----------------------------- Its: President / CEO Its: SVP / CFO -------------------------- ----------------------------- 5 /s/ GB /s/ JN ---------------- EX-10.5 12 ex10_5.txt EXHIBIT 10.5 EXHIBIT 10.5 Financial Marketing Services Marketing, Promotions & Advertising Agreement Limited Engagement Based on presentations to the Board of Directors and the Marketing Committee during November 1999 and subsequent discussion during the week of December 20th with the Marketing Committee and Senior Management, Financial Marketing Services is prepared to work with the bank in developing and implementing its marketing programs as highlighted in the year 2000 Marketing Campaign and Strategic Recommendation workbook. As a precursor to refinement and implementation of the banks marketing plan, Financial Marketing Services recommends the Board of Directors, Senior Management, and another staff member with client services as part of their job description attend a half day strategic focus and tactical implementation hosted by Financial Marketing Services and facilitated by Robert Steiner. It is important that the bank define its quality service imperative and develop a clear understanding of what is expected of the Director Group and Management to support these objectives. While on the surface it may seem elementary; it is more complicated than it appears to clearly and effectively, define the issues surrounding Delivering Quality Service. We would suggest that before any campaign is launched that the bank address and reach consensus regarding the questions (and the sub-sets that develop) listed below: o How do we define Quality Service? o What actions, products and services support it? o How are you going to deliver it? o Who is going to deliver it? o What are the barriers to delivery? o What will it take (in resources) to deliver it? o How will you know when you have delivered it? o How will you track the results? o What will you do with data collected? o What is the role of: o The collective board? o The individual director? o The officers? o The staff? 2 I: The Chairman's Circle & Founder's Starter Kit - ------------------------------------------------ As discussed and outlined on page 19 of the Marketing Workbook Financial Marketing Services will begin development and fabrication of these items in support of the Chairman's Circle & Founder Appreciation evening to include: o 100 Laminated name, luggage tags/ (101) Business cards @ $10.00 per set, must be produced together $ 1,010.00 o 100 Lucite prospectus cubes @ $24.65 each $ 2,465.00 o 200 embroidered polo shirts @ $27.50 each(1) $ 5,500.00 Available in black & red o 300 Product brochure/ 100 for promotion & 100 for each branch @ $.36 each $ 108.00 o 100 Thank you cards @ $.12 each $ 12.00 o 100 Invitation letters @ $.15 each $ 15.00 o 100 Bank resource CDs @ $7.25 each $ 725.00 o Chairman's Circle & Founder's Private Reserve wines(2) 50 Merlot @ $13.99 each $ 699.50 o 50 Chardonnay @ $9.99 each $ 499.50(3) o 100 Mousepads / 4 color process @ $8.96 each (4) $ 896.00 o 100 Box / Packaging @ $5.50 each $ 550.00 -------------------------------------------------------------------- Subtotal of items $12,480.00 Design, production and assembly $ 6,347.00 ----------- Total $ 18,827.00 - --------------------- (1) Each shirt ordered over 100 receives a $3.00 earned discount per shirt (2) May be deleted by marketing committee (3) If you want each participant to have one bottle of each, double the cost (4) Order extras now for internet banking introduction, pricing is better in larger quantities 3 II. Developing the Central Creative Visual Thematic - --------------------------------------------------- While many of the marketing items outlined herein are promotionally driven or very specific in style, shape, or concept, their needs to be one central creative visual thematic. This type of creative theme is used to support the look and feel of the banks image within its marketplace through its marketing communication materials and message. In part, the bank began the process during the organizational phase with one contract contact and service you deserve answers you can depend on. (One slogan provided by the bank and one by Bankmark) To roll out or introduce the bank within its marketplace develop continuity and tie ins with all the promotional aspects of this years marketing efforts we must begin developing the central creative visual thematic now. These materials will be used in: a) Announcements to open Bank b) The Banks' "product brochures" c) In Banks' lobby and wall displays d) Announcements for business symposiums e) Product advertising f) Web based marketing g) Communications to shareholders h) Specific promotions to the Chairman's Circle and Founder's Groups The development process begins with Financial Marketing Services presenting several visual directions as a place to start the Management and Marketing Committee (after tight campaigns are completed.) In this process bank management works with Financial Marketing Services to develop copy points and direction that supports each visual thematic. Example: by the time the group has completed its strategic session on Service Quality much of key message points will have filtered out of this session. These will be considered and developed during this stage of the creative process. Larger institutions must often develop creative materials as needed so each message has its own unique creative "look". Small banks cannot afford to follow this process as each time the bank goes to the creative think tank money and time are spent unnecessarily. The fee to develop the central creative thematic is................... $8,000.00 4 III: Grand Opening Process - -------------------------- Financial Marketing Services will work with the Bank to develop Grand Opening concepts that 1) announce the bank to it's respective community 2) cater to and create a special appreciation to all shareholders 3) make sure the Grand Opening process, programs and materials are in support of other marketing programs and campaigns. The cost categories are only an estimate or guide. Their refinement will come as the plan is developed agreed to and implemented. Cost categories: a) Newspaper ads $6,500.00 b) Mailings, print & postage $2,500.00 c) Entertainment, food, beverages & event $8,000.00 Estimated total..................................$17,000.00 IV. General Awareness and Niche Promotional Marketing Programs - -------------------------------------------------------------- During the next 12 months, it will be necessary for the bank to implement on a periodic basis two other distinct forms of direct marketing. a) A general awareness- we are here, we have opened or used to support grand opening. Local Spin Tabloid Insert Design, copy, art production.................................... $3,700.00 Printing 80K $2,800.00 200K $2,479.00 Insertion 80K $3,160.00 200K $8,400.00 Estimated total for 80K $9,960.00* Estimated total for 200K $14,579.00* Thus, total cost is based on the number of pieces chosen. All printing done outside of Financial Marketing Services will need to be re-quoted at the time of the work. This is to allow for an exact quote based on the final artwork and quantity to be produced. The bank will also need to implement ongoing niche marketing promotional materials and smaller events breakfast and luncheons which are hosted by the bank and sponsored by Chairman Circle members, Founders, and Key Customers. b) Niche promotional programs and mailings. o Fortune Cookie General Promotion - Business to Business (500 Units) $3,800.00 5 o Right Tool for your Financial needs or Technology Banking Services Package $4,200.00 o Universal Tool $1,800.00 o Maglite or equivalent promotional item $1,800.00 Public relations and account management will be the primary responsibility of Financial Marketing Services with field support provided by Judith Buethe. The Banks primary account team will be: Dan Hudson - Strategic Direction, Creative Direction Robbie Shelton - SR Account Representative, Bankmark and FMS Jennifer Cisco - Production Manager Judith Buethe - Public Relations Account Manager Stacey Conti - Systems Administrator As an example of how the client/project support service will work: o The day to day project implementation from the clients prospective should be with Bryan Hyzdu. Joann Waters, Robbie Shelton and Judith Buethe providing support through timely updates and client meetings. o Status reports or questions involving delivery, media insertions, mailing, etc. should be with Jennifer Cisco or Robbie Shelton. o Public relations and community issues Judith Buethe, Robbie Shelton or Dan Hudson. o Technical support for systems supporting the project, web page or virtual community, Stacy Conti or Dan Hudson. o Project accounting and reconciliation, Jennifer Cisco or Dan Hudson. The marketing committee, SR management client contact representative and Dan Hudson will be responsible for strategic direction, project performance and evaluation, issues if any, contractual obligations. Outside of the marketing committee these responsibilities are handled by Hyzdu and Hudson. V: Initiating Work: - ------------------- o Initiating work by both parties to support the implementation of this contract will begin with Financial Marketing Services providing the banks SR management/client contact person with a written work order detailing the work to be performed, a specific timeline for development, review and input, approvals, edits, production or fabrication time. The work order will also specify quantities of items or materials to be produced. The dates for delivery and specifics for shipping. o As each component of the plan is implemented, Financial Marketing Services will again review and refine the strategy or assumptions that were initially developed. These elements will be restated in a supporting summary document with the work 6 order. This review process allows the bank and Financial Marketing Services to finalize each segment of the marketing plan before creative development and implementation. With each meeting between the bank and Financial Marketing Services the Financial Marketing Services representative upon completion of the meeting will generate a conference report. This report outlines who was in attendance representing each organization, what the general discussions were, and what course of action was agreed to be taken by each organization. o At the end of each 30 days the account representative will provide the SR management/bank representative with a summary report of work completed, work in progress, or pending action to be taken by the bank, Financial Marketing Services, or other outside organizations or individuals. o Once a quarter Financial Marketing Services will present to the marketing committee a review of work completed, new creative materials, discussion of what the bank or directors may do to enhance the marketing programs and addresses any general issues or questions the marketing committee may have. This forum allows Financial Marketing Services/Bankmark to present other industry issues or trends that the marketing committee may need to consider for Service 1st Bank. o Every six months Financial Marketing Services/Bankmark will present to the full board a discussion paper issues and insight presentation evaluating the Banks marketing efforts, the market place, competitive issues and a summary discussion of trends within the banking industry. o As you can see, the steps and stages are built into the marketing agreement to assure the best lines of communication, monitoring, discussion, and performance review. o The public relations component of the marketing program will be managed jointly with Bryan Hyzdu, Judith Buethe, Dan Hudson and Robbie Shelton. Any press releases or copy generated by FMS/Judith Buethe will be approved by signature of Bryan Hyzdu prior to release. VI: Account service - ------------------- Monthly retainer for the first 6 months of $2,250.00 for a total of $13,500.00. After the first 6 months the Bank converts to $65.00 per hour with each months time being estimated prior to the work being initiated. Financial Marketing Services and the Bank representative must agree to each monthly estimate in advance. This fee covers the account service time for Judith Buethe and Robbie Shelton. All the other service cost and staff time are included in the items to be produced. It is my belief that 75% of the time necessary to set the account up and implement the programs herein will occur in the first 6 months, after that the cost should be minimal, unless the bank 7 implements other projects. It is also easier to set the Banks in house person up during the first 6 months to handle much of the day to day implementation. Additional Terms of the Contract: - --------------------------------- o It is understood that final applicable sales tax for mugs, lapel pins, coffee, etc., will be billed upon final receipt of items by Financial Marketing Services. Any shipping costs for products are paid by the bank. Shipping will be Ground UPS insured. o Any earned discount for items purchased in quantity or media will be passed through to Service 1st Bank at the earned discount rate. o Issues and conflicts. Should a conflict arise between the 2 organizations, each must notify the other in writing as to the issues and recommendations for resolution. Each organization must notify the other within 10 days in writing regarding these issues. The organization needing to respond to these issues must do so within 15 days in writing. It is agreed that both organizations will then meet within 10 days face to face for final resolution to be documented in writing. o The parties agree that the Bank or Financial marketing Services may require that any controversy or claim arising out of or relating to this Agreement, or the breach thereof, will be settled by arbitration in accordance with the Rules of the American Arbitration Association in effect at the time that the controversy or claim arises, and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The forum for any such arbitration proceeding shall be at the nearest local office at the Judicial Arbitration Mediation Service. o Should any legal action or arbitration proceeding be brought in connection with any provisions of this Agreement, or to collect damages for either the breach of any term of this Agreement or false representation or warranty given in connection with this Agreement, the prevailing party shall be entitled to recover all reasonable attorney fees, and costs and expenses actually incurred in such action or proceeding. o All rights of reproduction shall remain solely with Financial Marketing Services unless specially agreed to otherwise in writing. Service 1st Bank understands it is licensing the right to use the marketing materials described herein. o Any additional work performed, at the request of the Bank, on this contract will be paid for at cost unless agreed to otherwise. o At the request of the Bank, any costs for changes in script, after approval, will be borne by the bank at cost. o At the request of the Bank, any costs incurred due to changes, after the approval of any phase of this production, shall be borne by the bank. 8 o On multiple contracts simultaneously produced, it is the right of Financial Marketing Services to cease work on any and all projects contingent on fulfillment of payment schedule of any contract. Any other work begun during the time of this Agreement but not specified in writing shall be protected by this contract's terms and conditions. o Payment of invoices. All invoices will be referenced to the work orders for the work to be produced. Invoices as deposits, work in progress, or work completed will be paid net 15 days. Again, all costs associated with shipping, sales tax, or changes specified by the client will be bore by the client. The Parties have executed this Agreement to be effective as of 2/1/2000 (the "Start Date"). Financial Marketing Services Service 1st Bank /s/ DAN HUDSON /s/ BRYAN HYZDU - ------------------------------- -------------------------------- Dan Hudson, President & CEO Representative 9 EX-10.6 13 ex10_6.txt EXHIBIT 10.6 EXHIBIT 10.6 - -------------------------------------------------------------------------------- SERVICE 1ST BANK 401(K) PROFIT SHARING PLAN AND TRUST SUMMARY PLAN DESCRIPTION - -------------------------------------------------------------------------------- Effective: January 1, 2000 Summary Plan Description Table of Contents ARTICLE DESCRIPTION PAGE I INTRODUCTION 1 II GENERAL INFORMATION ABOUT THE PLAN 2 III PARTICIPATION IN YOUR PLAN 3 IV EMPLOYEE CONTRIBUTIONS 5 V EMPLOYERS CONTRIBUTIONS 7 VI VESTING 9 VII SERVICE RULES 10 VIII COMPENSATION 11 IX PARTICIPANTS' ACCOUNTS 12 X DISTRIBUTIONS AND BENEFITS UNDER YOUR PLAN 14 XI BENEFIT PAYMENT OPTIONS 17 XII TOP-HEAVY RULES 18 XIII PARTICIPANT LOAN PROGRAM 19 XIV MISCELLANEOUS 22 XV STATEMENT OF ERISA RIGHTS 24 --------------------------------------------------- Article I INTRODUCTION --------------------------------------------------- In order to recognize the hard work and good efforts of its employees, your Employer, SERVICE 1ST BANK, (the "Employer") has established the SERVICE 1ST BANK 401(K) PROFIT SHARING PLAN AND TRUST (the "Plan"), effective January 1, 2000, for the exclusive benefit of all eligible employees and their beneficiaries. The Plan allows eligible employees to defer part of their income on a tax-favored basis into the Plan. The contributions which you make to the Plan as 401(k) salary deferrals are also called "salary reduction" contributions because your current taxable income is reduced for every dollar you deposit into the Plan. Also, the money in the Plan grows tax free until your retirement. However, you must pay taxes when the money is paid out, unless it is transferred to another retirement plan or an IRA. You may also be eligible for benefits in the event of your death, total disability or other termination of your employment with the Employer. This Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). This Summary Plan Description is a brief description of your Plan and your rights and benefits under the Plan. This Summary Plan Description is not meant to interpret or change the provisions of your Plan. A copy of your Plan is on file at your Employer's office and may be read by you, your beneficiaries, or your legal representatives at any reasonable time. If you have any questions regarding either your Plan or this Summary Plan Description, you should ask your Plan Administrator. If any discrepancies exist between this Summary Plan Description and the actual provisions of the Plan, the Plan shall govern. -1- --------------------------------------------------- Article II GENERAL INFORMATION ABOUT YOUR PLAN --------------------------------------------------- Plan Name: SERVICE 1ST BANK 401(K) PROFIT SHARING PLAN AND TRUST Employer: SERVICE 1ST BANK 60 W. 10TH STREET TRACY, CA 95376 209 820-7923 Employer I.D. No: 68-0434040 Plan Number: 001 Type of Plan: Cash or Deferred Arrangement (401(k) Plan) Administration Type: Self-Administered Plan Administrator: SERVICE 1ST BANK 60 W. 10TH STREET TRACY, CA 95376 209 820-7923 Legal Agent: SERVICE 1ST BANK 60 W. 10TH STREET TRACY, CA 95376 209 820-7923 (Legal Process may also be served on the Trustee or Plan Administrator.) Trustees: GARY BURNS JEAN STEBBINS BRYAN HYZDU PATRICK CARMAN Trustees Address: 60 W. 10TH STREET TRACY, CA 95376 209 820-7923 Funding Arrangement: Trust Plan Year: January 1st to December 31st Limitation Year: January 1st to December 31st Anniversary Date: December 31st -2- --------------------------------------------------- Article III PARTICIPATION IN YOUR PLAN --------------------------------------------------- Before you become a Participant in the Plan, there are certain eligibility and participation requirements which you must meet. These requirements are explained in this section. Eligible Employees: All of your Employer's employees are considered Eligible Employees and may participate in the Plan, once they meet the Eligibility and Participation Requirements, except members of a collective bargaining unit whose retirement benefits were the subject of a collective bargaining agreement that is in full force and effect, and non-resident aliens with no U.S. source of income. Eligibility Requirements: In order to be eligible for discretionary Employer contributions, you must have attained age 18 and have completed 1,000 Hours of Service. If you were employed on October 1st, 2000, you are eligible for discretionary contributions whether or not you meet the other requirements. To be eligible to enroll in the salary reduction portion of the Plan you must have attained age 18 and be credited with 1,000 Hours of Service. However, if you were employed on October 1st, 2000, you are eligible to make salary reduction contributions to the Plan whether or not you meet the other requirements. In order to be eligible for matching contributions, you must be making 401(k) contributions to the Plan. You must also have attained age 18 and be credited with 1,000 Hours of Service. However, if you were employed on October 1st, 2000 and are making 401(k) contributions, you are eligible for matching contributions whether or not you meet the other requirements. The "eligibility computation period" is a 12 month period that begins with your date of hire and each anniversary thereof. If you don't meet the service requirements during the first year following your date of hire, you may meet the requirements during a subsequent year. Entry Dates: Participation in the Plan can begin only on an Entry Date. Your first Entry Date will be the first day of the quarter, on or after meeting the Eligibility requirements. The quarterly entry dates are January 1st, April 1st, July 1st, and October 1st. -3- Rehired employees: If you had satisfied the Eligibility requirements before you terminated employment, you will become a Participant immediately on the date you are rehired, if your rehire date is on or after your first Entry Date, as defined above. Otherwise, you will be eligible to participate on the next Entry Date. If you had not yet satisfied the Eligibility requirements at the time you terminated employment, you must meet the Eligibility requirements as if you were a new employee. -4- --------------------------------------------------- Article IV EMPLOYEE CONTRIBUTIONS --------------------------------------------------- Your 401(k) Salary Deferral Plan offers you special tax advantages and incentives to participate. First, every dollar you put into the Plan reduces your income currently subject to Federal Income Tax. Thus, your deposits into the 401(k) Plan are often called "salary reductions." (However, you must still pay Social Security Taxes on your gross wages.) Although you will have to pay income tax when you withdraw money from the Plan, you may be able to defer taxes on a withdrawal and by depositing the funds into another Plan or an Individual Retirement Account (IRA). Because you defer paying taxes until you receive payments from the Plan, 401(k) contributions are sometimes called "salary deferrals." The following chart illustrates the advantage of making deposits into the 401(k) Plan (saving on a tax-deferred basis) rather than saving on an after-tax basis such as a bank passbook savings account or a money market fund. 401(k) Plan Passbook Tax-deferred After-tax Savings savings Gross Wages $ 20,000 $ 20,000 401(k) Deposit 1,000 N/A ---------- ---------- Taxable Wages 19,000 $ 20,000 Estimated Taxes (25%) 4,750 5,000 Passbook Deposit N/A 1,000 ---------- ---------- Net Take-home Pay $ 14,250 $ 14,000 In our example, net take-home pay (after paying taxes and after saving $1,000) is $250 greater when the savings are deposited into the 401(k) Plan, rather than an after-tax savings program like a money market or bank passbook account. Saving $1,000 in the 401(k) Plan only "cost" our example person $750 in take-home pay. This is only a rough illustration of the advantages of tax-deferred savings. Please discuss your situation with your tax advisor. Tax free accumulation: Another big advantage your Plan offers is tax-deferred accumulation of the earnings on your investments. All the earnings on the money you contribute to your account compounds tax free. You pay taxes on this money only when you retire or take distributions for some other reason, such as death or becoming totally disabled. If you put your money into a savings account you are required to pay income taxes on the interest each year. Thus, by contributing to your 401(k) Savings Plan, you'll have more money available at retirement. -5- Salary reduction agreement: In order to enroll (or to refuse enrollment), your Employer will ask you to complete a Salary Reduction Agreement. It is here that you tell your Employer how much of your income you wish to defer to your Plan. There are limits placed on the amount you can defer into this Plan. Your salary deferrals cannot exceed a maximum dollar amount determined by the Federal Government each year. For 2000, that amount is $10,500. Generally, if your total deferrals from all cash or deferred arrangements for a calendar year exceed the dollar amount set by the government, the excess must be included in your income for the year. The IRS also requires that the combined contribution by you and your Employer to your accounts not exceed the lesser of $30,000 or 25% of your pay. Your Employer may also place restrictions on the amount you may defer in order to meet IRS requirements. Your Employer will deduct the amount you've elected from your paycheck in accordance with procedures established by your Employer. Restrictions: In order to provide tax-advantaged savings, the Plan must place restrictions on withdrawals from the Plan. Article X describes the circumstances under which you may withdraw 401(k) deposits from the Plan. Election not to defer: You may decide that you do not wish to make salary reduction contributions on your first Entry Date. The Plan Administrator will explain the procedures for delayed enrollment in the salary reduction portion of the Plan, if you decide to enroll at a later date. Excess deferrals: If you participate in two or more deferred compensation plans (which include 401(k), Simplified Employee Pensions and 403(b) plans), your total deferrals to all plans could exceed IRS limits for the year. To avoid paying additional excise taxes if excess contributions have to be returned, you may want to designate which plan is to return any excess contributions to you. If you elect to have this Plan return any excess, you should notify the Plan Administrator so that the excess can be returned to you, along with any earnings, before April 15. -6- --------------------------------------------------- Article V EMPLOYER CONTRIBUTIONS --------------------------------------------------- Your Employer may make contributions to the plan, in addition to your salary deferral 401(k) contributions. Your Employer may make matching contributions, non-elective or discretionary contributions and required minimum contributions, under the Top-Heavy rules (see Article XII) or other legal requirements. Matching Contributions: To be eligible to receive an allocation of matching contributions, you must have worked 1,000 hours during the Plan Year, and be employed on the last day of the Plan Year. If you do not meet the hours requirement or are not employed on the last day of the Plan Year because you have retired, become disabled, or died, you will still receive matching contributions. The amount of the match depends on your 401(k) contributions. Each year, your Employer may set a matching percentage that is proportionate to the amount of your Elective contributions. Your employer will make matching contributions, if any, only on the first 3% of compensation deposited as elective contributions. Amounts deferred over 3% are not matched. Matching contributions will be allocated to your accounts as of the Anniversary Date. Non-Elective or Discretionary Contributions: In order to receive an allocation of discretionary Employer contributions, you must have worked 1,000 hours during the Plan Year, and be employed on the last day of the Plan Year. If you do not meet the hours requirement or are not employed on the last day of the Plan Year because you have retired, become disabled, or died, you will still receive an allocation of the discretionary Employer contribution. You do not have to make 401(k) contributions in order to receive a discretionary contribution. The amount of the discretionary contribution is set by the Employer each year. Your share of the non-elective/discretionary contribution is based on the relationship of your compensation to the total compensation for all Participants. For example, if your compensation is $20,000 and if the total compensation is $1,000,000, your share would be 2% of the total discretionary contribution. In our example, if the discretionary contribution was $30,000, your share would be: $30,000 x ($20,000/$1,000,000) = $600 or $30,000 x .02 (2%) = $600 -7- Other required contributions: In certain situations, your Employer may be required to make additional contributions to the Plan. If the Plan is Top-Heavy (see Article XII) or if highly paid participants contribute a higher percentage of pay to the Plan than other participants, your Employer may have to take corrective action. This action could result in either a reduction in the contributions for the highly compensated participants or an additional Employer contribution, in the form of Non-Elective or Qualified Non-Elective contributions. -8- --------------------------------------------------- Article VI VESTING --------------------------------------------------- The term "vesting" refers to the percentage of your Employer contribution accounts) (if any) other than your Qualified Non-Elective contributions account, that you are entitled to receive in the event of your termination of employment. You are always 100% vested in your Qualified Non-Elective account. If you terminate employment before you meet the requirements for retirement (see Article X), the distribution from the Employer matching and discretionary accounts will be limited to the vested portion. Your vesting percentage grows with your Years of Service. Article VII explains how Years of Service are credited. The same vesting schedule applies to the matching and discretionary Employer contributions. Vesting schedule for matching and discretionary Employer accounts: Years of Service Percent Vested Less than 1 0% 1 but less than 2 20% 2 but less than 3 40% 3 but less than 4 60% 4 but less than 5 80% 5 but less than 6 100% 6 but less than 7 100% 7 or more 100% You will also become 100% vested at Normal Retirement, if you become disabled or if you die. Refer to Article X for information on retirement, disability or death. In the event the Plan should become 'top-heavy', a faster vesting schedule will apply. See Article XII for an explanation of the top-heavy rules. Top-Heavy vesting schedule for matching and discretionary Employer accounts: Years of Service Percent Vested Less than 1 0% 1 but less than 2 0% 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 but less than 6 80% 6 or more 100% -9- --------------------------------------------------- Article VII SERVICE RULES --------------------------------------------------- Year of Service: You will earn a Year of Service for vesting if you are credited with 1,000 Hours of Service during a Plan Year. However, if you are credited with 1,000 hours during your first year of employment, you'll earn a Year of Service. You cannot earn more than one Year of Service credit during any Plan Year, though. If you terminate employment and are later rehired by the Employer, your Years of Service after reemployment may be added to the Years of Service you had accumulated when you left. In order for the two periods of service to be added together, you must return to work within 5 years of your termination date. Hours of Service: You are credited with the actual number of hours you work and for hours for which you are paid, but are not at work such as paid vacation or paid sick leave. Break in service rules: When you fail to complete at least 501 hours during the Plan Year, you incur a break in service. Thus, in any year in which you work leas than 501 hours (approximately 3 months), you will incur a break in service. However, in certain circumstances, your Plan is required to credit you with 501 hours, even though you didn't actually work 501 hours. This is primarily if you take time off to have, adopt or care for a child for a period immediately following the birth or adoption. You will receive this credit only for the purpose of determining whether you have incurred a break in service and not for receiving additional credit for a contribution or for vesting. -10- --------------------------------------------------- Article VIII COMPENSATION --------------------------------------------------- Throughout this Summary Plan Description, the words "compensation" and "pay" are used to define contribution amounts. "Pay" or "Compensation" means the total wages as defined in Section 415(c) of the IRS Code for the Plan Year. Compensation includes deferred compensation which is not includable in your gross taxable income due to SEP Deferrals, Cafeteria Benefits, 401(k) deferrals, Tax Deferred Annuities and Governmental Deferred Compensation Plans. In no event shall compensation in excess of $170,000 (as adjusted for changes in the Consumer Price Index: $170,000 for 2000) be taken into account for any Participant in this Plan. Your compensation for the first Plan Year in which you participate shall be your compensation from the Employer for the full Plan Year. -11- --------------------------------------------------- Article IX PARTICIPANTS' ACCOUNTS --------------------------------------------------- Under the 401(k) Savings Plan, the money you deposit and any Employer contributions are placed into investment accounts, which are credited with gains and losses at each Valuation Date. Separate accounts are set up for each different type of money: 401(k) deposits, matching, discretionary, rollover and Qualified Non-Elective contributions because there are different Plan and IRS rules for each type of contribution. Forfeitures: Forfeitures of Employer discretionary contributions will supplement non-elective contributions. Forfeitures of matching contributions will reduce matching contributions. "Forfeitures" are amounts which could not be paid to terminated participants because they were not 100% vested when they separated from service with the Employer. In order to share in the allocation of forfeitures, you must be eligible to share in Employer contributions for the Plan Year. If you are eligible to share in the forfeiture allocation, your portion will be credited to your account as of the last day of the Plan Year in which the terminated participant receives a distribution from the Plan. And, your portion will be determined in proportion to your compensation. Rollover Accounts: Your Plan allows employees who had retirement accounts with a previous employer to directly transfer or rollover the previous account balance to your Plan only if you are a Participant in this Plan. This is a segregated "Rollover" account and it is always 100% vested. If you are making a rollover instead of a direct transfer, in order to avoid taxes on your "Rollover" money, you must complete the rollover from your old plan to this Plan within 60 days after receiving the money. Investments: Your Plan. offers several investment options and you may instruct the Trustees how you would like to invest the funds in your Rollover, 401(k), Matching, Voluntary, Non-Elective and Qualified Non-Elective accounts. If you choose not to select how your accounts are invested, the Trustee will invest them for you. The Trustees are fiduciaries of the Plan, which means that they have a responsibility to you to invest the Plan assets prudently. Contact your Plan Administrator for information concerning the investment options which are currently available. -12- Crediting your accounts with gain or loss: Each investment account is credited with investment gain or loss as of each Valuation Date. Earnings or losses are allocated on the basis of the ratio your account balance bears to the total account balances of all participants in the same investment. You are then credited with that percentage of earnings or losses. If you receive a distribution from the Plan as of any date other than a Valuation Date, the value of your account will be the value as of the prior Valuation Date. -13- --------------------------------------------------- Article X DISTRIBUTIONS AND BENEFITS UNDER YOUR PLAN --------------------------------------------------- In-Service Distributions: An In-Service Distribution is one that you receive while you are actively employed. The primary purpose of the Plan is to provide benefits to you upon your retirement, but you may request an In-Service Distribution of all or a portion of your accounts, provided that you are fully vested and have reached age 59 1/2, and the amount to be withdrawn has been allocated to your account for 2 years or you must have been a participant in the Plan for 5 years. In addition, you may request an In-Service Distribution of the full value of all of your accounts, on or after the date you reach Normal Retirement Age (defined below), or a distribution of the value of your Rollover Account, at any time. Also, you may request an In-Service Distribution in the event of financial hardship. Financial hardship might result from your own, your spouse's or your dependents' medical expenses, expenses in purchasing your primary residence or in preventing eviction or foreclosure, or tuition for the next 12 months of post-secondary education for you, your spouse or dependents. In addition, a financial hardship only occurs when you have no other resources available to you. For example, you may need to prove that you have been turned down for loans or that you have sold other assets before you can receive a Hardship Distribution. The amount of your Hardship Distribution cannot exceed the amount needed to meet the immediate financial hardship. In addition, the distribution will be limited to the amount of your 401(k) contributions (no investment income) plus the vested portion of your employer and matching accounts, and the value of your other accounts. If you receive a Hardship Distribution, the Plan must impose restrictions on the amount of your 401(k) salary deferrals in the future. First, you cannot make any 401(k) contributions for the 12-month period following the date of your Hardship Distribution. Secondly, the maximum amount of 401(k) contributions that you can make for the calendar year that begins after the date of distribution is reduced by the amount of your elective deferrals in the year you took the hardship withdrawal. For example, let's say that you took a hardship withdrawal on July 1, 2000, and during 2000, you deposited $5,000 in elective deferrals. You can't make any 401(k) contributions until July 1, 2001. And, the maximum amount that you can contribute for 2001 would be the legal limit minus $5,000. If the legal maximum was $10,000 for 2001, you would be limited to $5,000. Plan benefits are also paid when you retire, or become permanently disabled. Benefit payments may also be made to your beneficiary (ies) upon your death. Each of these events is discussed below. Normal Retirement Benefits: The Normal Retirement Age for the Plan is age 65. Your Normal Retirement Date is the first day of the month coincident with or next following the date you reach Normal Retirement Age. At your Normal Retirement Date, you will be entitled to 100% of your account balance. Payment of your benefits will begin as soon as practicable following your retirement. (See Article XI, Benefit Payment Options.) -14- Late Retirement Benefits: If you decide to work past your Normal Retirement Date, you can defer payment of your benefits until your Retirement Date. Payment of your Retirement benefits will commence as soon as practicable following your late retirement date. Death Benefits: Should you die before termination of your employment by retirement or disability, your spouse or beneficiary will be entitled to 100% of your account balance. If you are married at the time of your death, your spouse will be the beneficiary of your death benefits, unless you otherwise elect in writing on a form to be furnished to you by the Plan Administrator. IF YOU WISH TO DESIGNATE A BENEFICIARY OTHER THAN YOUR SPOUSE AS YOUR BENEFICIARY, YOUR SPOUSE MUST CONSENT TO WAIVE HIS/HER RIGHT TO RECEIVE DEATH BENEFITS UNDER THE PLAN. YOUR SPOUSE'S CONSENT MUST BE IN WRITING AND WITNESSED BY A NOTARY OR A PLAN REPRESENTATIVE. If your spouse has consented to a valid waiver of any rights to the death benefit; or your spouse cannot be located; or you are single at the time of your death, then your death benefit will be paid to any beneficiary you may choose. The Plan Administrator will supply you with a beneficiary designation form. Since your spouse has certain rights under your Plan, you should immediately inform the Plan Administrator of any changes in your marital status. Disability Benefits: Should you become permanently disabled while a Participant under this Plan, you will receive 100% of your account balance. "Disability" means a medically determinable physical or mental impairment which may be expected to result in death or to last at least a year and which renders you incapable of performing your duties with your Employer. A determination of disability will be made by the Plan Administrator in a uniform, nondiscriminatory manner on the basis of medical evidence. If it is determined you are disabled, your payments will begin as soon as practicable following the date you were determined to be disabled. Benefits Upon Termination: If your employment is terminated for any reason other than those set out above, you will only be entitled to that portion of your Employer accounts in which you are vested. "Vesting" refers to the percentage of your account balance you are entitled to at any point in time. For each year you remain a Participant in the Plan, you become vested with a higher percentage of your Employer account balance. (See Vesting, Article VI.) If your benefit is over $5,000, you may at your option, request the Plan Administrator to distribute your benefit to you before your retirement date. However, the value of your account will not be determined earlier than the Valuation Date coinciding with or following your termination if you are not fully vested, or the Valuation Date coinciding with or following the date of termination if you are 100% vested. You will receive payment of your benefits as soon as practical after that date. -15- If your benefit is $5,000 or less, the Plan Administrator may distribute your benefit early. No consent is needed for distributions of $5,000 or less. Distributions Due To A Domestic Relations Order: In general, contributions made by you or your Employer for your retirement are not subject to alienation. This means they cannot be sold, used as collateral for a loan, given away or otherwise transferred. They are not subject to the claims of your creditors. However, they may be subject to claims under a Qualified Domestic Relations Order (QDRO). The Administrator may be required by law to recognize obligations you incur as a result of court ordered child support or alimony payments. The Administrator must honor a "Qualified Domestic Relations Order" which is defined as a decree or order issued by a court that obligates you to pay child support or alimony, or otherwise allocates a portion of your assets in the Plan to your spouse, child or other dependent. If a QDRO is received by the Administrator, all or portions of your benefits may be used to satisfy the obligation. It is the Plan Administrator's responsibility to determine the validity of a QDRO. Taxation of Distributions: The benefits you receive from the Plan will be subject to ordinary income tax in the year in which you receive the payment, unless you defer taxation by a "rollover" of your distribution into another qualified plan or an IRA. Also, in certain situations, your tax may be reduced by special tax treatment such as "5- year forward averaging." VERY IMPORTANT NOTE: Under most circumstances, if you receive a distribution from this Plan on or after January 1, 1993, twenty percent (20%) of your distribution will be withheld for federal income tax purposes, unless you instruct the trustees of this Plan to DIRECTLY transfer your distribution into another qualified plan or an IRA. You must give these instructions to the trustees no more than 90 days before the date you receive the payment. Also, unless you sign a waiver form, the trustees must wait at least 30 days after receiving your instructions before making the payment, to allow you time to change your decision. In addition to ordinary income tax, you may be subject to a 10% tax penalty if you receive a "premature" distribution. If you receive a distribution upon terminating employment before age 55 and you don't receive the payment as a life annuity, you will be subject to the 10% penalty, unless you "rollover" your payment. If you take a hardship withdrawal before age 59-1/2, the withdrawal will usually be subject to the 10% penalty. But, there is no penalty for payments due to your death or disability. As the rules concerning "rollovers" and the taxation of benefits are complex, please consult your tax advisor before making a withdrawal or requesting a distribution from the Plan. As required by law the Plan Administrator will provide you with a brief explanation of the rules concerning "rollovers". -16- --------------------------------------------------- Article XI BENEFIT PAYMENT OPTIONS --------------------------------------------------- There is one form of payment under your Plan. Your distribution will be in the form of a lump-sum distribution of your total account balances, or you may select an alternate form of payment, if permitted under your Plan, at the time of your distribution. The Plan Administrator may delay payment to you for a reasonable time for administrative convenience. However, unless you choose to defer receipt of your distribution, the Plan must begin your payments within 60 days after the close of the Plan Year following the latest of: (a) the date on which you reached your Normal Retirement Age; (b) the 10th anniversary of the year in which you became a Participant in the Plan; or (c) the date you terminated employment with the Employer. Under certain circumstances, the law requires that your distributions begin no later than April 1 of the year following the date you reach age 70-1/2 (the date six months after your 70th birthday). Your Plan Administrator will contact you if you are affected by this requirement. -17- --------------------------------------------------- Article XII TOP-HEAVY RULES --------------------------------------------------- A Plan becomes Top-Heavy when the total of the Key Employees' account balances make up more than 60% of the total of all account balances in the Plan. Key Employees are certain highly compensated officers or owners/shareholders. If your Plan is Top-Heavy, Plan participants who are not "key" must receive a minimum contribution. This minimum contribution is the smaller of the percentage of pay contributed by the Employer to Key Employees, or 3% of your compensation. If the Employer contribution allocated to your account for the Top-Heavy year is equal to or more than this minimum contribution, no additional Employer contribution would be needed to meet the Top-Heavy rules. Also, the vesting schedules which apply to the Discretionary Employer and Matching contributions change if your Plan becomes Top-Heavy. Vesting is discussed in Article VI. -18- --------------------------------------------------- Article XIII PARTICIPANT LOAN PROGRAM --------------------------------------------------- Pursuant to the terms of SERVICE 1ST BANK 401(K) PROFIT SHARING PLAN AND TRUST, the Trustee has adopted a participant loan program as part of such Plan and Trust. The program is intended to comply with Labor Regulation 2550.408b-1, and Proposed Internal Revenue Regulation sec 1.72(p)-1. Loans will be made pursuant to the terms of the Plan and Trust and the following provisions of this Participant Loan Program. A. Administration of Program The following person ("the Loan Administrator") is responsible for the administration of the loan program. All loan requests and other inquiries should be delivered to: SERVICE 1ST BANK 60 W. 10TH STREET TRACY, CA 95376 209 820-7923 B. Application Procedure 1. Obtain and complete a loan application on forms provided by the Loan Administrator. 2. Submit the completed loan application to the Loan Administrator at least 14 days before the date the loan is to be made. 3. Loan applications will be reviewed by the Loan Administrator for completeness. Incomplete applications will be returned to the applicant for completion. 4. Approved loans will be processed on any day. C. Basis for Approvals Loans are available to all actively employed participants without regard to any individual's race, color, religion, sex, age or national origin. Each application will be reviewed on a nondiscriminatory basis but will be assessed on the applicant's credit worthiness, financial need, and the purpose and terms of the loan. An individual may be denied future loans if he or she defaulted on any previous loan. A loan will not be made to a five (5%) percent or greater shareholder-employee of an S corporation, an owner of more than ten (10%) percent of either the capital interest or the profits interest of an unincorporated Employer, or a family member (as defined in Section 267(c)(4) of the Code) of such persons, unless an exemption for the loan is obtained pursuant to Section 408 of the Act. D. Limitations 1. Limitations on Types of Loans -19- Subject to the limitations on the amount of any loan, loans will be approved if the loan proceeds are to be used for any purpose. 2. Limitations on Amounts of Loans - The minimum amount of any loan is $1,000. - the maximum amount of any loan is the lesser of $50,000 or 50% of the vested interest of the participant in the Plan. The $50,000 maximum amount will be reduced by the participant's highest outstanding loan balance in the previous twelve months, even if amounts have been repaid. - The balance of outstanding loans to a single participant may not exceed $50,000. - A participant may have no more than 1 loan outstanding at any one time. 3. Prior to funding a Participant Loan The Participant shall elect on a form provided by the Loan Administrator the fund or funds from which the amount necessary to fund the Participant Loan shall be taken. The loan shall be transferred to a segregated account. During the term of the Participant Loan, this segregated account shall be maintained, and repayment of principal and interest shall be made to this segregated account. This segregated account shall not share in any gains or losses credited to the Plan that do not directly relate to the Participant Loan. E. Interest The interest rate will be determined from time to time by the Trustee with the intention of providing the Plan with a return commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances. Until otherwise determined by the Trustee, the interest rate will be prime plus 2% if prime is less than 10% and prime plus 1% if prime is 10% or greater. The rate of interest will be constant throughout the term of the loan. To cover the added administrative costs associated with a Participant Loan under the Plan, you will be charged a $100 loan origination fee and a $50 annual loan processing fee every year after the first, including the year the loan is paid in full or declared in default. F. Collateral or Other Security All loans must be adequately secured. No more than 50 percent of the present value of a participant's vested interest in the Plan may be considered by the Plan as security for the outstanding balance of all Plan loans made to the participant. -20- G. Repayment Terms All loans are required to be repaid within 0 years of the date of the loan. If the Participant notifies the Loan Administrator in writing that the entire proceeds of the loan will be used to acquire a dwelling unit that will, within a reasonable time, be used as the principal residence of the Participant the loan will be required to be repaid within 30 years of the original date of the loan. Loans are to be repaid on the basis of substantially level amortization over the term of the loan with payments made through salary reduction each pay period. Loan payments shall be suspended during a leave of absence of up to one year, if the Participant's pay from the Employer is insufficient to service the loan. But the loan must none the less be repaid within 5 years as provided by Internal Revenue Code section 72(p)(2)(B), or by the due date of the loan if the purpose of the loan was for the acquisition of the primary residence of the Participant. If the leave of absence is on account of the Participant performing service in the uniformed services (as defined in chapter 43 of title 38 United State Code), whether or not qualified military service, such suspension shall not be taken into account for purposes of meeting requirements of sections 72(p), 401 (a) or 4975(d)(1) of the Internal Revenue Code, and the Participant is entitled to reemployment rights under such chapter with respect to such service. For example, if the loan was due in 5 years, the 5 year period would be calculated by extending the period by the length of the leave of absence. H. Default A loan is in default when a scheduled installment payment has not been received by the last day of the calendar quarter following the calendar quarter in which the last scheduled installment payment was due. If payment has not been made within 15 days of the installment due date, the Loan Administrator will notify the participant in writing that the loan will be in default at the end of the applicable calendar quarter following the calendar quarter in which it was due. If payment is not received within such stipulated time period, the following will take place: 1. The entire unpaid balance on a defaulted loan will be considered to be in default as of the date the last payment was due. 2. At the discretion of the Trustee exercised in a uniform and nondiscriminatory manner, the loan will be renegotiated and payments will be made through payroll withholding. If the loan is not renegotiated in a manner acceptable to the Trustee, if permitted in the Plan, the loan will be deemed an in-service withdrawal. Such withdrawal will be subject to personal income and possible penalty taxes. Form 1099R will be timely issued to the participant and the IRS showing such withdrawal. 3. If the participant fails to make provisions for repayment reasonably acceptable to the Trustee, at the election of the Trustee, exercised in a uniform and nondiscriminatory manner, the remaining principal on the loan shall be declared due and payable as of the date the last payment was due. 4. The amount of any uncured default will be considered as having been received in a taxable event, subject to personal income and penalty taxes. Such tax consequences do not affect the participant's obligation to repay the loan. Form 1099R will be timely issued to the Participant and the IRS; however, the loan will not be charged against the Participant's vested account balance until he or she terminates service, retires, dies, becomes disabled, or reaches the earliest date distribution is permitted under the Plan. 5. To the extent necessary, any other collateral pledged as additional security will be foreclosed upon. -21- --------------------------------------------------- Article XIV MISCELLANEOUS --------------------------------------------------- Protection of benefits: Except for the requirements of a Qualified Domestic Relations Order, your Plan benefits are not subject to claims, indebtedness, execution, garnishment or other similar legal or equitable process. Also, you cannot voluntarily (or involuntarily) assign your benefits under this Plan. See Distributions due to a Domestic Relations Order in Article X. Amendment and Termination: The Employer has reserved the right to amend or terminate your Plan. However, no amendment can take away any benefits you have already earned. If your Plan is terminated, you will be entitled to the full amount in your account as of the date of termination, regardless of the percent you are vested at the time of termination. Pension Benefit Guaranty Corporation: The Pension Benefit Guaranty Corporation (PBGC) provides plan termination insurance for defined benefit pension plans. In your 401(k) Plan (a defined contribution plan), all of the contributions and investment earnings are allocated to Participants' accounts. PBGC insurance is not needed and does not apply. Claims: When you request a distribution of all or any part of your account, you will contact the Plan Administrator who will provide you with the proper forms to make your claim for benefits. Your claim for benefits will be given a full and fair review. However, if your claim is denied, in whole or in part, the Plan Administrator will notify you of the denial within 90 days of date your claim for benefits was received, unless special circumstances delay the notification. If a delay occurs, you will be given a written notice of the reason for the delay and a date by which a final decision will be given (not more than 180 days after the receipt of your claim.) Notification of a denial of claims will include: (a) the specific reason(s) for the denial, (b) reference(s) to the Plan provision(s) on which the denial is based, (c) a description of any additional material necessary to correct your claim and an explanation of why the material is necessary, and (d) an explanation of the steps to follow to appeal the denial, including notification that you (or your beneficiary) must file your appeal within 60 days of the date you receive the denial notice. -22- If you or your beneficiary do not file an appeal within the 60-day period, the denial will stand. If you do file an appeal within the 60 days, your Employer will review the facts and hold hearings, if necessary, in order to reach a final decision. Your Employer's decision will be made within 60 days of receipt of the notice of your appeal, unless an extension is needed due to special circumstances. In any event, your Employer will make a decision within 120 days of the receipt of your appeal. Article XV, STATEMENT OF ERISA RIGHTS, describes the protection you have under ERISA and the steps you can take to enforce these rights. -23- --------------------------------------------------- Article XV STATEMENT OF ERISA RIGHTS --------------------------------------------------- As a participant in SERVICE 1ST BANK 401(K) PROFIT SHARING PLAN AND TRUST you are entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA provides that all Plan participants shall be entitled to: (a) examine, without charge, at the Plan Administrator's office copies of all documents filed by the Plan with the U.S. Department of Labor, such as detailed annual reports and Plan descriptions, (b) obtain copies of all Plan documents and other Plan information upon written request to the Plan Administrator (the Administrator may make a reasonable charge for the copies), (c) receive a summary of the Plan's annual financial report. The Plan Administrator is required by law to furnish each participant with a copy of thus summary annual report, (d) obtain a statement telling you whether you have a right to receive a retirement benefit at Normal Retirement Age and if so, what your benefits would be at Normal Retirement Age if you stop working under the Plan now. If you do not have a right to a benefit, the statement will tell you how many more years you have to work to get a right to a benefit. This statement must be requested in writing and is not required to be given more than once a year. The Plan must provide the statement free of charge. In addition to creating rights for Plan participants, ERISA imposes duties upon the people who are responsible for the operation of the employee benefit plan. The people who operate your Plan, called "fiduciaries" of the Plan, have a duty to do so prudently and in the interest of you and other Plan participants and beneficiaries. No one, including your Employer may fire you or otherwise discriminate against you in any way to prevent you from obtaining a retirement benefit or exercising your rights under ERISA. If your claim for a retirement benefit is denied in whole or in part you must receive a written explanation of the reason for the denial. You have the right to have the Plan review and reconsider your claim. Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials from the Plan and do not receive them within 30 days, you may file suit in a federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay you up to $100 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the administrator. If you have a claim for benefits which is denied or ignored, in whole or in part, you may file suit in a state or federal court. If it should happen that Plan fiduciaries misuse the Plan's money, or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a federal court. The court will decide who should pay court costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees, for example, if it finds your claim is frivolous. -24- If you have questions about your Plan, you should contact the Plan Administrator. If you have any questions about this statement or your rights under ERISA, you should contact the nearest office of the Pension and Welfare Benefits Administration, U.S. Department of Labor, listed in your telephone directory or the Division of Technical Assistance and Inquiries, Pension and Welfare Benefits Administration, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington, D.C. 20210. -25- EX-10.7 14 ex10_7.txt EXHIBIT 10.7 SERVICE 1ST BANK (Graphic Logo Omitted) EXHIBIT 10.7 May 26, 2000 Mr. Patrick Carman, Manager FUTURE OPPORTUNITIES DEPT. 40 Oakbrook Place Pittsburg, CA 94565 Dear Pat: Please accept this letter as an offer of employment with Service 1st Bank as Senior Vice President/Chief Credit Officer (subject to regulatory approval). The following terms and conditions apply: Salary: Eighty five thousand dollars ($85,000.00) per year Bonus: Max. of 15% ($12,750.00) based on an assessment of overall performance in the areas of portfolio growth/mgm't., lender development, compliance, loan accounting, regulatory assessment, etc. Hours: Full time/Exempt Review: o 90 day "Coaching" o 6-month performance review o Annual review thereafter (anniv. of hire date) Vacation: 4 weeks (pro-rated 2000) Severance*: Salary continuation for a period of six (6) months if terminated without cause during the first eighteen (18) months of employment -or- during the first twelve (12) months after the new CEO is hired - whichever occurs first. * Severance provision added 6/2/00 401k: Eligible according to the Bank's 401k Plan when it becomes available. 2800 W. March Lane, Suite 120 o Stockton, CA 95219 o (209) 956-7800 (209) 956-9633 fax 60 W. Tenth Street o Tracy, CA 95376 o (209) 830-6995 o (209) 830-6891 fax www.service1stbank.com ---------------------- SERVICE 1ST BANK (Graphic Logo Omitted) www.service1stbank.com Patrick Carman May 26, 2000 page 2 Insurance: The Bank's life, medical, dental & vision insurance coverage is available on the first day of the month following your hire date. The Bank will pay the premium(s) for you as an employee. You will be responsible for the premium(s) of other family member(s) you wish to add. Stock Ten thousand (10,000) shares; vesting over 3 years; Options available and awarded according to the Bank's Stock Option Plan (approved by shareholders 5/11/2000). Basic Job Description: Reports directly to C.E.O./indirectly to President, and Loan Committee Chairman o Manage Lenders' credit production efforts (i.e., review, structure, approve credits and/or prepare same for Loan Committee action) o Support lenders' business development efforts in pro-actively marketing the bank to the community in an effort to produce the maximum number of new loan opportunities o Develop loan participation relationships and responsibly book/manage (or appropriately delegate management) of same o Manage Loan Operations/Note Dep't. functions/personnel o Manage loan portfolio trends/concentrations, loan policy exceptions, conduct stress-tests, etc. EQUAL HOUSING FDIC 2800 W. March Lane, Suite 120 49 W. 10th St. LENDER (graphic Stockton, CA 95219 Tracy, CA 95376 (graphic omitted) (209) 956-7800 (209) 830-6995 omitted) (209) 956-9633 Fax (209) 830-6981 Fax SERVICE 1ST BANK (Graphic Logo Omitted) www.service1stbank.com Patrick Carman May 26, 2000 page 3 Basic Job Description: (cont'd.) o Recommend revisions to Loan Policy o Manage Compliance, Reporting, FASB Loan Acct'g., etc. o Manage Watch List/Problem Loan portfolio o Manage credit mgm't. information systems o Develop new credit products/services o Stay abreast of/report on credit-oriented industry trends/changes, etc. If the above meets with your approval, please sign below and return a copy to Bryan Hyzdu in the enclosed envelope. The terms and conditions of this offer expire on June 9, 2000 (2 weeks). Sincerely, /s/ Bryan Hyzdu Bryan Hyzdu President Accepted By: /s/ Patrick Carman Date: 6/30/00 ---------------------------- -------------- EQUAL HOUSING FDIC 2800 W. March Lane, Suite 120 49 W. 10th St. LENDER (graphic Stockton, CA 95219 Tracy, CA 95376 (graphic omitted) (209) 956-7800 (209) 830-6995 omitted) (209) 956-9633 Fax (209) 830-6981 Fax EX-10.8 15 ex10_8.txt EXHIBIT 10.8 EXHIBIT 10.8 EMPLOYMENT AGREEMENT This Agreement is made and entered into as of November 1, 2000, by and between Service 1st Bank ("Employer") and John O. Brooks ("Employee"). RECITALS -------- WHEREAS, Employer is a California state-chartered banking corporation subject to the supervision and regulation of the California Department of Financial Institutions ("CDFI") and the Federal Deposit Insurance Corporation ("FDIC"); WHEREAS, Employer and Employee desire to enter into an employment agreement for the purposes of engaging the services of Employee by reason of his experience, training and ability in the commercial banking industry and to delineate the rights, obligations and responsibilities of the Employer and Employee; and NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the Employer and Employee agree as follows: AGREEMENT --------- 1. Term of Employment. Employer hereby employs Employee and Employee hereby accepts employment with Employer, upon the terms and conditions hereinafter set forth, for a period of three (3) years from the date hereof, subject to the termination provisions of paragraph 16 and any required regulatory approvals as specified in paragraph 28 of this Agreement. 2. Duties and Obligations of Employee. Employee shall serve as the Chairman of the Board of Directors and Chief Executive Officer of Employer and shall perform the customary duties of such office as may from time to time be reasonably requested of him by the Board of Directors of Employer, in addition to the following: (a) Voting as a member of the Board of Directors of Employer and such committees thereof as the Board of Directors of Employer shall designate; (b) Participating in community affairs which are beneficial to the Employer; (c) Maintaining a good relationship with Employer's shareholders and the Board of Directors of Employer; (d) Maintaining a good relationship with regulatory agencies and governmental authorities having jurisdiction over Employer; (e) Providing leadership in planning and implementing the conduct of business and the affairs of the Employer; (f) Hiring and firing of all employees other than executive officers of the Employer, subject at all times to the policies and directives set by the Employer's Board of Directors. Employee will consult with the Employer's Executive Committee of the Board of Directors prior to hiring or firing of executive officers of the Employer; and (g) Preparing and submitting, with the assistance of other members of senior management of Employer, to Employer's Board of Directors not later than November 30, 2000, an operating budget for the 2001 calendar year. Such budget shall include financial projections reflecting all categories financial data including income, expense and operating requirements, as are customary for financial institution budgets and as may be required by regulatory accounting and/or generally accepted accounting principles. Employee shall be responsible for the preparation and submission of similar budgets to Employer's Board of Directors annually in the third quarter of each year during the term of this Agreement. Each budget shall be subject to the approval of Employer's Board of Directors. 3. Devotion to Employer's Business. (a) Employee shall devote his full business time, ability, and attention to the business of Employer during the term of this Agreement and shall not during the term of this Agreement engage in any other business activities, duties, or pursuits whatsoever, or directly or indirectly render any services of a business, commercial, or professional nature to any other person or organization, whether for compensation or otherwise, without the prior written consent of Employer's Board of Directors. However, the expenditure of reasonable amounts of time for educational, charitable, or professional activities shall not be deemed a breach of this Agreement if those activities do not materially interfere with the services required of Employee under this Agreement. Nothing in this Agreement shall be interpreted to prohibit Employee from making passive personal investments; provided that, except for ownership interests in businesses acquired prior to the date of this Agreement which represent in each case less than three percent (3%) of the total ownership of each such business, the Employee shall not directly or indirectly acquire, hold, or retain any ownership interest in any financial institution, including its affiliated companies, or any other business competing with or similar in nature to the business of Employer, which conducts business or operations in San Joaquin County. (b) Employee agrees to conduct himself at all times with due regard to public conventions and morals. Employee further agrees not to do or commit any act that will reasonably tend to shock or offend the community and have an adverse effect upon Employer. (c) Employee hereby represents and agrees that the services to be performed under the terms of this Agreement are of a special, unique, unusual, extraordinary, and intellectual character that gives them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in an action at law. Employee therefore expressly agrees that Employer, in addition to any other rights or remedies that Employer may possess, shall be entitled to injunctive and other equitable relief to prevent or remedy a breach of this Agreement by Employee. -2- 4. Noncompetition by Employee. Employee shall not, during the term of this Agreement, directly or indirectly, either as an employee, employer, consultant, agent, principal, stockholder (except as permitted in paragraph 3(a) of this Agreement), officer, director, or in any other individual or representative capacity, engage, assist, consult or participate in any other banking or financial services business without the prior written consent of Employer. Following the termination of this Agreement and during any period when Employee is receiving severance payments from Employer pursuant to or related to this Agreement, the Employee shall be subject to the foregoing noncompetition restrictions only with respect to banking or financial services businesses which conduct business or operations in San Joaquin County. This paragraph 4 shall survive the expiration or termination of this Agreement. 5. Indemnification. (a) Employee shall indemnify and hold Employer harmless from all liability for loss, damage, or injury to persons or property resulting from the gross negligence or intentional misconduct of the Employee. (b) To the fullest extent permitted by law and applicable regulations of the CDFI and FDIC, Employer shall indemnify Employee if he was or is a party or is threatened to be made a party in any action brought by a third party against Employee (whether or not Employer is joined as a party defendant) against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with said action if Employee acted in good faith and in a manner Employee reasonably believed to be in the best interest of Employer (and with respect to a criminal proceeding if Employee had no reasonable cause to believe his conduct was unlawful), provided that the alleged conduct of Employee arose out of and was within the course and scope of his employment as an officer or employee of Employer. 6. Disclosure of Information. Employee shall not, either before or after termination of this Agreement, without the prior written consent of Employer's Board of Directors or except as required by law to comply with legal process including, without limitation, by oral questions, interrogatories; requests for information or documents, subpoena, civil investigative demand or similar process, disclose to anyone any financial information, trade or business secrets, customer lists, computer software or other information not otherwise publicly available concerning the business or operations of Employer. Employee further recognizes and acknowledges that any financial information concerning any customers of Employer, as it may exist from time to time, is strictly confidential and is a valuable, special and unique asset of Employer's business. Employee shall not, either before or after termination of this Agreement, without such consent or except as required by law, disclose to anyone said financial information or any part thereof, for any reason or purpose whatsoever. In the event Employee is required by law to disclose such infor nation, described in this paragraph 6, Employee will provide Employer and its respective counsel with immediate notice of such request so that they may consider seeking a protective order. If in the absence of a protective order or the receipt of a waiver hereunder Employee is nonetheless, in the written opinion of knowledgeable counsel, compelled to disclose any of such information to any tribunal or any other party or else stand liable for contempt or suffer other material censure or material penalty, then Employee may disclose (on an "as needed" basis only) -3- such information to such tribunal or other party without liability hereunder. Notwithstanding the foregoing, Employee may disclose such information concerning the business or operations of Employer as may be required by the CDFI, FDIC or other bank regulatory agency having jurisdiction over the operations of Employer in connection with an examination of Employer or other proceeding conducted by such bank regulatory agency. This paragraph 6 shall survive the expiration or termination of this Agreement. 7. Written, Printed or Electronic Material. All written, printed or electronic material, notebooks and records including, without limitation, computer disks used by Employee in performing duties for Employer, other than Employee's personal notes and diaries, are and shall remain the sole property of Employer. Upon termination of employment, Employee shall promptly return all such material (including all copies, extracts and summaries thereof) to Employer. This paragraph 7 shall survive the expiration or termination of this Agreement. 8. Surety Bond. Employee agrees that he will furnish all information and take any other steps necessary from time to time to enable Employer to obtain or maintain a fidelity bond conditional on the rendering of a true account by Employee of all monies, goods, or other property which may come into the custody, charge, or possession of Employee during the term of his employment. The surety company issuing the bond and the amount of the bond must be acceptable to Employer. All premiums on the bond shall be paid by Employer. Employer shall have no obligation to pay severance benefits to Employee in accordance with paragraph 16 (d) of this Agreement in the event that the Employee's employment is terminated in connection with the Employee's failure to qualify for a surety bond at any time during the term of this Agreement and such failure to qualify results from an occurrence described in paragraph 16(a) (5), (6), (7), (8), (9), or (11, to the extent of an Employee breach). 9. Base Salary. In consideration for the services to be performed hereunder, Employee shall receive a salary at the rate of One Hundred Fifty Thousand Dollars ($150,000) per annum, payable in substantially equal installments during the term of this Agreement of approximately Six Thousand Two Hundred and Fifty Dollars ($6,250) on the first and fifteenth days of each month, subject to applicable adjustments for withholding taxes and prorations for any partial employment period. Employee shall receive such annual adjustments in salary, if any, as may be determined by Employer's Board of Directors, in its sole discretion. 10. Salary Continuation During Disability. If Employee for any reason (except as expressly provided below) becomes temporarily or permanently disabled so that the is unable to perform the duties under this Agreement, Employer agrees to pay Employee the base salary otherwise payable to Employee pursuant to paragraph 9 of this Agreement, reduced by the amounts received by Employee from state disability insurance, or worker's compensation or other similar insurance benefits through policies provided by Employer, for a period of six (6) months from the date of disability. For purposes of this paragraph 10, "disability" shall be defined as provided in Employer's disability insurance program. Notwithstanding anything herein to the contrary, Employer shall have no obligation to make payments for a disability resulting from the deliberate, intentional -4- actions of Employee, such as, but not limited to, attempted suicide or chemical dependence of Employee. 11. Incentive Compensation. Employee shall be entitled to receive an annual incentive compensation payment based upon the following: (a) Net profits for a given fiscal year of Employer must exceed the net profits budget goal for that year which was approved by Employer's Board of Directors. In such event, the Board of Directors will establish a bonus pool in an amount equal to ten percent (10%) of the increase in net profits over such budget goal (the "Bonus Pool"). (b) Fifty-Five Percent (55%) of the Bonus Pool shall be distributed to Employee for achieving the increase in net profits described in paragraph 11 (a) above. (c) Fifteen Percent (15%) of the Bonus Pool shall be distributed to Employee for achieving an increase in the dollar amount of total loans outstanding (excluding nonaccrual loans and loans classified as "watch", "special mention", "substandard", "doubtful", "loss", or similarly impaired, restructured and nonperforming loans), which exceeds the approved budget goal for the subject fiscal year of Employer. (d) Fifteen Percent (15%) of the Bonus Pool shall be distributed to Employee for achieving an increase in deposits (excluding brokered deposits and deposits for which a rate of interest in excess of twenty-five (25) basis points over Employer's posted rate of interest for such deposits are paid to depositors). (e) Fifteen Percent (15%) of the Bonus Pool shall be distributed to Employee for achieving an increase in the fair market value of Employer's common stock which exceeds the fair market value for the prior fiscal year-end of Employer. Such fair market value shall be the average of the bid, ask and closing prices of a share of Employer's common stock as reported on the OTC Bulletin Board or any securities exchange or the averages of such prices reported by Employer's market makers, in each case for the twenty trading days immediately preceding the end of the subject fiscal year of Employer. Notwithstanding the foregoing, Employer and Employee agree that a fair market value for the fiscal year ended December 31, 2001 of Ten Dollars ($10.00) or above shall be determined to meet criteria for bonus pool distribution. Notwithstanding the foregoing, no incentive compensation payments shall be prorated for a partial year and Employee shall not be entitled to receive incentive compensation payments based upon the increased profitability described above for any year during the term of this Agreement in which Employee was not employed by Employer for Employer's full fiscal year. Any incentive compensation payable to Employee shall be distributed to Employee following review by Employer's Board of Directors of the final audited financial results of operations for the immediately preceding fiscal year of Employer. 12. Stock Options. Employer agrees to grant to Employee incentive stock options to purchase Twenty-Five Thousand (25,000) shares of Employer's common stock at the fair market -5- value of such common stock on the date of grant and otherwise pursuant to Employer's 1999 Stock Option Plan (the "1999 Plan"). Such grant shall be evidenced by a Stock Option Agreement entered into between Employer and Employee pursuant to the 1999 Plan and shall vest at the rate of one third (l/3) each year commencing one year following the date of grant. Notwithstanding any contrary provision of the 1999 Plan or such Stock Option Agreement, no rights of employment shall be conferred upon Employee or result from the 1999 Plan or such Stock Option Agreement. Any employment rights and corresponding duties of Employee pursuant to his employment by Employer shall be limited to and interpreted solely in accordance with the terms and provisions of this Agreement. 13. Other Benefits. Employee shall be entitled to those employee benefits adopted by Employer for all employees of Employer, subject to applicable qualification requirements and regulatory approval requirements, if any. Employee shall be further entitled to the following additional benefits which shall supplement or replace, to the extent duplicative of any part or all of the general employee benefits, the benefits otherwise provided to Employee: (a) Vacation. Employee shall be entitled to four (4) weeks annual vacation leave at his then existing rate of full salary each year during the term of this Agreement. Employee may be absent from his employment for vacation as long as such leave is reasonable and does not jeopardize his responsibilities and duties specified in this Agreement. The length of vacation should not exceed two (2) weeks without the approval of Employer's Board of Directors. Vacation time will accrue in accordance with Employer's personnel policies. (b) Automobile Allowance and Insurance. Employer shall pay to Employee an automobile allowance of Six Thousand Dollars ($6,000) per year during the term of this Agreement, payable at the rate of Five Hundred Dollars ($500) per month. Employee shall acquire or otherwise make available for his business and personal use an automobile, suitable to his position, and - -maintain it in good condition and repair. Employee shall obtain and maintain insurance policies with insurer(s) acceptable to Employer and with coverages for (i) bodily injury in amounts not less than Three Hundred Thousand Dollars ($300,000) per person and Five Hundred Thousand Dollars ($500,000) per occurrence, (ii) property damage in amounts not less than One Hundred Thousand Dollars ($100,000) per occurrence, (iii) uninsured motorist in amounts not less than One Hundred Thousand Dollars ($100,000) per person and Three Hundred Thousand Dollars ($300,000) per occurrence, and (iv) medical protection in amounts not less than Five Thousand Dollars ($5,000) per person. Such insurance policies shall name Employer as an additional insured, subject to the requirement that Employee's allowance described above shall be increased in an amount equal to the additional premium expense, if any, resulting from Employer being named as an additional insured. Employer may, in its sole discretion, elect to provide and pay for such insurance policies in lieu of Employee maintaining such policies. (c) Insurance. Employer shall provide during the term of this Agreement at Employer's sole cost, group life, health (including medical, dental and hospitalization), accident and disability insurance coverage for Employee and his dependents through a policy or policies provided by the insurer(s) selected by Employer in its sole discretion. -6- 14. Annual Physical Examnination. Employer shall pay or reimburse Employee for the cost of an annual physical examination conducted by a California licensed physician selected by Employee and reasonably acceptable to Employer. 15. Business Expenses. Employee shall be reimbursed for all ordinary and necessary expenses incurred by Employee in connection with his employment. Employee shall also be reimbursed for expenses incurred in activities associated with promoting the business of Employer, including expenses for club memberships, entertainment, travel and other expenses for attendance at conventions and education programs, and similar items. Employer will pay for or will reimburse Employee for such expenses upon presentation by Employee from time to time of receipts or other appropriate evidence of such expenditures in form and content reasonably acceptable to Employer. Any club memberships shall be approved in advance of purchase by the Employer's Board of Directors. 16. Termination of Agreement. (a) Automatic Termination. This Agreement shall terminate automatically without further act of the parties and immediately upon the occurrence of any one of the following events, subject to either party's right, without any obligation whatsoever, to waive an event reasonably susceptible of waiver which otherwise benefits the waiving party, and the obligation of Employer to pay the amounts which would otherwise be payable to Employee under this Agreement through the end of the month in which the event occurs, except that only in the event of termination based upon subparagraphs (1), (4) or (11, to the extent of Employer's breach) below shall Employee be entitled to receive severance payments based upon automatic termination pursuant to paragraph 16 (d) of this Agreement: (1) The occurrence of circumstances that make it impossible or impractical for Employer to conduct or continue its business. (2) The death of Employee. (3) The loss by Employee of legal capacity. (4) The loss by Employer of legal capacity to contract. (5) The willful and material breach or the habitual and continued neglect by the Employee of his employment responsibilities and duties; -7- (6) The continuous mental or physical incapacity of the Employee, subject to disability rights under this Agreement; (7) The Employee's willful violation of any federal banking or securities laws, or of the Bylaws, rules, policies or resolutions of Employer, or the rules or regulations of the CDFI, FDIC, or other regulatory agency or governmental authority having jurisdiction over the Employer, which has an adverse effect upon the Employer; (8) The written determination by a state or federal banking agency or governmental authority having jurisdiction over the Employer that Employee is not suitable to act in the capacity for which he is employed by Employer; (9) The Employee's conviction of (i) any felony or (ii) a crime involving moral turpitude, or the Employee's willful commission of a fraudulent or dishonest act; or (10) The Employee's willful disclosure, without authority, of any secret or confidential information concerning Employer or taking any action which the Employer's Board of Directors determines, in its sole discretion and subject to good faith, fair dealing and reasonableness, constitutes unfair competition with or induces any customer to breach any contract with the Employer. (11) Either party materially breaches the terms or provisions of this Agreement. (b) Termination by Employer. Employer may, at its election and in its sole discretion, terminate this Agreement at any time for any reason, or for no reason, without prejudice to any other remedy to which Employer may be entitled either at law, in equity or under this Agreement. Upon such termination, Employee shall immediately cease performing and discharging the duties and responsibilities of his position and remove himself and his personal belongings from the Employer's premises. All rights and obligations accruing to Employee under this Agreement shall cease at such termination, except that such termination shall not prejudice Employee's rights regarding employment benefits which shall have accrued prior to such termination, including the right to receive the severance pay specified in paragraph 16 (d) below, and any other remedy which Employee may have at law, in equity or under this Agreement, which remedy accrued prior to such termination. (c) Termination by Employee. This Agreement may be terminated at any time by Employee for any reason, or no reason, by giving not less than thirty (30) days' prior written notice of termination to Employer. Upon such termination, all rights and obligations accruing to Employee under this Agreement shall cease, except that such termination shall not prejudice -8- Employee's rights regarding employment benefits which shall have accrued prior to such termination and any other remedy which Employee may have at law, in equity or under this Agreement, which remedy accrued prior to such termination. (d) Severance Pay - Termination by Employer. In the event of termination by Employer pursuant to paragraph 16 (b) or automatic termination based upon paragraph 16 (a) (1), (4) or (11, to the extent of Employer's breach) of this Agreement, Employee shall be entitled to receive severance pay (in addition to any salary, incentive compensation, or other payments, if any, due Employee) equal to six (6) months base salary, payable in lump sum within thirty (30) days following termination. Notwithstanding the foregoing, in the event of a "change in control" as defined in subparagraph (e) below, Employee shall not be entitled to severance pay pursuant to this subparagraph (d) and any rights of Employee to severance pay shall be limited to such rights as are specified in subparagraph (e) below. Employee acknowledges and agrees that severance pay pursuant to this subparagraph (d) is in lieu of all damages, payments and liabilities on account of the early termination of this Agreement and the sole and exclusive remedy for Employee terminated at the will of Employer pursuant to paragraph 16 (b) or pursuant to certain provisions of paragraph 16 (a) described herein. (e) Severance Pay - Change in Control. In the event of a "change in control" as defined herein and within a period of eighteen (18) months following consummation of such a change in control (i) Employee's employment is terminated; or (ii) any adverse change occurs in the nature and scope of Employee's position, responsibilities, duties, salary, benefits or location of employment; or (iii) any event occurs which reasonably constitutes a demotion, significant diminution or constructive termination (by resignation or otherwise) of Employee's employment, Employee shall be entitled to receive severance pay in addition to any bonus or incentive compensation payments due Employee. Any such severance pay due Employee shall be in an amount equal to one (1) year of Employee's base salary at the rate in effect immediately prior to termination. Any such severance shall be payable in lump sum within thirty (30) days following the occurrence of an event described in paragraph 16 (e). Such severance payments, if any, shall be in lieu of all damages, payments and liabilities on account of the events described above for which such severance payments, if any, may be due Employee and any severance payment rights of Employee under paragraph 16 (d) of this Agreement. This paragraph 16 (e) shall be binding upon and inure to the benefit of the parties and any successors or assigns of Employer or any "person" as defined herein. Notwithstanding the foregoing, Employee shall not be entitled to receive nor shall Employer, its successors, assigns or any "person" as defined herein be obligated to pay severance payments pursuant to this paragraph 16 (e) in the event of an occurrence described in paragraph 16 (a) (5), (7) (8), (9), (10), or (11, to the extent of Employee's breach), or in the event Employee terminates employment in accordance with paragraph 16 (c) and the termination is not a result of or based upon the occurrence of any event described in paragraph 16 (e) (ii) or (iii) above. -9- 17. Change in Control Definition. The term "change in control" shall mean the first to occur of any of the following events with respect to the Employer: (a) Any "person" (as such term is used in sections 13 and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), becomes the beneficial owner (as that term is used in section 13(d) of the Exchange Act), directly or indirectly, of twenty-five percent (25%) or more of the Employer's capital stock entitled to vote in the election of directors, other than a group of two or more persons not (i) acting in concert for the purpose of acquiring, holding or disposing of such stock or (ii) otherwise required to file any form or report with any governmental agency or regulatory authority having jurisdiction over the Employer which requires the reporting of any change in control; (b) During any period of not more than two (2) consecutive years, not including any period prior to the date of this Agreement, individuals who, at the beginning of such period, constitute the Board of Directors of the Employer, cease for any reason to constitute at least a majority thereof; (c) The effective date of any consolidation or merger of the Employer (after all requisite shareholder, applicable regulatory and other approvals and consents have been obtained), other than a consolidation or merger of the Employer in which the holders of the voting capital stock of the Employer immediately prior to the consolidation or merger hold more than fifty percent (50%) of the voting capital stock of the surviving entity immediately after the consolidation or merger; (d) The shareholders of the Employer approve any plan or proposal for the liquidation or dissolution of the Employer; or (e) The shareholders of the Employer approve the sale or transfer of substantially all of the Employer's assets to parties that are not within a "controlled group of corporations" (as that term is defined in section 1563 of the Code) in which the Employer is a member. 18. Notices. Any notices to be given hereunder by either party to the other shall be in writing and may be transmitted by personal delivery or by U.S. mail, registered or certified, postage prepaid with return receipt requested. Mailed notices shall be addressed to the parties at the addresses listed as follows: Employer: Principal place of business Employee: Principal residence as shown in Employer's Personnel Records and Employee's personal file. Each party may change the address for receipt of notices by written notice in accordance with this paragraph 18. Notices delivered personally shall be deemed communicated as of the date of -10- actual receipt; mailed notices shall be deemed communicated as of three (3) days after the date of mailing. 19. Arbitration. All claims, disputes and other matters in question arising out of or relating to this Agreement or the breach or interpretation thereof, other than those matters which are to be determined by the Employer in its sole and absolute discretion, shall be resolved by binding arbitration before a representative member, selected by the mutual agreement of the parties, of the Judicial Arbitration and Mediation Services, Inc., San Francisco, California ("JAMS"), in accordance with the rules and procedures of JAMS then in effect. In the event JAMS is unable or unwilling to conduct such arbitration, or has discontinued its business, the parties agree that a representative member, selected by the mutual agreement of the parties, of the American Arbitration Association, San Francisco, California ("AAA"), shall conduct such binding arbitration in accordance with the rules and procedures of the AAA then in effect. Notice of the demand for arbitration shall be filed in writing with the other party to this Agreement and with JAMS (or AAA, if necessary). In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. Any award rendered by JAMS or AAA shall be final and binding upon the parties, and as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns, and may be entered in any court having jurisdiction thereof. The obligation of the parties to arbitrate pursuant to this clause shall be specifically enforceable in accordance with, and shall be conducted consistently with, the provisions of Title 9 of Part 3 of the California Code of Civil Procedure. Any arbitration hereunder shall be conducted in Stockton, California, unless otherwise agreed to by the parties. 20. Attorneys' Fees and Costs. In the event of litigation, arbitration or any other action or proceeding between the parties to interpret or enforce this Agreement or any part thereof or otherwise arising out of or relating to this Agreement, the prevailing party shall be entitled to recover its costs related to any such action or proceeding and its reasonable fees of attorneys, accountants and expert witnesses incurred by such party in connection with any such action or proceeding. The prevailing party shall be deemed to be the party which obtains substantially the relief sought by final resolution, compromise or settlement, or as may otherwise be determined by order of a court of competent jurisdiction in the event of litigation, an award or decision of one or more arbitrators in the event of arbitration, or a decision of a comparable official in the event of any other action or proceeding. Every obligation to indemnify under this Agreement includes the obligation to pay reasonable fees of attorneys, accountants and,expert witnesses incurred by the indemnified party in connection with matters subject to indemnification. 21. Entire Agreement. This Agreement supersedes any and all other agreements, either oral or in writing, between the parties with respect to the employment of Employee by Employer and contains all of the covenants and agreements between the parties with respect to the employment of Employee by Employer. Each party to this Agreement acknowledges that no other representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not set forth herein, and that no -11- other agreement, statement, or promise not contained in this Agreement shall be valid or binding on either party. 22. Modifications. Any modification of this Agreement will be effective only if it is in writing and signed by a party or its authorized representative. 23. Waiver. The failure of either party to insist on strict compliance with any of the terms, provisions, covenants, or conditions of this Agreement by the other party shall not be deemed a waiver of any term, provision, covenant, or condition, individually or in the aggregate, unless such waiver is in writing, nor shall any waiver or relinquishment of any right or power at any one time or times be deemed a waiver or relinquishment of that right or power for all or any other times. 24. Partial Invalidity. If any provision in this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions shall nevertheless continue in full force and effect without being impaired or invalidated in any way. 25. Advice of Counsel and Advisors. Employee acknowledges and agrees that he has read and understands the terms and provisions of this Agreement and prior to signing this Agreement, he has had the advice of counsel and such other advisors as he deemed appropriate in connection with his review and analysis of such terms and provisions of this Agreement. 26. Governing Law and Venue. The laws of the State of California, other than those laws denominated choice of law rules, shall govern the validity, construction and effect of this Agreement. Any action which in any way involves the rights, duties and obligations of the parties hereunder shall be brought in the courts of the State of California and venue for any action or proceeding shall be in San Joaquin County or in the United States District Court for the Eastern District of California, and the parties hereby submit to the personal jurisdiction of said courts. 27. Payments Due Deceased Employee. If Employee dies prior to the expiration of the term of his employment, any payments that may be due Employee from Employer under this Agreement as of the date of death shall be paid to Employee's executors, administrators, heirs, personal representatives, successors, or assigns. 28. Regulatory Approval. Employer and Employee agree to cooperate in obtaining any required regulatory approvals of this Agreement from the CDFI, FDIC or other governmental or regulatory authority having jurisdiction over Employer at the earliest practicable date. Notwithstanding any other provision of this Agreement, Employer and Employee further agree that no benefits, rights or obligations shall accrue to the parties hereunder in the absence of obtaining any such required regulatory approvals and in the event that any such governmental or regulatory authority shall disapprove any provision of this Agreement, then the parties hereto will use their best efforts, acting in good faith, to amend this Agreement in a manner that will be acceptable to the parties and to such governmental or regulatory authorities. -12- IN WITNESS WHEREOF, the parties have executed this Agreement in Stockton, California, as of the date set forth above. EMPLOYER: EMPLOYEE: Service lst Bank By: /s/ EUGENE C. GINI /s/ JOHN O. BROOKS ----------------------------- ---------------------------- Name Eugene C. Gini John O. Brooks Title Chairman -13- EX-10.9 16 ex10_9.txt EXHIBIT 10.9 SERVICE 1ST BANK (Graphic Omitted) EXHIBIT 10.9 February 26, 2001 Robert Bloch 602 Cool Valley Road Paso Robles, CA 93446 RE: Offer Sheet Dear Bob, Pursuant to my recent conversation coupled with the ratification of the Board we are prepared to offer you the position of Chief Financial Officer, subject to regulatory approval. I am delighted with the opportunity to join forces as we build a new Financial Services Depository! The terms of this position are as follows: o Salary: $95,000.00 per year o Bonus: $5,000.00 - payable one year anniversary o Stock Options: $15,000 shares - 3 year vesting o Title: Executive Vice President/Chief Financial Officer o Auto Allowance: $400.00 per month o Moving: $3,000,000 allowance o CQG: The Bank will provide this facility o Insurance: Full access to the normal package which includes: medical, dental, life, LTD, vision o 401K: Availability subject to the terms of the Plan (not currently matching) I believe the foregoing captures the essential points of our offer. I included a package for you to complete. Please return to me as soon as possible so that we may receive regulatory authorization. Additionally, I plan to receive confirmation on your title and options from the Board as soon as we receive a "non-objection" from the regulators. Please let me know if you have any further questions, otherwise indicate your acceptance on a copy of this letter and return to my attention with the completed package. Sincerely, /s/ JOHN BROOKS - -------------------------- John Brooks Chairman Chief Executive Officer Accepted by: /s/ Robert E. Bloch Date: 2/26/01 ---------------------------- -------- 2800 W. March Lane, Suite 120 - Stockton, CA 95219 - (209) 956-7800 (209) 956-9633 fax 60 W. Tenth Street - Tracy, CA 95376 - (209) 830-6995 - (209) 830-6891 fax www.service1stbank.com ---------------------- EX-10.10 17 ex10_10.txt EXHIBIT 10.10 EXHIBIT 10.10 EMPLOYMENT AGREEMENT THIS AGREEMENT is made this 22nd day of January 2002, between SERVICE 1st BANK (the "Bank"), having a principal place of business at Stockton, California, and Dennis A. Reed ("Employee"), and supercedes any prior Employment Agreement. W I T N E S S E T H - - - - - - - - - - WHEREAS, the Bank is a California banking corporation, which is validly existing and in good standing under the laws of the State of California, with power to own property and carry on its business as it is now being conducted; WHEREAS, the Bank desires to avail itself of the skill, knowledge and experience of Employee in order to insure the successful management of its business; WHEREAS, the parties hereto desire to specify the terms of the Employee's employment by the Bank as controlling Employee's employment with the Bank; NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, it is agreed that from and after February 1, 2002 (the "Effective Date"), the following terms and conditions shall apply to Employee's said employment: A. TERM OF EMPLOYMENT ------------------ 1. Term. The Bank hereby employs Employee and Employee hereby accepts employment with the Bank for the period commencing with the Effective Date and continuing for an undetermined time. B. DUTIES OF EMPLOYEE ------------------ 1. Duties. Employee shall perform the duties of Senior Vice President & Senior Real Estate Officer, as described more fully in a job description entitled Real Estate Officer (the "Job Description"), subject to the powers by law vested in the Board of Directors of the Bank and in the Bank's shareholders. The duties of Employee hereunder may be reasonably changed by the Board of Directors of the Bank from time-to-time without resulting in a rescission or breach of this Agreement, and, without limiting the foregoing, Employee agrees, if requested by the Board of Directors of the Bank and subject to the rights of the Bank's stockholders, to serve in such additional or alternative capacities as the Bank's Directors dictate subject to a revised job description and/or compensation plan mutually agreeable to the Bank and the Employee. During the Term, Employee shall perform exclusively the services herein contemplated to be performed by Employee faithfully, diligently and to the best of Employees ability, consistent with the highest and best standards of the banking industry and in compliance with all applicable laws and the Bank's Articles of Incorporation and Bylaws. 2. Conflicts of Interest. Except as permitted by the prior written consent of the Chief Credit Officer of the Bank, Employee shall devote sufficient time, ability and attention, during the Term, to fully and timely meet the specifications and standards set forth in the Job Description. The Employee shall not directly or indirectly render any services of a business, commercial or professional nature, to any other person, firm or corporation, whether for compensation or otherwise, which are in conflict with the Bank's interests. C. COMPENSATION ------------ 1. The Employee will be paid a Base Pay of $45,000.00 per annum. 2. The Employee will be paid commission according to the following schedule: a. Loans: 30% of the net total fees, excluding any premiums on the sale of government guaranteed loans in the secondary market, earned by the Bank on loans originated by Employee; that is, loans booked by the Bank or loans placed with other lenders on behalf of the Bank by the substantial effort of the Employee, regardless of the source of the loan application. b. Other: Commissions may be earned for ancillary services generated by employee subject to future negotiations when services are available. D. EMPLOYEE BENEFITS ----------------- 1. Vacation. Employee is entitled to four (4) weeks of paid vacation at the Base Pay in effect at the time the vacation is taken. Said vacation should be scheduled at the convenience of the Bank in order to handle the workload in a reasonable and timely manner. 2. Automobile. Employee will receive an automobile allowance of $375 per month. 3. Group Medical and Life Insurance Benefits. The Bank shall provide for Employee, medical and life insurance benefits equivalent to the normal and customary benefits available from time to time under the California Banker's Association Group insurance Program (or equivalent) for a salary level equivalent to $100,000 per annum. The Bank's liability to Employee for any breach of this Subsection shall be limited to the amount of premiums payable by the Bank to obtain the coverage contemplated herein. 4. Use of Bank Facilities, Equipment, and Supplies. The Bank will provide, and the Employee will have access to and use of, the facilities, equipment, and supplies of the Bank, to the extent any salaried officer of the Bank would have in the execution of his or her employment responsibilities without the Bank being entitled to any compensation for the use thereof. The facilities, equipment, and supplies shall include, but not necessarily be limited to, a shared or unshared office, telephones (including land lines and wireless telephonic devices) facsimile machines, copier(s), and any other equipment and supplies made available by the Bank to facilitate its normal business activities. E. REIMBURSEMENT FOR BUSINESS EXPENSES ----------------------------------- Employee shall be entitled to reimbursement by the Bank for any ordinary and necessary business expenses incurred by Employee in the performance of Employee's duties and in acting for the Bank during the Term, which types of expenditures shall be determined by the Board of Directors, provided that: 1. Each such expenditure is of a nature qualifying it as a proper deduction on the federal and state income tax returns of the Bank as a business expense and not as compensation to Employee; and 2. Employee furnishes to the Bank adequate records and other documentary evidence required by federal and state statutes and regulations issued by the appropriate taxing authorities for the 2 substantiation of such expenditures as deductible business expenses of the Bank and not as compensation to Employee. F. TERMINATION ----------- 1. Termination. The Bank may terminate this Agreement at any time without further obligation or liability to Employee, by action of the Chief Credit Officer, if Employee fails to perform or habitually neglects the duties which he is required to perform hereunder if Employee engages in illegal activity which materially adversely affects the Bank's reputation in the community or which evidences the lack of Employee's fitness or ability to perform Employee's duties as determined by the Chief Credit Officer in good faith; any breach of fiduciary duty, dishonesty, deliberate or repeated disregard of the policies or procedures of the Bank as adopted by the Board of Directors or a committee thereof or refusal or failure to act in accordance with any direction or order of the Board of Directors or a committee thereof of the Bank, except those in contravention of any law or regulation; gross negligence adversely impacting the Bank; willful breach of this Agreement or any other willful misconduct; or if Employee is found to be physically or mentally incapable (as hereinafter defined) of performing Employee's duties for a continuous period of ninety (90) days or more by the Chief Credit Officer in good faith. Such termination shall not prejudice any remedy, which the Bank may have at law, in equity, or under this Agreement. Termination pursuant to this Subsection F.1 shall become effective immediately upon notice of termination from the Bank. Notwithstanding the foregoing, the Employee will be compensated in accordance with paragraph C of this Agreement for each loan transaction that closes after the effective date of termination that was processed by the Employee under the terms of the Job Description; provided, however, that the Risk Analysis Presentation for the loan transaction was approved by the Chief Credit Officer on or prior to the termination date. For purposes of this Agreement only, physical or mental disability shall be defined as Employee being unable to fully perform under this Agreement for a continuous period of ninety (90) days. If there should be a dispute between the Bank and Employee as to Employee's physical or mental disability for purposes of this Agreement, the question shall be settled by the opinion of an impartial reputable physician or psychiatrist agreed upon by the parties or their representatives, or if the parties cannot agree within ten (10) days after a request for designation of such party, then by a physician or psychiatrist designated by the San Joaquin Medical Association. The certification of such physician or psychiatrist as to the question in dispute shall be final and binding upon the parties hereto. Employee reserves the right to terminate this agreement at any time for any reason subject to a 30-day notification. Said notification shall be in writing and delivered to the Chief Credit Officer at the address of 60 W. 10th Street, Tracy, CA 95376. 2. Action by Supervisory Authority. If the Bank is closed or taken over by the California Department of Financial Institutions or other supervisory authority, including the Federal Deposit Insurance Corporation, such bank supervisory authority may immediately terminate this Agreement without further liability or obligation to Employee. 3. Merger or Corporate Dissolution. In the event of a merger where the Bank is not the surviving corporation or a consolidation or a transfer of all or substantially all of the assets of the Bank, or any other corporate reorganization where there is a change in ownership of at least twenty-five percent (25%) of the outstanding stock of the Bank, except as may result from a transfer of shares to another corporation in exchange for at least eighty percent (80%) control of that corporation, or in the event of the dissolution of the Bank, this Agreement may be terminated without further liability to Employee by the Bank or the surviving bank. Notwithstanding the foregoing, this Section F.3. shall not be applicable in the event of the formation of a bank holding company for the Bank wherein the shareholders of the Bank maintain the same percentage of ownership of the bank holding company. 3 4. Termination Without Cause. Notwithstanding anything to the contrary contained herein, it is agreed by the parties hereto that the Bank may at any time elect to terminate this Agreement and Employee's employment by the Bank for any reason by action of its Chief Credit Officer. G. GENERAL PROVISIONS ------------------ 1. Proprietary and Confidential Knowledge. During the Term, Employee will have access to and become acquainted with what Employee and the Bank acknowledge to be proprietary and confidential knowledge, to wit, data and information concerning the Bank, including its operations and business, and the identity of customers of the Bank, including knowledge of their financial condition, their financial needs, as well as their methods of doing business. Employee shall not disclose any of the aforesaid proprietary and confidential knowledge, directly or indirectly, or use them in any way, either during the Term or for a period of one (1) year after the termination of this Agreement, except as required in the course of Employee's employment with the Bank. 2. Indemnification. To the extent permitted by law, applicable statutes and the Bylaws or resolutions of the Bank in effect from time to time, the Bank will indemnify Employee against liability or loss arising out of Employee's actual or asserted misfeasance or non-feasance in the performance of Employee's duties or out of any actual or asserted wrongful act against, or by, the Bank including but not limited to judgment, fines, settlements and expenses incurred in the defense of actions, proceedings and appeals therefrom. The provisions of this Subsection shall apply to the estate, executor, administrator, heirs, legatees or devisees of Employee. 3. Return of Documents. Unless otherwise agreed to in writing by the Bank and the Employee, the Employee expressly agrees that all manuals, documents, files, reports, studies, instruments or other materials used and/or developed by Employee during the Term are solely the property of the Bank, and that Employee has no right, title or interest therein. Upon termination of this Agreement, Employee or Employee's representative shall promptly deliver possession of all of said property to the Bank in good condition. Notwithstanding the foregoing, the Employee from time to time may create or modify a system or procedure to be used by the Bank and the Employee in the execution of the Job Description. The Employee may use such systems and procedures materially created or modified by the Employee in employment activities unrelated to the specific business of the Bank. 4. Notices. Any notice, request, demand or other communication required or permitted hereunder shall be deemed to be properly given when personally served in writing, when deposited in the United State mail by either certified or registered mail with return receipt requested, postage prepaid, or when communicated to a public telegraph company for transmittal, addressed to the party at the address appearing at the end of this Agreement. Either party may change its address by written notice in accordance with this Subsection. 5. California Law. This Agreement is to be governed by and construed under the laws of the State of California. 6. Captions and Section Headings. Captions and section headings used herein are for convenience only and are not a part of this Agreement and shall not be used in construing it. 7. Invalid Provisions. Should any provision of this Agreement for any reason be declared invalid, void, or unenforceable by a court of competent jurisdiction, the validity and binding effect of any remaining portion shall not be affected, and the remaining portions of this Agreement shall remain in full force and effect as if this Agreement had been executed with said provision eliminated. 4 8. Entire Agreement. This Agreement contains the entire agreement of the parties. It supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of Employee by the Bank. Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding. This Agreement may not be modified or amended by oral agreement, but only by an agreement in writing signed by the Bank and Employee. 9. Receipt of Agreement. Each of the parties hereto acknowledges that he has read this Agreement in its entirety and does hereby acknowledge receipt of a fully executed copy thereof. A fully executed copy shall be an original for all purposes, and is a duplicate original. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. Service 1st Bank Dennis A. Reed /s/ PATRICK CARMAN /s/ DENNIS A. REED - ------------------------------------ --------------------------------- Patrick Carman, Chief Credit Officer Dennis A. Reed 60 W. 10th Street 3785 Middlefield Road Tracy, CA 95376 Palo Alto, CA 94303 Attachment - Job Description 5 EX-10.11 18 ex10_11.txt EXHIBIT 10.11 EXHIBIT 10.11 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is made this 18th day of March, 2002, between SERVICE 1st BANK (the "Bank"), having a principal place of business at Stockton, California, and John A. Montalbo ("Employee"), and supercedes any prior Employment Agreement. W I T N E S S E T H - - - - - - - - - - WHEREAS, the Bank is a California banking corporation, which is validly existing and in good standing under the laws of the State of California, with power to own property and carry on its business as it is now being conducted; WHEREAS, the Bank desires to avail itself of the skill, knowledge and experience of Employee in order to insure the successful management of its business; WHEREAS, the parties hereto desire to specify the terms of the Employee's employment by the Bank as controlling Employee's employment with the Bank; NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, it is agreed that from and after March 18, 2002 (the "Effective Date"), the following terms and conditions shall apply to Employee's said employment: A. TERM OF EMPLOYMENT ------------------ 1. Term. The Bank hereby employs Employee and Employee hereby accepts employment with the Bank for the period commencing with the Effective Date and continuing for an undetermined time. B. DUTIES OF EMPLOYEE ------------------ l. Duties. Employee shall perform the duties of Senior Vice President & SBA Department Manager, as described more fully in a job description entitled SBA Department Manager (the "Job Description"), subject to the powers by law vested in the Board of Directors of the Bank and in the Bank's shareholders. The duties of Employee hereunder may be reasonably changed by the Board of Directors of the Bank from time-to-time without resulting in a rescission or breach of this Agreement, and, without limiting the foregoing, Employee agrees, if requested by the Board of Directors of the Bank and subject to the rights of the Bank's stockholders, to serve in such additional or alternative capacities as the Bank's Directors dictate subject to a revised job description and/or compensation plan mutually agreeable to the Bank and the Employee. During the Term, Employee shall perform exclusively the services herein contemplated to be performed by Employee faithfully, diligently and to the best of Employee's ability, consistent with the highest and best standards of the banking industry and in compliance with all applicable laws and the Bank's Articles of Incorporation and Bylaws. 2. Conflicts of Interest. Except as permitted by the prior written consent of the Chief Credit Officer of the Bank, Employee shall devote sufficient time, ability and attention, during the Term, to fully and timely meet the specifications and standards set forth in the Job Description. The Employee shall not directly or indirectly render any services of a business, commercial or professional nature, to any other person, firm or corporation, whether for compensation or otherwise, which are in conflict with the Bank's interests. C. COMPENSATION ------------ 1. The Employee will be paid a Base Pay of $60,000.00 per annum. 2. The Employee will be paid commission according to the following schedule: a. SBA Guaranteed Loans: Paid monthly, included within the paycheck for the 15th of the month following receipt of premium from the sale of the guaranteed portion of the loan. The incentive pay will be the following percentage of the Net Premium Earned, defined as the gross premium earned in the sale of the guaranteed portion less any broker fees paid. % of Net Premium Annual Loan Volume Earned ------------------ From $-0- to $5,000,000 25% From $5,000,001 to $10,000,000 40% From $10,000,001 and up 50% If within 90 days of the final disbursement on a SBA guaranteed loan the Bank has not sold the guaranteed portion, the Bank will pay a commission of 1.00% on the gross loan amount as part of the incentive pay compensation. If at a later date, the guaranteed portion is sold, the Bank will pay the net difference between the incentive pay calculated on the amount of Net Premium Earned, as determined by the above chart, and the amount previously paid under the 1.00% commission option. If for any reason, the Bank must refund the premium, the incentive pay will not be paid or, if already paid, will be immediately reimbursed to the Bank out of future incentive pay and/or base salary. If the Business Development Officer is no longer employed by the Bank and has no future compensation due, then the Business Development Officer agrees to immediately reimburse the Bank through personal financial resources b. Non-SBA Guaranteed Loans: Paid monthly, included within the paycheck for the 15th of the following month, based on the following volumes of Total Loan Commitments boarded during the month and earned percentage:
Monthly Loan Volume % of Total Commitment ------------------- $-0- to $1,000,000 0.40% of amount over $-0- $1,000,001 to $2,000,000 0.55% of amount over $1,000,000 $2,000,001 and up 0.60% of amount over $2,000,000
Total Loan Commitments for a month is determined by adding the Calculated Commitment for each loan boarded. The Calculated Commitment is determined by multiplying the loan commitment, net of any amount participated, by the appropriate percentage for the following loan types: 2
Loan Type % of Commitment --------- All term loans 100% All lines of credit 75% Construction loans, not rolling into 75% a permanent loan Construction loans rolling into a 100% permanent loan Letters of Credit 0% Transaction loans 100%(pro rate if term is less than one year).
Loan boardings that qualify are the initial loan and any new loan boarded within six months of the boarding date of the initial loan. Loan renewals do not qualify. c. Deposits: Paid quarterly, included in the paycheck on the 15th of the month following the quarter-end. The incentive pay is based on the average collected balance and is paid for two years at the following percentages: ACCOUNT TYPE 1st YEAR 2nd YEAR ------------ Non-interest bearing 0.50% 0.25% Interest bearing 0.25% 0.125% (excluding CDs) Certificate of Deposits 0.05% .025% Sweep Products & 0.00% 0.00% other Inv. Products D. EMPLOYEE BENEFITS ----------------- 1. Vacation. Employee is entitled to four (4) weeks of paid vacation at the Base Pay in effect at the time the vacation is taken. Said vacation should be scheduled at the convenience of the Bank in order to handle the workload in a reasonable and timely manner. 2. Automobile. Employee will receive an automobile allowance of $375 per month. 3. Group Medical and Life Insurance Benefits. The Bank shall provide for Employee, medical and life insurance benefits equivalent to the normal and customary benefits available from time to time under the California Banker's Association Group insurance Program (or equivalent) for a salary level equivalent to $50,000 per annum. The Bank's liability to Employee for any breach of this Subsection shall be limited to the amount of premiums payable by the Bank to obtain the coverage contemplated herein. 4. Use of Bank Facilities, Equipment and Supplies. The Bank will provide, and the Employee will have access to and use of, the facilities, equipment, and supplies of the Bank, to the extent any salaried officer of the Bank would have in the execution of his or her employment responsibilities without the Bank being entitled to any compensation for the use thereof. The facilities, equipment, and supplies shall include, but not necessarily be limited to, a shared or unshared office, telephones (including land lines and wireless telephonic devices) facsimile machines, copier(s), and any other equipment and supplies made available by the Bank to facilitate its normal business activities. 3 E. REIMBURSEMENT FOR BUSINESS EXPENSES ----------------------------------- Employee shall be entitled to reimbursement by the Bank for any ordinary and necessary business expenses incurred by Employee in the performance of Employee's duties and in acting for the Bank during the Term, which types of expenditures shall be determined by the Board of Directors, provided that: l. Each such expenditure is of a nature qualifying it as a proper deduction on the federal and state income tax returns of the Bank as a business expense and not as compensation to Employee; and 2. Employee furnishes to the Bank adequate records and other documentary evidence required by federal and state statutes and regulations issued by the appropriate taxing authorities for the substantiation of such expenditures as deductible business expenses of the Bank and not as compensation to Employee. F. TERMINATION ----------- 1. Termination. The Bank may terminate this Agreement at any time without further obligation or liability to Employee, by action of the Chief Credit Officer, if Employee fails to perform or habitually neglects the duties which he is required to perform hereunder; if Employee engages in illegal activity which materially adversely affects the Bank's reputation in the community or which evidences the lack of Employee's fitness or ability to perform Employee's duties as determined by the Chief Credit Officer in good faith; any breach of fiduciary duty, dishonesty, deliberate or repeated disregard of the policies or procedures of the Bank as adopted by the Board of Directors or a committee thereof or refusal or failure to act in accordance with any direction or order of the Board of Directors or a committee thereof of the Bank, except those in contravention of any law or regulation; gross negligence adversely impacting the Bank; willful breach of this Agreement or any other willful misconduct; or if Employee is found to be physically or mentally incapable (as hereinafter defined) of performing Employee's duties for a continuous period of ninety (90) days or more by the Chief Credit Officer in good faith. Such termination shall not prejudice any remedy, which the Bank may have at law, in equity, or under this Agreement. Termination pursuant to this Subsection F.1 shall become effective immediately upon notice of termination from the Bank. Notwithstanding the foregoing, the Employee will be compensated in accordance with paragraph C of this Agreement for each loan transaction that closes after the effective date of termination that was processed by the Employee under the terms of the Job Description; provided, however, that the Risk Analysis Presentation for the loan transaction was approved by the Chief Credit Officer on or prior to the termination date. For purposes of this Agreement only, physical or mental disability shall be defined as Employee being unable to fully perform under this Agreement for a continuous period of ninety (90) days. If there should be a dispute between the Bank and Employee as to Employee's physical or mental disability for purposes of this Agreement, the question shall be settled by the opinion of an impartial reputable physician or psychiatrist agreed upon by the parties or their representatives, or if the parties cannot agree within ten (10) days after a request for designation of such party, then by a physician or psychiatrist designated by the San Joaquin Medical Association. The certification of such physician or psychiatrist as to the question in dispute shall be final and binding upon the parties hereto. Employee reserves the right to terminate this agreement at any time for any reason subject to a 30-day notification. Said notification shall be in writing and delivered to the Chief Credit Officer at the address of 60 W. 1Oth Street, Tracy, CA 95376. 2. Action by Supervisory Authority. If the Bank is closed or taken over by the California Department of Financial Institutions or other supervisory authority, including the Federal Deposit Insurance Corporation, such bank supervisory authority may immediately terminate this Agreement without further liability or obligation to Employee. 4 3. Merger or Corporate Dissolution. In the event of a merger where the Bank is not the surviving corporation or a consolidation or a transfer of all or substantially all of the assets of the Bank, or any other corporate reorganization where there is a change in ownership of at least twenty-five percent (25%) of the outstanding stock of the Bank, except as may result from a transfer of shares to another corporation in exchange for at least eighty percent (80%) control of that corporation, or in the event of the dissolution of the Bank, this Agreement may be terminated without further liability to Employee by the Bank or the surviving bank. Notwithstanding the foregoing, this Section F.3. shall not be applicable in the event of the formation of a bank holding company for the Bank wherein the shareholders of the Bank maintain the same percentage of ownership of the bank holding company. 4. Termination Without Cause. Notwithstanding anything to the contrary contained herein, it is agreed by the parties hereto that the Bank may at any time elect to terminate this Agreement and Employee's employment by the Bank for any reason by action of its Chief Credit Officer. G. GENERAL PROVISIONS ------------------ 1. Proprietary and Confidential Knowledge. During the Term, Employee will have access to and become acquainted with what Employee and the Bank acknowledge to be proprietary and confidential knowledge, to wit, data and information concerning the Bank, including its operations and business, and the identity of customers of the Bank, including knowledge of their financial condition, their financial needs, as well as their methods of doing business. Employee shall not disclose any of the aforesaid proprietary and confidential knowledge, directly or indirectly, or use them in any way, either during the Tens or for a period of one (1) year after the termination of this Agreement, except as required in the course of Employee's employment with the Bank. 2. Indemnification. To the extent permitted by law, applicable statutes and the Bylaws or resolutions of the Bank in effect from time to time, the Bank will indemnify Employee against liability or loss arising out of Employee's actual or asserted misfeasance or non-feasance in the performance of Employee's duties or out of any actual or asserted wrongful act against, or by, the Bank including but not limited to judgment, fines, settlements and expenses incurred in the defense of actions, proceedings and appeals therefrom. The provisions of this Subsection shall apply to the estate, executor, administrator, heirs, legatees or devisees of Employee. 3. Return of Documents. Unless otherwise agreed to in writing by the Bank and the Employee, the Employee expressly agrees that all manuals, documents, files, reports, studies, instruments or other materials used and/or developed by Employee during the Term are solely the property of the Bank, and that Employee has no right, title or interest therein. Upon termination of this Agreement, Employee or Employee's representative shall promptly deliver possession of all of said property to the Bank in good condition. Notwithstanding the foregoing, the Employee from time to time may create or modify a system or procedure to be used by the Bank and the Employee in the execution of the Job Description. The,Employee may use such systems and procedures materially created or modified by the Employee in employment activities unrelated to the specific business of the Bank. 4. Notices. Any notice, request, demand or other communication required or permitted hereunder shall be deemed to be properly given when personally served in writing, when deposited in the United State mail by either certified or registered mail with return receipt requested, postage prepaid, or when communicated to a public telegraph company for transmittal, addressed to the party at the address appearing at the end of this Agreement. Either party may change its address by written notice in accordance with this Subsection. 5 5. California Law. This Agreement is to be governed by and construed under the laws of the State of California. 6. Captions and Section Headings. Captions and section headings used herein are for convenience only and are not a part of this Agreement and shall not be used in construing it. 7. Invalid Provisions. Should any provision of this Agreement for any reason be declared invalid, void, or unenforceable by a court of competent jurisdiction, the validity and binding effect of any remaining portion shall not be affected, and the remaining portions of this Agreement shall remain in full force and effect as if this Agreement had been executed with said provision eliminated. 8. Entire Agreement. This Agreement contains the entire agreement of the parties. It supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of Employee by the Bank. Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding. This Agreement may not be modified or amended by oral agreement, but only by an agreement in writing signed by the Bank and Employee. 9. Receipt of Agreement. Each of the parties hereto acknowledges that he has read this Agreement in its entirety and does hereby acknowledge receipt of a fully executed copy thereof. A fully executed copy shall be an original for all purposes, and is a duplicate original. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. Service 1st Bank John A. Montalbo /s/ PATRICK CARMAN /s/ JOHN A. MONTALBO - ------------------------------------ ----------------------------------- Patrick Carman, Chief Credit Officer John A. Montalbo 60 W. 10th Street 523 Glenbriar Circle Tracy, CA 95376 Tracy, CA 95377 Attachment- Job Description 6 EX-10.12 19 ex10_12.txt EXHIBIT 10.12 EXHIBIT 10.12 SEVERANCE AGREEMENT - Bryan Hyzdu --------------------------------- THIS Agreement is made this 1st day of November, 2002 between Service 1st Bank (the "Bank"), headquartered at Stockton, California, and BRYAN HYZDU ("Executive"). Whereas, the Bank is a California state-chartered banking corporation, validly existing and in good standing underthe laws of the State of California, subject to the supervision and regulation of the California Department of Financial Institutions, and the Federal Deposit Insurance Corporation, with power to own property and carry on its business as it is now being conducted; Whereas, the Bank desires to avail itself of the skill, knowledge and experience of Executive in order to insure the successful management of its business; Whereas, the parties hereto desire to specify the terms of the Executive's employment by the Bank as controlling Executive's employment with the Bank; NOW, therefore, in consideration of the mutual covenants hereinafter set forth, it is agreed that from and after November 1, 2002 (the "Effective Date"), the following terms and conditions shall apply to executive's said employment: A. TERM OF EMPLOYMENT - --------------------------- 1. Term The Bank hereby employs Executive and Executive hereby accepts employment with the Bank for the period commencing with the Effective Date and continuing indefinitely, subject, however, to prior termination of this Agreement as hereinafter provided. Where used herein, "Term" shall refer to the entire period of employment of Executive by the Bank hereunder, whether terminated earlier as hereinafter provided. B. DUTIES OF EXECUTIVE - ---------------------------- 1. Duties Executive shall perform the duties of President of the Bank, as described more fully in a job description, subject to the powers by law vested in the Board of Directors of the Bank and in the Bank's shareholders. The duties of Executive hereunder may be changed by the Chief Executive Officer and/or the Board of Directors of the Bank from time-to-time without resulting in a rescission or breach of this Agreement, and, without limiting the foregoing, Executive agrees, if requested by the Chief Executive Officer and/or Board of Directors of the Bank and subject to the rights of the Bank's stockholders, to serve in such additional or alternative capacities as the Bank's stockholders, to serve in such additional or alternative capacities as the Bank and Executive may agree upon without compensation in addition to that provided for in this Agreement. Notwithstanding any such change from the duties originally assigned, or hereafter assigned, the employment of Executive shall be construed as continuing under this Agreement as modified. During the Term, Executive shall perform exclusively the services herein contemplated to be performed by Executive faithfully, diligently and to the best of Executive's ability, consistent with the highest and best standards of the banking industry and in compliance with all applicable laws and the Bank's Articles of Incorporation and Bylaws. Page 1 of 6 B. DUTIES OF EXECUTIVE (cont'd) - ------------------------------------- 2. Conflicts of Interest Except as permitted by the prior written consent of the Board of Directors of the Bank, Executive shall devote Executive's entire productive time, ability and attention to the business of the Bank during the Term and Executive shall not directly or indirectly render any services of a business, commercial or professional nature, to any other person, firm or corporation, whether for compensation or otherwise, which are in conflict with the Bank's interests. Notwithstanding the foregoing, Executive may make investments of a passive nature in any business or venture, provided however, that such business or venture is neither in competition, directly or indirectly, in any manner with the Bank nor a customer of the Bank, and also may engage in civic and charitable activities and may also invest in any company listed on a national securities exchange provided that he does not own 1% or more of the company's outstanding shares. C. COMPENSATION - --------------------- 1. Salary For Executive's service hereunder, the Bank shall pay or cause to be paid as annual base salary to Executive a minimum of One Hundred Thirteen Thousand Three Hundred Dollars ($113,300.00) per year, and subject to upward adjustments as may be determined annually by the Chief Executive Officer and/or the Board of Directors in their discretion. Said salary shall be payable in equal installments in conformity with the Bank's normal payroll period. 2. Annual Bonuses Annual bonuses will be determined by the Chief Executive Officer and Board of Directors. Executive will qualify for bonuses based on the Bank's profitability and Executive's implementation of the Bank's strategic plan. 3. Contract Renewal Bonus The Executive shall receive a one-time lump sum cash payment of ($ 10,000.00) payable during the last week of January 2003. D. EXECUTIVE BENEFITS - --------------------------- 1. Vacation Executive shall be entitled to up to four (4) weeks of vacation each year during the Term, prorated for any portion of a year, which vacation shall be taken at such times as are agreed upon by Executive and the Board of Directors; provided, however, that during each year of the Term, Executive is required to and shall take at least two (2) weeks of said vacation (the "Mandatory Vacation"), which shall be taken consecutively. 2. Automobile During the Term, Bank shall pay to Executive, as an automobile allowance, the sum of Seven Hundred Fifty Dollars ($750.00) per month. 3. Group Medical, Dental, Life, and Disability Insurance Benefits The Bank, at its expense, shall provide for Executive and his dependents, medical/dental, and life insurance benefits equivalent to the normal and customary benefits available from time to time under the California Banker's Association Group insurance Program (or equivalent) for an employee of Executive's salary level. The Bank, at its expense, shall also continue to provide for Executive a personal disability policy with Unum Provident Co. (Policy # 7905284) or equivalent. Page 2 of 6 D. EXECUTIVE BENEFITS (cont'd.) - ------------------------------------- 4. Stock Options The Bank has granted Executive 20,000 shares of the bank's common stock per the terms of Executive's original Employment Agreement, dated 1/7/1999. Those shares vested at the rate of one-third (1/3) of the options each anniversary from the date of grant. As of the date of this Agreement, those shares are 100% vested. The Bank also agrees that, to the maximum extent permitted by law, the option will qualify as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. E. REIMBURSEMENT FOR BUSINESS EXPENSES - -------------------------------------------- Executive shall be entitled to reimbursement by the Bank for any ordinary and necessary business expenses incurred by Executive in the performance of Executive's duties and in acting for the Bank during the Term, which types of expenditures shall be determined by the Board of Directors, provided: 1. Qualification Each such expenditure is of a nature qualifying it as a proper deduction on the federal and state income tax returns of the Bank as a business expense and not as compensation to Executive; and 2. Documentation Executive furnishes to the Bank adequate records and other documentary evidence required by federal and state statutes and regulations issued by the appropriate taxing authorities for the substantiation of such expenditures as deductible business expenses of the Bank and not as compensation to Executive. F. TERMINATION - -------------------- 1. Termination The Bank may terminate this Agreement at any time without further obligation or liability to Executive, by action of the Board of Directors, if Executive fails to perform or habitually neglects the duties which he is required to perform hereunder; if Executive engages in illegal activity which materially adversely affects the Bank's reputation in the community or which evidences the lack of Executive's fitness or ability to perform Executive's duties as determined by the Board of Directors in good faith; any breach of fiduciary duty, dishonesty, deliberate or repeated disregard of the policies or procedures of the Bank as adopted by the Board of Directors or a committee thereof or refusal or failure to act in accordance with any direction or order of the Board of Directors or a committee thereof of the Bank, except those in contravention of any law or regulation; gross negligence adversely impacting the Bank; willful breach of this Agreement or any other willful misconduct; or if Executive is found to be physically or mentally incapable (as hereinafter defined) of performing Executive's duties for a continuous period of ninety (90) days or more by the Board of Directors in good faith. Such termination shall not prejudice any remedy which the Bank may have at law, Inequity, or under this Agreement. For purposes of this Agreement only, physical or mental disability shall be defined as Executive being unable to fully perform under this Agreement for a continuous period of ninety (90) days. If there should be a dispute between the Bank and Executive as to Executive's physical or mental disability for Page 3 of 6 F. TERMINATION (cont'd.) - ------------------------------ purposes of this Agreement, the question shall be settled by the opinion of an impartial reputable physician or psychiatrist agreed upon by the parties or their representatives, or if the parties cannot agree within ten (10) days after a request for designation of such party, then by a physician or psychiatrist designated by the San Joaquin Medical Association. The certification of such physician or psychiatrist as to the question in dispute shall be final and binding upon the parties hereto. 2. Action by Supervisory Authority If the Bank is closed or taken over by the California Department of Financial Institutions or other supervisory authority, including the Federal Deposit Insurance Corporation, such bank supervisory authority may immediately terminate this Agreement without further liability or obligation to Executive. 3. Change in Control In the event of a merger where the Bank is not the surviving corporation, or a consolidation or a transfer of all or substantially all of the assets of the Bank, or any other corporate reorganization where there is a change in ownership of at least twenty-five percent (25%) of the outstanding stock of the Bank, except as may result from a transfer of shares to another corporation in exchange for at least eighty percent (80%) control of that corporation, or in the event of the dissolution of the Bank, this Agreement may be terminated without further liability to Executive by the Bank or the surviving bank, upon cash severance payment to Executive within 30 days of six___________ (6) months of his then current salary. If, within eighteen (18) months following the consummation of such a "change of control", Executive's employment is terminated, or any adverse change occurs in the nature and scope of Executive's position, responsibilities, duties, salary, benefits, work location(s), or any event occurs which reasonably constitutes a demotion or constructive termination (by resignation or otherwise), Executive shall be entitled to receive severance payment referenced immediately above. This Section F.3. shall not be applicable in the event of the formation of a bank holding company for the Bank wherein the shareholders of the Bank maintain the same percentage of ownership of the bank holding company. 4. Termination Without Cause. Notwithstanding anything to the contrary contained herein, it is agreed by the parties hereto that the Bank may at any time elect to terminate this Agreement and Executive's employment by the Bank for any reason by action of its Board of Directors, which action shall be deemed to have been taken upon the affirmative vote of at least a majority of the authorized number of Directors of the Bank. Any termination under this Subsection F.4 shall be effective immediately upon Executive's receipt of notice from the Bank, and all benefits provided by the Bank hereunder to Executive shall thereupon cease, other than the insurance benefits provided to Executive hereunder which shall be continued by the Bank for a period not to exceed sixty (60) days after termination. Notwithstanding the foregoing, it is agreed that in the event of such termination, Executive shall continue to be paid Executive's salary for a period of six (6) months following Executive's termination, which payments shall be paid to Executive in accordance with the normal method of payment. Such action shall not be construed as a breach of this Agreement, and the payment of the sum above stated shall constitute full and complete performance by the Bank of its obligations hereunder. 5. Effect of Termination In the event of the termination of this Agreementt Executive shall be entitled to the salary earned by Executive prior to the date of termination as provided for in this Agreement, computed pro rata up to and including that date; but Executive shall be entitled to no further compensation for services rendered after the date of termination, except as provided in Subsections C. 2 and F. 4 above if Executive's employment is terminated pursuant to Subsection F.4. Page 4 of 6 F. TERMINATION (cont'd.) - ------------------------------ Executive further agrees that in the event of termination for any reason, he shall resign from the Board of Directors of the Bank on the effective date of the termination of this Agreement. G. GENERAL PROVISIONS - --------------------------- 1. Trade Secrets During the Term, Executive will have access to and become acquainted with what Executive and the Bank acknowledge are trade secrets, to wit, knowledge or data concerning the Bank, including its operations and business, and the identity of customers of the Bank, including knowledge of their financial condition, their financial needs, as well as their methods of doing business. Executive shall not disclose any of the aforesaid trade secrets, directly or indirectly, or use them in any way, either during the Term or for a period of one (1) year after the termination of this Agreement, except as required in the course of Executive's employment with the Bank. 2. Covenant Not to Compete Executive hereby covenants and agrees that for a period of six (6) months after termination of this Agreement, Executive shall not engage in the business of banking within San Joaquin County. 3. Indemnification. To the extent permitted by law, applicable statutes and the Bylaws or resolutions of the Bank in effect from time to time, the Bank may indemnify Executive against liability or loss arising out of Executive's actual or asserted misfeasance or non-feasance in the performance of Executive's duties or out of any actual or asserted wrongful act against, or by, the Bank including but not limited to judgment, fines, settlements and expenses incurred in the defense of actions, proceedings and appeals therefrom. The provisions of this Subsection shall apply to the estate, executor, administrator, heirs, legatees or devisees of Executive. 4. Return of Documents Executive expressly agrees that all manuals, documents, files, reports, studies, instruments or other materials used and/or developed by Executive during the Term are solely the property of the Bank, and that Executive has no right, title or interest therein. Upon termination of this Agreement, Executive or Executive's representative shall promptly deliver possession of all of said property to the Bank in good condition. 5. Notices. Any notice, request, demand or other communication required or permitted hereunder shall be deemed to be properly given when personally served in writing, when deposited in the United States mail by either certified or registered mail with return receipt requested, postage prepaid, or when communicated to a public telegraph company for transmittal, addressed to the party at the address appearing at the beginning of this Agreement. Either party may change its address by written notice in accordance with this Subsection. 6. California Law This Agreement is to be governed by and construed under the laws of the State of California. 7. Captions and Section Heading Captions and section headings used herein are for convenience only and are not a part of this Agreement and shall not be used in construing it. 8. Invalid Provisions Should any provision of this Agreement for any reason be declared invalid, void, or unenforceable by a court of competent jurisdiction, the validity and binding effect of any Page 5 of 6 G. GENERAL PROVISIONS (cont'd.) - ---------------------------------- remaining portion shall not be affected, and the remaining portions of this Agreement shall remain in full force and effect as if this Agreement had been executed with said provision eliminated. 9. Entire Agreement. This Agreement contains the entire agreement of the parties. It supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of Executive by the Bank. Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding. This Agreement may not be modified or amended by oral agreement, but only by an agreement in writing signed by the Bank and Executive. 10. Receipt of Agreement Each of the parties hereto acknowledges that he has read this Agreement in its entirety and does hereby acknowledge receipt of a fully executed copy thereof. A fully executed copy shall be an original for all purposes, and is a duplicate original. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. Service 1st Bank ("Bank") Bryan Hyzdu ("Executive") ------------------------- ------------------------- By: /s/ JOHN O. BROOKS By: /s/ BRYAN HYZDU ------------------------------- -------------------------------- Printed Name John 0. Brooks Printed Name Bryan Hyzdu ---------------------- ----------------------- Page 6 of 6 EX-23.1 20 ex23_1tos-4.txt EXHIBIT 23.1 EXHIBIT 23.1 [LETTERHEAD OF VAVRINEK, TRINE, DAY & CO, LLP] CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated February 6, 2003, accompanying the balance sheets of Service 1st Bank as of December 31, 2002 and 2001 and the related statements of operations, changes in shareholders' equity, and cash flows for each of the two years ended December 31, 2002, contained in this Registration Statement and Prospectus. We consent to the use of the aforementioned report in this Registration Statement and Prospectus and to the use of our name as it appears under the caption "Experts." /s/ VAVRINEK, TRINE, DAY & CO., LLP - ----------------------------------- Laguna Hills, California April 1, 2003 EX-99.1 21 ex99_1.txt EXHIBIT 99.1 EXHIBIT 99.1 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The undersigned hereby appoints Messrs. Robert D. Lawrence, Gary A. Podesto and Michael K. Repetto as proxies with full power of substitution, to represent, vote and act with respect to all shares of common stock of Service 1st Bank (the "Bank") PROXY which the undersigned would be entitled to vote at the annual meeting of shareholders to be held on May SERVICE 1ST BANK 29, 2003, at 6:00 p.m., at Service 1st Bank's Tracy office, 60 West 10th Street, Tracy, California, or any postponements or adjournments of the annual meeting, with all the powers the undersigned would possess if personally present, including authority to cumulate votes represented by the shares covered by this proxy in the election of directors, as follows: 1. Election of the twelve (12) persons named below as directors. John O. Brooks Frances C. Mizuno Michael K. Repetto Eugene C. Gini Richard R. Paulsen Anthony F. Souza Bryan R. Hyzdu Gary A. Podesto Albert Van Veldhuizen Robert D. Lawrence Toni Marie Raymus Donald L. Walters [ ] FOR ALL NOMINEES LISTED ABOVE [ ] WITHHOLD AUTHORITY (except as marked to the (to vote for all nominees contrary below) listed above) (INSTRUCTION: To withhold authority to vote for any individual nominee or nominees write the nominee name or names on the space provided) -------------------------------------------------------------- 2. To consider and vote on a proposal to approve a plan of reorganization and merger agreement, dated as of March 11, 2003, among Service 1st Bank, Service 1st Bancorp, a newly formed bank holding company, and Service 1st Merger Corporation, a wholly-owned subsidiary of Service 1st Bancorp, and the merger of Service 1st Merger Corporation into Service 1st Bank with Service 1st Bank surviving the merger to become a wholly-owned subsidiary of Service 1st Bancorp. [ ] FOR [ ] AGAINST [ ] ABSTAIN 3. Ratification of the appointment of Vavrinek, Trine, Day & Co., LLP as Service 1st Bank's independent public accountants for the year 2003. [ ] FOR [ ] AGAINST [ ] ABSTAIN 4. In their discretion, the proxies are authorized to vote upon such other business as may properly come before the annual meeting and any and all postponements or adjournments of the annual meeting. PLEASE SIGN AND DATE BELOW THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" ELECTION OF ALL THE DIRECTORS NOMINATED AND NAMED IN THE PROXY STATEMENT-PROSPECTUS, "FOR" APPROVAL OF A PLAN OF REORGANIZATION AND MERGER AGREEMENT, DATED AS OF MARCH 11, 2003, AMONG SERVICE 1ST BANK, SERVICE 1ST BANCORP, A NEWLY FORMED BANK HOLDING COMPANY, AND SERVICE 1ST MERGER CORPORATION, A WHOLLY-OWNED SUBSIDIARY OF SERVICE 1ST BANCORP, AND THE MERGER OF SERVICE 1ST MERGER CORPORATION INTO SERVICE 1ST BANK WITH SERVICE 1ST BANK SURVIVING THE MERGER TO BECOME A WHOLLY-OWNED SUBSIDIARY OF SERVICE 1ST BANCORP, AND "FOR" RATIFICATION OF THE APPOINTMENT OF VAVRINEK, TRINE, DAY & CO., LLP, AS INDEPENDENT PUBLIC ACCOUNTANTS FOR THE YEAR 2003. IF ANY OTHER BUSINESS IS PRESENTED AT THE ANNUAL MEETING OR ANY POSTPONEMENTS OR ADJOURNMENTS OF THE ANNUAL MEETING, THIS PROXY CONFERS AUTHORITY TO AND SHALL BE VOTED IN ACCORDANCE WITH THE RECOMMENDATIONS OF MANAGEMENT. (Please date this Proxy and sign your name exactly as it appears on your stock certificates. Executors, administrators, trustees, etc., should give their full title. If a corporation, please sign full corporate name by the president or other authorized officer. If a partnership, please sign in partnership name by an authorized person. All joint owners should sign.) [ ] I DO EXPECT TO ATTEND THE [ ] I DO NOT EXPECT TO ATTEND THE MEETING MEETING ___________________________________ ___________________________________ (Number of Shares) (Date) ___________________________________ ___________________________________ (Please Print Your Name) (Signature of Shareholder) ___________________________________ ___________________________________ (Please Print Your Name) (Signature of Shareholder) - -------------------------------------------------------------------------------- THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND MAY BE REVOKED PRIOR TO ITS EXERCISE BY FILING WITH THE SECRETARY OF THE BANK A DULY EXECUTED PROXY BEARING A LATER DATE OR AN INSTRUMENT REVOKING THIS PROXY OR BY ATTENDING THE MEETING AND VOTING IN PERSON. - -------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----